The threat to economic liberty from international organizations.

• Author: Lal, Deepak

It is one of the abiding ironies at the beginning of the new millennium that various international organizations set up after the Second World War to create a new Liberal International Economic Order (LIEO) are now the major purveyors of" global illiberalism. How has this come to pass? Is there any need for these international organizations? These are the questions I address in this article.

Liberal International Economic Order

After the Second World War the United States sought to create a new LIEO. That effort was partly in response to its own isolationist behavior in the interwar years, which had contributed to global economic disorder and the destruction of the first LIEO built by the British in the 19th century. However, there were important differentes in the instruments used by these two imperial powers in creating their LIEOs.

The 19th century LIEO was built on five pillars: free trade, laissez faire, the gold standard and free mobility of capital, free labor mobility, and international property rights. In the interwar years this LIEO unraveled. The imposition of the Smoot-Hawley tariff by the United States marked the end of free trade. The "Blue Sky" laws, which banned U.S. banks from lending to foreign governments, and the collapse of the gold standard into a whole host of dirigiste interventions in the payments regime (like exchange controls) ended the free mobility of capital. The rise of welfare states ended free labor mobility, and immigration controls became ubiquitous as welfare states created property rights in "citizenship"--with a "citizen" having the right to pick the pockets of his fellow citizens. The international legal order, painstakingly put together by a series of treaties in the 19th century, disintegrated with the rise of the Bolsheviks in Russia and Kemal Attaturk in Turkey, who repudiated any international property rights in the name of national sovereignty. Laissez faire became a victim to the growing dirigisme in Europe at the turn of the 19th century and in the United States with Roosevelt's New Deal.

After the Second World War, at Bretton Woods, the United States tried to resurrect three of the pillars on which the 19th century LIEO had been built: free trade, the gold standard, and free capital mobility. But, whereas the British Empire had fostered these by example, treaties, and direct and indirect imperialism, the United States instead created transnational institutions: the General Agreement on Tariffs and Trade (GATT) followed by the World Trade Organization (WTO), the International Monetary Fund (IMF), and the World Bank. But, there was no hope of resurrecting free mobility of labor with the spread of welfare states in all the industrialized countries, or of restoring laissez faire with the ensuing expansion of the state. Likewise, with the explosion of economic nationalism in the Third World, aided and abetted by the U.S. Wilsonian anti-imperialist moralism that scuttled the ill-fated Suez adventure of the British and the French in 1956 to prevent Nasser's nationalization of the Suez canal, there was no way in which the new nation states could be thwarted in the assertion of their national sovereignty against any purported international property rights. Indeed, there was no bulwark against this disintegration of the international legal order.

GATT, the WTO, and Free Trade

Rather than follow the correct British policy of adopting unilateral free trade and then allowing its hegemony to spread the norm, the United States chose the extremely acrimonious route of multilateral and more recently bilateral negotiations to reduce trade barriers. Unlike the British, who had correctly seen free trade as a positive-sum game and since the repeal of the Corn Laws adhered to it and its close cousin laissez faire throughout the 19th century (despite various attempts by politicians like Joseph Chamberlain to stir the pot by demanding protection in the name of "fair trade"), the Americans have never accepted the classical liberal case for free trade. (1) They have always looked upon trade as a zero-sum game. They have been protectionist. Only for a brief period between 1846 and 1861 was there a relatively liberal trade policy, and even then the average ad valorem tariff on the ,51 most imported categories of goods was 27 percent.

The principle of reciprocity has been the central tenet of U.S. trade policy ever since, and the 20th century hegemon has sought to achieve free trade through reciprocal concessions in the GATT and WTO. But, as the anti-globalization riots in Seattle and elsewhere demonstrate, by perpetuating the myth that trade is a zero-sum game, and that removing tariffs can only be done on the basis of reciprocity, the United States has ensured that issues of domestic policy will inevitably spill over into trade policy.

While the ostensible champion of free markets balks at accepting the principle of a unilateral adoption of free trade, an erstwhile communist country--China--has embraced this economically impeccable principle. It is instructive to note that one of the largest unilateral movements to free trade has occurred in China since Deng Xiaoping adopted the "Open Door" policy (see Lardy 2002, 2003).

From its inception until the early 1980s, the GATT did achieve considerable liberalization of foreign trade. During that period, the developing countries balked at opening up their economies and were granted various special privileges and exemptions from the emerging LIEO. After the OPEC coup in the early 1970s, the developing countries tried to use their perceived commodity power to create a dirigiste new international economic order (NIEO). With the failure to assert their fabled commodity power, and as a result of the 1980s debt crisis, the NIEO died. Thereafter, much of the Third World aided and abetted by the World Bank and the IMF moved toward economic liberalization. Most developing countries realized that their best hope for prosperity was to join the Far Eastern Tigers, who had shown that integration with the world economy could lead to rapid growth, which would banish poverty within a generation. In this new Age of Reform, many countries, notably Chile and China, undertook massive unilateral liberalizations of their foreign trade regimes.

But in the early 1980s, the United States, which had hitherto pursued the objective of promoting free trade through the multilateral route, chose to adopt a "two-track" approach--combining multilateralism to be pursued through the GATT with the pursuit of preferential trading arrangements (PTAs) to liberalize trade with likeminded countries wherever multilateral progress was blocked by other countries. The unintended consequence of this has been the explosion of PTAs in the 1990s and the growing fragmentation of the multilateral trading system. The preferential route to liberalizing trade was prompted by the resistance of the European Union to accept free trade, particularly in agriculture.

This is hardly surprising. For despite the classical liberal hope, that by creating a larger internal European market, and successively lowering external tariffs and quotas, the EU would foster global free trade, it has turned out to be an inward looking protectionist bloc--especially for agricultural trade. This outcome is largely because despite appearances and its stated aim of being an economic project, the EU is and always has been a political one--namely, to create a United States of Europe. The main movers in this project have been the French and the Germans--the former claiming with some justification to be riding the German horse. The aim is to recreate a new Holy Roman Empire. The French and the Germans have tried to do this in the past through force of arms, but with Napoleon's defeat at Waterloo in 1815, and the German defeats in the two world wars, war is not seen as a feasible route to create this territorial empire. Rather, it is a neomercantilist project reminiscent of the post-Renaissance European princes who, as Eli Hecksher argued, were motivated by the desire to create nation states out of the varied feuding groups that comprised their patrimony.

The turning point in the battle between two ideas, which had jousted in the early years of the EU, came with the Maastricht Treaty (Wolf 1994). The two ideas were the liberal one that the economic power of the state must be kept in check, and the other that, if nation states cannot protect their sovereignty individually, they need to create a supranational authority within which the economic power of the state can be reestablished. The Masstricht Treaty and now the proposed European Constitution are dirigiste charters. Instead of increasing individual economic freedom they seek to centralize the exercise of political power and to harmonize taxes, labor laws, welfare provisions, and so on. Moreover, as the antics of the French and Germans in the run-up to the Iraq war showed, for these prime movers in the European project, anti-Americanism is a central feature of their desired "Europe." Classical liberals must hope that this centralizing dirigiste project does not come to fruition--a hope that is strengthened by the recent rejection of the proposed constitution in the French and Dutch referenda.

But, equally important for the worldwide promotion of economic liberty is the need for the United States to recognize that instead of promoting free trade, the PTAs are fragmenting world trade. Being most often trade diverting than trade creating, they area major departure flora classical liberal principles. The fly in...