Free Trade and Globalization: Utopian Dream

By David L. Brown

Advocates of expanded free trade through elimination of tariffs and other economic barriers claim that more open trade would benefit people in developing nations. The failure of the ongoing Doha round of trade negotiations among exporting nations is viewed as a tragedy for economically underprivileged people, particularly those engaged in subsistence agriculture.

An article in a recent issue of Science magazine questions this. Here is a key paragraph from the piece that appeared in the January 9 issue:

In July 2008, negotiations for a Doha Round trade deal collapsed again, this time over provisions to allow developing countries to protect the livelihoods of subsistence farmers. Premature trade liberalization undermines the policy space necessary for investment and technology policies for development. Further agricultural trade liberalization will undermine food security in most developing countries, many of which have been transformed from net food exporters into net food importers. Contrary to the claims of advocates of agricultural trade liberalization, eliminating agricultural and export subsidies in the Organisation for Economic Co-operation and Development would, at least temporarily, increase food prices in food-importing countries! The supposed gains from agricultural trade liberalization are likely to bring greater benefits to a few rich agriculture-exporting countries, rather than to most of the developing world, let alone the bulk of the poor.

The co-authors are  Jome Kwame Sandaram, Assistant Secretary General for Economic Development, U.N. Department of Economic and Social Affairs, and Rudiger von Arnim, an assistant professor of economics at the University of Denver.

The article mentions several arguments about why more open trade would harm poor nations. I’ve pulled a few statements out of the article. They are presented below in boldface followed by my observations and comments.

“The overwhelming volume of trade occurs between nations that are similar.”

This makes sense. Americans may buy Mercedes and Toyota automobiles from Germany and Japan. They have not shown a desire to purchase cars engineered and manufactured in places such as the Philippines, India, Botswana, Malaysia or Uzbekistan, although these and many other nations manufacture automobiles.

Attempting to create a level “playing field” between trading partners that are separated by factors of technology, wealth, consumer demand and tradition is obviously a difficult proposition. Values are different, costs relative, and there is a vast gap in supply-demand factors. According to myth, Manhattan Island was purchased for a bunch of beads and buttons which were happily received by the native Americans living there. Whether or not that is true, it is a fact that Europeans systematically offered primitive  peoples cheap trade goods in return for major concessions of land. Thus was the era of colonialism begun. The natives had no complaint, because they had no concept of land ownership and viewed the receipt of trade beads, cloth, iron axes and such as windfalls.

The situation today is quite different from the days of European expansion, but not entirely different. To expect that the poorest nations of the world can compete economically with the richest and most advanced raises definite questions. An African family might be able to grow two or three acres of corn using techniques not too different from those of centuries ago, while an Illinois farmer might single handedly grow a thousand acres with considerably more success.

Can a rich nation and a poor nation really be trading partners when their products and markets are so vastly different? Or, must they interact in a way reminiscent of feudalism, like master as to serf? Perhaps.

“Offshore outsourcing…can be a threat to the welfare of developed countries.”

The reason American and European countries have moved manufacturing to the Third World is to take advantage of cheap labor. This has left us in a precarious position. For example, a large percentage of the consumer items purchased in the U.S. are made in China. American factories have been closed and their former employees laid off. This has benefited American corporations in that they have reaped greater profits by reducing labor costs. It has benefited American consumers in that they have enjoyed many luxury items at prices they may not otherwise have been able to afford. It has, of course, benefitted Chinese workers and their bosses, creating a growing middle class there. Meanwhile, it has destroyed jobs for many Americans, causing them to end up unemployed or working at much lower paying jobs.

Viewing these pluses and minuses, it seems that it may not have been the smartest thing for American companies to have basically given away their industrial base. In view of current economic events that seems to have been a big mistake. Let us assume that the economic problems lead to a serious worldwide depression, as seems possible and perhaps even likely. Already thousands of Chinese factories have closed. Shipping and international trade is at a virtual standstill. Retailers that have served as conduits for Chinese-made goods are going belly up.

Should things really go all pear-shaped, the stability of China is in serious jeopardy. Already there are hundreds of millions of poor Chinese, living on the edge of poverty. In case of an on-going depression, the emerging middle class will sink back and chaos could result. Already tens of thousands of riots and demonstrations occur in China each year. It would not take much to tip the nation into anarchy and possible civil war on a scale that has no parallel in history. Like the former Soviet Union, China is a patchwork quilt made up of formerly independent regions with different languages, culture, and beliefs. It is not inconceivable that the Beijing masters could lose control in a brief moment in time, just as the Soviet empire collapsed like a house of cards.

