Harvard Business School Explains the Need to Nurture Free Trade
While global free trade is clearly a good idea and necessary to our ultimate success, it’s important to remember that it’s not the natural order of things. It needs to be nurtured, tended, and maintained over time to survive. To get a better idea of what this looks like, Harvard Business School associate professor Sophus Reinert and professor of management practice Dante Roscini discuss the history of free trade and what we can learn from the lessons of the past.
Globalization Isn’t Automatic
While many people believe that globalization is inevitable as our world becomes more interconnected, that’s not actually the case. There have been times during the technological revolution when globalization took a step backward. For example, Roscini mentioned the Great Depression, which saw countries close in on themselves, and Reinert mentioned the invention of the telegraph, which dramatically opened up trade at first, but thanks to international rivalry, didn’t last.
“Ultimately a shot in Sarajevo killed the Archduke Ferdinand and started World War I, and it all collapsed,” said Reinert. “As percentages of GDP, we didn’t return to those earlier levels of global capital flows until the 1990s. Global free trade is not the natural order of things. Globalization is a project, and projects need to be maintained.”
Global Trade Doesn’t Benefit Everyone
There’s no doubt that global trade provides an overall gain, but that doesn’t mean that it necessarily benefits everyone. It can help develop more wealth, but much of that goes to the new middle class and not the working middle class in the already developed world. That’s why many industries and regions request protection through trade barriers because they are negatively affected by free trade.
“The Catfish War is a famous example pitting the Mississippi Delta, where very poor people live off the catfish industry, against the Mekong Delta, where you have the same,” explained Roscini. “The US producers felt that they were being threatened by cheap fish from Vietnam, and local politicians went all the way up to Washington, which imposed a series of trade barriers. The costs are borne by diffuse interests, including the consumer, who ends up paying higher prices.”
Ending Trade Wars
Ending global trade wars is a complicated process. Global supply chains are complex with trade flows spanning dozens of countries, which means managing resolution is difficult. Ideally, the parties reach an agreement under the rules of the WTO but managing one element of trade can affect many other elements, meaning the lasting effects can be difficult to predict.
But, “as long as we live in that world, we will be forced to face these challenges. We cannot sit back and expect an ever-expanding, ever-wealthier, more peaceful world economy. An international system needs to be nurtured. We can’t take it for granted—that is one thing we’ve learned. Again,” explained Reinert.
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