by Jason Hickel
Six
Free Trade and the Rise of the Virtual Senate
Only free men can negotiate. Prisoners cannot enter into contracts.
Nelson Mandela
At the same time that structural adjustment was being imposed across the global South, cracking open markets and clearing the way for Western exports and multinational companies, there was already something else afoot – yet another tactic with which the South would have to contend. A new organisation was being designed that would govern the emerging world of global commerce. At first glance it seemed banal – the domain of bleary-eyed technocrats sitting behind computer screens in Geneva offices – but this new organisation quickly came to be the most powerful in the world, and today enjoys the prerogative to override the sovereignty of even independent nations. Whoever controls the rules of international trade controls the flow of our planet’s vast wealth and resources – and the architects of the World Trade Organization understood this well. But the secret of this new system is that it would not appear tyrannical in the least. On the contrary, it would draw its legitimacy from the very opposite – the idea of freedom – promising the right to engage in that most human of all activities, to truck and barter, without restriction by king or state.
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As a tactic of extraction, inequitable trade rules are nothing new. Indeed, to understand the hidden power of the modern trade system, we need to depart from our narrative arc for a moment and rewind a little bit – back to the 1770s, when the rebellious settlers of America’s East Coast were fighting for their independence from the British Crown. America’s rebels understood something about the power of trade that most people fail to grasp today – and it sparked the rage of an entire nation.
At the time, the young United States, like all colonies, was under what is known as an ‘unequal treaty’ with Britain. America’s trade tariffs were decided by London, and fixed at a low rate so as to allow British exporters the right to sell their goods on the American market with ease. The British called this ‘free trade’, and they pursued it with an almost religious zeal. But there was a double standard at play. The British were imposing low tariffs on America and their other colonies while knowing full well that their own industrial development had depended on exactly the opposite. Ever since the 14th century, and particularly during the 18th century, Britain had aggressively protected its own markets with high tariffs, excluding foreign competitors in order to build up its own industries.
The system was rigged, and the Americans knew it. Indeed, they routinely referred to free trade as a ‘conspiracy’ through which the British interfered with the American economy. The Americans wanted to have greater control over their own tariffs so that they could protect themselves from British imports and successfully develop their own young industries. And that’s exactly what they got once they won the War of American Independence. After independence in 1776, the United States gained the power to formulate their own trade laws. Alexander Hamilton, the first secretary of the Treasury, became the main author of US economic policy in the Washington administration. Hamilton knew from studying the British experience that a country’s industries needed protection from foreign competition during the early stages of their development. So that’s what the Americans did. They quickly raised trade tariffs, and enacted a kind of import substitution policy – similar to that which they would later deny to Latin America. But they didn’t stop there: they also used cartels, subsidies and other forms of state support to build their industrial power, again following in the footsteps of the British. Hamilton explicitly rejected the theories of Adam Smith and other British free-trade figures. He recognised that they were promoting free trade not because it was better for all, but because it benefited their own economic interests. Hamilton knew that for young economies like that of the United States, strong protectionism and solid state support were the only path to real industrial development.
Between the 1860s and the 1930s, the United States was the most heavily protected economy in the world. The model worked marvellously well, and the US quickly became the world’s dominant industrial power. Britain, for its part, had to compensate for its loss of the American market by pushing free trade elsewhere in the world, forcing it onto China through the Opium Wars and on their colonies in South Asia and Africa by executive fiat. The global South lost their economic independence because the Americans had gained it. Meanwhile, every other Western country followed the American System, as it was called by that time, line by line. During the first decades of the 20th century, protectionism was the norm across the industrialised world.
But then the Great Depression hit, followed by the Second World War. In the wake of the war, when Western powers gathered at the Bretton Woods Conference in New Hampshire to decide how to prevent such a catastrophe from recurring, they set up the General Agreement on Tariffs and Trade (GATT). John Maynard Keynes, the key figure at the conference, argued that the rise of protectionism across the industrialised world had contributed to low aggregate demand: people weren’t buying enough stuff because prices were too high, and the economy ground to a halt. For Keynes, excess protectionism was a primary driver of the Great Depression – a depression that had caused such misery in Germany and Japan, for example, that it had eventually given rise to the fascist politics that led to the war. Keynes believed that demand could be revived by carefully relaxing trade tariffs. This would allow prices to fall, people would start consuming again and the economy would be jolted back to life. The goal of the GATT was to reduce tariffs across the board through collective bargaining among industrialised countries. The system was designed to be beneficial to all, in the spirit of unity and solidarity, so the rules were not rigidly applied: member states could negotiate to avoid policies that would cause their economies significant harm.
In other words, the GATT began its life as an ostensibly benevolent institution, set on maintaining economic stability and peace. Just like the original IMF and the World Bank, which were founded during the same conference, it was rooted in Keynesian principles and committed to a kind of collective good.
