The answer to the question posed in the title, seen from the perspectives and trends of how things stand in the last quarter of 2007, would seem to be “yes.” The great dream of the early 1990s, when President George Bush Senior proclaimed that a “new world order” was about to dawn, has now become a nightmare. It is true that the global economy is booming, like never before, with growth occurring in all continents, coupled with low inflation. And yet, the geopolitical picture – which obviously influences trade – is bleak. While the Middle East has long been a cauldron, it has reached an unprecedented state of frenetic ebullition.

Much of global instability and tensions can be ascribed to the disastrous policies of the current American administration since 2001. In the 1990s, the U.S. appeared as a benign hegemon, combining seemingly formidable ‘hard power’ – military, geopolitical and economic might – with unparalleled ‘soft power’ – the arts, academe, the media, lifestyle, etc. Today, with the humiliating failure in Iraq, the U.S.’ hard power appears inept and impotent; the economy is in a state of uncontrolled disarray, while on soft power, the U.S.’ prestige in the world has plummeted to depths not seen for decades.

The weakness of the U.S. results in the aggravation of problems and indeed turning what should be opportunities into threats. The most evident example is China. Thus, while China’s massive entry into the global economic arena since the 1980s should be heralded on all counts as a tremendous positive boost, America’s economic disarray and weakness of leadership are in grave danger of transforming this great opportunity into a conflict.

Generally speaking, while much of the responsibility must, per force, lie with the global hegemon, the U.S., the global “mood” is generally unhealthy. Between the great powers, the U.S., Russia, the EU, China, India, Brazil and Japan, there is an acute absence of trust. American weakness, geopolitical volatilities, the spirit of mistrust, and lack of political will also explain why the global trade agenda is at a paralytic standstill. In fact, the current round of the WTO, the so-called Doha Development Agenda, is effectively dead – certainly brain dead – though trade negotiators, for reasons of their own, like to pretend otherwise. This in turn both causes and reflects the growing obsolescence and irrelevance of the international economic institutions.

Without a solid global governance framework and the collective commitment of the major trading powers to solidify the framework and adhere to its rules and principles, and with the global economy bound to dip, free trade will undoubtedly erode and protectionism, in various guises, reappear. The outlook is not good.

FREE TRADE AND POLITICAL POWER

There is no serious economic theory that questions the basic premise that free trade is the preferred form of cross-border economic relations and that the benefits on balance accrue to most stakeholders. Both material and welfare gains are considerable, including not only standards of living but also the quality of life. Contrast North Korea with South Korea or Myanmar with Thailand – or indeed Vietnam – to get a sense of the costs of autarky in contrast to the great gains, at all levels, of an open economy.

All great civilizations have been great traders. Nayan Chanda’s excellent new book (Bound Together: How Traders, Preachers, Adventurers and Warriors Shaped Globalization, 2007), demonstrates how over the millenniums trade has enhanced not only the consumption of goods and the movement of capital, but also the flourishing of the arts and sciences. Trade ultimately brought the Chinese invention of the printing press to Europe, which in turn allowed Gutenberg to publish his eponymous bible and thereby herald a cultural revolution, bringing the written words to the masses, hence breaking the monopolistic power on reading of the ecclesiastic and civil autocracies. Trade with China also enabled the rich and powerful of the West to decorate their palaces with Chinese porcelains and scrolls, collectively known as chinoiseries. Today, trade with China benefits millions, indeed billions, thanks to the tremendous reduction of costs that Chinese production has brought about. The price of a T-shirt in the U.S. is estimated to have fallen by close to 40 percent this decade, clearly a great boost to the poor, notably single mothers on social security.

Free trade cannot be disassociated from the broader phenomenon of globalization. Globalization in essence means the growing integration of markets through the cross-border movements of goods, capital, information, technology and people. Free trade is the engine of globalization. A car may look beautiful, but unless it has an engine it will not move. The same applies to the relationship between globalization and free trade.

