Free trade

Submitted by martin on 9 February, 2008 - 9:15 Author: Paul Hampton

Whether you live in Mexico or Morocco, South Korea or Spain, you can buy food produced on the other side of the world. Toys made in China, jeans in Guatemala, trainers in Indonesia and cars made in Brazil are sold thousands of miles away. This is the golden age of world trade, if nothing else.

The world trade order today

By 2000 world trade was 20 times larger than it had been in 1950 — far outstripping the growth in world output (GDP), which had grown nearly seven times over the same period. Trade has grown especially fast since the late 1980s, twice as fast as output.

This is not the first period in which international trade has grown dramatically. From 1815 until 1914 world trade also expanded rapidly. In 1800 world trade accounted for 3% of world output. By 1913 it was 33% — about the same as it is today.

After the repeal of the Corn Laws in 1846, Britain, then the dominant industrial power, pursued free trade — no import controls, no tariffs. Around the 1860s free trade briefly became widespread. Then the USA, Germany, and other rising powers increased tariffs. Trade continued to grow. The world continued to have a relatively open trading system, based on the gold standard (gold, and the British pound firmly pegged to it, as the standard of world trade). Before 1914 agriculture dominated the trade in raw materials but during the early 20th century minerals such as oil became more important.

After World War One, the gold standard collapsed. Tariffs grew. Especially in the 1930s, trade imploded, retreating into a series of imperial or regional trading blocs. Only in 1968 did trade reach the level it had in 1913.

After World War Two the US dominance of world trade peaked, with a third of world exports. Japan’s importance grew during the long boom, producing 15% of world exports by 1987, compared with 3% in 1950. During this period the global trade in goods shifted towards manufactured goods and away from raw materials. Today around three-quarters of world trade takes place between rich countries.

Since World War Two, under US hegemony, the richer capitalist countries have reduced tariffs slowly but steadily. The USA’s total import duties as a percentage of total imports went down from 10% in 1946 to 2.3% in 1996.

Former colonies that won independence usually imposed high tariff rates to protect their infant industries. India, for example, still had an average tariff rate of 100% in 1988.

In the 1990s, however, ex-colonies and poorer countries have also reduced their tariffs. India’s average rate was 31% by 2001. “Low-income” countries reduced their average rate from 43% in 1991 to 15% in 2001; “middle-income”, from 20% in 1991 to 11% in 2001.

Trade is freer now than at any time for 90 years — and quite probably freer than it was in the previous heyday of free trade, the 1860s. According to The Economist magazine, in the 1940s developed countries’ tariffs on manufactured goods averaged around 40%. By 2000, that average was less than 4%. Though these figures mask wide differences between different countries and different industries, they still indicate an overall trend.

And the pattern of global capital flows has also changed over the past two hundred years.

At the end of 2004, the Multi-Fibre Arrangement of quotas that governed world trade in clothing and textiles expired. The US government is pushing for a Free Trade Area of the Americas, stretching across the whole continent, and governments large and small, weak and powerful are concluding their own trade pacts, spinning a vast web across the globe.

Since 2002 the EU has been negotiating Economic Partnership Agreements (EPAs) with countries in the Africa, the Caribbean and the Pacific. EPAs are essentially free trade agreements. They require developing countries to rapidly open up their markets to European corporations – threatening jobs, industries, government revenues and public services in some of the poorest countries in the world.

Since the 1960s and 70s patterns of trade have become more varied and apparently less uneven. Before then the basic pattern was one of richer, mostly European, countries exporting manufactured goods, while poorer countries exported raw materials, very often being entirely dependent on a single commodity export (Chile’s nitrates, some Central American countries’ bananas, and so on).

Now many poor countries export mainly manufactured goods. The main world centres for export of some high-technology goods are in Asia (Taiwan, Singapore, South Korea, Singapore). The USA, the world’s richest country, imports more manufactured goods from the ex-colonial world than it exports to it.

The USA and Europe are the biggest exporters of bulk agricultural products, while Third World agriculture has increasingly turned to export of higher-value products, flowers, fruit, etc.Very few poor countries have their foreign trade completely dominated by one rich country in the fashion that most colonies, and even some independent countries like Argentina (then trading mostly with Britain), suffered a hundred years ago.

