A Free Trade Area for the Free World
Comparative advantage is the economic principle that a country, firm, or individual should specialize in producing the goods or services they can make at the lowest opportunity cost, even if others are absolutely more efficient at producing everything. At the national level, this means countries export the goods for which they have the lowest opportunity cost and import goods that would be more costly for them to produce domestically. Trade occurs because each country gains by specializing in what it sacrifices the least to produce. Free trade reduces barriers to this optimization.
Over three decades, the multilateral trading system under WTO rules supported a near-fivefold expansion in the value of global trade, substantially outpacing the growth of global economic output. Lower tariffs, more predictable market access, and common commercial rules helped facilitate an enormous expansion of international commerce. Trade integration also contributed substantially to the extraordinary decline in global poverty during the same period, particularly as developing economies gained access to global markets. The WTO estimates that more than 1.5 billion people have escaped extreme poverty since its creation, with expanding trade among the forces driving that transformation.
However, the great experiment in universal trade liberalization has encountered a problem that its architects never adequately resolved: free markets depend upon institutions that are not universal.
For several decades, Western trade policy proceeded from the assumption that economic integration could transcend political systems. Democracies and autocracies could participate in the same international trading order provided that they accepted a common set of commercial rules.
Greater economic integration would increase prosperity, while exposure to international markets might gradually encourage political and institutional liberalization. The first assumption was substantially correct. The second has aged considerably less well.
Free trade does not exist independently of the rule of law. International commerce depends upon enforceable contracts, secure property rights, reasonably impartial courts, protection of intellectual property, predictable regulation, and confidence that governments will not arbitrarily confiscate assets or manipulate markets. A company operating within a liberal democracy can challenge its own government in court and win. When government leans authoritarian, however, the rule of law is weakened: contracts may be enforced selectively or preferentially; property rights may become subject to the whims of powerful commissars; courts may be biased or politically subordinate; intellectual property rights are weakened; and the regulatory environment becomes less predictable and, in some cases, more opaque.
The problem extends beyond the courtroom. Liberal economies increasingly compete against states capable of directing credit, subsidizing strategic industries, manipulating procurement, restricting market access, and supporting nominally private companies for political purposes. Democracies also subsidize industries, sometimes excessively, but their subsidies are generally visible, legislated, and subject to judicial and political scrutiny. There is an important difference between industrial policy conducted within a transparent legal system and state capitalism conducted through institutions ultimately subordinate to an authoritarian government.
There is also a moral and strategic cost. Economic interdependence does not merely allow Western consumers to purchase inexpensive manufactured goods. It transfers capital, technology, and productive capacity to governments whose behavior liberal states subsequently spend enormous sums attempting to contain. Europe discovered the danger of this arrangement when its dependence upon Russian energy collided with Russia's invasion of Ukraine. Western companies operating in China have confronted intellectual-property appropriation and political interference, while Western consumers remain connected through global supply chains to a state responsible for severe repression of the Uyghurs in Xinjiang. Self-censorship is also a byproduct of this relationship, visible in the sensitivity surrounding references to the 1989 Tiananmen Square massacre among media and Internet companies doing business in China. The bargain becomes increasingly absurd: liberal societies compromise their own moral stature and enrich governments whose policies they simultaneously sanction, deter, and condemn.
The alternative need not be autarky. Nor does it require democracies to prohibit commerce with every authoritarian state. It requires replacing indiscriminate globalization with preferential liberalization.
The democratic states of Europe, North America, and the Indo-Pacific should begin constructing a common free-trade area based upon institutional criteria. Membership would require competitive elections, protection of fundamental human rights, an independent judiciary, enforceable property and contractual rights, transparent subsidies, protection of intellectual property, and adherence to agreed commercial rules. Within that area, tariffs and non-tariff barriers should progressively approach zero, regulatory standards should be mutually recognized wherever practicable, capital should move freely subject to narrowly defined national-security restrictions, and commercial disputes should be adjudicated through independent institutions.
Members would receive substantially greater privileges; nonmembers would fall back to ordinary commercial relations, with countervailing measures, export controls, sanctions, and other restrictions where independently justified. Such a “liberal trading zone” (LTZ) need not arise overnight but could emerge through WTO-style multilateral negotiations aimed at the gradual reduction and eventual removal of tariffs and non-tariff trade barriers, alongside the harmonization or mutual recognition of regulations where appropriate. To ensure that LTZ standards are maintained, membership would be contractual and conditional, with objective accession and suspension criteria.
This idea is hardly new. Ash Jain and Matthew Kroenig’s 2019 Atlantic Council report Present at the Re-Creation explicitly proposed a “Free World Trade Agreement (FWTA)” linking the major democracies of Europe, Asia, and the Americas into a single free-trade zone. Aaron Friedberg went considerably further in 2022. His preferred scenario, which he called “Value-Based Blocs” or “Globalization 2.5,” was essentially a reconstruction of the partial liberal trading system of the early Cold War: the advanced industrial democracies of Europe, Asia, and the Western Hemisphere would form a free-trade area or deeper economic bloc, while economic relations with China and other outsiders would continue but become more restricted and strategically managed.
The distinction proposed here is that membership would rest explicitly upon institutional criteria rather than geopolitical alignment alone, making the depth of economic integration conditional upon the political and legal institutions required to sustain it.
There is already a successful precedent. The European single market demonstrates that enormous economic benefits can follow when states accept common commercial rules and credible mechanisms for enforcing them. Its achievement was not merely the removal of tariffs. It created a legal environment in which businesses could operate across national borders with considerable confidence that common rules would actually be observed.
The Doha Round trade negotiations launched by the WTO represented the high-water mark of a different ambition: progressively liberalizing trade across almost the entire world. That project has effectively stalled. Perhaps the mistake is continuing to assume that the next stage of trade liberalization must also be universal.
A liberal trading bloc would instead offer countries a choice. States willing to maintain the political and legal institutions necessary for genuinely free trade would receive substantially greater access to the world's largest collection of wealthy markets. Governments choosing arbitrary rule, state-directed capitalism, and commercial coercion would remain outside those privileges.
This is idealistic, but hardly impossible. The European Union itself was once an improbable exercise in binding historically antagonistic states into a common economic and legal system. A wider liberal trading area would require considerably less political integration.
The international trading system does not need less free trade. It needs considerably more free trade among countries capable of sustaining it.
