Splendid Exchange, A

by Bernstein, William L

  World trade has not quite evolved to the point described by John Stuart Mill in the epigraph of chapter 12, where “all things would be produced in the places where the same labor and capital would produce them in the greatest quantity and quality,” but it is getting there rapidly. In the process, the frictions and crises described in the previous chapters will multiply and accelerate.

  14

  THE BATTLE OF SEATTLE

  Our argument provides no political ammunition for the protectionist. . . . It has been shown that the harm which free trade inflicts upon one factor of production is necessarily less than the gain to the other. Hence, it is always possible to bribe the suffering factor by subsidy or other redistributive devices so as to leave all factors better off as a result of trade.—Wolfgang Stolper and Paul Samuelson1

  In January 1999, Seattle’s political leaders had every right to be proud when their bid to host the Third Ministerial Conference of the WTO later that year beat out San Diego’s. Not only would thousands of visitors flood hotels and restaurants, but the meeting would showcase the city to world leaders, including the U.S. president and secretary of state.

  Norm Stamper, Seattle’s well-regarded police chief, also knew that the conference would draw tens of thousands of antiglobalization protesters, and that the last Ministerial Conference, held eighteen months before in Geneva, had turned ugly. But this was the United States, not Europe; the country had not seen significant violent political protest for a generation, and certainly the 1,200 well-trained officers under his command were up to any challenge. In addition, the AFL-CIO, the protest’s largest contingent, had promised to keep the lid on.

  Stamper and the AFL-CIO miscalculated. A large minority of protesters, well-stocked with bottles, gas masks, crowbars, masonry hammers, and tripods from which to suspend observers above the throng, wreaked mayhem. By the third day of the conference, Seattle’s finest had lost control. Mobs slashed tires, broke windows, and looted shops, and more than a thousand attackers laid siege to a precinct house for hours before its astonished defenders dispersed the assault with tear gas and rubber bullets.2

  The protesters forced the conference to adjourn early and focused the world’s attention on the process of global free trade. Did the Battle of Seattle represent something new in the history of world trade?

  Hardly. Almost no economic, ideological, or even tactical daylight separated the rioters in Seattle from the antiglobalists of preceding centuries: Madeiran growers incensed by sugar imports from the New World; Mexico City’s Spanish barbers and silk growers anxious about cheap Asian labor and textiles; English refiners of muscovado angry at competition from Barbadian factories; the wool weavers who attacked Josiah Child’s House, the EIC’s headquarters, and Parliament; or the revelers at the Boston Tea Party. Were archaeologists to discover that four thousand years ago, Dilmun’s farmers, unhappy with the dumping of Sumerian grain, had sacked the customhouse, we would scarcely be surprised.

  This final chapter asks two simple questions: What has the history of world trade taught us? How can we apply those lessons to today’s debates about globalization?

  The instinct to truck and barter is part of human nature; any effort to stifle it is doomed to fail in the long run. Ever since men first challenged the world’s seas and deserts with ships and camels, they have carried with them tradable commodities. At the dawn of the Common Era, the extremities of civilized Europe and Asia knew and coveted each other’s luxury goods. By the end of the nineteenth century, most of the features we consider peculiar to modern global commerce—instantaneous communication, long-distance trade in bulk commodities and perishables, and an intercontinental manufacturing cycle—were well established. Today’s debates over globalization repeat, nearly word for word in some cases, those of earlier eras. Wherever trade arrives, resentment, protectionism, and their constant companions—smuggling, disrespect for authority, and occasionally war—will follow.

  Ships have always been, and for the foreseeable future will be, the most efficient method of long-distance transport. Seaborne commerce in turn requires political stability at critical maritime choke points. From ancient times, Europe’s convoluted coastal geography taught its merchants and navies the value of strategic straits and passages, the capture of which could bring starvation to a nation or to its enemies. For at least 2,500 years, the Hellespont and the Bosphorus have been the quintessential maritime choke points; they remain so to this day. When Europeans ventured into the Indian Ocean in Vasco da Gama’s trail, their first targets, not always attained, were the straits at Malacca, Hormuz, and Bab el Mandeb.

