Free Trade Is About More Than Economics – It’s Also Necessary for World Peace

A pillar of international peace and the longstanding global liberal order fell last week: free trade.

Most of the news coverage of the new tariffs that President Trump announced this month has focused on their potential economic effects, but trade is also inseparable from international relations – and historically, the United States has seen a close relationship between global peace and global free trade.

From the early nineteenth century through the 1930s, the United States kept tariff rates fairly high in order to protect its own manufacturers, and for a while, the combination of high trade barriers and isolation from European affairs seemed to work. But in the early 1930s, the United States discovered how dependent its own economy was on global trade when it increased already high tariff rates to even higher levels under the Smoot-Hawley Tariff, which taxed some imports at a rate of 60 percent. The Smoot-Hawley Tariff precipitated a global trade war that resulted in precipitous declines in both imports and exports for the United States – which was exactly the opposite of what the United States needed at the time, as it dealt with the Great Depression. The unemployment rate climbed to 25 percent by 1932. Hundreds of banks failed.

But perhaps the international effects of the tariff were even worse, because in the midst of a global trade war, economies around the world suffered. The unemployment rate in Germany climbed from 10 percent in 1930 (the year Smoot-Hawley was passed) to 30 percent in 1932. Desperate people turned to desperate measures. Adolf Hitler became chancellor of Germany in January 1933. And though Hitler was the worst of the authoritarian leaders who rose to power in Europe during the economic chaos of the Great Depression, he was not the only one. Across Europe, countries became more authoritarian – sometimes with violence. Francisco Franco took power by force in Spain after a civil war, overthrowing a republic and establishing a fascist state. Austria also established a one-party fascist government in 1934.

While the Smoot-Hawley Tariff and the ensuing trade war were not the sole cause of Germany and Europe’s economic troubles, they were a significant contributing factor in transforming a severe recession into a global Great Depression. For decades, economists have been almost unanimous in excoriating the Smoot-Hawley Tariff as a cause of international economic collapse.

Many economists recognized the error of Smoot-Hawley as soon as it was passed, which was why Franklin D. Roosevelt ran his 1932 presidential campaign partly on a promise for its repeal – a promise that he started to fulfill with a downward revision in tariff rates in 1934. But it was only after the rise of totalitarianism in Europe and the onset of World War II that some Americans began to realize the full extent of the political effects of trade wars.

It’s impossible to say for certain whether an American free trade policy in the early 1930s would have prevented Hitler’s rise to power or whether the spread of fascism in Europe could be blamed on the Smoot-Hawley Tariff, but it’s fair to say that if the tariff was a major factor in Germany’s economic downturn (as economic historians believe) and if the rise of fascism in Europe was largely a reaction to that downturn, the Smoot-Hawley Tariff was a contributing factor in European totalitarianism and the origins of World War II.

That is why in the final year of the Second World War, the United States led the world in the creation of a new economic system of globally interconnected free trade. At the American-led Bretton Woods conference of 1944, the participating countries agreed to create the International Monetary Fund and a new system of international free trade that was based on the premise that free trade led to global peace and prosperity for all.

“Since foreign trade affects the standard of life of every people, all countries have a vital interest in the system of exchange of national currencies and the regulations and conditions which govern its working,” the Bretton Woods conference declared. “Because these monetary transactions are international exchanges, the nations must agree on the basic rules which govern the exchanges if the system is to work smoothly. When they do not agree, and when single nations and small groups of nations attempt by special and different regulations of the foreign exchanges to gain trade advantages, the result is instability, a reduced volume of foreign trade, and damage to national economies. This course of action is likely to lead to economic warfare and to endanger the world’s peace.”

Until the early 1970s, most American policymakers did not question this system of free trade, because its advantages seemed obvious. The American economy grew rapidly in the 1950s and 1960s, and the countries of the free (that is, non-Communist) world remained at peace with each other.

In the 1970s, as the United States experienced a relative decline of its economy when compared with Japan and Germany, trade barriers became a more popular idea in the United States, but the principle of free trade reigned again in the 1990s, when President Bill Clinton made it a central goal of his foreign policy.

