"Foreign policy and domestic policy are but one system": Mises on international organizations and the World Trade Organization.

• Author: Dorobat, Carmen Elena
• Position: Report

The unsuccessful Doha Round and the future of the World Trade Organization (WTO) have been the subject of intense debate recently. The misadventures of the past ten years of trade talks have led many scholars to become more pessimistic about the future of multilateral trade agreements, while the optimists keep busy suggesting alternatives for current negotiations. The one issue both sides agree upon is that the existence of an international organization is a necessary, inevitable step toward international free trade. As a consequence of this general agreement, suggested alternatives revolve around reforming the negotiations arena and rehashing its role.

Once revamped, can the WTO indeed make a lasting contribution to free trade? This article attempts to answer this question by outlining Ludwig von Mises's views on the role and usefulness of international organizations and trade agreements. Unlike our contemporaries, Mises believed that the failure of international organizations was inevitable in the presence of domestic economic intervention. Whereas negotiating governments are attached to the idea of interventionism and thrive on anticapitalistic mentalities, peace and free trade require the unhampered development of free enterprise. In Mises's view, as long as the inherent tension between domestic and foreign policy persists, international trade-planning bodies cannot bring about free trade.

The purpose of this article is therefore twofold. First, it highlights Mises's contributions to the topic of foreign--trade policy, which have so far received little attention. Mises offered noteworthy insights on the shortcomings of international organizations established after World War II, and his remarks foreshadow half a century of international trade negotiations. This stands as a testimony to his acumen and mastery of the topic. Second, following Mises, I argue that the current impasse of WTO negotiations was caused by the pursuit of international agreements that clash with domestic policies in a manner similar to the League of Nations' failure to preserve peace in the early twentieth century.

To this end, the article is structured as follows. The first section briefly outlines the international economic landscape--that is, the international trade system and the free-trade movement, from the beginning of the twentieth century up to the present day. The next section turns to Mises's contributions, as set out in his works and private correspondence. I briefly look at Mises's career as an applied economist to establish his expertise on international policy issues. Further, I show that Mises witnessed in the interwar period the conflict between the agenda of international organizations and the economic nationalism of European countries. Thus, Mises cautioned his readers that peace and prosperity were first and foremost an ideological issue and analyzed in detail how domestic interventionist mentalities would necessarily frustrate international efforts for peace and free trade. The next section then turns to the current problems of the WTO and the Doha Round. I argue that Mises offers a better framework for understanding the predicament of the official international free-trade movement than current alternative explanations. The final section discusses briefly the future of the international trade system by presenting the pros and cons of suggested improvements to the WTO as well as Mises's own alternative solution for the future of international trade.

The International Economic Landscape before and after the Two World Wars

Throughout the nineteenth century and up to World War I, western European economies experienced a "golden age" of classical liberalism and free trade. An international gold standard and a network of trade agreements--whose foundational stone was the Cobden-Chevalier Treaty of 1860 between England and France--provided a sound economic basis for a long period of peace among European countries. In turn, a peaceful Europe allowed foreign trade to flourish on the continent as well as across the world (Daudin, Morys, and O'Rourke 2008, 2). As a consequence, the more developed West became a standard of prosperity that the majority of eastern European economies wished to attain by modernizing and industrializing their production structure (Berend 2000). At the beginning of the twentieth century, however, liberalism was showing signs of weakness as the world was slowly returning to government interventions and trade restrictions (Ebeling 2000), a situation that brought about and was worsened by the onset of World War I.

In the interwar period, trade, migration, and capital restrictions proliferated. Most Western economies saw these economic measures as necessary compromises, given the political circumstances in Europe at the time. (1) Nonetheless, as economic historian Alan Milward points out, "[T]he inter-war experience imposed distinct limitations in practice on the ease with which trade, people and capital could flow across national boundaries" (2005, 161). The reason behind these restrictions, Milward argued, was the "constant tension in all Western European countries between, on the one hand, the widely accepted idea that in the long run prosperity depended on a return to more open economies with a relatively free multilateral system of trade and payments, and, on the other hand, the determination to reconstruct the economy and society in the way in which the purely national mandate for change demanded" (162).

This inherent tension eventually "pushed [European countries] toward economic nationalism in their foreign policies" (Ebeling 2009, 171) and tipped the balance in favor of restricted foreign trade and more interventionist policies. In eastern Europe, the situation was even more severe, as "fundamental nationalism urged ... a split with the Western dominated world system, or even a total rejection of Western values and market capitalism" (Berend 2000, 315-16). The goal of political independence became indelibly tied with that of economic independence, even though attaining peace in Europe would have required unhampered markets and a drastic fall in protectionism (Milward 2005, 165).

World War I--as well as the Great Depression--thus represented a turning point in European history that marked the definitive departure from classical-liberal ideas in favor of economic and political nationalism. The 1920s and 1930s "ushered in an era of economic planning, price and production controls, foreign-exchange regulations, restrictions on international trade, capital movements, and migration, and a flood of paper money inflations to cover the costs of war" (Ebeling 2000, xix). Unsurprisingly, then, the idea of peace and international economic cooperation failed to grow any roots in interwar Europe, and "the attempts ... to recreate a multilateral framework for international trade ... [were not] very successful" (Milward 2005, 162). These latent conflicts among countries eventually boiled over in World War II.

After 1945, economists and policymakers alike understood that political nationalism had been a recipe for disaster. At the same, they were not interested in returning to the golden age of classical liberalism, a system that they believed no longer fit the political and economic context of a war-ridden Europe. As a consequence, according to Jan Tumlir and Laura La Haye, "it was generally accepted, even by the U.S. government, that the postwar reconstruction of the European economies would have to be planned and closely controlled by their governments" (1981, 372). The ailing world could not be left to the market but instead had to be cared for by the welfare state as well as by intergovernmental organizations that would plan and manage international economic relations among states. (2) At the same time, state central planning made an even more forceful return in eastern Europe, which embraced full-blown socialism and barricaded itself from the rest of the world politically and economically. The anticapitalistic mentality also swayed the majority of developing countries, which sought to achieve prosperity by renouncing free-market principles.

In the second half of the twentieth century, military conflicts returned to the international arena against the backdrop of the Cold War. In reaction to real or imagined threats, the idea of a European Community became increasingly appealing and brought about the creation of a free-trade area and, later on, of a political union in western Europe (Shanks 1971). Nonetheless, the protectionist policies of European member states were only repackaged and shifted from national to union borders (Apolte 2010). At the same time, the United States needed heavy monetary inflation to fuel the Vietnam War and the Great Society programs of the Johnson administration. (3) As the general expansion of money supplies and bank credit continued after World War II, Bretton Woods institutions were unable to reestablish a sound monetary foundation for international trade. By 1971, "closing the gold window" became inevitable in order to "stabilize" the dollar. Unsurprisingly, the blow given to the international monetary system represented an ample setback for the international trade system.

As a consequence, by 1980 economists and policymakers alike turned away once more from free trade, and nontariff barriers began replacing the old-fashioned customs duties of previous decades. Governments of the world unwaveringly followed what Jagdish Bhagwati (1988) refers to as "the law of constant protection": although the General Agreement on Tariffs and Trade (4) had been somewhat successful in convincing countries to lower their trade-protective duties, alternative economic restrictions were introduced to compensate for these reductions.

The international trade system only continued this trend thereafter. Since 2001, the U.S.-led war on terror--a multilateral war against a vague...