During the 1980s, however, as neoliberal ideology was ascending across the Western world, this system took a dramatic turn. As the markets of developing countries were being forced open, there was an opportunity for the GATT to expand its remit beyond the already industrialised countries and embrace the South as well. Towards this end, GATT members met in the Uruguayan city of Punta del Este to decide what this new institution would look like. Unlike previous meetings, this time the agenda was led by neoliberal economists and policymakers from the United States who had a very different vision from the one Keynes espoused – one focused less on solidarity and more on economic realpolitik. When the talks concluded in 1995, the World Trade Organization was born. The WTO was a completely different animal from the GATT. Instead of seeking to maintain economic stability and cooperation, it was designed to open up the world to capital flows from rich countries, especially the United States, Western Europe and Japan. And in place of the flexibility of the GATT, it would be an all-or-nothing deal, or a ‘single undertaking’: countries had to sign on to the whole package of WTO rules, or be frozen out of the world economy.
While accession to the WTO was technically optional, developing countries didn’t really have much of a choice. After fifteen years of structural adjustment, their economies had been reorganised towards exports. They now depended on access to Western markets for their survival. Joining the WTO would facilitate such access, but in return they would have to reduce their tariffs, stop subsidising their own industries, deregulate capital flows and allow foreign corporations to operate domestically without prejudice – in other words, exactly the opposite of what they knew they needed for meaningful industrial development. Whereas structural adjustment imposed free-market policies on developing countries one by one, the WTO extended and standardised the neoliberal system across the global South in one fell swoop. Most countries had no choice but to c
omply.
Poor Theory, Poor Countries
If free trade runs counter to the development needs of poor countries, why do most mainstream economists continue to advocate it?
One reason is that the theory of free trade is so remarkably compelling. The keystone of modern free-trade theory comes from David Ricardo, the early-19th-century British economist. Ricardo argued that the global economy would operate most efficiently and productively if every country specialised in producing the goods in which they have a comparative advantage over other countries, given their particular set of technologies. If Portugal is better at producing wine and England is better at producing cloth, it doesn’t make any sense for England to waste its time producing wine – it should just focus on cloth and import the wine from Portugal. The more modern version of the theory – known as the Heckscher–Ohlin–Samuelson theory – shifts the comparison from relative endowments of technology to relative endowments of ‘factors of production’. It argues that in order to achieve maximum efficiency in the global economy, countries that have an abundance of cheap labour should specialise in labour-intensive goods, while countries that have an abundance of capital should specialise in capital-intensive goods. According to the theory, the only way to ensure this happens is to remove any ‘distortions’ in the trade system, such as subsidies and tariffs. Once exposed to the tough reality of market competition, industries will sink or swim depending on their relative competitiveness, and each country will naturally gravitate towards the things they’re relatively better at. This will lead to increased trade, income and consumption across the board.
The Heckscher–Ohlin–Samuelson model sounds so reasonable, on the face of it. It seems so obviously correct. But it has the insidious effect of naturalising global inequalities. The model assumes that each country has a natural endowment of factors of production. In other words, it wants us to believe that rich countries have a natural abundance of capital relative to poor countries, which have a natural abundance of cheap labour, as though this arrangement has always been the case – as if it was written in the stars or handed down by the gods. But of course it is not written in the stars. We have to ask: why is labour so cheap in poor countries in the first place? And why is capital so abundant in rich countries?
In a famous 1848 speech, a well-known German economist made a barbed critique of free-trade theory – and of European imperialism – with the following words:
We are told that free trade would create an international division of labour, and thereby give to each country the production which is in most harmony with its natural advantage. You believe, perhaps, gentlemen, that the production of coffee and sugar is the natural destiny of the West Indies. Two centuries ago, nature, which does not trouble herself about commerce, had planted neither sugar-cane nor coffee trees there.
The economist was Karl Marx. And his point was that the relative endowments of capital and labour are the product of historical and political processes – they are man-made, not natural. Rich countries have expensive labour because of a long history of unions and strong labour laws, and have abundant capital because of long-standing tariff protections that allowed them to develop their industries. Poor countries, on the other hand, have cheap labour and no capital because of a long history of colonisation, dispossession, unequal treaties and structural adjustment. Comparative advantage isn’t given, it is created. To suggest that the global South should focus on exporting raw material while the North should focus on capital-intensive industry is the equivalent of saying that black people are just naturally better at working in the cotton fields while white people are just naturally better at being overseers, and that investing in educating a black person to become anything other than a common labourer is a ‘distortion’ that runs against their natural abilities. It takes an inequitable social relationship and gives it the aura of the natural, of the unquestionable.
