[The Editors' Verdict] The End of the 54-Year Free Trade Order

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Historically significant turning points in which the United States reshaped the global economy and trade order have, coincidentally, mostly occurred in August. It was in August 1971 that former President Richard Nixon announced the abandonment of the gold convertibility system, which allowed dollars to be exchanged for gold. The agreement to implement the United States-Canada Free Trade Agreement (FTA), which laid the foundation for the North American Free Trade Agreement (NAFTA), the predecessor of the United States-Mexico-Canada Agreement (USMCA), was reached in August 1988. In August 2017, during Donald Trump's first term, the U.S. officially announced an investigation into China's intellectual property (IP) violations, marking the starting point of the U.S.-China trade war. Most recently, on August 7 (local time), Jamieson Greer, the U.S. Trade Representative (USTR) under Trump’s second administration, officially declared the end of the World Trade Organization (WTO) system with the implementation of reciprocal tariffs. If we consider that the Bretton Woods system, based on the gold standard, disappeared in August 1971 and free trade began in earnest, it means that the era of liberal trade that drove the global economy has, in effect, come to an end exactly 54 years later.

As free trade begins to contract, the protective shield for Korea’s trade-dependent economy will also disappear. Not only will tariff barriers undermine price competitiveness, but it will also become increasingly difficult to rectify unfair trade practices.

The WTO, which has served as an international arbiter in trade disputes, has already lost its functionality. While first-instance panel rulings are still being maintained, the appellate process is no longer functioning properly when parties appeal the decisions. The WTO Appellate Body, which is supposed to play a dispute resolution role, has long been rendered ineffective. Some argue that free trade could still be possible among countries other than the United States, but experts are skeptical that other nations will continue to abide by WTO rules now that the U.S., which created the WTO, has abandoned it.

The WTO currently has a temporary system called the Multi-Party Interim Appeal Arbitration Arrangement (MPIA). This allows member countries that wish to do so to appeal among themselves, and currently 57 countries are participating. Since South Korea is not a member, it is difficult for the country to benefit from this arrangement.

When trade disputes intensify, the gap between developed and developing countries widens even further. This phenomenon was evident in the Trump administration’s recent imposition of reciprocal tariffs. Many developing countries, including Vietnam and Bangladesh, were notified of reciprocal tariff rates exceeding 20 percent. This is higher than the 15 percent imposed on relatively wealthier countries like South Korea and Japan. In the past, the U.S. did not impose tariffs on developing countries by applying the Generalized System of Preferences (GSP), but since suspending the program in 2020, there has been no sign of its reinstatement. In effect, the weaker countries are being treated even more harshly.

If access to the U.S. market becomes more limited, the purchasing power of underdeveloped countries will decline further, negatively impacting their trade with other countries as well. Moreover, the advantage of cheap labor in developing countries is no longer appealing. Companies will inevitably relocate their production bases closer to their target markets to avoid tariffs. In other words, tariff barriers could trigger an exodus from developing countries.

Korea is not exempt from these changes. Although there is strong sentiment that the value of free trade, which has driven the Korean economy for over 50 years, should not be denied, it is impossible to ignore the changing global order. Over the past 54 years, the United States gained dollar hegemony but lost its manufacturing industry. Now, the U.S. is declaring a revival of manufacturing and is bringing factories back home. For Korea, it is time to seriously consider reshoring overseas operations to prevent industrial hollowing out. A senior executive at a major conglomerate said, "During the four years of the Trump administration, we have no idea what new demands may arise." This is a time when only uncertainty is certain. We must take every possible measure within our power.

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