Free Trade. The New Debate over Free Trade

For generations the fault line in debates over trade was between proponents of free trade (trade between countries that is exempt from duties, customs, or tariffs) and champions of protectionism (a mechanism used by some countries to protect its industries by imposing high tariffs on imported goods).

Following the ideas of Adam Smith, whose influential work The Wealth of Nations was published in 1776, free traders built their case for unfettered trade, in which markets would act as the famous "invisible hand," creating maximal wealth. In fact the rationale for free trade is over two centuries old: Free trade encourages specialization, market-based prices guide resource allocation, and the end result is that free trade leads to greater good.

The case for protectionism, as expressed in certain French and German ideas, has lost ground in recent years. Nineteenth-century protectionists maintained that markets should be managed by the guiding hand of the state. The French term is dirigisme (government control or intervention, especially in business activity or economy).

Marxists welcomed the strong state, which was theoretically the prelude to an era of voluntary communitarianism, but in practice the heavyhanded state in Communist regimes ushered in the gulag. But now central planning has for the most part been abandoned. The upshot is that this earlier debate is largely over: The free traders have won; open markets are the key to economic growth.

The New Debate over Free Trade. Now free traders find that the wealth-creating engine of free trade is being asked to accommodate newer issues, such as labor and environmental standards, and socioeconomic equity, so that those who have been left out can become part of the system.

The emergence of these so-called social issues pits free traders in the classic mould against those who seek something called "free but fair trade"—a halfway house combining liberalization with certain market interventions—and others who reject free trade altogether as a force that threatens and degrades labor and the environment while widening the gap between the ever-richer haves and the legions of have-nots. These rejectionists often use the attack on free trade as an attack on the market economy.

Environmental historians can hardly avoid being pulled into this new debate, which links trade and social issues. Although protectionism is now passe, these newer forms of market intervention have emerged with great speed and have wide appeal. This troubles free traders, who smell protectionism, but this new perspective—with its explicit reliance on a greater role for government—is gaining ground. With these new issues in mind it is well to consider how free trade came to be adopted.

The Rise of Free Trade. Adam Smith maintained that free trade was the most efficient and effective way to create more wealth for more people. In Great Britain, nineteenth-century liberals put their belief in laissez-faire and individualism into practice with the Corn Law reforms of the 1840s. Letting markets set the prices for commodities such as wheat and ending the quotas on sugar resulted in lower prices and a surge of mass consumption. It was then that the British as a nation became addicted to sugar and sweets with their afternoon tea. However, it happened that the repeal of the Corn Laws is one of the few examples of pure liberal economics in action.

France and Germany, for their part, followed more directed forms of capitalism in their pursuit of economic growth and national interest, while Japan (after it embarked upon modernization in the late nineteenth century), especially, and even the United States, deviated from classic economic liberalism in forging their own pathways to growth. All in their ways pursued empires, projections of state power that had little to do with the dictates of classic free-trade theory. (Whether imperialism paid is debatable; only in the case of impoverished Portugual living off its overseas possessions is the answer an unambiguous yes.)

Meanwhile, the Latin American model of mixed economies (state- run industries with a macroeconomic model of import substitution with little emphasis on exports) as developed in Brazil and Mexico proved less efficient than the export-based model of the so-called Asian Tigers (Singapore, Korea, Taiwan, and Malaysia), who raced from behind to overtake Latin America in productivity and national wealth.

To be sure, by the end of the nineteenth century laissez-faire liberalism in the Western world was already being modified as governments intervened in markets with regulations to protect and advance the public interest. In the United States this took the form of mandating such things as food and product safety standards, the eight-hour day, and breaking up monopolies such as Standard Oil to promote competition and hinder price fixing.

Meanwhile, Great Britain enacted the first urban air pollution abatement regulations in the 1870s. Thanks to Otto von Bismarck, the first chancellor of the German empire, Germans reaching age sixty-five could retire on the country's new and first-of-its-kind state pension plan. This was the high road of interventionist public policy.

Less compatible with free-trade theory was (and is) the tendency of governments to use trade protection selectively to shield specific sectors from imports or to promote domestic employment and output. It is in that arena that free-trade policy meets politics in the real world.