Free trade: myth and reality

The capitalist class and its ideologues argue that free trade makes all economies grow faster. They say everybody gains.

The argument runs as follows: if countries specialise in what they produce most efficiently, and import what they don’t produce, then both sides gain. This theory, known as the theory of comparative advantage, and first developed almost 200 years ago by David Ricardo, is said to work even if one country is more efficient in producing all goods. But there are both theoretical and practical problems with the theory of comparative advantage.

Inequality: One consequence of the modern free trade regime is growing inequality between different states across the globe – in other words not everyone gains. According to an OECD study by Angus Maddison, the gap between the richest and poorest regions of the world, measured by per capita income, has grown substantially over the last 130 years. In 1870 the ratio was 5:1, but by 1950 it was 15:1. In 1973 the ratio was 13:1 — but by 1998 the gap was 19:1.

According to Guardian journalist George Monbiot: “The wealthiest 5% of the world’s people now earn 114 times as much as the poorest 5%. The 500 richest people on earth now own $1.54 trillion — more than the entire gross domestic product of Africa, or the combined annual incomes of the poorest half of humanity.” (The Guardian 2 September 2003)

The poorest countries of the world owe $2.5 trillion in debt. Sierra Leone spends 6.7 times more on debt interest payments than it does on primary education. In sub-Saharan Africa, half of its 700 million people subsist on $1 or less a day.

Freer trade creates growing inequality between countries. And the policies imposed on poorer countries to fit them into the world market create growing inequality within those countries.

Jobs and wages: Advocates of free trade argue that it improves the employment prospects and wages of workers in those countries that are involved.

A useful test of this argument is the North American Free Trade Agreement (NAFTA) between the United States, Canada and Mexico that began in 1994, which was hailed as a model for the rest of the Americas. In the first decade after NAFTA, net foreign investment in Mexico trebled while Mexican exports to the US more than doubled.

Although not quite the “giant sucking sound” anticipated, some studies estimate that between 1994 and 2001 766,000 jobs were lost in the US because of NAFTA. The US Department of Labor has issued over 400,000 workers with benefit payments related to job losses caused by NAFTA. And the real wages of unskilled workers in the US have stagnated or fallen over the last decade, in fact over the last thirty years.

In Mexico, the number of maquiladoras (export processing factories) — producing everything from car parts, chemicals, shoes, food and drink and toys — expanded after NAFTA was signed. By 2000 there were around 3,700 maquiladora factories employing 1.3 million workers, compared with just over half a million workers in 1994.

However in 2001 after the US recession and competition from China around 300,000 of those maquiladoras jobs were lost. Although Mexican manufacturing productivity has increased rapidly, the average wage in manufacturing industry has dropped by more than 20%. The number of Mexicans living in poverty has increased from just over half the population to nearly 60% over the last decade.

Structural adjustment

Free trade has also chimed in with creed of neoliberalism after the world economy went into recession in 1973. The International Monetary Fund (IMF) and the World Bank have consistently imposed a “one-size fits all” neoliberal policy of “structural adjustment” on weaker economies — in most cases exacerbating their problems. The IMF’s standard formula is that governments should restrict the money supply and credit, open the door to foreign capital, cut public spending and privatise nationalised industries.

Joseph Stiglitz, former chief economist of the World Bank, argues that in Thailand, South Korea and Indonesia in 1997, Russia in 1998 and Argentina in 2001, IMF policies greatly worsened their economic crises, impoverishing tens of millions of people.

The same IMF medicine shattered the Hungarian economy. In 1990 the IMF told Hungary that it was undergoing an inflationary crisis. So between 1990 and 1996, the central bank halved the credit made available to businesses. To ensure that Hungary serviced its debt, the Fund demanded that it cut every possible public service, and privatise every possible state asset. As George Monbiot puts it: “Entire economic sectors were flogged swiftly and cheaply, with the result that foreign corporations acquired complete market control.” (Guardian 19 August 2003)

The result was that “the Hungarian economy artificially plunged into its greatest ever depression in peacetime”. Between 1990 and 1993, its GDP fell by 18%. One and a half million people (almost 30% of the workforce) lost their jobs. The incomes of those who stayed in work declined by 24%; pensions fell by 31%. By 1996, most people were living on or around subsistence levels. And, far from curing inflation, between 1993 and 1996, prices rose by 130%.