The Heckscher–Ohlin–Samuelson theory runs straight against the evidence of history. As we have seen again and again, a country’s factor endowments can be quite easily changed with the right policies. Making strategic use of tariffs and subsidies, global South countries could have built national industries and increased their capital endowments – indeed, that is exactly what they began to do after they gained independence during the 1950s and 1960s, before structural adjustment. But this kind of industrial strategy requires careful planning and government intervention, which is something that free-traders are vehemently against, for it interferes with the ‘natural’ order of things.
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Based on the theory of comparative advantage, free-trade advocates lead us to believe that trade liberalisation will ultimately boost economic development in poor countries.
But while it may be true that free trade increases efficiency in some abstract, mathematical sense, and perhaps even boosts consumption in the short term, it is not a meaningful strategy for long-term economic development. In fact, the theory itself never pretends to make this claim – it is merely a fancy bit of rhetoric that gets wheeled out by people who stand to benefit from it. In order for real economic development to occur, poor countries need to build their capacity for capital-intensive industry. This means intentionally insulating their industries from global competition until they are fully prepared to compete on the open market – just as Britain and the United States did during their own periods of economic development, along with every one of today’s rich countries. It’s surprising, and perhaps even offensive, then, that rich countries have now turned around and denied this strategy to poor countries. They insist that poor countries should be liberalised as quickly as possible in order to expose them to competition, so that they will have an incentive to develop their most competitive industries in order to survive. Protection, they say, only induces laziness and complacency.
The Cambridge economist Ha-Joon Chang likes to illustrate the problems of this theory by using the example of his very young son, Jin-Gyu. If Jin-Gyu is going to have a chance at becoming something great and succeeding in the world, then he will need many years of parental protection and investment to make sure he stays healthy, attends a good school and has plenty of time to focus on his studies before being let loose into the world to make it on his own. But what if we were to apply the logic of free trade to the Chang family? We might say that little Jin-Gyu lives in an economic bubble, his parents subsidise his idle existence and he is protected from the harsh realities of competition. What he needs is to have the subsidies cut off, get a job and make a living for himself – this will force him to become productive and efficient. ‘But,’ Chang argues, ‘if I drive Jin-Gyu into the labour market at the age of six, he may become a savvy shoeshine boy or even a prosperous hawker, but he will never become a brain surgeon or a nuclear physicist – that would require at least another dozen years of my protection and investment.’
‘Likewise,’ Chang says, ‘industries in developing countries will not survive if they are exposed to international competition too early. They need time to improve their capabilities by mastering advanced technologies and building effective organizations. This is the essence of infant industry protection.’ Infant industry protection – at least for a certain period of time – is the only way that poor countries have a shot at becoming anything more than the national equivalent of a shoeshine boy.
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The stated goal of the World Trade Organization is to create a ‘level playing field’ among trading partners. Each member has to play by the same rules – the same low tariffs and the same ban on subsidies. But in reality the idea of a level playing field is something of an illusion. When rich countries step onto the playing field they do so with industries that are immensely powerful and competitive – precisely because they spent their formative years of development under heavy protection. Poor countries, for their part, step onto the playing field with industries that have never had the benefit of protection and therefore have no hope of competing with their counterparts in rich countries.
It may be a level playing field, but what good is a level playing field in a match between schoolchildren and a Premier League team? The rules are the same for both sides, but that doesn’t mean the game is equitable. The young industries of poorer countries are sure to collapse in the face of more powerful competition from the North, and will be forced to fall back once again on exporting raw materials or agricultural goods with little value added. Certainly not a recipe for development.
Even if we assume that the game is in fact equitable, if we look more closely it becomes clear that the ‘level playing field’ is actually not very level at all: the rules are unfair even by the WTO’s own standards. Theoretically, the WTO requires every country to reduce their tariffs and subsidies to the same level, but in reality these cuts are applied selectively in favour of rich countries. Under the WTO, poor countries are required to stop subsidising their industrial goods, to prevent them from competing ‘unfairly’ with rich-country exports. As a result, many have no choice but to give up any hope of industrialisation and focus instead on agriculture. But through the US Farm Bill and the European Common Agricultural Policy, rich countries subsidise their own agricultural goods to the tune of $374 billion per year, then dump them on global markets for less than the cost of production, undercutting producers across the global South and driving down their market share. This flagrant double standard undermines the agricultural sector in poor countries, which is supposed to be their field of comparative advantage. It’s subsidies for the rich, and free trade for the poor.
In other words, because of the selective application of the WTO’s rules, many poor countries are effectively prevented from developing the one sector that free-trade theory says they should develop. Whether they attempt industrial development or agricultural development, they’re blocked both ways. And the WTO’s Agreement on Agriculture (AoA) locks these imbalances into international law.