While there are certain absolute fundamental realities about free trade, there are also a number of myths. Thus there is the quite powerful myth, propounded by some of the more enthusiastic advocates of free trade, that there is a close correlation between trade and peace. Tell that, as they say, to the Chinese. In the course of the Qing Dynasty (1644-1911), China opted for an isolationist unilateralist policy. By the late 18th and early 19th centuries, Britain, followed by other Western powers, engaged in aggressive imperialist trade policies. Dissatisfied with the meager results of its trade with China, the gaping trade deficit and outflow of specie that ensued, Britain sought, successfully, to force by war the Chinese government to open its market to the one product that at the time Britain knew was in great popular Chinese demand – Bengali opium. Thus the Opium Wars (1838-1841, 1858-1860) stand in condemnation of the view that free trade is peaceful and moral. Indeed, throughout most of the 19th and early 20th centuries, China and other non-Western countries (by the late 19th century joined by Japan) were the victims of the West’s rapacious trade policies.

The modern historical narrative of trade demonstrates that there is in fact a very close correlation between economic trade and political power, which at times has been transformed into military might. Gunboat diplomacy during the era of Western imperialism more often than not consisted of utilizing national military means for commercial interests. This was the case with the Opium Wars. The Royal Navy bombarded and invaded China to serve the interests of the great Scottish opium traders of the period, notably Jardine, Matheson & Co. Free trade, therefore, can be said to be the lance of the powerful and protectionism the shield of the weak.

TRADE POLICIES AFTER WORLD WAR TWO

After World War II, when the power of the West seemed to have eroded, when decolonization occurred and developing countries found new sources of self-confidence and identity, and the prestige of the Soviet Union soared, there was in the Second and Third Worlds a rejection of the principles and practice of free trade and indeed of trade in general, which was perceived, at best, as a necessary evil. The adoption of protectionist policies ranged right across the political spectrum, from democratic to dictatorial, from right to left. Import substitution industrialization (ISI) policies were premised on the theory that nations must build up strong domestic industries before considering opening their markets; otherwise their colonial conditions would remain. Thus India engaged in a state-sponsored policy of quite extensive industrialization across multiple sectors. As a senior Indian government official told the author on a visit to New Delhi in 1981, “We [India] can make everything from nuclear power stations to hairpins.”

One of the most influential proponents of protectionism and import substitution was the Argentine economist Raъl Prebisch who developed the theory of dependencia. Whenever a developing country engages in trade with a developed country, the theory goes, inevitably the developing country will be caught in a trap of dependence whereby it is doomed to remain forever a supplier of low value added commodities to the industrialized country, in exchange for which it imports manufactured goods, hence postponing irredeemably its own process of industrialization. This perspective, indeed doctrine, prevailed in most of the developing world until the late 1980s and the early 1990s.

The post-war developments in the West, however, were quite different. Three forces propelled the West to a greater degree of market integration and trade liberalization. First, it was quite widely recognized that the aggressive protectionist and trade war policies engaged in by Western countries in the wake of the Great Depression of 1929 had not only caused great economic devastation, but also contributed powerfully to the ultimate outbreak of war itself. Second, the emergence of what Winston Churchill dubbed the “Iron Curtain” and the ensuing Cold War acted as a major lever in bringing about greater Western cooperation on all fronts, including on trade. Third, the U.S. led forcefully in setting global economic policy. Through both capital transfers, notably the Marshall Plan, and opening up its own booming post-war market, it acted as a formidable economic locomotive, allowing both its allies and its erstwhile enemies (the Federal Republic of Germany, Italy and Japan), to engage in economic reconstruction, ultimately leading to a series of “economic miracles.”