  Little has changed, save for the addition of two more man-made choke points at Suez and Panama. Today, about 80 percent of world commerce travels by ship, most going through one, and sometimes two or three, of these seven critical passages.

  By any measure—physical volume, monetary value, or strategic importance—petroleum is the most critical product carried, occupying at any given moment almost half of the planet’s commercial tonnage. The world currently pumps and ships about eighty million barrels per day, of which the United States uses one-fourth: twenty million barrels. About three-fifths of this, or twelve million barrels per day, must be imported. Petroleum not only powers the world but also lubricates it, fertilizes it, and supplies the major ingredient of the modern world’s most ubiquitous manufacturing material, plastic. Were oil supply lines seriously interrupted, much of the planet’s activity would quite literally grind to a halt, and hundreds of millions of people would starve.

  The volume of American oil imports roughly corresponds to the amount of crude passing daily through the Persian Gulf entrance at the Strait of Hormuz. A smaller, but still strategically important, amount also passes through the Dardanelles and Bosphorus (these two passages together hereafter are referred to as the Turkish Straits), Bab el Mandeb, the Suez Canal, the Sumed pipeline (which parallels the Suez Canal), and the Panama Canal. Finally, most petroleum that exits through these Middle Eastern straits bound for East Asia must also pass by Malacca. The sudden closure of any of these passages would throw the world economy into turmoil.

  World Oil Flows, Millions of Barrels per Day

  Within the next few decades, such an event is not merely possible or probable, but nearly certain. Those who doubt this should consider some recent history. The Suez area has sparked two conflicts in the twentieth century alone: one in 1956 involving Egypt, Israel, Britain, and France; and another in 1967, the Six-Day War, after which it was closed for fifteen years.

  Hormuz is even more problematic. In his 1980 State of the Union Address, President Carter enunciated what came to be known as the Carter Doctrine:

  An attempt by an outside force to gain control of the Persian Gulf region will be regarded as an assault on the vital interests of the United States of America, and such an assault will be repelled by any means necessary, including military force.3

  During the war between Iran and Iraq in 1981–1988, these two nations engaged in a “tanker war”: both combatant and neutral shipping (particularly Kuwaiti shipping) was attacked. Most ominously, the Iraqis repeatedly attempted to put Iran’s main export facility at Kharg Island out of commission. When Lloyd’s of London sharply increased insurance premiums on Gulf-bound vessels, both the Soviet Union and the United States chartered tankers and “reflagged” them under their own colors to force the combatants to think twice about continued assaults.

  It didn’t work, in spite of the fact that by the end of the 1980s, at least ten Western navies and eight regional ones patrolled the Gulf. On May 17, 1987, an Iraqi missile “mistakenly” struck the USS Stark and killed thirty-seven sailors. Since the United States had sided with Iraq, President Reagan blamed the incident on Iran for initiating the conflict, an accusation as untrue as it was bizarre.

  When Iranians hit one of the reflagged tankers, the Sea Isle City, American forces retaliated by destroying two Iranian oil platforms.4 After a truce in August 1988, the situation
quieted down, only to be replaced by a new danger in 2000, when Al Qaeda struck the USS Cole in the harbor of Aden at Bab el Mandeb, killing seventeen. The world trade system is most vulnerable at these three choke points—the Suez Canal, the Strait of Hormuz, and Bab el Mandeb—for all lie in a highly unstable region, within easy striking range of both state and nonstate actors hostile to the West.

  Even the “safe” passages have their problems. Although the Turkish straits have been placid for the past several decades, they saw fierce fighting in the Crimean War and World War I. In 1936, the Montreux Convention, while giving nominal control of the Straits to Turkey, granted all nations free right of passage through them. In practice, this convention allows Turkey to “meter” traffic through the straits, but not to board or inspect transiting vessels.

