Free trade is under threat

by Michael Collins, Investment Commentator at Fidelity International

August 2016

US Republican presidential candidate Donald Trump reckons globalisation “has left millions of our workers with nothing but poverty and heartache” and he is against a proposed 21-strong Pacific trade pact. Democrat nominee Hillary Clinton says she agrees with such anti-trade talk. Within three days of the UK vote to leave the EU, French Prime Minister Manuel Valls effectively killed an EU-US trade pact by saying “talks aren’t going in the right direction”. In Australia’s latest parliament, protectionist-leaning independents and minor parties hold pivotal positions, forewarning of steps to prop up uneconomical local manufacturers.

Trade barriers kill more jobs than they preserve, squander taxpayer money, strain government finances, hamper productivity growth and suppress living standards. Yet they are festering at their fastest pace since 2008, according to the WTO.[1] While economists and pro-trade bodies can rail all they like about the case for free trade, it appears a losing argument for the foreseeable future. After three decades of lifting billions of people out of poverty in developing countries, boosting living standards overall in the advanced world and knitting closer the international community, the flaws of international trade have made the free flow of goods and services across borders politically toxic.

The undermining of perhaps the most fundamental tenet of globalisation, which can be defined as the free movement of goods, capital and people, undercuts the neoliberalist creed that has steered advanced liberal democracies since the early 1980s. The worry for investors is that the upending of this anything-goes ideology leaves nothing in its place.

The political blowback against trade is manifesting itself in two main issues. The most-pressing is trade’s role in widening inequality within countries and, to a lesser degree, between countries, even as it boosts material wealth overall. Serbian-born economist Branko Milanovic has identified that one of the biggest non-winners of free trade and globalisation is the lower-middle class in advanced countries.[2]

The second political drawback of free trade is how it erodes sovereignty. Global trade agreements demand harmonisation between countries. These pacts standardise laws and regulations on such things as intellectual property, pharmaceutical price-setting, investor-dispute mechanisms, labour standards and product safety. They give rise to supranational bodies such as the World Trade Organisation and the EU. This is all at the cost of self-determination through democratically elected parliaments.


Neoliberalism as a term traces its origins to German economist Alexander Rüstow who coined the word in 1938 to suggest a middle path between laissez-faire economics and market planning. While the meaning of the expression has changed over time, neoliberals favour market-based competition while advocating a limited role for government outside of protecting private ownership and wealth. By the time the ideology gained credence in the 1980s it included pushing for unregulated labour markets, free capital flows, the privatisation of state assets, limited government, low taxation and a belief in trickle-down economics. If neoliberalism were to be defined in one word it would be globalisation.

If neoliberalism were to be linked to one organisation outside of political parties and academia it would be the IMF. The IMF speaks with many voices. Still, it staggered many when three IMF economists in June released a paper in the body’s flagship Finance & Development publication questioning whether neoliberalism has been “oversold”. The economists looked at the worth of free capital movements and rigid control over government finances to curb the size of the state and found their benefits “seem difficult to establish”, “the costs in terms of increased inequality are prominent” and “increased inequality in turn hurts the level and sustainability of growth”.[3]

Such a non-ideological conclusion begs the question left by the decline of neoliberalism: What comes next? The answer might well centre on the fact that many countries that industrialised successfully under capitalism were not besotted with neoliberalism. Investors can probably look forward to a more pragmatic form of capitalism replacing neoliberalism. Hopefully, it will be pure enough to embrace free trade but sensible enough to help its losers.

Financial information comes from Bloomberg unless stated otherwise.


[1] World Trade Organisation. “Report on G20 trade measures (mid-October 2015 to mid-May 2016). 21 June 2016.

[2] Branko Milanovic. World Bank policy research working papers. “Global income inequality by the numbers: In history and now – an overview.” November 2012. (Pay to view.)

[3] Jonathan D. Ostry, Prakash Loungani and David Furceri. “Neoliberalism: Oversold?” Finance & Development IMF publication. June 2016, vol. 53, no 2.