Free Trade Agreements – A brief history

By Sebastian Keil. Sebastian will begin a program in International Studies at the University of Leiden in September.

Free trade is a term that appeals to the human mind because it creates the image of a flourishing economy. (1) Trade agreements, however, are secretly negotiated behind closed doors by just a few individuals. What they contain affects billions of lives around the globe. The concept of free trade is as old as human economies. While free trade is promoted to enhance the overall well-being of involved parties, it can also be used as a weapon of economic warfare through the exclusion of others. (2) History shows that free trade has more often than not been imposed by the ‘stronger’ on the ‘weaker’, and rarely negotiated on equal levels. The shapes and forms of free trade agreements have changed throughout history, but even to this date they continue to be a tool of the powerful. People still struggle to influence to outcome of these treaties. (3) This article will serve as a brief guide of free trade areas and demonstrate how they are closely interconnected with military power and global influence. It will shed light on the imperial history of free trade, and show how power ambitious continue to play an important role in the free trade agreements which are currently in public debate.

Empires and free trade

Before the rise of the state system as we know it today, free trade “spheres of influence” were an integral part of expanding empires. In 30BC, Rome annexed the Ptolemaic Kingdom of Egypt to include it into its empire. Egypt’s highly developed urban economy soon served as the main producer of grain for the empire, which also installed a sophisticated taxation system in its new province. Low taxes for landowners and entrepreneurs, as well as a push for the privatization of Egyptian land, both played an important role in integrating Egypt into the Roman economy. This new system boosted overall trade in the first two centuries of its existence and brought monetarization (the usage of coins) and complexity to the economy. However, it also oppressed the poor and exploited the lands, benefiting mainly wealthy parts of the population in Alexandria and the capital (Rome), which were the end stations of the supply chain. (4)

The creation of spheres of influence has been a reoccurring pattern throughout history: an empire expands its territory by military force and then integrates the conquered lands economically by forcing “free trade” upon them. While this mechanism served mainly to exploit the conquered in favor of the conqueror, it also brought development through sophisticated methods of trade and bureaucracy. However, free trade zones could hardly be called “agreements”, since the weaker parties simply had no choice. Another common form of this “conquer and exploit” approach was through colonies, which also depended on the power of their motherlands. Colonization was even more detrimental to the weaker links as the conquerors had no interest in fully integrating the colonies into their economy – their only interest was to exploit resources. It was for example a vital interest of Rome to integrate Egypt into its economy, while the colonial powers’ interest in Africa were primarily the continent’s rich resources. Historical records of this approach go back to as early as 1900 BC, when the Assyrians colonized Kanesh in Cappadocia. (5)

The nature of free trade changed fundamentally in the nineteenth century as the political wave of “free trade imperialism” took off in Great Britain – the new global economic power of the time. The core difference in Britain’s approach was that the empire’s focus shifted from colonization and territorial expansion in the classical sense, to commercial domination through the forces of the market and diplomacy. This new philosophy focused on convincing the places of interest of the idea that open trade relations are in both parties’ interest. Despite putting focus on the diplomatic part, the enforcement of free trade depended on military might. Free trade imperialism was intellectually backed by the emerging theories of Adam Smith and David Ricardo that elaborated on the overall economic benefits for nations involved in free trade. Although the British Empire officially promoted the idea that international agreements could secure trade interests of all parties, it made sure to protect its weaker domestic industries, such as agriculture, from international competition through high import tariffs (e.g. Corn Laws). (6)

Although Britain primarily used diplomatic force to open up foreign markets for its “free trade” policies, military power remained the major component ensuring this system functioned. The empire was always ready to make use of its superior military if another nation would resist its foreign policy. An astute example of this was with China, as its economy was basically self-sufficient and there simply was no need for Western goods. But its resistance to open up markets resulted in the Anglo-Chinese War (1839-42) which the Britons won quickly. The empire gained access to five treaty ports and the most-favored nation status, which means that a trade framework was created in which no nation is any more favored than another in terms of trade issues. Given the economic and military imbalances at the time, this policy ensured Britain became a major influence on trade policies in China. (7)

The rise of US power and modern free trade agreements

The Great Depression of the early 1930s led to the collapse of international trade. Until the Great Depression, the United States (U.S.) was a perfect example of a protectionist nation. (8) In 1930, import fees on goods were at an all-time high, but the U.S. already had a long tradition of strongly protecting its economy from free trade influences in order to prevent it from being exploited by other powers (especially Britain). However, in the following decade dominated by fear and chaos with the world slipping into another great war, the United States took a different approach that would ensure its later global dominance. It started signing more than 20 bilateral free trade agreements, especially in Latin America, but later also with Britain and Canada. (9) As the graph below illustrates, the US also started to dramatically decrease its import tariffs. This was a strong sign demonstrating to the rest of the world that the U.S. was rising to become an economic (and military) superpower.

