Prague, December 2024
In his recent commentary on Trump’s world, Francis Fukuyama argues that the world has undergone two major distortions over the last fifty years (FT 9-10 November 2024). He associates both with “neoliberalism”. One of those distortions has been the shift in the emphasis on freedoms of the gay communities, on transgender issues, equity, and, generally, on the inclusion of minorities. The second distortion noted by Mr. Fukuyama was globalization, which he sees as the effect of liberals who believe in “the sanctity of markets”, which in turn “reduced the ability of governments to protect those hurt by economic change”. While the world got richer in the aggregate, working class people lost jobs and opportunities, he claims. It is the latter distortion that I want to challenge since it reflects the standard criticism of many others.
While I accept that both employment and wages in the US manufacturing sector were affected by market liberalization, the benefits of market liberalization for economic growth elsewhere are far more remarkable. The positive story obviously starts with the economic success of China. We should recall that the China of 40 years ago was one of the poorest countries in the world, and that it was able to dramatically reduce poverty as well as its income and technological lags behind the West during a remarkably short period of time. But the China story is not unique. Concurrent with the expansion of China, we have seen a major expansion of economic growth and development all over Asia. During the same period, we saw a dramatic increase in the standard of living in most formerly communist countries, especially those that have been taking an active part in the process of globalization such as Czechia, Poland, Hungary and the Baltic states. Economic growth has been impeded by other factors such as COVID and wars in the Ukraine and the Middle East, which operated in a highly disruptive manner and reduced the benefits of globalization. Surely, one could also name other features of these liberal policies such as deterioration in income distribution in various countries but, overall, the world is substantially richer now than 40 years ago. Even the US saw a 23% reduction in the rate of poverty over the same period, let alone the spectacular rise of the fintech industry simulating, by far, the most rapid economic growth in the world during the last five years.
Discussions of globalization should, therefore, be nuanced more than they are in Fukuyama’s article. Globalization has certainly not been a product of conspiracies of various types of elites as it was commonly argued by the opponents of liberal regimes in the past. Donald Trump’s threat of re-introducing tariffs and protection of US industry is a direct attack on the liberal international trading system (ITS) and on America’s own values and standards as the US was pivotal after World War II in establishing the GATT/WTO as a part of the Bretton Woods system. Fukuyama’s criticism and the deeds of Mr. Trump are not dissimilar. Globalization and its guiding principles, norms and rules of the ITS, were the result of long and deep discussions and negotiations. And those agreements are not a “sanctification of markets” but an attempt to make international markets work better. The interventions were and still are expected to work on four levels.
Opening markets. The first guiding principle of the Bretton-Woods system was the idea that larger markets create better opportunities than do smaller markets, hence a reduction of trade protection is desirable. The world after WW II also learned from the autarky that followed the introduction of the Smoot–Hawley Tariff Act of 1930 in the US, the collapse of the gold standard and the rise of militarism in Europe. The second guiding principle is transparency and efficiency. The signatories pushed for tariffs as the key trade policy instrument rather than quotas because of the transparency and higher efficiency of tariffs. At the same time, the WTO system recognized serious imperfections of markets in certain countries and that economic efficiency may not always the driving principle, especially in countries with extreme poverty, hence it introduced various exceptions to its rule s and special treatments. The third, and arguably the most powerful argument for desanctifying the role of markets in the WTO are safeguards. In recognition that markets are NOT holy and therefore should not be “sanctified”, the agreements recognize the concept of regulatory needs by introducing safeguards for countries needing to protect themselves against vis majeure or other unexpected outcomes. In those situations, the Members are allowed to take protective measures which may even run against their own WTO commitments but are in accordance with the relevant WTO rules. Finally, the fourth critical element is dispute settlements. The Members recognized the principle that, notwithstanding the general agreement of all Members to the rules, trade disputes may still arise. The “regulators” and the agreements allow for an orderly resolution of disputes that may arise under the existing system. Given the highly “democratic” system of the WTO governance (the veto rights), no country has dominant control over the jurisdiction.
Post scriptum. Any change in our lives always calls for adaptation. When the forefathers of the ITS said “A” they did not say” B”. When they drafted the rules of international trade, they did not draft, of course, the rules for countries to conduct their domestic policies once they comply and trade expands and relative prices change. When American manufacturing firms moved en masse to China (and Mexico) following the liberalization of world markets and the affected American workers did not, in turn, move to more productive and better paid jobs, this called for measures to be taken by US authorities to facilitate their market adjustment. The US Government tried to help but failed. As a result, real incomes of workers froze and remained stagnant for a decade or more. Evidently, the US adjustment program did not work, which raises questions about its design and about the implementation of the program.
The rules designed for the ITS fully recognized the limitations of “free markets”. They only cover “goods” and partially “services” in recognition of serious market distortions in those sectors. They also recognized the need for regulations. But the efficiency of international rules – even in trade in goods – greatly depends on the conduct of domestic policies and on the performance of institutions. If the latter do not provide effective domestic support for the implementation of international commitments, the benefits of international cooperation are diminished. In the case of the US, the alleged unfairness of international trade, as perceived by Mr. Trump, has been self-inflicted.
Moreover, the negotiators also had to deal with countries that were not prima facie market economies. This required a treatment in the agreements of “state aid”, and those vary from country to country. As a result, the coverage of rules on “state aid” in the agreements is incomplete, and this, together with other imperfections, also critically affected the efficiency of international rules. The negotiators, led by the US, were too eager to complete the negotiations and to put the whole system in place as quickly as possible. They did not, therefore, “sanctify” markets but they did “sanctify” the international agreement and its rules.
dr. Zdenek Drabek, formerly at the World Bank and the WTO. Now Charles University, Prague