Globalisation Part 2 – The move towards free trade

Globalisation Part 2 – The move towards free trade

In this first section we shall review the tendency towards increased world trade since World War II. We shall consider the economic forces that lay behind this trend and how far this trade can be termed ‘free trade.’

1. What does ‘free trade’ mean?

The term ‘free trade’ is the exchange of goods at their market price, in the absence of ‘distortions’. Such distortions include tariffs (adding to the import price), import quotas (restrictions on the amount a state will allow to be imported) and export subsidies (so exports can be sold at a deliberately lower price). These are examples of what are known as ‘protectionist’ measures (so-called because they are put in place by governments to improve the terms of trade for their domestic industries.) Protectionism often has an associated cost for the state that adopts it, given that its trading partners will be likely to introduce their own protectionist measures in retaliation. While protectionism might favour the short term interests of a nation, it raises the possibility of retaliation and hence a trade war. Such a trade war obviously reduces the amount of trade between states which can damage the interests of all the nations involved.

2. The ‘benefits’ of free trade

The theory of the benefits of free trade was founded upon Ricardo’s theory of ‘comparative advantage’. He argued that a state can maximise its profits by specialising in those industries in which it has the greatest advantage in efficiency (i.e. profitability) relative to other states. This means that, even if State A is less profitable than State B in all sectors of the economy, the profits for both A and B will be maximised if each specialises in the areas in which it is best (or least bad) and trades with the other.

Comparative advantage theory relies upon a set of unrealistic assumptions. One of these is the assumption that all economies are already making the most efficient possible use of their resources (human labour, capital, technology etc.) If they are not, then, as has been pointed out by critics of the Ricardian theory, a protectionist policy might be justifiable to allow fledgling industries to develop to a point where resources are being used to their full potential.

Still, the fundamental point made by Ricardo remains pertinent. This is that profits will usually be maximised when production within a country concentrates on areas where productivity and hence profits are highest. With this point, Ricardo has provided an important reason why capitalism benefits from trade. Ricardo’s theory is supported by empirical evidence. For example, a recent study by J.Sachs and A.Warner took a sample of 111 countries which they classed as either ‘open’ or ‘closed’ according to how far they had liberal terms of trade. They discovered much faster growth (i.e. more profits)—among the ‘open’ economies.(1)

The benefits of free trade for capitalism, to which Ricardo drew attention has been an important factor in the huge post- Second World War push for ever greater, transnational profitability. International mobility of capital, goods and services (i.e. free trade) has characterised this period of capitalist development. As we shall discover, though, this trend was brought about forcefully by the world’s largest economic powers who were only prepared to adhere to the Ricardian textbook in so far as it suited their interests.

3. Start of the post-war shift

The place to start a review of trade developments since the Second World War is with the economic alliances formed in the aftermath of the Second World War. As Sklar argues, there was an especially concerted effort among the United States of America (U.S.A.), Europe and Japan to establish worldwide economic hegemony. The liberalisation of capital and goods markets was an integral part of their strategy. The U.S.A. and Britain agreed to start cutting down on tariffs in 1944 as part of the famous Bretton Woods agreements. Further measures were then taken, such as in 1949, when 30 per cent of European trade was freed from restrictions.

The reduction of tariff barriers after the formation of the (European Economic Community) E.E.C. in 1958 increased trade by the order of 25–35%. Within E.F.T.A., (the free trade zone formed by seven of the non-E.E.C. European countries, including at that time the United Kingdom) lower barriers resulted in extra imports of around 10–15% for the countries concerned.(3; p31)

The U.S.A. was somewhat slower to lift trade restrictions given that there was already a high demand for U.S. goods after the war. As is pointed out by Armstrong et al, it was Kennedy in the later sixties “whose round of cuts saw the average level of tariffs on manufactured goods falling by one third and by half on machinery and vehicles.”(3; p154)

Very high rates of tariff covering about 7% of goods in the United States and United Kingdom almost disappeared, and the proportion of trade (excluding agriculture and fuels) which attracted tariffs of 15 per cent or less rose from 54% to 85% in the USA, from 37% to 85% in the United Kingdom and from 71% to 97% for the EEC. (3; p154)

World trade grew by an average of 8.7% between 1963–72. This growth then slowed sharply from 1973 (it averaged 3.8% per year from 1973–88.) In 1973 the Trilateral Commission was founded, to continue the work of building what Sklar calls the ‘new economic order.’

As Sklar puts it:

the (Trilateral Commission) planned and encouraged an utter restructuring of the world’s political and economic agenda with much of its new power arrangements built to favour transnational corporate activity.(4)

As Sklar shows, the objectives of the Commission are evident in their various reports and policy documents. A call for the lifting of restrictions on capital mobility is made in Towards a Regenerated Economic System:-

countries that want economic development would be well-advised to welcome foreign firms on appropriate terms(5)

You do not need a degree in economics to work out what might have been meant by ‘appropriate’ in this context. It is made clear in the following statement by D.Rockefeller, one of the leading U.S. politicians in the Trilateral Commission:

international bankers, corporations, and investors have little need for tariffs and other trade barriers. Their interest lies in finding the most efficient, profitable, productive, and convenient spot for their investment(4)

George Ball, undersecretary of state for Economic Affairs in the Kennedy Administration and a director of Lehman brothers Kuhn Loeb, a large investment house, told the British National Committee of the International Chamber of Commerce in 1967:

In these twenty postwar years, we have come to recognise in action, though not always in words, that the political boundaries of nation-states are too narrow and constituted to define the scope and activities of modern business… (4)

Although protectionism has re-emerged at certain times since the 1940s, as occurred in U.S./Japanese and U.S./ South Korea trade wars during the 1980s, the overall trend has been towards a reduction in protectionist measures. Tariffs have been reduced and quotas are used less widely. An important factor in this has been the General Agreement on Tariffs and Trade. (the G.A.T.T.) that shall now be considered.

