MySay: Wins by Biden and two Senate Democrats could mean a return to free trade

This article first appeared in Forum, The Edge Malaysia Weekly, on January 18, 2021 - January 24, 2021.
MySay: Wins by Biden and two Senate Democrats could mean a return to free trade
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The substantial victory by Joe Biden in November signals a clear return to a world where the US is looked upon by other nations as a free trade partner. And Biden’s ability to usher in a renewed era of trade has just been bolstered by the Democrats’ double victory in the Senate. 

This gives Biden’s party control of the chamber, as vice-president-elect Kamala Harris will break all tie votes in the Democrats’ favour. With control of both houses of Congress, Biden can broadly control fiscal policy and entertain new trade agreements without facing an objectionable Republican majority.

Still, speculating about Biden-era trade is difficult for many analysts, mainly because the history of trade politics in the US has been uneven. When discussing the longstanding positions of the parties on free trade and protectionism, economists and historians usually mean post-World War II party positions. But a review of recent flip-flops by Democrats and Republicans reflects a longer and more complicated history, dating back to the US’ early years.

In his farewell address, the first US president George Washington warned Americans “… to take advantage of their isolated position and to avoid attachments and entanglements in foreign affairs” that are unrelated to the country. Many have taken this to mean that Washington was advocating isolationism, but that is far from true. Instead, he was fearful of the country becoming inextricably linked to the ongoing tussles besetting Europe’s powers. Furthermore, Washington closed his address by advocating free trade with all nations, with a limited role for government.

Advocates of free-market capitalism gleefully point out the majestic timing of the publication of An Inquiry into the Nature and Causes of the Wealth of Nations by the “Father of Capitalism”, Adam Smith. In his magnum opus, Smith argued that free trade enriched people and countries. His book was published in 1776, the same year Thomas Jefferson’s Declaration of Independence catapulted democracy onto the world stage. Since then, proponents of free trade and liberal democracy have proceeded hand-in-hand, despite some celebrated clashes.

Today, there remains considerable disagreement over the extent to which free trade benefits a nation’s citizens. But trade agreements per se are a proven source of economic enrichment and happiness. This can be seen any day of the year, in any country, by observing the most basic economic transaction. That is, when a customer agrees to pay RM5 for a breakfast of nasi lemak, he values the meal more than the RM5, and the seller at the stall values the RM5 more than the nasi lemak. Their trade agreement thus satisfies both buyer and seller.

Free trade is good for businesses, consumers and governments by increasing job opportunities through the expansion of business and industry. And trade has many residual beneficiaries not so easily observed, such as charities. As businesses prosper and consumers save money through business competition and resultant lower prices, gifts to the less fortunate escalate.

Still, many people distrust free-market capitalism. Interestingly, the term capitalism was not part of people’s vocabulary until 1867 (ironically, it was popularised by the father of communism, Karl Marx, in his book Das Kapital). To this day, those who oppose capitalism like to recall early American leaders who were protectionists, such as the first US secretary of the treasury Alexander Hamilton. Though he understood finance and politics, he had little training in or understanding of economics. He thought that by imposing steep tariffs on British products, such as textiles, American consumers would purchase cheaper American products. He was making a misguided case, during the US’ infancy, for governmental interference in trade. Importantly, this was long before nations had the opportunity to engage in the large-scale trade arrangements that Smith had predicted.

In the early 20th century, free trade was favoured by American progressives — those who advocated greater freedom and opportunities for a growing population. It was promoted by people who fought for women’s equality and those who sought strong international ties. Indeed, free trade was considered by many to be a useful tool for peace.

But the popularity of free trade crumbled with World War I and its aftermath. As the world struggled with famine, depression, misunderstood price cycles and the rise of totalitarianism in Europe and Asia, many analysts blamed the culture of free trade. Writers and politicians around the world argued that free trade left people defenceless against the forces that threatened them.

But history has shown that the trashing of free trade was unwarranted and foolish. The problems listed above were the result of missteps and miscalculations by politicians. Free trade did not cause World War I or its consequences, and certainly did not contribute to the rise of fascism. Eventually, people in Europe and Asia — most notably in Germany and Japan, two nations where totalitarianism reigned in the 1930s — would discover that free-market capitalism was their road to prosperity.

Following World War II, the US’ roaring economy depended, to a great extent, on global trade. Americans desperately wanted products from other nations, especially those from Europe and Japan, and people around the world wanted things the US produced, especially automobiles and household appliances.

Thus, as a practical matter, free trade agreements made sense to Americans during this economic boom. Industrialists in the US naturally favoured the business-oriented Republican Party while powerful and popular labour unions adopted somewhat protectionist postures as they feared that the popularity of, for example, Japanese- and German-made cars would put a crimp in the domestic labour force.