An absolutely key and indeed momentous lesson that the architects and leaders of the post World War II economic system took away from the 1930s was that trade between states needs an overarching framework and a set of rules. It was the lawlessness indeed anarchy of the 1930s that had caused, or certainly exacerbated, the economic conflicts that occurred. Hence, the establishment of the General Agreement on Tariffs and Trade (GATT) based on certain fundamental principles, notably that of non-discrimination, and the compilation of rules that would seek to ensure “fair” trade.

The consequences were remarkable. The Western nations and Japan engaged in binding multilateral trade agreements based on the principle of non-discrimination. Their economies boomed, the specialization emerging from trade allowed the Japanese, for example, to excel in transport equipment (cars and motorcycles) and in electronics, providing Western consumers with high quality low-cost goods. Furthermore, while the countries of Western Europe, Japan, the U.S., Canada, Australia and New Zealand had spent most of the first half of the 20th century in various alliances at war with each other, the new order brought both peace and prosperity.

However, the West’s prosperity brought by the free trade came to stand in stark contrast with the stagnation of the autarkic East increasingly in the course of the latter decades of the 20th century. As popular dissatisfaction mounted in the former Socialist states, the developing countries that had been practicing import substitution policies were facing financial crises. A group of developing countries, which were initially referred to as the NIEs (newly industrialized economies) of Hong Kong, Korea, Singapore and Taiwan, were seen as models. These Four Dragons, as they were subsequently called, had come to spurn import substitution industrialization strategies in favor of remarkably successful export oriented strategies (EOS).

As it became increasingly seen that while central control and command economies had failed, in contrast to the thriving market economies, the world was also approaching what was about to become the information and communication technology (ICT) revolution, the most profound technological change since the industrial revolution or indeed, as some have argued, since the publication half-a-millennium ago of the Gutenberg bible.

Thus in the early 1990s, there occurred a dual global market and information technology revolution that had great seismic force and indeed shook the world. The outcome has not been a “new world order,” as President Bush Snr argued, but a chaotic transition to a very different, uncertain and still undecipherable paradigm. It was in the midst of the early stages of this transition that the WTO was established in 1995. In fact, the last GATT Round, the Uruguay Round (UR), launched in Punta del Este in 1986 and concluded in Marrakech in 1994, can be said to mark the transition from the familiar paradigm of the world market economy that emerged from the ashes of World War Two to the new globalization era.

THE CONSEQUENCES OF THE OPEN MARKET SYSTEM

The trade system that prevailed from 1945 to 1995 (or thereabouts) cannot be termed global. It was international in the sense that it engaged multiple nations and it was multilateral in that the trading nations adhered to a set of principles – though often violating them in practice – that derived from the GATT. However, it excluded all of the Socialist nations, and most of the Third World countries were either not members or simply passive. The GATT was effectively controlled by four players who called the shots, in fact mainly the first two: the U.S., the EU, Canada and Japan, collectively known as the “Quad.”

This system could be characterized as an oligopolistic cartel. It should be also stated that these four accounted for 80 percent or more of world trade. The result was that negotiations were conducted, compromises were made and conclusions were reached in a manner and on terms that benefited the Quad. The interests of other actors, notably the developing countries, were not taken into consideration and indeed they were disadvantaged in many ways. The advantages possessed by the Quad – and also some of its peripheral members, such as Switzerland, Norway and Australia – included the “savoir-faire” of trade negotiation.

However, the institutional “culture” that emerged during the GATT era has been one of bureaucratic complexity and obfuscation. Trade documents tend to be hellishly and totally unnecessarily complicated. The GATT/WTO is also possibly unique in that its rhetoric, which is unashamedly mercantilist, is in contradiction to its principles, which are founded in liberalism. Thus the GATT/WTO has, rightly, been derided by a number of its critics as a bastion of hypocrisy. The most egregious example is agriculture, in which European negotiators posture and pant that cutting subsidies and reducing tariffs will impose great sacrifices, pain and, indeed suffering, whereas in fact the great beneficiaries of European agricultural reform and liberalization would be the European consumers, especially poorer ones. The visceral inclination to bare-faced lies on the part of negotiators has inevitably resulted in what can only be termed a very warped institutional ethos, which undoubtedly has contributed markedly to the deterioration of trust in global governance.

