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Thursday, November 27, 2008

Free Trade And Distorted Development:

A Critique Of WTO Perspectives

by Sharat G Lin (November 12 2008)

"Evidence is persuasive that trade openness delivers efficiencies and generates wealth. If trade opening takes place under the right conditions, all countries can benefit from international exchange." This was the assessment of the Director General of the World Trade Organization (WTO), Pascal Lamy, speaking at the Stanford Institute for Economic Policy Research (SIEPR) and the Stanford Center for International Development (SCID) on 27 October 2008.

He said that the multilateral system that came into being with the WTO "has brought transparency and predictability to international trade".

"All of the models suggest that the gains to developing countries will be larger the more they open their markets to trade". Citing specific cases, he said, "since opening their economies, Asian giants like China and India have together lifted more than 440 million people out of poverty, an economic success which, I think, we all can agree is without any precedent".

While trade has been an engine of aggregate economic growth in the BRICs (Brazil, Russia, India, China) and similar emerging countries, Lamy did not consider the unmitigated displacement of traditional sectors in these economies and the uneven development that has led to an alarming rise in income inequality both socially and geographically within each country.

With the 153 members of the WTO at all levels of development, and thirty more queuing for membership, Lamy acknowledged that the WTO framework is "no one size fits all paradigm". He continued, "We acknowledge that the poorest are simply not equipped to take on the obligations of the rich".

Lamy argued that a thirty-fold growth in international trade in real terms over the past sixty years was made possible by progressive reductions in tariffs. "In 1947-48 before the GATT negotiations, average tariffs in the industrial world were around twenty to thirty per cent and trade was constrained by a myriad of quantitative restrictions. Eight successive rounds of negotiations succeeded in reducing average MFN tariffs on the imports of manufacturers to the four per cent today in industrial countries."

The WTO has faced scathing criticism for the free trade policies that have accelerated globalization and the integration of a worldwide capitalist free market economy. But Lamy did make an important distinction: "trade opening is not synonymous with deregulation". The tariff reductions negotiated under the WTO framework involve complex rules and formulas that are transparent to all parties. The problem is not one of deregulation or opacity, but that the industrially developed countries have, until recently, dominated the negotiations because of the differential rules and preferential subsidies that they have long had in place, and owing to their post-colonial political weight. Fortunately, that is changing. Recent trade negotiating rounds have conceded important preferences and exemptions for poor countries.

What free trade has done, however, through the facilitated movement of capital is accelerate the development of capitalist relations of production worldwide. The social alienation attributable to the production process is far more profound than the social alienation owing to competitive trade between structurally unequal economies. Once again, the legitimate concerns about economic justice must focus primarily on the relations of production, and secondarily on the relations of exchange.

Job Losses

Lamy admitted that free trade can be dislocating: "No doubt about it, trade opening has led to some job losses globally and in the US". He added, "Some of the wage stagnation that has beset American workers is due to competition from lower-wage countries - exporters".

But he insisted, "The role of trade has been rather small compared to other factors. Were trade the culprit for the declining manufacturing jobs, you would very likely have seen domestic manufacturing output decline as foreign products displaced local products on the marketplace. But this wasn't the case. US manufacturing output rose to an all-time record last year [2007]. For the last two decades the Fed says real manufacturing output has risen more than 120 per cent."

In fact, the US Federal Reserve Bank reported that the period 1991-2000 witnessed a sustained cumulative manufacturing growth rate of over fifty per cent, led by the high-technology sector until free trade facilitated off-shoring of software development, manufacturing, and back office services to low-wage countries with qualified pools of talent. This was followed by a period of greatly reduced manufacturing growth. The index of US industrial production rose about seven per cent from 2000 to 2007, followed by a substantial decline in 2008. When a mean annual population growth rate of 0.9 per cent is taken into account, US per capita industrial production was stagnant over the period 2000-2007, and experienced a net decline over the interval 2000-2008 during which free trade in North America under NAFTA and globally was in full swing.

Lamy attributed the loss of US manufacturing jobs primarily to "productivity growth brought about by advances in technology. According to Bob Lawrence at Harvard only about ten per cent of job manufacturing losses in this decade are due to international trade. Other studies put this number at somewhere between five and fifteen per cent. And in the US until very recently productivity growth has been at an all-time high. The US Bureau of Labor Statistics reports that non-farm business sector productivity rose at an annual rate of nearly three per cent for the decades 1950s and 1960s. Each year in the 1995-2000 average manufacturing productivity rose at four per cent. And though this rate has tapered off slightly since 2000, it is still with a rate of 3.7 per cent. Where more goods and services are being produced with fewer workers, job losses are inevitable."

What Lamy did not mention is that this "productivity growth" has been measured as output per person, not output per hour of work. With salaried employees being pushed to work longer hours in the economy in general, and the high-tech sector in particular, output per person has risen much faster than output per hour of work owing to advances in technology.

Citing Lawrence again, Lamy acknowledged, "the principal factor in keeping wages flat has been the sharp rise of the share going to the super-rich, the top one per cent of taxpayers, and the share that has gone to profits which were at near record levels until this year".

Lamy ascribed health care costs as a secondary cause of keeping wages flat. "Labour costs for US corporations have actually risen 25 per cent since 2000, but nearly the entire increase went to pay the higher bill for health insurance which is twice as expensive today as it was at the beginning of this decade".

