Is free trade finally passé?

Illustration: TBS

In 1987, Nobel Laureate economist Paul Krugman posed a question that seemed more like academic provocation than a policy guide: "Is free trade passé?"

As Krugman himself had helped pioneer the 'new trade theory', which showed how large-scale production and markets dominated by a few powerful firms could unsettle the old faith in comparative advantage, he was, in effect, asking whether his own breakthroughs were toppling the longstanding case for free trade.

Economists James Brander and Barbara Spencer showed that in oligopolistic industries with large fixed costs and scale economies, governments could use 'strategic trade policy'—such as export subsidies or market-share shifting measures—to transfer rents from foreign to domestic firms. Sectors like aircraft (Boeing vs Airbus) and semiconductors illustrated how such models provided rationales for selective protection and state intervention.

Nevertheless, at the time, the answer to Krugman's pondering was broadly assumed to be an emphatic "no". Free trade was thought to have underpinned post-war prosperity, and the policy world was still committed to liberalisation.

While acknowledging that the new theories opened intellectual space for activist policies, Krugman argued that retaliatory measures by other countries, information problems in selecting industries to be supported, and the potential for protectionist abuse meant that free trade remained the best and most practical policy option. 

As he wrote, "Free trade is not passé, but is an idea that has irretrievably lost its innocence."

Yet, decades later, the question has resurfaced with a practical urgency that now troubles even the staunchest advocates of free trade.

The years after Krugman's article did not bring a rush into strategic protectionism. Quite the opposite: the 1990s and 2000s marked an era of hyper-globalisation. The creation of the WTO in 1995, China's accession in 2001, and successive waves of liberalisation instead produced an unprecedented level of global trade and integration.

From 1990 to 2008, global trade leapt from less than 40% to over 60% of world GDP. China's manufacturing share exploded from 5% in 2000 to over a quarter of the world total within two decades. Global value chains revolutionised the idea of 'trade in tasks,' with different components of the same product made in multiple countries and reassembled into what became known as 'made in the world.' Clothes and coffee, iPods and iPhones, even the Boeing Dreamliner became poster children of this hyper-globalised production. In retrospect, while theory hinted at intervention, practice celebrated openness and efficiency.

In the 1990s and 2000s, Krugman increasingly emphasised the dangers of moving away from free trade in practice. He criticised policymakers and commentators who used strategic trade arguments to justify protectionism or "competitiveness" rhetoric. He argued that much of this was political opportunism dressed up in academic language. He repeatedly stressed that while the models are elegant in theory, governments cannot implement them without risking distortion, rent-seeking, and lobbying capture. His position could not have been clearer: free trade is not theoretically perfect, but it is the most workable and robust policy in the real world.

That idea began to fray with Donald Trump's arrival at the centre of US and global politics. During his 2016 campaign, international trade was framed in adversarial, zero-sum terms, with the benefits of decades-long trade and globalisation being called into question.

Once in office, President Trump slapped Section 301 tariffs on China, pulled the US out of the Trans-Pacific Partnership, and recast NAFTA. Most damaging of all, from 2017 the US blocked new judges to the WTO Appellate Body—long hailed as the jewel in the crown of multilateral trade—paralysing its dispute settlement arm. It marked the first decisive rupture in US's post-war commitment to an open, rules-based system.

Those expecting a policy reversal under President Joe Biden were mistaken. While the rhetoric softened, the substance did not. Tariffs on China remained. Industrial policy returned to the heart of Washington's economic strategy, most visibly through the Inflation Reduction Act, with its $369 billion in subsidies for clean energy and electric vehicles, and the CHIPS and Science Act. Both measures openly prioritised domestic production and supply-chain resilience, in ways that sit uncomfortably with WTO rules. Crucially, Biden continued the US blockade on Appellate Body appointments, leaving the WTO's legal core still suspended.

The Covid-19 pandemic was another turning point, as shortages from masks to semiconductors pushed Western governments into a new phase of activism—onshoring in some cases, offshoring to 'friendly' partners in others, and experimenting with the language of 'friend-shoring'. Incentives and subsidies soon followed, bringing production closer to home or along geopolitical lines. For a moment this seemed to offer opportunities for countries outside China, but as the relocation drive gathered pace it bred uncertainty: supply chains were no longer shaped by comparative advantage, but by abrupt policy shifts and strategic calculations with uncertain consequences.

