There are tides in the affairs of the globe as well as those of nations and of individuals. Right now the tide of international cooperation and of multilateral institutions is ebbing. Preference for national autonomy is flowing. For some, these currents entail isolationism and even xenophobia.
This is perhaps most salient in the United Kingdom, as it awaits a referendum to approve its newly negotiated position within the European Union. A “no” vote calls for the UK to leave an entity of which it has been a member for over 40 years.
In our country, populist presidential candidates Bernie Sanders and Donald Trump have made criticism of U.S. participation in trade agreements a foundation of their campaigns — often appealing to the emotions of those voters hurt by these agreements without full disclosure of the benefits of trade or the context of the agreements. Both candidates, in somewhat different ways, appeal for a reduction in U.S. military commitments overseas, including NATO, which has been the cornerstone of U.S. defense policy for two-thirds of a century.
What is going on?
One answer involves Arnold Toynbee’s argument that history is a process of “challenge and response.” Societies respond, consciously or by default, to political, social and economic challenges. How effectively they respond determines how well they fare.
The global move toward multilateralism 70 years ago was not necessarily a mistake. Nor is retreating from it now. Circumstances change, and as they do, so do appropriate responses to the challenges posed. But it is good to reflect on why and how we change.
“Splendid isolation” was the default political stance for our country for its first 150 years. President George Washington, in his farewell address, warned against “entangling alliances,” and we took it to heart. As late as the Paris Peace Conference of 1919, our country took pains to emphasize that we were not an “ally” of France, Britain and other foes of Germany and Austria. We were an “associated power.” And our disregard for the views of other nations was manifest in the unilateral declaration of a trade war embodied in the Smoot-Hawley Tariff Act of 1930.
That tariff increase did not cause the Great Depression, but it helped ensure that it was both deep and global. The reaction to this challenge, the Reciprocal Trade Agreements Act of 1934, acknowledged the error and, perhaps inadvertently, established a precedent that runs unbroken to today’s Trans-Pacific Partnership debate that has become central in this year’s election.
There was widespread recognition that we needed to undo the collapse of international commerce that followed Smoot-Hawley. But Congress and the Roosevelt administration needed political cover. So the 1934 act authorized the administration to lower tariffs as long as it could do so as part of a treaty that involved reciprocal lowering by some other nation. This is when trade policy became “deals” with other countries rather than a unilateral act by the U.S. Congress. They became “bilateral” or “multilateral,” in other words.
It also became clear that the failure to establish a reasonably just and stable international financial order after World War I was a major cause both of the Great Depression and of World War II. The repeated inability of the major nations to act together either financially or militarily in the 21-year inter-war era posed a clear example of what to avoid.
(Author Liaquat Ahmed’s “Lords of Finance,” an account of the tragic financial and diplomatic missteps of that period, remains instructive for the current global situation.)
So at the end of World War II, the idea of multilateral cooperation and established international financial institutions found great support. At first these plans somewhat grudgingly included a role for the Soviet Union. After all, some 84 percent of all German battle deaths were at the hands of the USSR. But as Stalin’s territory grabs soured post-war relations, opposition to the Soviets rapidly became a dominant factor driving international cooperation among the industrialized nations.
The Marshall Plan of U.S. economic aid to Europe, the North Atlantic Treaty Organization for military cooperation and the European Economic Community that grew from the Treaty of Rome were distinct entities, each driven by their own sets of historical forces. But there was great overlap among these sets of forces. British General Hastings Ismay’s quip that the purpose of NATO was “to keep the Russians out, the Americans in and the Germans down” applied in great measure to all three.
It also applied to the role of institutions created at Bretton Woods, the World Bank and the International Monetary Fund. De facto, they became tools of Cold War diplomacy. So did the General Agreement on Tariffs and Trade, a weak entity established as an end run around isolationists in the U.S. senate that has since morphed into the World Trade Organization.
When Richard Nixon’s daring diplomacy in the 1970s further split China out of the communist bloc and Mao Zedong’s successor then announced an opening to market forces in its communist economy, what better way to encourage it than to grant it the same trade status as all other GATT member nations?
Internationally, participation in or aid from these Bretton Woods institutions had been a key carrot to offer nations to stick with the west. And these served as a domestic policy excuse for governments to follow economic policies that were unpopular. Being tied to the mast of an international agreement was a time-tested justification for politically difficult decisions.
So when a teetering Canadian conservative prime minister asked the Reagan administration for a Canadian-U.S. trade agreement that would contractually bind his nation to policies that might otherwise disappear after the next election, Reagan was glad to oblige. Ditto when a conservative Mexican president, trying to restructure a sclerotic economy, sought the same for his country. Reagan’s successor, George H.W. Bush, was willing to negotiate and sign the agreement just in time for Bill Clinton to forward it to the Senate for confirmation. So we now have NAFTA, the North American Free Trade Agreement, that neo-isolationist candidates are quick to deride.
Similarly, one can consider the EU’s progression from a post-war coal and steel agreement to a free trade area to full economic union and then, at least for some members, to full monetary union.
Perhaps all of these things went too far. Economists certainly erred in discounting the social costs of adjusting to more free trade and ignored how unequally the costs — and benefits — were distributed within society. Most ignored clear evidence that Europe was not an “optimal currency area” for which a common currency would work. And it’s clearly not working.
Regardless of who gets elected president in November, the ebb away from multilateralism is likely to continue, in populism if not politics. In moderation, that is not all bad. I am not the only economist, for example, who questions the promised economic gains of the TPP.
At the same time, China is flexing its economic and military muscle after strongly self-perceived centuries of international humiliation. Its neighbors are frightened, and countries like South Korea, Japan, Taiwan, the Philippines and Indonesia have been U.S. allies for decades. Militarily, do we really want to signal disinterest in the region?
The issues are complex, and we could use thoughtful insights from political candidates about the trade-offs we face. It is too bad we are not getting them.