Source 1.1: Akarlin (2009)

Two years after the end of the Second World War, GATT (General Agreement on Tariffs and Trade) was established and was on its way to creating a new global economic order. It was the first international treaty to be founded on the idea of multilateralism, which means that multiple parties can take part in it, and the most-favored nation principle. 23 nations were included in the treaty when it was signed, but the idea was that many more would join later as a domino effect kicked in. Alongside GATT, the International Monetary Fund (IMF) and the World Bank came into existence to maintain a stable exchange rate and grant reconstruction capital to countries that had suffered war damage. This new international framework allowed the U.S. to dictate trade policies, as it remained the economically and militarily unchallenged power on the western side of the iron curtain. In the east, the Soviet Union was the only counterbalance to U.S. power.

After the collapse of the Soviet Union in 1991, the United States emerged as the only remaining superpower. Through its unchallenged global position, the U.S. managed to push for an international system to promote its commercial interest globally which led to the creation of the World Trade Organization (WTO) in 1995, including 123 nations. The WTO oversees the GATT, GATS (General Agreement on Trade in Services) and TRIPS (Trade-related aspects of Intellectual Property Rights) under one roof. GATS and TRIPS were negotiated in the Uruguay round and added to the main pillars of the WTO. They reflect a “new” U.S. trade policy agenda that focuses on thematic issues such as investment, services and intellectual property in a multilateral trade system. This has also been central to the bilateral and regional treaties the U.S. has signed before, such as NAFTA (North-American Free Trade Agreement). (10)

On the other side of the atlantic, the European States signed several treaties with each other in the years following World War II. European trade became more and more interconnected leading to the creation of the European Union (EU) in 1992. Over the years, more countries have been integrated in the Union, which functions as a customs union. A customs union can be seen as an advanced form of a free trade agreement which passes several responsibilities on to be addressed at a supranational level. This is, for example, the reason the EU now negotiates free trade agreements on behalf of Europe as a whole, instead of as single countries. (11)

The new era of FTAs

The global distribution of power has changed once again since the creation of the U.S.-dominated WTO. The European Union, as could be expected, is now an economic superpower. (12) However, it has no unified military and its member states are also part of the U.S.-dominated security treaty NATO. (13) Therefore, the EU is no direct candidate for becoming a new global hegemon. The rise of the BRICS countries however, especially China, has changed the order of international trade fundamentally. In recent years, there has been an explosion of bilateral and regional free trade agreements. As the global south and other developing countries have begun to raise their voices in the WTO and stopped simply agreeing to what developed nations propose, negotiations have shifted away from the multilateral approach to more interest-orientated talks. Overall, global trade has become more interconnected and power has become more plural.

Three free trade agreements that are currently being negotiated in secret are unparalled in their scope and influence on the global system: TISA (an international treaty on services), TTIP (a treaty between the EU and the USA) and TPP (a treaty between East Asia and the USA, excluding China). (14) The main feature shared by these agreements is that they only very remotely focus on actual trade. They are in fact a means to protect the current economic system from the increasing influence of other uprising powers in shaping its form. These treaties would have two major consequences if successfully implemented. Firstly, they would create a giant trade block outside the WTO. Given its excellent geopolitical position in the center of all the nations involved, its military might and economic strength, the U.S. and the large corporations that constitute its economic power are expected to dictate trade policies within this block. The graphic below illustrates the central role the US plays in TISA,TPP and TTIP. The new era in FTAs could also bring about a profound shift in power inside the nations involved: away from sovereign states and towards international corporate power. In the long run, other major powers such as China, Russia and India, which are excluded from negotiations so far, would either have to submit to the conditions of this new geopolitical axis or they would be pushed into creating their own trade systems and regulations.