In 1993, the Democratic Party, along with then US president Bill Clinton, entered into the gigantic North American Free Trade Agreement (Nafta) with the support of most Republicans. Since it was the policy of a Democratic president, Nafta’s passage showed that his party was no longer a bastion of protectionism, something which remains important as Biden and a fresh Democratic congressional majority prepare to govern.

Eventually, protectionist sentiments, combined with nativism, produced renewed scepticism about the wisdom of free trade and eventually this played to the great advantage of Donald Trump. But polls show that most Americans want to reject Trump’s “America First” posture and the protectionism it produces.

Despite Trump’s policies and positions, global trade has continued to flourish. Today, there are more than 400 trade agreements among the 200 nations of the world, and while not all of these agreements foster free trade, they do govern global trade in the broadest sense.

President-elect Biden clearly understands that by engaging more nations in free trade arrangements, the US stands to benefit. Those who doubt this, and many do, need to step back and ask themselves a simple question: Why would any country voluntarily agree to a trade agreement with another country if it did not profit from such an agreement?

Currently, the US has 14 free trade agreements in force, involving 20 countries. This number is likely to expand under Biden, considering his eagerness to engage the world in a variety of efforts involving economics, peace treaties and climate change. Indeed, the raw numbers show how much potential for increased trade deals exists, since only 10% of the world’s countries now have such agreements with the world’s largest economy.

During the 2020 nomination campaign, Biden had a difficult time navigating his trade position between the demands of the party’s moderates, who would like to return to a status quo of sorts on international trade, and progressives, who are wary of most trade agreements. Moderates contend that global free trade has, and will, bring peace and prosperity. But leftists in the party argue that such trade arrangements threaten labourers in the US while benefiting corporate interests. They fear that Biden, a supporter of Nafta and proponent of China’s entry into the World Trade Organization 20 years ago, will pursue the free trade posture of former presidents Clinton and Barack Obama.

While Biden’s overall stance on new free trade agreements is only speculation at this time, his past actions and statements offer some clues about his general feelings on trade. And it would be a mistake for anyone to underestimate the influence on Biden a Democratic Senate is likely to have. But as he prepares to lead, a few things are clear, and important.

First, Biden probably will move slowly in entering into any new trade agreements as he has stressed his belief that the first economic goal of his administration should be to straighten out domestic economic priorities. This means, most likely, a range of spending programmes in the US, including a gigantic infrastructure investment of the sort that many incorrectly believed Trump would support four years ago. He has, in fact, promised to include labour union leaders and environmentalists in upcoming trade deals. Vice-president-elect Kamala Harris actually voted against the revised Nafta agreement, arguing that it contained too few climate-change provisions.

Second, Biden’s overarching trade posture surely will be one that mirrors his foreign policy generally, which is to say he will seek multilateral partnerships. The “America First” posture of Trump will be a thing of the past, and the rest of the world knows this. Thus, it is a certainty that American trade policies and agreements under Biden will reflect harmony with the US’ allies and good faith with its adversaries.

Third, Biden is likely to continue Trump’s policy of cracking down on unfair competition and the theft of American intellectual property, especially by China. Indeed, this is the one facet of Trump’s trade and foreign policy that most Democrats have endorsed. Many have pointed out that such a stand on China was long overdue and that Trump deserves credit for embracing it. 

To this end, Biden will surely exercise his power to act on Section 301 tariffs to entice China to comply with trade promises, including a crackdown on intellectual property theft and the elimination of forced transfers of US technology by American businesses operating in China. At the same time, however, he has not stated clearly whether he would proceed with bans on Chinese social media sites such as TikTok and WeChat, nor has he said definitively that he would push for entry into the all-important Trans-Pacific Partnership (TPP). 

Fourth, Biden will surely tie his major trade moves to the larger effort at combating global warming. This is an issue that strongly unites Democrats, and which almost all trading partners support.

Perhaps the most coveted deal among free trade proponents in the US is the TPP, which Obama worked hard to negotiate — only to see Trump yank the US out of it almost immediately upon taking office in 2017. The TPP went into force without the US, and the 11 countries involved — including Malaysia and six other Asian nations — have benefited as a result. This is why so many economists believe it is imperative to get the US back on board with these important trading partners. 

A Democratic Congress does not guarantee entry into TPP, but Democrats are far more likely to push Biden in such a direction, if only to rebuke Trump. Democrats recognise that countries around the world will continue to develop new standards for conducting business — especially those involving supply chains and digital services — in years to come, and they want the US to be part of this movement. That is, most of them would like to see the US shift its focus from imposing tariffs to participating in meaningful trade talks. Indeed, a 2020 survey by the Chicago Council on Global Affairs found that 75% of Democrats agreed that the economic connections of globalisation are “mostly good” for the US. 

In a nutshell, notwithstanding the petty issues that always infect politics, Democrats basically understand that economic isolationism is a losing proposition and are likely to work with the new president towards renewal of the US’ commitment to worldwide free trade.

William G Borges is a professor at HELP University

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