Free Trade Doesn't Work

by Ian Fletcher

  Projected Benefits of Trade Liberalization516

  Model

  Year

  Benefits (in billions)

  Developing Nations

  Entire World

  GTAP

  2002

  $108

  $254

  GTAP

  2005

  $22

  $84

  LINKAGE

  2003

  $539

  $832

  LINKAGE

  2005

  $90

  $287

  The 2005 (most recent) GTAP model estimates that the total benefit, to all the nations in the world, of abolishing all remaining restrictions on trade is only 84 billion dollars.517 This is less than the annual sales of the CVS drugstore chain.518 It works out to less than four cents per day per person on the planet, or less than one-half of one percent of world economic output. So for all the disruption and problems trade liberalization causes worldwide, that’s the meager payoff.

  This $84 billion estimate also applies to eliminating all the world’s remaining trade barriers, which is not realistically on the table. If one dials back liberalization to more plausible levels, the numbers go down even more. For example, for a plausible package of tariff cuts ranging from 33 to 75 percent on various goods, LINKAGE predicts gains only about a third the size 100 percent liberalization would produce.519 This would cut them down to just over a penny a day per person in the developing world.

  These gains are also a one-time event, not an annual increment. They do not open any new long-term pathways to growth and once they’ve been exhausted, that’s it. Furthermore, they will not be evenly distributed. Some people will get more than a penny a day, some will get less, and some will get nothing at all. Some people will even get less than zero: that is, they will be net losers from trade liberalization.

  GTAP also gives a surprising answer regarding which industries the benefits of liberalization would occur in: mainly just agriculture. Free traders love to paint free trade as the master key to a global high-tech boom, but, in fact, all the projected net benefits of liberalization are in mundane areas. This shouldn’t actually be a surprise, given that agriculture is the most (overtly) protected sector remaining in the developed world, where the big GDPs are and thus the opportunities for percentage gains to translate into large dollar amounts. Most of these gains simply consist in slightly lower consumer prices if remaining agricultural protections, from sugar in the U.S. to cheese in Europe, are eliminated. The second-largest field of prospective gains, after agriculture, is textiles—which is also the only major industry in which most of the benefits go to developing countries.520

  FREE TRADE DOES NOT REDUCE GLOBAL POVERTY

  The First World is at least rich enough to afford mistakes about trade. The Third World is not, so it matters enormously that the potential for free trade to reduce global poverty is minimal, especially compared to the hype on the subject.521 GTAP calculates that complete global trade liberalization would be worth $57 per person per year in the developed world—but less than $5 in the developing world.522

  Many optimistic figures on poverty reduction as a result of trade liberalization do not survive even casual scrutiny. For a start, the World Bank standard for poverty is $2 a day, so “moving a million people out of poverty” can merely consist in moving a million people from incomes of $1.99 a day to $2.01 a day. In one widely-cited study, there were only two nations in which the average beneficiary jumped from less than $1.88 to more than $2.13: Pakistan and Thailand.523 Every other nation was making minor jumps in between. This is better than nothing, but still small stuff to set against the costs of trade liberalization. It is definitely not the qualitative jump from material misery to a decent standard of living that people imagine from the phrase “lift out of poverty.”

  The developing world’s projected gains from trade liberalization are also concentrated in a relatively small group of nations, due to the fact that only a few developing nations have economies that are actually capable of taking advantage of freer trade to any meaningful extent.524 Although it depends a bit on the model, China, India, Brazil, Mexico, Argentina, Vietnam, and Turkey generally take the lion’s share.525 This list sounds impressive, but it actually leaves out most Third World nations. Dirt-poor nations like Haiti aren’t even on the radar. Even nations one notch up the scale, like Bolivia, barely figure.

  Like it or not, this is perfectly logical, as increased access to the ruthlessly competitive global marketplace (which is all free trade provides) benefits only nations whose industries have something to sell which foreign trade barriers are currently keeping out. Their industries must both be strong enough to be globally competitive and have pent-up potential due to trade barriers abroad, a fairly rare combination. So the most desperately impoverished nations, which have few or no internationally competitive industries, have little to gain.

  Might there perhaps be some way to share the gains from free trade more equally among nations at different levels of development? Unfortunately not, because free trade is, by definition, not regulated, which means that any such scheme would not be free trade at all. It would be some sort of managed trade. Any number of such share-the-wealth schemes have been proposed, but they are outside free trade entirely. This also leaves open the question of whether these redistributive schemes would actually work and whether the developed nations, which have de facto veto power over all proposals to reorder the global economy, would agree to them.

  FREE TRADE INCREASES GLOBAL INEQUALITY

  Despite careless talk about the “global” economy, only about a third of humanity is actually integrated into modern flows of goods and capital.526 This third consists of basically the entire population of the developed world plus varying percentages of the populations of poorer nations. But two-thirds of humanity is only peripherally involved at best. The spreading Third World affluence one sees in TV commercials only means that the thin upper crust of Western-style consumers is now more widespread than ever before. There are indeed Indians driving BMWs around Bangalore in a way that there weren’t in 1970. But having more affluent people in the Third World is not the same as the Third World as a whole nearing the living standards of the First. Think of the developed world as a formerly all-white country club that has started admitting rich Asians and a few others, while the economic gap between the club and the surrounding town has actually grown, and you will not be far wrong.

