The future of free trade

The global trade landscape is changing, but not in a way free trade advocates had hoped. Since the end of the World War II, the belief that economic openness could foster peace and prosperity reigned supreme. It is argued that free trade promotes economic growth, lowers prices for consumers due to specialisation and competition, increased variety of goods, efficiency through resource allocation, and greater innovation driven by a wider market. It also fosters international cooperation, reduces the risk of conflict, and provides access to a broader range of raw materials and technologies for producers.

Although free trade is generally beneficial, it can also lead to job losses in industries that struggle to compete with imports. Policies are often needed to manage these challenges and ensure the gains from trade are shared equitably.

Donald Trump's push for tariffs is creating a loss of faith in the international free trade system. OECD Secretary General Mathias Cormann addressing a gathering of business executives in Melbourne recently warned that there had "been a loss of faith in the international trading system". He further added that the politicised trade barriers and their economic and social impacts are reshaping the global economy and draining support for open markets.

After the World War II, to remove government impediments to trade and to stimulate global trade so countries could achieve economic growth and employment, an institutional framework called the General Agreement on Tariffs and Trade (GATT) was signed on October 30, 1947, in Geneva, Switzerland, by 23 countries, and it came into effect on January 1, 1948. It was a multilateral agreement aimed at reducing trade barriers and promoting international trade after the protectionist policies of the pre-World War II era.

The GATT was the foundation for a stronger, more liberalised multilateral trading system, which evolved through a series of global trade negotiations consisting of nine rounds between 1947 and 1995. Ultimately the Uruguay Round negotiations in the 1990s resulted in the creation of the World Trade Organisation (WTO) in 1995. This was a very rare moment when 123 countries found a common ground to liberalise trade not only in goods but in services and intellectual property also. The GATT still exists as the WTO's umbrella treaty for trade in goods, updated as a result of the Uruguay Round negotiations

The current world trading system is a set of rules concerning international commercial policies that are embodied in the WTO which oversees the system and serves as a forum for negotiations and dispute resolutions. While the WTO has greatly constrained protectionism since its inception, it is no longer the prime mover of free trade anymore. It has increasingly become quite dysfunctional. Multilateral trade negotiations have completely stalled, and trade dispute settlement system also does not operate.

OECD Secretary General Cormann praised open markets and rule-based global trade for driving growth, jobs, and higher living standards, but noted that inconsistent adoption of artificial intelligence among OECD members could increase inequality in market democracies.

Over time, policy does shift a bit in one direction or the other, often at the urging of specific interest groups. The battle between export and import interests has always been the core of what shapes trade policy and will continue to play that role. The trading system is structured with certain limits on protectionism in most developed countries, and more so in developing countries.

Nationalism, populism, nativism and protectionism exploit people's vulnerabilities; especially economic insecurity or feeling of being left out by the system. Although the future of free trade is never certain, a universal inclusive system where people can pursue opportunities to better their lives will help garner public support for an open and free trade system.

Economic policy is complex, and in political debates "neoliberalism" often means either an extreme reliance on free markets or, for some, government favouritism toward corporations. Free trade is generally considered to be a core component of neoliberalism. Regional and bilateral "free trade" agreements are not a cure-all for market economies. Economists note that such discriminatory arrangements may divert more trade than they create.

Director-General of the WTO Ngozi Okonjo-Iweala admits that partly due to disempowerment of the WTO by President Trump since 2019, "the global trading system today is experiencing its worst disruption since the second World War. Multilateral cooperation itself is being called into question…WTO economists have downgraded expectation of merchandise trade volume growth by nearly three percentage points and now expects a 0.2 percent contraction."

In 2024, global merchandise exports totalled approximately $24.43 trillion, and US merchandise exports were $3.23 trillion, resulting in the US holding about 13.2 per cent of global merchandise exports. In global services trade, total exports were US$8.69 trillion, of which the US accounted for US$1.08 trillion -- about 12 per cent. The United States is a major global trader, holding a substantial share of both merchandise and services trade.

The U.S. share of global merchandise imports in 2024 was 13.8 per cent, based on the data published the WTO, estimated to be approximately US$ 3.36 trillion.

WTO's "Global Trade Outlook" report - April 2025, highlights that the U.S. was the largest importer of merchandise in 2024. UNCTAD also stated that world merchandise trade reached a record $33 trillion in 2024, with goods trade making up about three-quarters of the total.

The relations between the WTO and the US have never been more fraught as they are now. The US makes a substantial financial contribution to the WTO, based on its share of global trade, but has recently been not paying its dues, which were around $24 million annually in a $232 million budget as of March 2025. As such a WTO without the US is also very difficult to contemplate.

According to the Global Trade Outlook and Statistics, April 2025, the outlook for global trade has deteriorated sharply due to a surge in tariffs and trade policy uncertainty. Based on measures in place as of April 14, including the suspension of "reciprocal tariffs" by the United States, the volume of world merchandise trade is now expected to decline by 0.2 per cent in 2025 before posting a modest recovery of 2.5 per cent in 2026. The 2025 estimate is almost three percentage points lower due to recent policy changes, reversing earlier WTO expectations of ongoing trade growth.

The U.S. has historically been a dominant force in the global trading system, which was established after World War II to promote free trade through agreements like the GATT and the WTO. However, recent U.S. tariff policies have introduced significant uncertainty and upheaval by challenging established rules, such as the MFN principle.

The global economy needs a rules-based trading system. The minimum elements required are transparency, fixed and contractually bound tariffs, and a binding dispute settlement process. In addition, the system needs reciprocity and non-discriminatory treatment, two of the key elements.

The future of free trade involves a balance between free and open trading system and national interest, with challenges posed by geo-political rivalries. As nations grapple with new challenges, trade policies will reflect new priorities reflecting economic resilience and national interests.

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