The world is now witnessing the spread of unilateralism, xenophobia and protectionism, which accelerate division and disunity in society, domestic and international. If "civilization" is defined as a state born from a spirit of integration and coexistence, then confrontation and conflict resulting from division and disunity can be said to be signs of a reversion to barbarism. The ongoing U.S.-China trade war is emblematic of such a backward development in today's world.
"Pursuing protectionism is like locking oneself in a dark room. While wind and rain may be kept outside, that dark room will also block light and air," Chinese President Xi Jinping said in a speech at the opening plenary session of the World Economic Forum Annual Meeting in January 2017. His view is right in general terms. In principle, free trade helps the world get rich, whereas protectionism does not increase production and employment, ending up incurring economic losses to the world. The proposition that two-way free trade brings benefits to both countries involved is correct as a theory in economics.
However, in reality, unconstrained competition tends to entail income and wealth concentration, a situation that is not necessarily in line with the interests of the public. Likewise, when free trade continues to be in place without tariffs and quantitative trade restrictions, the global marketplace can eventually be controlled by economically powerful countries. In this respect, the idea of free trade can be regarded as "the logic of the strong."
In fact, when free trade was strongly advocated in the 19th century, equally strong arguments against it emerged. The opponents strongly warned that free trade would inflict devastating damage on domestic industries in less developed countries, which they said should be protected as "infant industries."
What may be theoretically correct is not always correct in empirical and historical terms. Therefore, when we look at the issue of free trade and protectionism, we need to distinguish between economic theories and historical realities and be clearly conscious of the distance between them. Further, we need to clarify what criteria the defense of free trade should be based on. To that end, it is necessary to understand why the idea of free trade was floated and which social groups have promoted the idea. So let's look back at some ideological background and historical examples.
Speaking of trade disputes between countries in his 1758 essay titled "Of the Jealousy of Trade," Scottish philosopher David Hume wrote: "Nothing is more usual, among states which have made some advances in commerce, than to look on the progress of their neighbors with a suspicious eye, to consider all trading states as their rivals, and to suppose that it is impossible for any of them to flourish, but at their expense." As such, U.S. President Donald Trump's way of thinking regarding other countries with which the United States trades had already been epitomized in this essay as early as 260 years ago.
Malice and jealousy
As for the malice and jealousy associated with trade relations, Hume pointed to a serious logical flaw by adding: "In opposition to this narrow and malignant opinion, I will venture to assert, that the increase of riches and commerce in any one nation, instead of hurting, commonly promotes the riches and commerce of all its neighbors; and that a state can scarcely carry its trade and industry very far, where all the surrounding states are buried in ignorance, sloth, and barbarism."
In the years following the end of World War II, there was a scene during multilateral trade-related negotiations in which Hume's political philosophy was effectively embodied. At the time, Japan sought to become a member of the General Agreement on Tariffs and Trade (GATT), but Australia, Britain and New Zealand, among other countries, opposed the admission of Japan into the new world trade watchdog. The Commonwealth countries' opposition reflected their distrust of Japan, which they accused of having thrown the world economy into chaos by dumping its products abroad and devaluing its currency. Nevertheless, the United States supported Japan's GATT membership bid. As the world's largest economy, the United States thought that if Japan, one of its transpacific neighbors, grew as a major market with increased foreign trade, it would serve not only American interests but also those of the world economy as a whole. The United States did not side with Japan merely out of kindness. Rather, its approach was based on enlightened self-interest. In other words, the United States could still afford at the time to believe in the philosophy of coexistence and co-prosperity set forth by Hume about 200 years earlier.
Trump puts priority on decreasing the U.S. current account deficit -- the broadest measure of the balance of trade in goods and services. His attitude is identical to what mercantilism brought to the world in the 18th century -- leaders deemed precious metals, such as gold, indispensable for swelling their countries' wealth and, therefore, made it a priority to increase trade surpluses to keep acquiring precious metals. In that sense, Trump's trade policy can be said to be a "throwback" to mercantilism, whose ideas came under strong criticism from 18th-century Scottish philosopher and economist Adam Smith.
Smith thought foreign trade was the most important means for countries to foster relationships of trust. In the middle of the 18th century, Western Europe brought to an end a series of religious wars that had ravaged every part of the region, and its priority was to establish a new international order amid conflicts over colonial expansion and a fierce Anglo-French rift. An international order cannot be solely created by military and diplomatic endeavors. Smith thought orderly international relations would be viable when countries deepened mutual understanding by exchanging goods or engaging in two-way trade. Also, trade would help a fellow-feeling develop on both sides, thus making people and countries behave with self-command.
Self-contradiction
But Smith's ideas on free trade gradually became relevant to the logic of the strong in the 19th century when economic competition intensified and Britain strengthened its economic might. In 1846, Britain repealed the Corn Laws, which had protected British agriculture by imposing tariffs and other trade restrictions on cheaper wheat from the European continent. The revocation meant a victory for free trade advocates who wanted British factory hands to get wheat at cheaper prices. With cheaper wheat, factory workers' living expenses remained low, enabling Britain to keep both wages and production costs relatively low, to the extent that the nation felt confident of capturing the lion's share in the international manufactured goods market. Similarly, in 2017, Xi Jinping emerged as a leader supporting free trade, reflecting his confidence that China will eventually gain hegemonic status in international competition.
History shows that a majority of countries in the world have been in favor of protectionism. This of course includes the United States, the bastion of modern protectionism. It is true that there was a time when free trade flourished, but such a period lasted no more than 20 years under the Anglo-French Commercial Treaty of 1860. In the 1920s, or the years just after the end of World War I, countries tended to reduce tariff rates, indicating that free trade might be reinstated. However, the Great Depression broke out in the last year of that decade. In June 1930, the United States enacted the Smoot-Hawley Tariff Act to impose higher tariffs on imports. This law was not the real cause of the worldwide economic plight, but it did mark a turning point in history by exacerbating the depression.
History itself has neither always asserted free trade as an appropriate policy choice nor continuously supported protectionism. Regardless of which side people advocate, they are required to clarify the purpose and ideals they want to protect. For his part, Trump has clarified nothing beyond repeating his "America First" campaign mantra, while eagerly coming up with one new policy after another to keep his supporters in the United States pleased with his administration. The key point is that the president's combative protectionist approaches have not been in harmony with the administration's domestic economic policies -- they have fallen into self-contradiction.
Even if Trump's protectionist push successfully leads to trimming the U.S. current account deficit, his domestic policies, such as tax cuts and the relaxation of financial market and car-fuel efficiency regulations, are expected to increase consumer spending and corporate investment beyond domestic production, swelling the deficit at the end of the day. In addition, given the U.S. Federal Reserve's current policy of keeping short-term interest rates relatively high, the current account deficit is most likely to increase further. Isn't Trump's way of pursuing policies that serve naked self-interest alone destined to eventually trap him in self-contradiction?
Special to The Yomiuri Shimbun
Inoki is a professor emeritus at Osaka University, where he also served as dean of the economics department. Until recently, he was a special professor at Aoyama Gakuin University. Prior to that, he served as director general of the International Research Center for Japanese Studies from 2008 to 2012.
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