  It is no accident that, according to the World Bank, the entire net global decline in the number of people living in poverty since 1981 has been in mercantilist China, where free trade is not practiced. Elsewhere, their numbers have grown.527 The story on global poverty in the last 30 years is roughly as follows:

  1. China (one fifth of humanity) braked its population growth, made a quantum leap from agrarian Marxism to industrial neo-mercantilism, and thrived—largely because the U.S. was so open to being the “designated driver” of its export-centered growth strategy during this period.

  2. India (another fifth) sharply increased the capitalist share of its mixture of capitalism and Gandhian-Fabian socialism after 1991. It did reasonably well, but not as well as China and not well enough to reduce the absolute number of its people living in poverty, given unbraked population growth.528

  3. Latin America lost its way after the twin oil shocks of the 1970s, experienced the 1980s as an economic “lost decade,” and tried to implement the free market Washington Consensus in the 1990s. It didn’t get the promised results, so many nations have since lurched left.

  4. The collapse of Communism left some nations (Cuba, North Korea) marooned in Marxist poverty,529 while others (Uzbekistan, Mongolia) discovered that the only thing worse than an intact communist economy is the wreckage of one. Much of Eastern Europe and the ex-USSR got burned by an overly abrupt transition to capitalism, then recovered at various speeds.

  5. Sub-Saharan Africa spent much of this period in political chaos, with predicta
ble economic results (except for South Africa and Botswana). Washington Consensus policies in the 1990s did not deliver, and the few bright spots recently noted have yet to prove enduring.

  6. Other poor countries followed patterns one through five to varying degrees, with corresponding outcomes.

  China is unquestionably the star here. But even China, for all its brutally efficient achievements in forcing up the living standards of its people from an extremely low base, has serious problems on this score. Most fundamentally, its growth miracle has been largely confined to the metropolitan areas of the country’s coastal provinces.530 Of the 800 million peasants left behind in agriculture, perhaps 400 million have seen their incomes stagnate or even decline.531 China has something like 200 million migrant workers—more than the entire workforce of the US—who have left their villages looking for a place to work.532 In the words of Joshua Muldavin, a professor of Asian studies at Sarah Lawrence College who has lived in the Chinese countryside for years:

  China’s rural hinterlands are in essence the engine as well as the dumping ground of China’s unprecedented economic growth. These rural areas provide the country’s booming cities with cheap unorganized labor principally drawn from extremely poor peasant com-munities in the midst of their own social and environmental crises. It’s also here that the most toxic industries are located, out of sight of the world’s media. Rural peasants labor in some of the world’s dirtiest, most dangerous conditions in these far-flung townships and village enterprises spread across the whole country. These are industrial subcontractors not only to Chinese companies but also international companies that spew pollution into the air and water and onto the land. And when the health of rural workers is destroyed, they return to tilling decimated lands around their villages, which have become toxic waste dumps for this unregulated production…Rural China, its environment, and its people are on the bottom of a global commodity chain tied to China’s emergence as global companies’ industrial platform of choice.533

  And even in urban, coastal China, most Chinese are still poor workers, who often sleep 100 to a room in cinderblock factory dormitories.

  In the last 30 years of greatly expanding free trade, most of the world’s poor nations have actually seen the gap between themselves and the rest of the world increase.534 As Dani Rodrik reports:

  The income gap between these regions of the developing world and the industrial countries has been steadily rising. In 1980, 32 Sub-Saharan countries had an income per capita at purchasing power parity equal to 9.3 percent of the U.S. level, while 25 Latin American and Caribbean countries had an income equal to 26.3 percent of the U.S. average. By 2004, the numbers had dropped to 6.1 percent and 16.5 percent respectively for these two regions. This represents a drop of over 35 percent in relative per capita income.535

  This situation is not going to improve any time soon: the United Nations Development Programme reports that if high-income countries were “to stop growing today and Latin America and Sub-Saharan Africa were to continue on their current growth trajectories, it would take Latin America until 2177 and Africa until 2236 to catch up.”536 2236 is as far into the future as 1782 is into the past. And, of course, developed nations are unlikely to stop growing.

  An even profounder problem is that this assumes it is ecologically possible for the entire world to consume at North American levels. This is impossible with current technology and therefore depends upon technological breakthroughs that may not materialize. So mitigating global inequality through growth may be environmentally unsustainable, quite aside from whether it is economically likely.

