There are tides in the affairs of the globe as well as of people. Right now that 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 most salient in the United Kingdom, awaiting a referendum on its status within the European Union. A “no” vote means the UK leaves an organization it has been in for more than 40 years.
In the U.S., populist presidential candidates Bernie Sanders and Donald Trump make criticism of trade agreements a foundation of their campaigns. Both, in different ways, appeal for reducing U.S. military commitments overseas, including NATO, the cornerstone of U.S. defense policy for 70 years.
What is going on?
Arnold Toynbee argued that history is a process of “challenge and response.” Societies respond, consciously or by default, to political 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 challenges. But it is good to reflect on why and how we change.
“Splendid isolation” was the U.S. default for 150 years. In his farewell address, George Washington warned against “entangling alliances.” We took it to heart. At the Paris Peace Conference of 1919, our country even 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 deepen and widen it. The reaction to this challenge, the Reciprocal Trade Agreements Act of 1934, acknowledged the error and established a precedent that runs unbroken to the Trans-Pacific Partnership debate central to this year’s election.
It was widely recognized that we needed to undo the collapse of international commerce following Smoot-Hawley. But Congress and the Roosevelt administration needed political cover. So the act authorized the administration to lower tariffs as long as it was in a treaty that involved reciprocal lowering by another nation. This is when trade policy became “deals” with other countries rather than a unilateral act by the U.S. Congress.
It also became clear that the failure to establish a workable international financial order after World War I was a major cause of both the Depression and World War II. The repeated inability of the major nations to cooperate financially or militarily in the inter-war era showed what to avoid.
After World War II, multilateral cooperation and international financial institutions found great support. At first these somewhat grudgingly included a role for the Soviet Union. After all, 84 percent of all German battle deaths were by the USSR. But as Stalin’s territory grabs soured postwar relations, opposition to the Soviets rapidly drove international cooperation among the industrialized nations.
The Marshall Plan of aid to Europe, the North Atlantic Treaty Organization for military cooperation, and the European Economic Community were distinct entities, each driven by its own historical forces. But there was great overlap among these. British General Hastings “Pug” Ismay’s quip that NATO served “to keep the Russians out, the Americans in and the Germans down” applied to all three.
It also applied to institutions created at Bretton Woods — the World Bank and the International Monetary Fund. They became tools of Cold War diplomacy. So did the General Agreement on Tariffs and Trade, a weak entity that has since morphed into the World Trade Organization.
When Richard Nixon further split China out of the communist bloc and Mao Zedong’s successor announced an opening to market forces, what better encouragement than granting trade status like GATT members?
Internationally, participation in these institutions had been an incentive to stick with the west. And they served as a scapegoat in domestic politics for governments following unpopular economic policies.
So when a Canadian conservative prime minister asked the Reagan administration for a Canadian-U.S. trade agreement to bind his nation to policies that otherwise might disappear in the future, Reagan gladly obliged. Ditto when a Mexican president restructuring a sclerotic economy sought the same. Reagan’s successor, George H.W. Bush, negotiated and signed 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 deride.
Similarly, consider the EU’s progression from a postwar coal and steel agreement to a free trade area to full economic union and then, at least for some members, to full monetary union.
These moves perhaps went too far. Economists erred in discounting the social costs of adjusting to greater trade and ignored how unequally the costs were distributed. Many ignored evidence that Europe was not an “optimal currency area” for which a common currency would work.
Regardless of who gets elected in November, the ebbing of multilateralism will continue, in populism if not politics. 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 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. Do we really want to signal disinterest in the region?
The issues are complex. We need thoughtful insights from political candidates about the trade-offs we face. It is too bad we are not getting them.