Source 1.2: Bilaterals.org

Conclusion

History has shown that free trade is rarely something that is agreed on. One pattern has always repeated itself: whenever a major global power arises, it seeks to promote a trade policy that benefits its own interest. These policies are then imposed on the other parts of the world that the power wishes to exploit or integrate. In times of general instability, any power usually contracts to protect its domestic industries. In modern times, powerful nations take a much more diplomatic approach than ancient empires when promoting their economic interests abroad, although the ability to make use of military power and intelligence remains indispensable. While the developed world rhetorically encourages the developing world to catch up, it has created a system of global competition. To some extent, this competition takes away the possibility of developing internally. One may therefore argue, that the era of free trade imperialism has not yet ended, and lies at the heart of many problems the world faces today. After all, the vast majority of people living on this planet are still completely excluded from any decision-making regarding international trade policies. Just as in the time of the Roman Empire, trade policy is being made by a small amount of people. By their nature, policy makers are more concerned with domestic interest than with creating a harmonic global economy. The future will show whether trade policies will continue to be a matter of power and domination, or if the world can agree to an economic system that benefits all peoples. Trade agreements will also continue to play an essential role in the ever repeating questions of war and peace.

Essential terms:

Most-favoured nation: a status granted by one trade party to another, to ensure it equal status to the “most-favoured nation” in regards to trade, effectively it means that no trade party is discriminated against. MFN is essentiell to modern free trade agreements.

GATT : General Agreement on Tariffs and Trade is a multilateral free trade agreement. It was signed in 1947 and expanded within the WTO in 1994

GATS: General Agreement on Trade in Services has been signed within the WTO in 1994 and focuses mainly on services.

TRIPS: Agreement on Trade-Related Aspects of Intellectual Property Rights has been signed within the WTO in 1994 and focuses mainly on Intellectual Property.

WTO: The World Trade Organisation oversees all the above treaties in a multilateral system. Currently the WTO has 162 member states.

Multilateral: agreements between many nations/ trade partners

Bilateral: agreements between two nations/ trade partners

References:

• Boudreaux, D. J. (2015, April 20). The benefits of free trade: Addressing key myths. Retrieved from http://mercatus.org/publication/benefits-free-trade-addressing-key-myths
• (2016, February 3). Trade can make everyone worse off. Retrieved from https://nomadicequity.com/2016/02/03/trade-can-make-everyone-worse-off/
• Kaufmann, B. (2015, October 07). The direct democratic struggle about free trade. Retrieved from https://www.democracy-international.org/free-trade-ttip-direct-democracy
• Dorman, P.F. (n.d). Ancient Egypt. Retrieved from http://www.britannica.com/place/ancient-Egypt/Roman-and-Byzantine-Egypt-30-bc-ad-642
• Unknown Author. (n.d.). The Assyrian Colonies. Retrieved from http://smie.co/html/cultural_history/assyrian_colonies/assyrian_colonies.shtml
• The Editors of Encyclopædia Britannica. (n.d.). Corn Law. Retrieved from http://www.britannica.com/event/Corn-Law-British-history
• Pletcher, K. (n.d.). Opium Wars/ Chinese History. Retrieved from http://www.britannica.com/topic/Opium-Wars
• Karlin, A. (2009, October 19). Kicking Away the Ladder – Review. Retrieved from http://akarlin.com/2009/10/kicking-away-the-ladder-review/
• World Trade Organization. (2011). Historical background and current trends [Abstract]. World Trade Report 2011, 50-51. Retrieved from https://www.wto.org/english/res_e/booksp_e/anrep_e/wtr11-2b_e.pdf.
• World Trade Organization. (2011). Historical background and current trends [Abstract]. World Trade Report 2011, 52-53. Retrieved from https://www.wto.org/english/res_e/booksp_e/anrep_e/wtr11-2b_e.pdf.
• European Commission. (2015, November/December). What is trade policy? Retrieved from http://ec.europa.eu/trade/policy/policy-making/
• Rifkin, J. (2004, November/December). The World’s Other Economic Superpower. Retrieved from http://www.wsj.com/articles/SB110047329912173624
• US Department of State. (n.d.). NATO. Retrieved from http://www.state.gov/p/eur/rt/nato/
• Agazzi, I. (2014, October/November). TTIP, TISA and TTP – world trade revolution? Retrieved from http://www.alliancesud.ch/en/policy/trade/ttip-tisa-and-ttp-2013-world-trade-revolution

Illustrations:

1.1: Akarlin (2009) Retrieved from http://akarlin.com/2009/10/kicking-away-the-ladder-review/

1.2: Bilaterals.org Retrieved from http://www.bilaterals.org/IMG/png/sans_titre-2.png