  This is no small distinction, and to anyone who has seen the dramatic and beautiful Bosphorus, the meaning is obvious. Spanning little more than a thousand yards across at its narrowest point and fronted for twenty miles on both sides with expensive homes, it is packed around the clock with an unbroken line of tankers, freighters, long-distance ferries, and luxury liners choreographed into northbound and southbound lanes, along with thousands of smaller craft. The straits long ago reached their maximum carrying capacity, and deadly collisions and spills have become routine. Worse, when vessels more than five hundred feet long enter the Bosphorus, an almost constant occurrence, the opposite lane must be closed down because of the wide turning radius of these behemoths, causing horrendous delays.

  The newly discovered oil reserves of the Caspian area flow through the straits, and the possibility of an accidental spill has caused the Turks to push the limits of the powers granted to them by the Montreux Convention, forbidding, for example, night transits by large tankers. In 2001, Turkey announced plans to impose significant fees on tankers, although such levies are at least technically a violation of both the Montreux Convention and international law.

  With luck, these issues will be resolved diplomatically. More serious is the possibility of terrorism, from either Al Qaeda or Kurdish insurgents. Scientists have estimated that the detonation of a large liquid natural gas tanker in the Bosphorus would wreak havoc far exceeding that of a Richter 8.0 earthquake.5

  Farther east, oil bound for Japan, Korea, and China passes through the Strait of Malacca, which is plagued by pirates, the terrorist group Jamal Islamiya, and disputes over high dredging costs among the three nations bordering its shores: Malaysia, Indonesia, and Singapore. The United States Seventh Fleet currently patrols this strait, and it is not difficult to imagine a future Sino-American conflict arising from China’s concern over foreign control of its increasingly important oil and merchandise lifelines to the Middle East and Europe.

  Insecurity haunts even the Western Hemisphere choke points. In 1989, when the strongman Manuel Noriega annulled the election of Guillermo Endara as Panama’s president, the United States invaded, ostensibly to restore Endara to power. Had the same events taken place in Honduras or Paraguay, it seems unlikely that American troops would have become directly involved or that their leaders would have wound up in a Miami jail.

  Choke points can estrange even the best of neighbors. The once obscure Northwest Passage, which had long frustrated European explorers until being conquered by Roald Amundsen in 1906, has recently provoked confrontation between the United States, which considers the passage an international waterway, and Canada, which claims sovereignty over its eastern entrance at the Davis Strait (between Baffin Island and Greenland). In 1969, the first commercial transit of the passage by the Humble Oil tanker Manhattan drew the notice of Canada, and when an American Coast Guard cutter made the transit in 1985, the Canadians lodged a formal protest.6

  Because of global warming, the Northwest Passage is likely to become navigable year-round within a decade or two, and its emergence as a commercial sea-lane will produce lively discussion between Ottawa and Washington for years to come. Not long after the Northwest Passage opens, further increases in world temperatures will probably make practicable routes over the North Polar region via the Bering Strait from East Asia to Europe and the North American East coast, paring more than one-third of the distance off the current route via Suez. New routes from Europe to the North American West Coast would also become possible; these transpolar routes will almost certainly cause tension between the United States and Russia over control of the Bering Strait.7

  Enthusiasts of free trade have overestimated its economic benefits. The history of the nineteenth century casts doubt on the notion that trade is an engine of growth. Were free trade the path to national wealth, then the United States, which for most of its history had sky-high tariffs, would never have prospered. The “golden era” of tariff reduction in Europe, from 1860–1880, should have been a time of much higher growth than between 1880 and 1900, a period of protectionism; in fact, growth was higher during the later period. Also, after 1880, the economy of protectionist northern Europe grew faster than that of free-trading England.

