"It seems that the era of free trade is over. How will the world economy develop in the era of protectionism?" This is one of the most frequently asked questions these days. But the opposition of free trade and protectionism (as well as market and state or mercantilism and liberalism) is not particularly useful for understanding today's global economy. In addition to misrepresenting recent history, it also misrepresents the ongoing transformations of state policies, as well as the prerequisites necessary for the development of a healthier global economy.
"Free trade" evokes the image of the state receding into the background and letting markets generate all economic outcomes. But a market economy has always needed clear rules and regulations—such as industry standards, antitrust laws, consumer, worker, and environmental protection regulations, functions of creditors of last resort, and financial stability—rules usually defined and implemented by government agencies.
Also, connecting different national jurisdictions through international trade and financial affairs opens up a new question: Whose rules and regulations should be prioritized in regulating business on global markets? Should completely new rules be established through a system of international agreements and regional or global organizations?
When we look at things from this angle, it is clear that the era of hyperglobalization - the period that lasted approximately from the early 90s until the outbreak of the pandemic - was not an era of free trade in the traditional sense of the term. In the trade agreements signed over the last 30 years, the focus has shifted from removing barriers to cross-border trade and investment to regulatory standards, safety and health rules, investment, banking and finance, intellectual property, labor, the environment, and many other issues that are used to be the responsibility of the state and its legislators.
The newly established rules are not neutral. They favor the interests of large companies with good political connections, such as international banks, pharmaceutical companies and multinational corporations. In addition to their easier access to global markets, these are the companies that have benefited the most from international arbitration proceedings to overturn local laws that reduce business profits.
In the name of freer trade, tougher regulations for the protection of intellectual property were smuggled into the same package, which enabled pharmaceutical and high-tech companies to abuse their monopoly position. States were forced to accept the free movement of capital, while workers remained trapped within national borders. Climate change and public health have been neglected, partly because the agenda of hyperglobalization has relegated them to the background, and partly because the institute of public good in those areas would threaten the business interests of large companies.
In recent years, we have witnessed the strengthening of resistance to these policies, as well as a broader review of economic priorities in general. The process that some anathematize as the return of protectionism and mercantilism is actually an attempt to find a new equilibrium relationship in which there will be room for important domestic policy issues, such as job losses, regional backwardness, climate transition and public health. This is necessary in order to remove the damage done in the era of hyperglobalization, as well as to build a healthier form of globalization for the future.
The industrial policies proposed by US President Joe Biden - along with the subsidy program for the green transition and the strengthening of domestic production - best illustrate the reorientation that is underway. It is true that these policies cause resentment in Europe, Asia and parts of the developing world where they are seen as incompatible with the accepted rules of free trade. But at the same time, they are a model for people who are looking for alternatives to hyperglobalization and neoliberalism, often in these same countries.
We don't have to go back very far to find something similar to the system that could emerge from emerging new state policies. In the regime established in 1945 at Bretton Woods, which was dominant until the early 80s, states had considerable autonomy in the development of industrial, regulatory and financial policies. For many, the health of the national economy was more important than global integration. Trade agreements, relatively weak and limited in scope, did not significantly restrict developed economies. This was even less the case in developing countries. Internal control of capital flows was not the exception, but the rule.
Despite the fact that such a global economy was much more closed (by today's standards), the Bretton Woods era brought great economic and social progress. Developed countries went through decades of rapid economic growth and relative social and economic equality, until the second half of the 70s. In the group of lower-income countries, those countries that implemented effective development strategies - such as the "East Asian tigers" - developed at a high speed, despite the fact that their exports had to deal with much higher import barriers than developing countries today. When China joined the world economy in the 80s, it did so on its own terms, retaining subsidies, state ownership, currency and capital controls, and other policies closer to the Bretton Woods era than to the era of hyperglobalization.
The successes of the regime established in Bretton Woods should give thought to all those who still believe that giving space to countries to create their own policies is disastrous for the global economy. Keeping a nation's economy in good shape is the most important thing a country can do for all other countries.
Of course, historical precedent is no guarantee that a new agenda will produce a more benign global economic order. The Bretton Woods regime operated in a Cold War environment, when economic ties between the West and the Soviet Union were negligible and the Soviet bloc had little influence on the global economy. Hence, their geopolitical conflict did not threaten the expansion of trade and long-term investments.
Today's situation is quite different. America's main rival is China, a country that occupies a very important place in the world economy. A complete split between the West and China would produce unfathomable consequences for the entire world, including developed economies, due to the high dependence on Chinese industrial products. That is why we have reason to worry about the future of the world economy.
If the global economy becomes an even more inhospitable place, it will be due to the failure of America and China to fix their geopolitical relations, not the alleged abandonment of the principle of "free trade". State policy makers and analysts must focus on those risks that are most important at the moment.
(Project Syndicate; Peščanik.net; translation: Đ. Tomić)
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