The US is not alone. In fact, many rich countries within the G20 became more policy-proactive after the Global Financial Crisis of 2008. By 2024, the value of G20 import restrictions in force was estimated at $2,328 billion, equivalent to 12.7% of total G20 imports.

The European Union has responded with its Green Deal Industrial Plan, loosening state aid rules to support green industries. China's subsidies for solar, batteries, and electric vehicles continue at scale, while India's Production Linked Incentive schemes direct resources to favoured sectors such as electronics and pharmaceuticals. Japan and Korea, too, are pouring money into semiconductor support. Taken together, these policies represent a global resurgence of industrial strategy, with WTO disciplines increasingly treated as constraints of convenience rather than binding commitments.

As these policies stretch the boundaries of multilateral rules, governments have sought to present them in ways that appear at least formally compatible with WTO disciplines. The EU frames its Green Deal around environmental objectives and horizontal measures rather than explicit protectionism. 

India stresses that its schemes are production-linked, not export-contingent and therefore not subject to the WTO's strict prohibition of export subsidy rules. And China argues its support is open to foreign as well as domestic firms, aimed at climate goals and industrial upgrading rather than exports per se. Such manoeuvres, although undermining the spirit of multilateral rules, are at least presented with a veneer of WTO compatibility.

But then the US's reciprocal tariff policy has come as a more direct challenge, laying bare the bypassing of the multilateral framework, explicitly violating two of the WTO's core principles. First, it breaches the most-favoured-nation (MFN) rule under Article I of GATT, which requires that all WTO members be treated equally, rather than subject to country-specific tariff rates. 

Second, it disregards the tariff bindings under Article II, which commit members not to exceed previously negotiated maximum rates. Along with this, a significant component of the subsidy programmes is tied to the use of domestic content, and this appears to be WTO-incompatible. Rather than seeking to work within the WTO framework, the US has openly chosen unilateralism, accelerating the erosion of the multilateral trade order.

While it is possible to claim that the roots of US's "reciprocal tariffs" lie in the shortcomings of WTO-led multilateralism—the inability of the system to generate deeper reciprocal concessions or to discipline persistent asymmetries—the effect has nevertheless been to undermine the liberal trade order that held sway for decades. What once seemed a stable framework, balancing predictability with openness, is now openly contested. Beyond the US's turn to unilateralism, there is also a growing recognition among political scientists and international relations scholars that the rise of China, and the anxieties it generates, is reshaping the global economy into a more restricted and fragmented trading regime. The rules of the game are no longer guided solely by comparative advantage or universal commitments, but increasingly by strategic rivalry, security concerns, and geopolitical calculation.

So, is free trade finally passé? The answer depends on perspective. Perhaps, even after US policy shifts, tariffs remain relatively low in the world economy, global supply chains remain dense, and the WTO's rules still provide a framework for international commerce. Most countries, until now, have refrained from mimicking reciprocal tariffs in dealing with their respective bilateral trade deficits.

Yet free trade has undeniably lost its primacy. It is no longer the unquestioned doctrine of economic policy, but one objective competing with others: climate transition, national security, technological rivalry, and domestic industrial revival. In that sense, Krugman's question echoes louder today than in 1987. Free trade may not be dead yet, but it is no longer the guiding star. The age of industrial policy has returned, and with it, the WTO's centrality is being pushed to the margins.

For Bangladesh, shifting global dynamics present a paradox. On the one hand, it is affected by changing trade policies of major global economies; on the other, it remains one of the most protectionist economies in the world, with its average tariff rate far above the global average. Unlike the US, the EU, China, or India, Bangladesh does not have the fiscal space to deploy massive subsidy programmes.

Most worryingly, as industrial policies proliferate elsewhere, the case for Bangladesh to gain from its own long-delayed liberalisation could face setbacks. For years, the hope was that carefully sequenced tariff reductions and greater openness would yield competitiveness gains. However, if the global tide is flowing in the opposite direction, the biggest risk Bangladesh confronts is that the political and economic case for reform may shrink just when it is most needed, as the country transitions out of its LDC status.

Sketch: TBS

The author is Chairman, Research and Policy Integration for Development (RAPID). Email: m.a.razzaque@gmail.com 

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.