A Free Trade Backslide?

As the economy slumps, experts predict a rise in protectionism. The reasons range from obvious to interesting. Trade liberalization has the potential to decrease wages for blue-collar jobs in developed countries, which, especially in hard times, can cause political pressure to raise barriers to trade. Also, emerging markets are having a harder time exporting, which decreases their incentives to strive for freer trade. If they can't boost domestic demand, it will be hard for politicians to resist the pressure.

Another commonly overlooked factor is government bailouts - they are essentially a trade-distorting subsidy. It is hard to rule out the possibility of retaliatory measures.

For freer trade, the best case scenario involves strong political leadership from the developed world, especially America. Trade liberalization works like the prisoner's dilemma - if everyone cooperates it is possible to reap the best rewards, but there is no guarantee the other players won't be selfish.

The essential dilemma of free trade is that, while we find ourselves in an increasingly unified global market, there is still only local political sovereignty. If other countries have poor labor and environmental standards, we have no direct authority to do anything about it - even though the resulting low wages undercut the ability for everyone else to compete. So even if all trade was free, we'd still have to deal with a second prisoner's dillema: a wage reducing arms race. I can think of no other way to avoid this than strong international institutions and agreements, like the WTO.

Do you foresee the same future for trade? To read more, read this article from The Economist, and the Fair Trade section of our resource desk.