How to rescue free trade in the post-COVID world

Trade policy has become increasingly politicised across the globe, as citizens protest new trade deals and populist leaders promise to wind back free trade in the name of greater economic security and bring back jobs lost to offshoring.

And the global pandemic only promises to further exacerbate these protectionist responses as governments face a COVID-induced recession and realise the great vulnerability of their global value chains.

The pandemic has also ushered in new pressures for de-globalisation and self-reliance – helped along by the geo-economic tensions between China and the US.

But this mercantilist turn is only likely to exacerbate economic decline, similar to the Great Depression when beggar-thy-neighbor protectionist policies prolonged the economic slump and drove dangerous nationalist ideas, pushing the fragile global community into war.

To avoid this, governments need to restore growth quickly.

Leaders are facing the major policy dilemma of how not to succumb to knee-jerk mercantilist policies while also repairing the shaken public faith in the benefits of economic globalisation. But how can these two objectives be reconciled?

The multilateral trade system at the World Trade Organization is in free fall due to previous disagreements among members and the US blocking its Appellate Body for resolving disputes.

Correspondingly, free trade agreements (FTAs) are now the main vehicle for realising trade liberalisation and sustaining growth.

FTAs have been the poster boy of anti-globalisation activists, including both low-skilled workers who blame them for job losses and educated voters who view them with suspicion for promoting unchecked corporate interests, ruining livelihoods and hurting the planet.

Even in the recent past, free trade was a hard sell to the public across liberal democracies as standard policy instruments for averting trade losses have been ineffective in addressing economic dislocations.

So, what can governments do as the post-COVID world begins to emerge saddled with debt and concerned about the environmental effects of trade?

Well, new thinking is required to demonstrate to a skeptical public that free trade is a legitimate way towards the post-COVID recovery.

This will only be possible if voters are convinced that the benefits of FTAs are spread more evenly across society and no particular group is hurt by them.

To take a step back, Northern governments are facing resistance to free trade from two fronts. First, policymakers are struggling to maintain support for free trade among the losers of globalisation – like low-skilled workers employed in manufacturing.

Severe post-COVID budget constraints, automation and structural shifts in the economy are further straining governments’ ability to help faltering industries and their employees.

Second, more and more people are crying out against perceived inhumane and unjust practices by multinational corporations and the often-corrupt regimes who embrace them.

Lax labour and environmental protections (especially in poorer countries) that intensify this race to the bottom are a major concern for free trade critics who want fairer trade.

These two constituencies then mutually reinforce each other.

The first group feels the pressure of competition as jobs continue to be lost to low wage, polluting neighbours, while the second group rejects international competition because of social and environmental concerns.

The result is a vicious cycle of declining support for the bedrock of globalisation – free trade – and its main institutional vehicle, FTAs.

Our research shows that including labour and environmental provisions in free trade agreements can help make free trade work for all and deliver broad public support for FTAs.

Labour provisions require FTA signatories to uphold the core labour standards including freedom of association and the right to collective bargaining; elimination of all forms of forced or compulsory labor; abolition of child labor and the elimination of discrimination in employment and occupation.

Environmental provisions must require countries to enact laws and policies encouraging environmental protection as well as fulfilling obligations to multilateral environmental agreements.

Recent labor and environmental provisions in most North-South FTAs (between developed and developing countries), like the new USMCA that replaced NAFTA, are legally binding and enforceable.

Our research shows that these provisions are effective in instigating real labour and environmental policy change in developing nations, depending on the exact design of the provision.

Importantly, these social provisions don’t only improve labour and environmental conditions in the global South, they also impact peoples’ opinion of globalisation in the North and can increase support for free trade through two distinct mechanisms.

First, some view social provisions as a form of compensation for social dislocation associated with free trade.

In contrast with government spending, where traditional, compensation occurring after dislocation, social provisions ‘compensate’ globalisation’s losers by preventing it in the first place.

They level the playing field with cheaper, polluting Southern trading partners by improving their labour and environmental conditions. As a result, low-skilled workers (the ‘losers’ of globalisation) in Northern countries are more likely to support free trade if such protections are included.

Alternatively, individuals who value global fairness, are likely to support free trade when given assurances that its fruits are distributed equally, potential human rights abuses are averted and the environment is protected.

High-skilled workers (the ‘winners’ of globalisation) in the North have more support for free trade when FTAs include labor and environmental provisions.

Given the pressures on government budgets in the post-COVID world, alternative ways to win voters’ hearts and minds, like these social provisions, could be politically attractive.

Early signs tell us that even US Republicans, traditionally less interested in linking FTAs with social provisions, are beginning to understand their political attractiveness and perhaps the necessity of these clauses as exhibited in the stronger labor clauses in the re-negotiated NAFTA deal.

This makes FTA’s social provisions one of the few items on the trade agenda enjoying truly bipartisan support and Australian policy-makers should heed this message.

That said, of course more could be done to enforce existing labour and environmental provisions in current agreements.

Ensuring compliance with these standards will require technical and financial assistance to the developing world, as well as an information campaign among the voters in global North to raise their awareness of ‘managed’ globalisation.

The COVID-19 crisis provides an opportunity to escape de-globalisation. We can recalibrate existing policies to maintain the fruits of the last few decades of trade liberalisation while working on making it more equitable across societies.

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