Should the United States continue as a champion of free trade?

• Author: Gady, Franz-Stefan
• Position: Report

Introduction

Ever since the end of the Second World War and the introduction of the Bretton Woods system, the United States has been seen as a champion of free trade. In part due to its industrial supremacy and the onset of the Cold War, the U.S. government was one of the most consistent proponents of reduced tariff barriers and free trade in the last sixty years and helped to establish the General Agreement on Tariffs and Trade (GATT) and later, the World Trade Organization. Today, with its economic power in relative decline and neo-mercantilist powers such as China on the rise, the question arises whether the US will remain a champion of free trade.

This paper will argue that the United States should continue to be a champion of free trade for two reasons. First, free trade promotes peace and hence, makes it easier for the single hegemonic power to manage the international system. It lessens the cost of the "empire," so to speak. Second, the argument that the United States will deviate from free trade due its relative decline in relation to neo-mercantilist powers such as China is unsubstantiated. The truth is that a hegemon (1), despite the arguments of the hegemonic stability theory, can do very little to influence states' behavior in the international system. Hegemony is based on tacit consensus among the members of the international system. Hence, the professed inability of the hegemon to deal with a new emerging power should not be seen as a decline but merely as a natural exposition of the limitations of any state trying to influence the domestic policy of another state in the international arena.

The first part of the paper will attempt to show that free trade indeed promotes peace. The second part will take the historical case study of the British Empire and how it tried unsuccessfully to influence continental economic policy with little consequence for the overall promotion of free trade in the later part of the 19th century.

Peace through Free Trade

The old liberal idea that trade promotes peace is based on four assumptions or models. The first has been labeled the "opportunity cost" or "deterrence model". Armed conflict or even the threat of confrontation tends to disrupt normal trade pattern and out of that the resulting large economic costs will deter dependent states from using military force to solve political conflict. A case in point would be the large Chinese trade surplus that the Chinese government uses to invest in U.S. treasury notes. Economists have referred to the growing Chinese dollar reserve as a "balance of terror" since both economies would substantially be hurt if China decided to sell U.S. treasury notes as a retaliatory measure, for such instances as U.S. intervention in the Strait of Taiwan on behalf of the island, resulting in a devaluation of the U.S. currency.

The second assumption is an "efficiency argument" in that it compares the relative costs of acquiring productive resources. As trade increases it will become progressively less productive to acquire resources through plunder or conquest in order to promote economic growth. A good illustration for this is that the Soviet Union delivered more raw materials and wheat to Germany in one year prior to 1941 than Germany was able to extrapolate during four years of its occupation of the western parts of the Soviet Union from 1941 to 1944.

The third assumption is a sociological hypothesis and focuses on how trade helps to increase contact and communication across societies. Through those contacts national loyalties and competitive behavior are displaced and hence lead to a more stable international environment. Italy during the Renaissance provides a good example for this hypothesis. Wars were not uncommon during this period of time, but they were relatively bloodless and short mostly due to the economic interests of the parties involved such as the Medici family of Florence.

Fourth and lastly, international commerce, international trade and the resulting human interaction can provide important signaling mechanism that...