Free Trade is Facing Headwinds

The global trading system is becoming more complex and fragmented. What does the new disorder mean?

Free trade, an economic policy pursued for decades until relatively recently by many key Western economies with the aim of minimising or even eliminating government restrictions on international trade in pursuit of greater efficiency, competition, and growth, is facing headwinds.

The global system is changing and globalisation now looks very different. There has not been a new trade round agreed upon at the World Trade Organisation since its inception following the Uruguay round in the mid-1990s. However, recently even the world of the WTO, which the Uruguay round ushered in, is starting to look quite distant.

Why is free trade important?

Free trade has allowed businesses to access larger markets and serve a wider range of customers in more countries. Lower tariffs and trade barriers make it possible to create efficient global supply chains to import raw materials and critical components at a lower cost, helping to increase profits. More international competition helps to reduce prices to consumers and improve quality. While there can be some downsides, overall free trade helps boost economic growth, and when policymakers follow and uphold the rules, free trade agreements can contribute to peaceful international relations by fostering economic interdependence.

What is happening now?

Geopolitics is rapidly changing the landscape of world trade and changing the priorities of many of the world’s biggest economies. Trade disputes are becoming more difficult to resolve, trade wars are more likely, and new issues have evolved that fall outside the scope of the WTO. The pendulum of history seems to yet again be swinging away from the principle of open and free trade towards a more fragmented trade system in practice. Today, political thinking about trade is increasingly centred around regional preference, protectionism, and the pursuit of industrial policies in critical sectors.

It is true to say that in the last number of decades, we never had complete free trade as regions such as Europe and the United States have always protected and supported some sectors of their economies with tariffs and subsidies, e.g. agricultural, but overall we have lived in a world that was becoming ever more open, ever more global.

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