## Rethinking Free Trade

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**Canonical URL:** [Rethinking Free Trade](https://www.imf.org/-/media/files/publications/fandd/article/2026/06/ruhl.pdf)

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### Overview
- Free international trade expanded rapidly after World War II on the belief it was both economically efficient and politically stabilizing; world trade tripled as a share of GDP between 1950 and its peak in 2008, with about half of this trade in intermediate goods.
- The current geopolitical environment is causing policymakers to rebalance economic efficiency against national security, emphasizing resilient economies that can secure supplies of medicines, micro-chips, critical minerals, and other vital inputs and rapidly ramp up production in emergencies such as COVID-19.
- In the United States, the administration is pursuing policies to de-risk supply chains and build domestic capacity in key industries, implying a modification of prior near-unconditional openness.

### Decades of fragility — documented vulnerabilities and recent shocks
- Global supply chains progressively relocated to lowest-cost locations driven by efficiency, technology, and differences in environmental and labor standards.
- Fragilities accumulated as supply chains stretched and concentrated; these were often latent but became visible after recent disruptions.
- COVID-19 supply-chain disruptions demonstrated concentration of critical goods in a handful of countries.
  - Deloitte survey: only 15 percent of chief procurement officers could see the risks beyond their direct suppliers.
- Europe’s dependence on Russian energy:
  - In 2022, Russia accounted for 27 percent of EU oil imports and 45 percent of gas imports, according to the European Commission.
  - By 2025, Russia accounted for 3 percent of oil and 13 percent of gas imports.
  - The European Commission estimates higher energy bills cut incomes by about €1,000 per person in 2021–22.
- China’s export licensing controls:
  - Chinese export licensing controls imposed in April 2025 led to a shortage of rare earths and derivatives that threatened production lines in the US and elsewhere.
  - Six months later, China threatened to expand the scope and scale of its export controls.

### Analytical reframing — trade-offs and policy questions
- Geopolitical considerations of what and with whom to trade have become a priority; this does not repudiate comparative advantage but acknowledges free trade is not always appropriate.
- Key policy questions policymakers need frameworks to address:
  - Does a policy build leverage for the US or vulnerability?
  - Which goods should be controlled for national security reasons while avoiding unnecessary protectionism?
  - Which goods must be sourced domestically, and which can be imported from allies?
  - How can a domestic industry be restarted as efficiently as possible?
  - How to identify trade-offs between economic efficiency and strategic objectives?
- Economists have many analytical tools that can inform these trade-offs; existing and relevant policy instruments include:
  - Tariffs and sanctions
  - Price floors
  - Stockpiles
  - Export restrictions
  - Investment agreements
  - Tax policy
  - Industrial policy
  - Regulatory infrastructure

### Dangers identified — nonmarket forces and geoeconomic competition
- Dangerous political forces distorting economic outcomes include strategic state direction, subsidies, financial repression, protectionism, and regulatory arbitrage, especially when used by large adversarial countries.
- Geopolitics is increasingly governing economic decisions:
  - Control of international payment networks and the dollar are geopolitical strengths; some nonaligned countries are creating alternative payment networks in response to sanctions on Russia.
  - Countries are racing to secure critical mineral assets and competing (sometimes with allies) for resources.
  - Future-defining technologies such as AI, quantum computing, and biotech will continue to be subject to policy influence.

### Transition costs and institutional challenges
- Redirecting supply chains and relocating production across countries will take decades.
- Short-term consequences of resilience-focused policies may include price increases, scarcity of some goods, and costly investments.
- The structure of US democracy complicates long-term commitment because future administrations can reverse policy choices, exacerbating short-term costs.

### Recommendations and research agenda
- Use economic modeling that recognizes the trade-off between efficiency and resilience to guide policymakers and minimize costs while avoiding crude protectionism cloaked as national security.
- Increase economists’ engagement with geoeconomic issues and integrate geoeconomic considerations into the study of trade, industrial policy, and domestic regulatory instruments.
- Maintain pursuit of free trade in well-functioning markets, particularly with allies, while deploying targeted policies where deliberate nonmarket forces distort production and consumption.
- Develop tools that clearly identify trade-offs and unintended consequences of policy instruments used for economic statecraft.

*Kim Ruhl, June 2026, F&D Point of View*

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_Source: https://www.imf.org/-/media/files/publications/fandd/article/2026/06/ruhl.pdf_