For most of the GATT era, this did not matter, as the key players, the Quad & Co, knew the nature and “rules” of the game. But with a radically changed environment, there is now a growing dissonance between the game and reality and also between the defendants of the status quo and the aspirations of new entrants.

The victory, if that is the word, of the open market economic system has been truly overwhelming and its consequences very wide-ranging and profound. As the global market revolution occurred and more and more and more nations came to embrace trade liberalization, the reflex in the West was to salivate and leer over what were termed as “emerging markets.” The fact that the “emerging markets” might also become “emerging competitors” had not been thought through. The figures, however, are revealing: in the period from 1994 to 2004, trade increased among various countries as follows: India – 333 percent, China – 487 percent, Chile – 550 percent, and Vietnam – 575 percent.

All of this has resulted in a number of concurrent and intertwined trends:

A number of developing countries have dramatically increased their share of world trade.
This is leading not only to much increased penetration of Western (above all, the U.S.) markets, but also to ever-increasing flows of what is termed ‘South-South’ trade and investments.
The accumulation of huge piles of foreign exchange reserves and the windfalls generated in oil rich countries by the huge increases in energy prices have brought about a change in the balance of global prosperity, illustrated by the emergence of Sovereign Wealth Funds (SWF).

In the meantime, developing countries continue to feel discriminated against by the system that the Quad club concocted over the decades.
While the new aspiring nations that are enjoying the fruits of globalization – even though they may not be distributed equally – have become enthusiasts of an open market economy, in the West there is a rising backlash against open trade and increasingly strident protectionist calls.

Consequently, there is in fact a systemic failure in the global trading system.
While free trade has become the lance of the strong, protectionism has become the shield of the weak. Firms in the West that are innovative and competitive remain committed to free trade, but their political clout is decreasing.  At the same time, the power of uncompetitive firms and the lobbies of those vested interests that wish to maintain their privileges has been rising. An ever increasing number of the workforce feel insecure. While traditionally open markets only “threatened” blue collar workers, with the rise of outsourcing – as a consequence of the ICT revolution – white collar workers are also affected.

This rising insecurity, the uncharted and seemingly turbulent waters in which the global economic ship is heading, is occurring amidst frightening environmental degradation and climate change, apprehensions related to “identification” and immigration, the steep decline of the U.S. and the quagmire of the Middle East, the seemingly daunting industrial and financial muscle of China, rising inequality and high levels of poverty, and the fear of possible devastating pandemics.

The omens are not good. And this is happening precisely at a time when the system should be strengthened, not weakened, both in order to accommodate the new players, China especially, and to ensure that the benefits of trade are more evenly spread in order to enhance global prosperity and hence reduce poverty.

There is a need, indeed an imperative, for a new 21st century global contract, something along the lines of the Atlantic Charter of 1941 that heralded both the spirit and the structure of the post-war settlement. There is the need, indeed the imperative, for the refurbishing and possible restructuring of the existing institutions.

Russia, apart from its membership of the G8, has been on the global economic architectural sidelines. It is still outside the WTO and there is growing doubt whether membership would actually benefit Russia. Given Russia’s heavy reliance on oil and gas, it is difficult to make a purely economic case for Russian adhesion to the WTO. But it is vital for all nations to look beyond narrow short-term economic calculations, even though none of them are doing so at present. These are times that demand statesmanship.

When reading the history of the 1930s, one quite striking thread was how the League of Nations in Geneva became increasingly impotent and irrelevant. When the WTO ministerial meeting in Seattle in 1999 failed spectacularly, the then WTO Director General Mike Moore expressed the fear that the WTO might become “the League of Nations” of the 21st-century world economy. Eight years later, that fear would seem to be materializing.