These leaders, of course, weren’t acting out of altruism. They knew their economies were the most competitive, so they’d profit most from liberalization. And developing countries feared that their economies would be swamped by superior Western productivity. Today, however, the tables have turned—though few acknowledge it. The West continues to preach free trade, but practices it less and less (especially in agriculture; this is why the Doha Round of trade talks is dying). Asia, meanwhile, continues to plead for special protection but practices more and more free trade. China and India have lowered tariffs significantly.
That’s why Sarkozy’s words were so important: he finally injected some honesty into the trade debate. The truth is that large parts of the West are losing faith in free trade, though few leaders admit it. For example, four U.S. senators—Max Baucus, Charles Grassley, Charles Schumer and Lindsey Graham—introduced a new trade bill against China on June 13, portraying themselves as paragons of virtue. But the bill would require the Treasury Department to identify misaligned currencies based on International Monetary Fund criteria. This amounts to protectionism, since it would allow U.S. companies to appeal for anti-dumping duties on Chinese goods based on the distorted value of the yuan.
Raghuram Rajan, the IMF’s former chief economist, has challenged the notion that the IMF can fairly judge exchange rates, arguing that it will be tempted “to follow the U.S. lead and accept that the only truly undervalued exchange rates are those where the government intervenes explicitly … not those where the exchange rate is ‘market-determined’.” Such a standard would bias judgments against developing countries, since their governments naturally play a larger role. Rajan argues that powerful industrial countries should be equally liable to judgment by the IMF. Will the senators allow this?
Probably not. Indeed, few Western leaders are likely to acknowledge that they are becoming more protectionist, reflecting an intellectual dishonesty that plagues the trade debate today. Some economists are more honest. Paul Krugman is one of the few willing to acknowledge that protectionist arguments are returning. Krugman writes that “it’s bad economics to pretend that free trade is good for everyone, all the time … The accelerated pace of globalization means more losers as well as more winners; workers’ fears that they will lose their jobs to Chinese factories and Indian call centers aren’t irrational. Addressing those fears … is essential [to] a realistic political strategy in support of world trade.”
Krugman is right. In the short run, there will be winners and losers under free trade. This, of course, is what capitalism is all about. But more and more of these losers will be in the West. Economists in the developed world used to love quoting Joseph Schumpeter, who said that “creative destruction” was an essential part of capitalist growth. But they always assumed that destruction would happen over there. When Western workers began losing jobs, suddenly their leaders began to lose faith in their principles. Things have yet to reverse completely. But there’s clearly a negative trend in Western theory and practice.
A little hypocrisy is not in itself a serious problem. The real problem is that Western governments continue to insist that they retain control of the key global economic and financial institutions while drifting away from global liberalization. Look at what’s happening at the IMF. The Europeans have demanded that they keep the post of managing director. But all too often, Western officials put their own interests above everyone else’s when they dominate these global institutions.
The time has therefore come for the Asians—who are clearly the new winners in today’s global economy—to provide more intellectual leadership in supporting free trade. Sadly, they have yet to do so. Beijing, for example, does not want to frighten Washington by seeking leadership positions. Unless Asians speak out, however, there’s a real danger that Adam Smith’s principles, which have brought so much good to the world, could gradually die. And that would leave all of us worse off, in one way or another.
