In October 1929, the U.S. stock market crashed. Over the course of the following weeks and months, billions of dollars in wealth evaporated, banks failed, companies collapsed, and millions of ordinary people in the United States and around the world lost almost everything and were left unemployed. The Great Depression had begun.

In the U.S. the immediate response was an attempt to protect American industry and agriculture as the Smoot-Hawley Tariff Act was signed into law on June 17, 1930. The act established an isolationist trade policy for the United States by increasing tariffs on more than 20,000 imported products.

While the act was being deliberated, governments from around the world protested, warning of retaliation. More than 1,000 U.S. economists signed a letter urging President Herbert Hoover, who was himself against the act, to veto the bill. Ultimately Hoover gave in to party pressure and signed.

Countries from around the world hit back with tariffs on U.S.-made products, and a hot trade war resulted.

The almost universal view among historians and economists is that Smoot-Hawley and the resulting global trade war intensified and prolonged the Great Depression. Tens of millions of workers, farmers, craftsmen and small business owners suffered for more than a decade. Then came World War II, and the mass destruction that was brought to Asia, Europe and the global economy with the exception of the U.S., where the war effort finally revived the economy.

In the aftermath of these events, a consensus emerged that the best way to ensure that prosperity spread, and peace be maintained, was through a new way of thinking about trade, globalization, and methods for governments and companies to do business with each other.

Reset for shared prosperity

In the wake of these twin shocks to the world, there was a clear need to rebuild the global economy. The United States made a 180 degree turn and embraced free trade, slowly at first, because other nations needed to be encouraged to adopt the model. From Bretton Woods, where the first commercial and financial relations among nations were negotiated, to the establishment of the North American Free Trade Agreement (NAFTA), the world's current arrangements slowly emerged.

New global financial institutions, the globalization movement, and trade pacts established from the immediate post war period through the 2000s have been the bedrock of global peace and prosperity for 70 years. To date there still has not been a major power conflict in the free trade and globalization era.

Overall, the results have been positive for the world with billions of people released from poverty, developing nations blossoming and sharing more equally in the fruits of wealth, and innovation and technological progress taking off.

However, as with any major systemic change, there were also very real downsides to the new order. Not enough thought or planning went into how people and businesses around the world facing disruption and unemployment should be taken care of and transitioned into new models and modes of income. Technology, automation, more efficient markets and free trade, while positive overall, did leave some behind.

For those left behind, especially in the West and East, a perception began to develop that free trade was only benefitting corporations and elites, that if "they win, we lose." These feelings are real and must be addressed.

Former U.S. Treasury Secretary and President of Harvard University Lawrence Summers has written extensively on this subject in recent years. In a landmark admission that the concerns of everyday people needed to be addressed for free trade and globalization to progress and succeed, Summers wrote in a 2016 editorial in the Financial Times that "Certainly, a substantial part of what is behind the resistance is lack of knowledge. No one thanks global trade for the fact that their pay check buys twice as much in clothes, toys and other goods as it otherwise would. Those who succeed as exporters tend to credit their own prowess, not international agreements. So, there is certainly a case for our leaders and business communities to educate people about the benefits of global integration. The core of the revolt against global integration, though, is not ignorance. It is a sense, not wholly unwarranted, that it is a project carried out by elites for elites with little consideration for the interests of ordinary people—who see the globalization agenda as being set by big companies playing off one country against another."

It is hard to argue against this being the case. It is the responsibility of the majority who have benefited from our interconnected world to educate and help those who have not shared equally in its fruit.

Bluffing to the brink

The winds are now carrying the rhetoric of nationalism and protectionism around the world. The U.S. executive branch is touting "America first," Brexit is plowing ahead, and nationalism is on the rise in Europe and Asia. These are all dangers to the evolution of global interconnectedness and prosperity.

Most profoundly, tensions and destructive rhetoric between the United States and China are intensifying. President Trump began by promising to fulfill his campaign promises to roll back free trade. His administration began by leaving the Trans-Pacific Partnership, before turning its attention to NAFTA and most recently threatening a trade war with China.

In response, China has threatened to retaliate in kind and has proposed a broad array of countermeasures against the United States.

In an editorial published on April 11, CEO of Alibaba Group Jack Ma framed the current situation as follows: "China is shifting its economy from the world's largest exporter to the world's largest consumer. Chinese citizens now have the wealth and income to pursue discretionary spending. They want to buy high-quality imported food, cosmetics, fashions and health and wellness products for themselves and their children… Last year, President Xi Jinping said at the World Economic Forum that over the coming five years, China will import $8 trillion of goods. It is therefore ironic that the U.S. administration is waging a trade war at a time when the largest potential consumer market in the world is open for business. Is America going to forfeit this opportunity?"

It is yet to be determined how much the recent back and forth is posturing, bluffing and foundation building for positive negotiations or how close the world really is to an all-out trade war.

Cooler heads

Over the last few days things have, on the surface at least, started to move in a more positive direction. It is apparent that the best and brightest business, political and financial minds in the U.S. and China are calling for negotiations, discussions, and solutions that will ensure the recent tensions shift toward compromise.

President Xi's remarks at the opening of the Boao Forum for Asia Annual Conference 2018 are a step toward deescalating tensions between the United States and China. He correctly points out that trade balances are not the best measure of cooperation and prosperity and that China is nonetheless open to mitigating imbalances.

With consumption, technology innovation and services the pillars of China's future economy, ensuring open and free trade, and the protection of intellectual property is in China's, as well as the world's, best interests.

President Xi also noted that fair and balanced trade is a two-way street and that China asks that other countries act to ensure growth by reconsidering restrictions on Chinese exports, especially in the technology sector. Hopefully the speech is a sign that recent rhetoric and threats are receding and that the tension has been a catalyst for construction, rather than dismantling, of the important bilateral relationship between the United States and China.

The U.S., the EU, India and the rest of the world's major powers and economies should use this moment of crisis to build upon, rather than erode, the interconnected nature of business, trade and consumption.

Hopefully, populism and nationalism will recede because ultimately the same people calling for an end to free trade will ultimately be hurt most by its demise. That was true in 1929, and it would be equally as true today.

The author is vice president of the China and Asia Pacific Practice at consulting firm Tompkins International

Copyedited by Laurence Coulton

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