Between 1992 and 1997, Zambia’s trade barriers were drastically cut or abolished as a condition of getting an IMF loan. During the period, manufacturing employment almost halved, the economy shrank, imports rose and exports fell.

Even at its best, free trade is a destructive and inhuman system. Who would even dare to advocate pure free trade in health care, for example? It would only mean that the rich got more surgery and medicine than was good for them, while the poor died early or lived with unnecessary pain or disability.

Pure free trade means that workers in a vast range of industries in Eastern Europe, for example, get thrown out of jobs by the competition of exports produced with more advanced technologies. The mainstream economists mutter that “in the long run” it will all even out because Eastern Europe, with lower wages, will develop and attract new industries. When will the “long run” come? And how will those workers and their children survive in the meantime?

Despite its apparent evenness, even the most perfect free trade also has mechanisms built into it that increase inequality.

The theory of comparative advantage assumes that all the economic advantages of one country over another are the “static” advantages of climate, mineral resources, and so on.

In fact, the USA, for example, has many advantages over, say, India, of a quite different order.

It has better infrastructure: transport links, communications, power supply. Factories or offices sited in the USA can easily acquire a vast range of supplies and repairs, and draw on a vast range of skilled and healthy labour and of scientific research.

The corporations based in the USA systematically reinforce those advantages, drawing in profits from around the world, and building up their core functions in the USA while subcontracting bits of their production processes elsewhere.

Capitalists based in poorer countries suffer continuing disadvantages, even under the freest trade, because they have to acquire dollars or other rich-country currencies in order to buy advanced technology.

Even perfect free trade is a trade between unequals. Corporations with large advertising budgets, well-known brand names, and strong “home” governments and large slush funds to give them advantage in gaining big contracts, win out even if there are no tariffs or import controls helping them.

The multinational vampires

Free trade also means that multinational corporations dominate the world economy and make the key decisions about what to produce, how to produce it and who gains. The United Nations calculates that there are 60,000 multinational corporations, with half a million affiliates. According to the World Bank, these multinationals control 70% of world trade. Around a third of international trade takes place within the multinationals themselves.

The 200 largest multinationals control half of the global trade in goods. The three largest auto companies, General Motors, Daimler-Chrysler and Ford, have sales larger than the national income of Indonesia — the world’s fourth most populous country. Wal-Mart (owner of Asda in the UK) is three times richer than Bangladesh, the eighth most populous country. IBM is richer than Egypt or the Philippines (see box).

Companies such as Philip Morris, Cadbury Schweppes, Nestlé and Hershey dominate trade in many primary commodities. The top five companies have 77% of world cereal trade. Chiquita, Dole and Del Monte control 80% of world banana trade and the biggest three cocoa companies have 83% of the world cocoa trade. The biggest three companies control 85% of the tea trade and the biggest four companies have 87% of world trade in tobacco.

Real world trade patterns are shaped more by the strategies of corporations than by differences of climate or mineral resources between countries.

For example, Canada is the biggest trading partner of the US. That is not mainly because Canada has nickel which the USA hasn’t, or the USA has oil which Canada hasn’t. It is because US corporations have the power and will to conquer some of the Canadian market, and Canadian-based corporations have the power and will to conquer some of the US market.

More than half the exports of France, Germany and Italy go to other European Union countries. And these countries sell similar things to each other. Germany and France both import cars from the other.

Free capital, unfree labour

The destructiveness of free trade is increased by its freedom of movement for goods, services and capital being combined with extreme unfreedom of movement for labour. Not that a universal free-for-all would be an ideal world: even if unemployed workers in Indonesia were at all times free to “get on their bike” and go to the USA to find jobs, in the first place, how would they afford it and, in the second place, what if they wanted to remain among friends and family and bring up their children in a stable environment?

