Will the global trading system survive the Trump tariff onslaught and revert to normality? Yes, Malaysian Prime Minister Anwar Ibrahim assured the Financial Times recently, claiming that others share his view. But does the system really deserve to survive?
Advertisement
It is my own humble view that the status quo position regarding global trade was deeply flawed and unsustainable to begin with. And that goes for the existing global financial system too. Global trade is in its present “mess” – the best word to describe the outbreak of Trumpian trade wars and other protectionist barriers to international commerce – precisely because the system was not rooted in political and economic reality to begin with.
The fact is that champions of free trade such as Adam Smith – a British economist who believed the free exchange of goods would create prosperity – and David Ricardo, who argued similarly, did not foresee the wider social consequences of their intellectual convictions.
Ricardo argued that countries can benefit from trade by focusing on making goods they have an advantage in producing while buying things they are not as good at making from others. By focusing on their strengths, countries could produce goods more efficiently. However, Ricardo lived in the 19th century, before globalised trade could test his theory in earnest.
What we have seen, especially since the General Agreement on Tariffs and Trade was launched by 23 nations in the late 1940s – later to be succeeded by the World Trade Organization (WTO) in 1995 – is that supposedly efficient economic production can come at the expense of employment and national well-being.
The rapid spread of manufacturing operations by mainly American and European multinational corporations from the 1960s onwards, taking advantage of the “comparative advantage” of other countries’ cheaper cost structures, exacerbated this dilemma. But so long as major economic powers were in control, this did not necessarily make headlines.