However, he added that "WTO does not involve itself in the question of income inequality within a country's border, nor does it in the reduction of health costs".

"Policies aimed at trying to address job loss and stagnant wages through trade measures will not fix the problem of manufacturing job erosion and it could, on the contrary, lead to a deterioration of this most vibrant part of the US economy today", he said.

Financial Crisis: The Need for Regulation and Transparency

Turning to the global financial crisis, Lamy cautioned, "The immediate problem we face is the credit crunch. Roughly ninety per cent of international trade is financed with a short-term credit. Trade finance is ... one of the [most] favoured since it provides creditors with an obvious collateral which is boatload of cargo. Yet trade finance is being offered at 300 basis points about the LIBOR, and even at this high price it has been very difficult for some developing countries to get trade finance."

"As we witness the financial crisis bleed into the real economy, the lack of such a safety harness in the global financial system is in my view glaringly apparent ... What is clear is that the international financial system suffers from a lack of regulation, a lack of transparency, a lack of accountability", he said. "Trade in goods and services represents only about two per cent of international transactions, but it takes place in one of the most internationally-regulated environments ever created. No such regulations exist for international finance, and drawing them up will be considerably more difficult and complex than concluding the Doha round, itself a relatively complex series of negotiations".

Pressing for a successful conclusion of the Doha Round of negotiations, he said, "No international agreement on finance or climate change is possible today without China, without India, without Brazil or Indonesia on board. And this is why the importance of reaching the Doha agreement extends beyond the confines of trade. Compared to negotiations regulating international finance and climate change measures, the Doha Round is a sort of low-hanging fruit."

Farm Subsidies

"In the media, this July meeting [of the Doha Round] was portrayed as a failure", but Lamy observed, "An agreement is now on the table ... for slashing trade-distorting domestic farm subsidies. We have known for some time that direct export subsidies will be eliminated in agriculture. Likewise we have known that in the rich countries duties will be eliminated on at least 97 per cent of exports from the poorest countries."

"We all agree that the rules that were negotiated fifteen years ago [in the Uruguay Round] do not fit the world of today. Rules, which permit rich countries to pour billions of dollars into agricultural programs which impoverish developing countries and farmers, are seen by many as inequitable. Many find it unjust to have a WTO tariff system where tariffs in rich countries are three or four times higher on exports from the poorest countries than they are on products from other rich countries."

If and when agricultural farm subsidies are ended in the US, this would put additional pressure on US farmers while relieving Mexican farmers, thus reducing the push to emigrate and potentially decelerating undocumented immigration into the US. It would likely reduce some of the socio-economically distorting effects of free trade under NAFTA between the US and Mexico, and shift some economic hardships from one group to another.

Lamy concluded by saying that we can solve the economic crisis, climate change, poverty alleviation, instability of international finance "only if we pursue those solutions collectively through the rules-based international system that all of us have worked so hard to create".

Free Trade, Global Imbalances, and Immigration

In response to a question on the potential differential impact of free trade on national economies characterized by great differences in purchasing power parity, wage structures, and sectoral value added, resulting in enormous trade imbalances and immigration flows, Lamy said, "The harsh reality is that opening trade reshuffles economic and social fabrics, and that creates political hardship. In whichever condition, the moment some of your constituencies are better off, others are worse off, you have a political problem."

"Yes, there are large imbalances in the US economy. There is a huge trade deficit ... This has to be seen sort of globally. Very talented economists will tell you that the US trade deficit is nothing [more] than the other [side of the] coin of the US rate of saving. It has to be financed, and it is external finance that sort of matches the lack of domestic savings", he commented.

"And if you take the example of the US, and you look at this huge trade deficit with China, people see this as a US-China issue. Whereas, they don't realize that a large part of this huge trade deficit (bilateral) is offset by a Chinese deficit with many Asian countries who produce goods which then go to China which then go to the US. It's the old example of the i-Pod which is shipped from China to the US for $100 and you have $5 of Chinese added value in that."

Lamy continued, "I personally believe that issue of immigration is there to stay. Trade, no trade, big trade, trade deficit, trade surplus - migrations in this planet occur for reasons which are of a sort of such a compelling nature that I wouldn't link them to trade. The only prescription I would make is that if you believe that migrations are sort of a hardship for many, making sure that goods and money flow freely is the right way to reduce the incentive to immigration. If trade or finance were to flow less than they flow today, then the constraint on people to move would probably be harder."

Lamy apparently brushed off concerns about swelling global financial and trade imbalances as well as the social hardships associated with immigration driven by economic desperation. Yet it is the monumental debt and deficit burdens in the US that are at the root of the global financial crisis. Furthermore, his argument implies that the undocumented migration from Mexico and Central America to the US would occur regardless of free trade, which is not borne out by its historical correlation with NAFTA. The argument that the free flow of goods and capital will reduce the incentive to immigration applies only between two national economic structures that are qualitatively similar and whose intensive parameters are quantitatively similar. Under these conditions the free flow of goods and capital may tend to equalize conditions geographically between similar socio-economic frameworks. But between structurally very different economies, the free flow of goods and capital, but not people, introduces profound socio-economic distortions that impel distressed populations to migrate.

Global policymakers need to understand not only the economics of aggregate growth, but the socio-economic impact of globalized flows on the distribution of income and on the welfare of human beings.

Sharat G Lin writes on global political economy, the Middle East, India, and the environment. He is affiliated with the San Jose Peace and Justice Center.

Bill Totten


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