Fisher Investments Editorial Staff
US Economy, Trade

Everything in Its Right Place

By, 08/25/2008

Story Highlights:

  • As Thoreau famously wrote, the rule of law only goes as far as society's general acceptance of it—or more importantly, society's acceptance of its enforcement.
  • Therefore, it's perplexing so many folks assign such importance to the failures of international organizations, as if some law makes them the only game in town.
  • If free trade is stymied at the most ambitious levels, countries can skip the bureaucracy and go it alone.

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As Thoreau famously wrote, the rule of law only goes as far as society's general acceptance of it—or more importantly society's acceptance of its enforcement. We commonly experience laws when observing the rules of the road. Simple directives like stop, go, or don't park here. Most people obey these orders because they're actively enforced. Break the rules and you'll pay a fine or worse.

But without enforcement, rules are just social conventions. Consider the unwritten decree, one mustn't take multiple shots of tequila just before making a best man's speech—apparently it's uncouth. Yet anyone who's been to a wedding can attest there's no dependable way to enforce this, and for everyone involved, except the bride and groom, that's a good thing (or at the least a highly entertaining thing).

Interaction between sovereign nations is more like social convention than enforceable law. There's general agreement between sovereign states regarding what is or isn't acceptable behavior. But who's going to stop France from knocking over its chair at the UN, stumbling to the stage, and waxing poetic about when the US was just a wee child still regularly wetting the bed? No one. As much as we'd like to believe there's some kind of international order, the truth is there's not and never has been.

The closest things we've got are international "treaties" like the Geneva Convention. Most countries adhere to such treaties to ensure fair treatment of their own in extenuating circumstances (treat others as you wish to be treated). But they're still completely voluntary and obeyed out of self interest, not fear of punishment from some higher organization.

So it's a bit perplexing that so many folks assign such weight to the successes or failures of international organizations like the G-7 or the World Trade Organization (WTO)—as if they're the only game in town. Certainly these organizations can serve as useful forums for willing participants to hash out deals. But there's no law commanding countries to pursue free trade through them—how could such a law ever be enforced? Sovereign nations will still do as they please, WTO or no WTO. If free trade is stymied at the most ambitious levels, countries can skip the bureaucracy and go it alone.

Consider Hong Kong's unilateral free trade policy. Hong Kong is so convinced of free trade's benefits that they're willing to forsake the guaranteed cooperation of their trading partners (the primary reason the WTO exists at all). That devotion has witnessed Hong Kong "evolve from a rocky harbor into one of the wealthiest places on earth."

All countries don't enjoy the same domestic political consensus Hong Kong does, yet unilateral free trade exists in some industries worldwide. In particular, newer, nontraditional industries, like technology and information systems. Most of the world's quotas and tariffs protect old world sectors like agriculture or industrial production. Yet technology and information systems have been mostly free to expand unrestrained—and think of all the wondrous innovations they've given birth to in the last 30 years.

Beyond unilateral free trade, there are still bilateral or regional agreements like pending or completed US free-trade pacts with Singapore, Australia, South Korea, Malaysia, and Thailand. Or how about the EU? No international organization created the EU. Rather, the EU began as a series of multilateral trade agreements between a few Western European nations—their success attracted other participants until it grew into the organization we know today (for better or worse, depending who you ask).

We think free trade's the cat's pajamas. But bottom line: The world doesn't need international organizations like the WTO to have free trade. Instead of fretting such institutions' widely covered failures, it's more important to heed new protectionist regulations and trade prohibitions country by country. So far the world continues to overwhelmingly favor liberal trade policy. And everything's in its right place when nations are allowed to find new ways to be free.

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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