In addition to the landmark North American Free Trade Agreement (NAFTA), the Clinton administration negotiated more than 300 bilateral free trade agreements with countries around the world. At the time, both Republicans and Democrats supported these policies. Pat Buchanan and Ross Perot complained, but most mainstream Republican and Democratic candidates were generally supportive of the principle of free trade.

In recent years, though, the idea of tariffs have started to receive increased support from people who imagine that trade barriers that protect American manufacturing will bring back jobs that have been lost to China or elsewhere and will erase our trade deficit. In 2016, NAFTA and the free-trade principles it represented were blasted from prominent members of both parties. And there was tacit support from Democrats for the tariffs that Trump imposed on China in his first term. In fact, President Joe Biden even increased them.

But Trump’s latest round of tariffs are not like the protective tariffs he imposed in his first term. They’re not a target against a specific country or an effort to protect a specific industry, such as his first-term measures to protect US steel manufacturers against European competition. Instead, they’re an across-the-board attack on imports from nearly all countries.

Even the Smoot-Hawley Tariff Act didn’t go quite this far; it didn’t levy taxes on all imports, but only on imports in specific industries, because its goal was to protect US manufacturers, not make all imports to the United States needlessly expensive.

But Trump’s tariffs charge high import duties even on goods that are not currently produced in the US. There are no commercial diamond mines in the United States, for example – yet Trump has just levied a 27 percent tariff on diamond imports from India and an almost equally high rate on diamond imports from some other countries. This is highly unlikely to encourage diamond mining in the United States, at least for the foreseeable future, because it’s difficult to imagine that the US could develop a domestic diamond production industry that would be able to meet American demand. Instead, it’s likely to make diamonds more expensive for consumers in the United States (thus making it more difficult for prospective couples who will get engaged later this year) and anger former allies such as India.

So, if many of the tariffs will not help American manufacturers or end America’s trade deficit, what is their goal?

While various ideas have been proposed, my own view is that Trump is deliberately taking aim at a liberal international system that he never really liked – a system that emerged in the 1940s as a way to secure international peace by fostering the mutual interdependence of all countries and finding ways to ensure that everyone will prosper together.

It was based on an assumption that trade was not a matter of winners and losers, but was rather a positive-sum game in which all could mutually benefit, because everyone’s fortunes could be lifted together.

This is not how Trump thinks about the world. Instead, Trump and his supporters instead view trade and international relations in general in zero-sum terms, where one country’s gain is always another country’s loss. So, if Canada benefited from NAFTA, the United States must have suffered. And if the United States punishes Canada in a trade war, the United States must come out ahead.

Instead, there are good economic reasons to believe that trade is a non-zero-sum game in which one country’s loss will also be a reciprocal trade loss for all parties. No one wins a trade war; instead, everyone loses. So, we can expect an economic downturn to result from this, numerous economists have warned, with good reason.

But what’s even more concerning, I think, is that the international peace that the system of free trade was supposed to create – the peace that we’ve largely enjoyed for most of the last eighty years – may also be destroyed once the system of free trade collapses. Trump’s tariffs will likely destroy our economy, but they will also probably destroy our alliances and the goodwill that we have earned around the world. That damage may be even more catastrophic.

After all, it was bad enough that the Smoot-Hawley Tariff destroyed the American economy and prolonged the Great Depression, but if it destabilized the world, led to the rise of fascist regimes in Europe, and contributed to the development of World War II, those outcomes were arguably even greater tragedies.

I shudder to think what similar nightmares might ensue now that the system of free trade that was designed to preserve world peace has been eradicated.

To avoid this, we need to return to the positive-sum way of thinking about trade and global relations – that is, to a realization that our own country’s fortunes are inextricably linked to the fortunes of others. It is only through this recognition of mutual interdependence that we will experience prosperity and flourish as a nation. After the horrors of World War II, this was a truth that both Americans and Western Europeans finally recognized. It’s a truth we may have forgotten today – but it’s imperative for the sake of world peace that we remember it before it’s too late.