  This point is not lost on the better-read American protectionists, such as 1996 presidential candidate Patrick Buchanan, who wrote

  Behind a tariff wall built by Washington, Hamilton, Clay, Lincoln, and the Republican presidents who followed, the United States had gone from an agricultural coastal republic to become the greatest industrial power the world had ever seen—in a single century. Such was the success of the policy called protectionism that is so disparaged today.8

  Buchanan is not alone in this assertion; he is joined by a phalanx of economic historians, including the highly respected late Paul Bairoch.9 Modern quantitative techniques confirm that the evidence for free trade as an engine of growth in the nineteenth century is weak at best. In fact, a number of rigorous quantitative studies have suggested that during the 1800s, protectionism actually may have fostered economic development. A detailed “what if” analysis of American protectionism during the early nineteenth century by the economic historian Mark Bils shows that Hamilton, the Adams men, and Carey may have been right all along: without high tariffs, “about half of the industrial sector of New England would have been bankrupted.”10 Another distinguished economic historian, Kevin O’Rourke, studied eight wealthy European nations, the United States, and Canada during the late nineteenth century and was startled to find a positive correlation between tariff levels and economic growth—the higher the tariff, the better a nation did. In the understated language of academic economics, he concluded:

  It appears that the Bairoch hypothesis [that tariffs were positively associated with growth in the late nineteenth century] holds up remarkably well, when tested with recently available data, and when controlling for other factors influencing growth.11

  A rigorously conducted study of England’s break from free trade in 1932 also concluded that the tariffs of that year boosted its economy.12

  Not all trade historians agree that America’s high nineteenth-century tariffs were beneficial. Bradford DeLong of Berkeley notes that protectionism delayed the acquisition by New England entrepreneurs of leading-edge English steam and industrial technologies, stunting industries that might have benefited from them. Although Bils may be correct in saying that a lower tariff would have devastated existing New England factories, DeLong argues that the nation would have wound up with a different, and much more prosperous, capital-intensive “high-tech” industrial sector in its place.13

  After 1945, however, the picture changes. A detailed analysis by the economic historian Edward Denison showed that the GATT tariff reductions between 1950 and 1960 did produce a small amount of excess growth, only 1 percent extra, overall, during that decade in northern Europe; there was no effect in the United States.14

  After 1960, stronger evidence emerges in favor of the benefit of free trade, particularly in the developing world. In 1995, economists Jeffrey Sachs and Andrew Warner examined the experience with open international markets in the late twentieth century. They began by dividing th
e developing world into three groups: nations that have always had reasonably open trade policies, those that converted from protectionism at some point, and those that have always been highly protectionist. Table 14-1 lists the nations in the first and last groups.15

  The two lists speak for themselves; in 2006 the average GDP for the “always open” group was $17,521, as opposed to $2,362 for the “always closed” group. Sachs and his colleagues next looked at the effect of trade policy on the ability of a nation to join the “convergence club” of the world’s prosperous economies.16 This time, they examined the relationship in both developed and developing nations between per capita GDP in 1970 and growth rates over the next twenty years. They found that free-trading nations had very high growth rates. This was especially true of those that began in 1970 with relatively low per capita GDPs; these nations grew at rates that often exceeded 5 percent per year. The initially wealthy nations tended to grow less rapidly, at 2 to 3 percent per year. In other words, poor nations that adopt free trade tend to catch up with rich nations.

  Sachs and Warner next performed the same exercise for nations with generally protectionist policies over the same period. Their real per capita GDPs barely grew, clocking an average rate of just 0.5 percent per year.

  When the poor protect, they stagnate and fall ever further behind the developed nations. (Of late, Professor Sachs has become famous for his controversial views about the need to redistribute wealth from developed nations to developing nations. His earlier research on the connection between growth and trade commands more respect among economists than his more recent pronouncements.)

  How to reconcile the difference between the nineteenth- and twentieth-century data? Sachs and Warner begin by noting research by others which shows that in Japan and the United States, incomes in the prefectures and individual states, respectively, converged during the nineteenth and twentieth centuries, just as the developing nations’ economies had converged through trade in the late twentieth century.