And should China collapse, where will that leave American companies whose factories or contract suppliers of finished products are located not in Pennsylvania, Michigan, or California, but in Guangdong, Guangxi, or Fujian Provinces? Up a creek, that’s where. This “Uh oh” situation is a result of globalization and free trade.

“Exports of developing countries tend to be concentrated in primary products, which offer little added value.”

The bulk of exports from developing countries are non-renewable natural resources such as minerals, fossil fuels and timber. In the long run this benefits the buyers, not the nations that are supplying the commodities. What will become of, for example, Nigeria when its oil fields run dry or the security situation becomes too dangerous for production to continue? It could become another failed nation like Somalia, although a much larger one with 150 million people. This scenario can be applied to dozens of other fragile nation-states, even including such as Saudi Arabia which has squandered trillions of petro-dollars but never built a sustainable economy to continue when the oil is gone.

Developed countries, on the other hand, produce value-added products that find little market in the Third World. How many Chevrolet or Ford automobiles are sold in Nigeria? How many Frigidaires? How many Apple or Dell computers? (Never mind that many of these may be made in Mexico, China or Vietnam, because they are not products OF those countries, but only being manufactured there by American companies to take advantage of cheap labor.) The answer is, not many. As everywhere in the Third World, the vast majority of Nigerians are interested only in where the next meal is coming from and having a few used items of clothing to wear and a tin roof over their heads.

The Third World may no longer “belong” to the former Colonial powers, but they still are being exploited just as they were in the bad old days of Colonialism. To pretend that a seamless economy can be spread like a blanket across the entire globe to settle easily on the heads of everyone from America to Angola, from England to Egypt, or from Switzerland to Swaziland is a stretch of credulity. The world economy cannot be fitted with a one-size-fits-all solution

“…Tariff revenue … can account for up to half of total tax revenue in the poorest countries.”

Imagine if you will that America, or Great Britain, or France were to be asked to give up as much as half of their entire national tax revenues, all in the interests of “fair” trade? Not going to happen, is it? And yet if completely free trade were to be accepted by all the nations of the world, that would be the effect on poor nations. This alone is a huge argument against free trade. As the authors of the Science article point out, any acceptable plan would require developed nations to reimburse poorer ones for the lost revenues. That amounts to a subsidy, the very thing which free trade plans are supposed to eliminate.

In the end, the developed nations must still recognize the so-called White Man’s Burden, the responsibility to give special support to the poorest in the world. To simply eliminate trade barriers and expect developing nations to compete as equal partners is ridiculous. This explains why the Doha round of trade talks has failed to result in an agreement. The subject is too complex and the costs and benefits are enormous. To force literal free trade on poor nations would further impoverish them, while for leading nations to have to subsidize their poorer trading partners would work against the benefit of the rich nations.

This is a problem that may have no solution, for the idea of creating a global economy that includes all nations is probably a Utopian dream that is beyond the realm of the possible.

The arrival of the Oil Peak and recent collapse of the financial and credit markets makes all this even more untenable. Cheap energy for transportation of goods and materials has driven the globalization trend, and as we enter the downhill side of the Hubbert curve it will be less advantageous to move vast quantities of goods and commodities long distances all around the world. Already we have reported on the first signs of reversal of off-shoring (see my post “Insourcing” Brings Manufacturing Back to U.S., posted September 8, 2008). No doubt the future will see a growing trend toward economic self-sufficiency, with nations at every point on the spectrum relying less on trade and becoming self-sustaining to the extent possible in each case.

This may sound like “isolationism,” and it amounts to the same thing. It makes sense for a lot of reasons. It would result in a world not unlike the real one of today, with both rich and poor nations. It might mean the rich may not be quite SO obscenely rich, and at least some of the poor perhaps no worse off than before (although for many others factors such as famine, climate change, and civil unrest enter into the scenario).

It is clear from where it has led us that globalization is not a sustainable model. De-globalization could be the natural state that common sense and economic necessity requires, especially if we are to move toward a sustainable civilization in the post-peak oil world. I will leave it to you to imagine some of the contingencies that such changes might introduce. It’s time to take the idea of “One World” filled with happy people all sharing the questionable benefits of a Western-style standard of living and send it to the recycling center. Or even better, to the landfill where it can be laid permanently to rest.

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