  THE DISAPPEARANCE OF MIDDLE-INCOME NATIONS

  Today, because a few formerly poor nations are succeeding economically while most have been hit with economic decline, the world is splitting into a “twin peaks” income distribution, with a hollowing out of middle-income countries.537 (Most poor nations have high fertility, so population growth drags down their per capita income by a percentage point or two every year if economic growth does not outpace it.) And, contrary to impressions cultivated in the media, economic success is actually becoming more concentrated in the Western world, not less.538 According to one summary of the data by Syed Mansoob Murshed of Erasmus University in Rotterdam, Holland:

  Between 1960 and 2000 the Western share of rich countries has been increasing; to be affluent has almost become an exclusive Western prerogative—16 out of 19 non-Western nations who were rich in 1960 traversed into less affluent categories by 2000 (for example, Algeria, Angola, and Argentina.) Against that, four Asian non-rich countries moved into the first group. Most non-Western rich nations in 1960 joined the second income group by 2000, and most non-Western upper-middle-income countries in 1960 had fallen into the second and third categories by 2000. Of 22 upper-middle-income nations in 1960, 20 had declined into the third and fourth income categories, among them the Democratic Republic of the Congo, also known recently as Zaire, and Ghana. Most nations in the third group in 1960 descended into the lowest income category by 2000. Only Botswana moved to the third group from the fourth category, while Egypt remains in the third category. We seem to inhabit a downwardly mobile world with a vanishing middle class; by 2000 most countries were either rich or poor, in contrast to 1960 when most nations were in the middle-income groups.539 (Emphasis added.)

  This is all no accident. Free trade tends to mean that the industrial sectors of developing nations either “make it to the big time” and become globally competitive, or else get killed off entirely by imports, leaving nothing but agriculture and raw materials extraction, dead-end sectors which tend not to grow very fast. Free trade eliminates the protected middle ground for economies, like Mongolia or Peru, which don’t have globally competitive industrial sectors but were still better off having such sectors, albeit inefficient ones, than not having them at all.540

  The productivity of modern industry is so much higher than peasant agriculture that it raises average income even if it is not globally competitive. This is why Mongolia, Peru, and similar nations actually had higher average incomes before free trade was introduced during the “reforms” of the 1990s.541 Even their inefficient and protected industrial sectors set national wage floors that discouraged, among other things, overcultivation, the environmental degradation consequent upon driving the entire population into agriculture for lack of alternative job opportunities.542

  The sudden imposition of free trade upon such nations is even worse than its gradual imposition, as sudden drops in output are especially prone to kill off industries dependent upon scale economies, which (for reasons we will explore in Chapter Nine) are the only really good industries to have. Nations which open up their economies to (somewhat) free trade relatively late in their development, and continue to support domestic firms with industrial policy, are far more likely to retain medium and high technology industry, the key to their futures, than nations which embrace full-blown free trade and a laissez faire absence of industrial policy too early in their development.543

  There are numerous documented cases in which trade liberalization simply killed off indigenous industries without supplying anything to replace them. To take some typical examples from the International Forum on Globalization:

  Senegal experienced large job losses following liberalization in the late 1980s; by the early 1990s, employment cuts had eliminated one-third of all manufacturing jobs. The chemical, textile, shoe, and automobile assembly industries virtually collapsed in the Ivory Coast after tariffs were abruptly lowered by 40 percent in 1986. Similar problems have plagued liberalization attempts in Nigeria. In Sierra Leone, Zambia, Zaire, Uganda, Tanzania, and the Sudan, liberalization in the 1980s brought a tremendous surge in consumer imports and sharp cutbacks in foreign exchange available for purchases of intermediate inputs and capital goods, with devastating effects on industrial output and employment. In Ghana, liberalization caused industrial sector employment to plunge from 78,700 in 1987 to 28,000 in 1993.544

  O
ne unhappy corollary of this is the so-called Vanek-Reinert effect, in which the most advanced sectors of a primitive economy are the ones destroyed by a sudden transition to free trade.545 Once these sectors are gone, a nation can be locked in poverty indefinitely.

  NAFTA, CASE STUDY IN FAILURE

  The North American Free Trade Agreement, America’s biggest free trade controversy of the last 20 years, is a veritable case study in failure. This is all the more damning because this treaty was created, and is administered, by the very Washington elite that is loudest in proclaiming free trade’s virtues. So there is no room for excuses about incompetent implementation, the standard alibi for free trade’s failures in the developing world. This is all the more true given that, with the heavy penetration of American industry into Mexico, the American elite hasn’t just been running the American side, but much of the Mexican side as well. And when it hasn’t been, the Mexican economy has been under the control of American-trained technocrats such as President Ernesto Zedillo (PhD, economics, Yale) and President Carlos Salinas (PhD, economics, Harvard). So if free trade was going to work anywhere, it should have been here.

  Instead, what happened? NAFTA was sold as a policy that would reduce America’s trade deficit. But our trade balance worsened against both Canada and Mexico. For the four years prior to NAFTA’s implementation in 1994, America’s annual deficit with Canada averaged a modest $8.1 billion.546 Twelve years later, it was up to $71 billion.547 Our trade with Mexico showed a $1.6 billion surplus in 1993,548 but by 2007, our deficit had reached $74.8 billion.549