Bretton Woods, New Hampshire, 18 February 2017
The charge against international trade by President Donald Trump but also persistent opposition in the European Union to the free trade agreement between the EU and Canada (CETA) call for reiterating vigorously the case for free trade. Free trade remains the best option to foster economic growth and development all things considered. The alternative is often associated with more government intervention and market failures. The stock market rally on the basis of Trump's promises of increasing protectionism is inconsistent with past economic developments and likely to be only short-lived.
Bretton Woods, New Hampshire, is a unique place to consider the case for free trade. The United Nations Monetary and Financial Conference took place at Bretton Woods in July 1944 with the participation of 44 countries to reach agreement on the treaty to establish the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (World Bank). The conference was primarily about stabilising the international monetary system but was seen by many at the time as a conference about the restoration and promotion of international trade. International trade was considered as essential to improve job prospects and international security for the U.S. and the rest of the world.
“5,000,000 jobs in world trade—The Promise of Bretton Woods.”1 This was the title of a pamphlet issued by the Congress of Industrial Organisations (CIO) to support efforts to convince the U.S. Congress to ratify the Bretton Woods treaty (Articles of Agreement). Naturally, it may overstate the case for free trade. Yet, it offers the historical rationale for Bretton Woods and several arguments as to why any alternative is probably worse. Most still hold today.
“President Roosevelt and CIO President Murray have set the goal at 60,000,000 jobs to keep America secure and prosperous after the war. A big slice of these jobs must come from foreign trade […]: The continued prosperity of Americans is directly tied to the prosperity of people of all other nations.
Those who remember the ‘30s will recall how some countries deliberately drove down the value of their own money in order to undercut other countries on exports. The other countries then of course tried the same thing. This destroyed world trade. And with that destruction of world trade came, also in the ‘30s the most terrible depression in history and the preparation for World War II.”
The pamphlet explains why international trade is mutually beneficial and is not a winner-takes-all outcome: “Foreign trade is a two-way street. To sell goods to a country, you have to buy things in return. One country, cannot expect to go infinitely selling to its neighbors unless its neighbors can sell to it. We do not have to be afraid of competition from [other] countries. In a peaceful and stable world, made possible by the Bretton Woods kind of planning, the fact that millions of people have well paid jobs in other countries will mean millions of well paid jobs for [the US].”
The case against free trade is based largely on the assumption that international trade leads to losses of national employment due to production relocation and international competition. While international competition may indeed lead to shifts in specialisation and possible industry losses, the alternative of limiting and micro-managing international trade seems worse. It would make international trade subject to mounting national lobbying and special interests. It is likely to stifle innovation and raise incentives for inefficient industries to survive. The wasteful agricultural policies of the EU and US are a case in point.
National economic developments are linked to international developments. It seems unlikely that any economy can perform well in isolation nor can it be dissociated for long from broader international developments. The close correlation of U.S. exports and imports of goods and services and broad stock market index performance highlights the interdependence between national and international economic trends (Chart).
The promise of Bretton Woods still holds. The principle that international trade provides national jobs remains. While the best outcome would be multilateral international trade agreements, limited expected progress makes bilateral arrangements such as CETA the best second-best approach. Trump’s promise of more jobs through protectionism will only give a short-term boost if any. The market seems to unduly assume that such policies are sustainable over the medium term. They are not. U.S. stocks are therefore unlikely to maintain sustained upward momentum on the basis of increasing barriers to international exchange.
1CIO Publication, 5,000,000 jobs in world trade, what we can expect from Bretton Woods, No 117, Washington, DC., 1944.