Terence Corcoran: The old trade order isn’t dead. Let’s not kill it

American president Franklin Delano Roosevelt (1882 - 1945) meets British prime minister Winston Churchill (1874 - 1965) for a church service on board the HMS Prince of Wales in Placentia Bay, Newfoundland, August 1941. Photo by Print Collector/Getty Images

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Exactly 85 years ago this coming weekend, on Aug. 9, 1941 — in the thick of World War Two — British prime minister Winston Churchill and U.S. president Franklin Roosevelt met secretly for three days on a U.S. navy cruiser in Placentia Bay, Nfld. The meeting ultimately changed the course of economic history by leading the world into decades of free trade and dynamic economic growth.

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Churchill had crossed the North Atlantic on a British battleship, dodging German U-boats, before arriving at Ship Harbour. The U.S. had not entered the war at that time, and so Roosevelt, pretending to be on a fishing trip in New England, sailed up to Placentia Bay on a U.S. navy cruiser.

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The story goes that Churchill ferried over to Roosevelt’s navy cruiser, where they met with military officials and others to draft what became known as the Atlantic Charter, a 600-word note endorsed by the two leaders that included a brief summary of six “common principles” that should guide the world at the end of the war.

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The fourth principle would transform the international economy. Once peace is established, the nations of the world “will endeavour … to further the enjoyment by all states, great or small, victor or vanquished, of access, on equal terms, to the trade and to the raw materials of the world which are needed for their economic prosperity.”

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It’s an agreement economic historians agree launched the momentum for the founding in 1947 of the General Agreement on Tariffs and Trade (GATT) and its successor World Trade Organization (WTO) — institutions that would replace a global system of trade wars and tariff battles with a free-trade regime that still survives today, but under a growing threat.

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As the graph below illustrates, the opening of the global economy under the GATT/WTO rules unleashed a spectacular rise in trade. Tariffs fell from an average of 40 per cent to about 4.5 per cent, a rate that still prevails today globally but is now under threat from the Trump trade policies and the emerging willingness of other nations to turn away from the principles of free trade in favour of protective economic nationalism.

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Constantly under attack is the most favoured nation (MFN) principle, a keystone of the WTO system. Under MFN rules, countries can’t play favourites (except when they make comprehensive free-trade agreements with chosen partners). Each nation should treat other nations equally without favouring one over another.

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Under Donald Trump, MFN principles are ridiculed as policies that must be scrapped to set the stage for “the end of free trade,” a theme that seems to dominate academia and the media. Infamous Trump trade whisperer, former U.S. trade rep Robert Lighthizer, appeared last week in Foreign Affairs magazine to repeat his call for a new world trade order. Favoured nation should be scrapped, and the world should turn to balanced trade (an impossible and irrational objective) accompanied by increasing economic nationalism and constant trade manipulation by governments.