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How to save free trade in the post-COVID world

Trade policy has become increasingly politicized across the world, citizens protest against new trade agreements and populist leaders promise to end free trade in the name of greater economic security and bring back jobs lost to offshoring.

And the global pandemic only further exacerbates these protectionists responses as governments face a COVID-induced recession and realize the great vulnerability of their global value chains.

The FTAs ​​have been the poster child for anti-globalization activists. Image: Getty Images

The pandemic has also ushered in new pressures for de-globalization and self-sufficiency – aided by the geo-economic tensions between China and the United States.

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 spurred dangerous nationalist ideas, pushing the fragile global community to war.

To avoid this, governments must quickly restore growth.

Policymakers face the major political dilemma of how not to succumb to instinctive mercantilist policies while repairing shattered public confidence in the benefits of economic globalization. But how can these two objectives be reconciled?

The multilateral trading system at the World Trade Organization is in free fall due to previous disagreements between members and the US blocks appeals body for the resolution of disputes.

Consequently, free trade agreements (FTA) are now the main way to achieve trade liberalization and support growth.

FTAs have been the flagship of anti-globalization activists, including both low-skilled workers who blame them for job losses and educated voters who view them with suspicion for promoting runaway business interests, ruining resources. subsistence and harm the planet.

New thinking is needed to demonstrate to a skeptical public that free trade is legitimate. Image: Getty Images

Even in the recent past, free trade has been difficult to sell to the public in liberal democracies because standard policy instruments for avoiding trade losses have been ineffective in dealing with economic upheaval.

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

Well, new thinking is needed to demonstrate to a skeptical public that free trade is a legitimate path to post-COVID recovery.

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

To take a step back, northern governments face resistance to free trade on two fronts. First, policymakers struggle to maintain support for free trade among the losers from globalization, such as low-skilled workers employed in manufacturing.

Severe post-COVID budget constraints, automation and structural changes in the economy are further straining the ability of governments to help struggling industries and their workers.

Second, more and more people are speaking out against the perception inhumane and unfair practices of multinational companies and the often corrupt regimes that adopt them.

Labor and environmental provisions in free trade agreements can help make free trade work. Image: Getty Images

Labor laxity 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 reinforce each other.

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

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

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

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

Environmental provisions should require countries to adopt laws and policies that promote environmental protection as well as compliance with obligations under multilateral environmental agreements.

Environmental provisions should require countries to adopt laws and policies that promote environmental protection. Image: Getty Images

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

Our research shows that these provisions are effective in bringing about real change in labor and environmental policy in developing countries, depending on the exact design of the provision.

It is important to note that these social provisions not only improve the working and environmental conditions in the countries of the South, they also have an impact on the opinion of the people on globalization in the North and can increase support for free. -exchange through two separate mechanisms.

First, some see social arrangements as a form of compensation for the social upheavals associated with free trade.

Unlike public spending, where traditional compensation occurs after dislocation, social provisions “compensate” for the losers of globalization by preventing it in the first place.

They level the playing field with less expensive and polluting Southern trading partners by improving their working and environmental conditions. As a result, low-skilled workers (the “losers” of globalization) in the North 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 they are assured that its fruits are distributed fairly, that potential human rights violations are avoided, and that the environment is protected.

People who value global fairness are likely to support free trade when they are confident that it is distributed evenly. Image: Getty Images

Highly skilled workers (the “winners” of globalization) in the North are more supportive of free trade when FTAs ​​include labor and environmental provisions.

Given the pressures on government budgets in the post-COVID world, other ways to win the hearts and minds of voters, like these social arrangements, could be politically appealing.

Early signs tell us that even American Republicans, traditionally less interested in tying FTAs ​​to social arrangements, are beginning to understand their political appeal and perhaps the need for these clauses, as evidenced by the stricter labor clauses of the renegotiated NAFTA agreement.

This makes the social provisions of the FTA one of the few items on the trade agenda with genuinely bipartisan support and Australian policymakers should heed this message.

That said, of course, more could be done to implement existing labor 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 voters in the North to sensitize them to a “managed” globalization.

The COVID-19 crisis offers an opportunity to escape de-globalization. We can recalibrate existing policies to keep the fruits of the last decades of trade liberalization while working to make it more equitable between societies.

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