But migration controls keep many countries as pools of ultra-cheap labour (often siphoning off only their most skilled workers, doctors and nurses, for example, as permitted migrants to richer countries). They facilitate the “race to the bottom”, whereby US workers can be blackmailed by the threat of cheaper labour in Mexico, Mexican workers by the threat of cheaper labour in Indonesia, Indonesian workers by the threat of cheaper labour in China, and so on.

Actually, since the world order of today is shaped not by professors of economics pursuing their theoretical ideals, but by the interests of the big capitalist corporations and the governments that serve them, “free trade” is highly imperfect, and imperfect in a way systematically biased against the poor.

Rich country protectionism

While free trade has been imposed on the weaker economies since the debt crisis of the 1980s, the strongest still protect their industries from competition.

Richer countries still have huge subsidies to certain industries, especially agriculture in the European Union (EU) and Japan. The average farmer receives a subsidy of $17,000 in the EU and $15,000 in the US.

World Bank President James Wolfensohn admitted in May 2003 that: “The average European cow receives more subsidies than the entire average income of a person in Africa.” Two billion people worldwide live on $2 a day — the same amount the average European cow receives every day in government subsidies.

A report by Oxfam published in September 2003 shows that poorer countries tend to pay higher rates of tax in order to export their goods. The United States imposes tariffs of between zero and one per cent on major imports from Britain, France, Japan and Germany, but taxes of 14 or 15% on produce from Bangladesh, Cambodia and Nepal.

The British government does the same: Sri Lanka and Uruguay must pay eight times as much tax to sell their goods in Britain as the United States.

According to the World Development Movement, the poorest countries’ share of world trade has dropped by almost half since 1981 and is now just 0.4%. Sub-Saharan Africa, where many of those poorest countries are located, has gone backwards economically over the last 20 years.

The absence of democracy

The institutions that define “free trade” and acceptable departures from it are dominated by the governments and corporations of the richer countries.

The IMF and the World Bank were established in 1944 as part of the post-war order, when the US became the dominant world power. These organisations were set up to lend money to governments for particular projects, or to help them stabilise their exchange rates and finance their debts.

The IMF and the World Bank are not benevolent organisations. They both require an 85% majority to make decisions, and votes are allocated according to each country’s contribution to the funds. The eight most powerful countries (G8) have 49% of the votes at the IMF, and 48% at the World Bank. The US alone possesses a veto over both bodies, with 17% of votes in the former, and 18% in the latter. Both organisations are based in Washington, and are led by rich world bankers.

The World Trade Organisation (WTO) was founded in 1996, though its roots go back to the General Agreements on Tariffs and Trade (GATT) established in the 1940s. The WTO is the main international body that decides the rules that govern international trade and currently has 145 members. It appears to have a more democratic structure, with each member country having one vote. But, in practice, this is bypassed by the “Green Room” meetings, which are organised by the rich nations, corporate lobbyists, and their corporate lawyers to “resolve” trade disputes. Poor countries are hard-pressed even to maintain a representative at WTO meetings, let alone keep up with the lobbying and pressurising from the richer countries.

The WTO has expanded its remit with the General Agreement on Trade in Services (GATS), which covers everything from schools and hospitals to postal services, transport and rubbish collection. Many of the colourful acronyms, such as TRIMS (on foreign investment) and TRIPS (intellectual property rights) mask a fundamental privatising agenda that effectively does away with the concept of “public services”.

So, for example, at the failed WTO summit in Cancun, Mexico in September 2003, the UK and other powerful governments tried to force an agreement on investment, competition policy, government procurement and trade facilitation. This would have meant governments having less power to regulate foreign investment in agriculture, mining and manufacturing industries, and the opening of the public sector to multinationals.

The British government, the EU and other big powers continue to promote privatisation, service liberalisation and GATS wherever they can get away with it.

What is the answer? Many people campaign for the richer countries to be consistent and open up their markets fully to exports from poorer countries. But that would not remedy the drives towards increasing inequality inherent in free trade itself.

Many condemn the WTO, the IMF and the World Bank. But a capitalist world without central institutions of regulation, with trade agreements negotiated only country-by-country, would probably be no better than the current regime.

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