4. G.A.T.T. and the liberalisation of trade

The General Agreement on Tariffs and Trade (or G.A.T.T.) was established in 1947. G.A.T.T. ’rounds’ of negotiation continued until the 1990s and each successive round sought to enshrine the principles of free trade in international laws, designed to be applicable worldwide. In the G.A.T.T. a one-country one-vote system was tried initially (until 1959) but the big trading powers saw this as inimical to their interests. The system that finally emerged worked more by a consensus arrangement than by voting. The United States, Japan, European Union and Canada tended to hold the decisive influence. (20; p39)

The G.A.T.T. rounds have had an important role in the move towards trade liberalisation.

Six rounds of General Agreements on Tariffs and Trade (G.A.T.T.) negotiations, from 1947 to 1967, for example, brought tariffs on all dutiable U.S. imports down from their 1932 high of 59.0% to 9.9% in 1970.(6)

Founded just after the Second World War, the first forty years of G.A.T.T. were primarily concerned with tariffs and related matters. As Lori Wallach has shown, the original articles of G.A.T.T. when it was founded in 1947 contain the basic principles that were gradually put into practice. Most notable are the following:

Article One establishes the rule of ‘Most Favoured Nation’—one country cannot discriminate between domestic products and ‘like products’ imported from another G.A.T.T. country. ‘Like products’ were defined in 1971 to be limited to consideration of product characteristics and does not allow consideration of how the product is produced or harvested.

Article Three contains the principle of ‘National Treatment’ which states that:

one G.A.T.T. country may not use tariffs, taxes or any regulations to provide different treatment to imports than it would provide to domestically produced goods.(6)

Environmentalists had hoped that Article 20 would allow for exceptions to the above principle in the case of environmental protection. It allows for “measures necessary to protect human, animal and plant health or life.” Article 20(h) allows for waivers “undertaken in pursuance of obligations under any intergovernmental commodity agreement.”(14) Again, this had encouraged environmentalists who hoped it might be extended to international environmental agreements and protocols.

The well-publicised tuna-dolphin case, in which the Mexican government appealed against the U.S. Marine Mammal Protection Act of 1972, put the hopes of environmentalists to the test:

in August 1991, a three-person, secret G.A.T.T. dispute panel in Geneva ruled that the (1972 act) was an illegal barrier to trade because it restricts importing tuna into the United States that are caught using techniques that kill large numbers of dolphins.(6)

As Ralph Nader puts it,

G.A.T.T. …. set out rules limiting countries’ ability to exclude imports on the basis of labour, human rights, or environmental conditions in the country of production.(6)

The judgement in the dolphin-tuna case was just one of many such examples. The agreements allow another country to challenge as infringing upon the trade environmental, health or safety laws such as those of the U.S. They therefore have the effect of ‘harmonising’ environmental and safety standards, a euphemism for bringing those nations with more stringent regulations down to the level of the least stringent.

The Uruguay Round of G.A.T.T., concluded in 1992, brought new economic sectors, most notably food, agriculture and services such as banking, insurance and shipping, within the remit of the G.A.T.T. This agreement also addressed the issue of liberalising international capital movements, due to the demands of multinationals to be free to investment anywhere in the world. (This issue was to be taken up later by the proposed Multilateral Agreement on Investment which was never ratified- see below.)

Introduce elements of non-free trade.

5. Trading Regions

Anderson and Norheim investigated the growth of intraregional and intetrade for the world’s major economic regions since the 1930s (1993a: 1993b):. Theirresults show no strong move towards regionalization: trade has grown vigorouslybetween regions as well as within them. While the intensity of intraregional trade rosein the postwar period (figures for Europe in the nineteenth century show virtually nointraregional bias), between 1979 and 1990 there was only a small rise in intraregionalintensity within the EU and actual falls in Asia and America. Interestingly the intensityof intraregional trade is lower in Western Europe than in America or Asia, so that theinstitutionalization of regional markets does not necessarily appear to lead to closedregions. This is reinforced by other evidence, specifically indices for the propensity totrade extraregionally. These indices show ,a rising propensity for extraregiondelin America and Asia, and a fluctuating propensity in Europe over the postwar period. These figures, consistent with other estimates, do not support the regionalization thesis(cf. Lioyd. 1992).168

As well as the G.A.T.T., international trade liberalisation has also occurred on a regional level through, most notably, the European Union, the North American Free Trade Agreement (N.A.F.T.A.) These regional trading blocks reduce barriers in participant countries although can serve to discourage trade between regions.

Regional trading blocks were consolidated during the 1990s. Most member states of the European Union agreed to join a single currency. In 1994, Canada, the U.S. and Mexico, agreed to sign up to N.A.F.T.A. This agreement as Nader puts it:

basically a mini-G.A.T.T., except that N.A.F.T.A. offers even greater privileges to business and allows for fewer restrictions on corporate operations in the three countries.(6)

Some steps have also been taken towards establishing trading zones in South America (M.E.R.C.O.S.U.R.) and South East Asia—the Association of South-East Asian Nations(A.S.E.A.N.) However, free trade agreements are far from being agreed in these areas. A M.E.R.C.O.S.U.R. agreement in South America would require compromise with U.S. interests which currently has strong trading links with the region.(25) In South East Asia, there is a tradition of protectionism in certain sectors and reconciling the various interests of different states will not be straightforward.(26)

The development of these regional trading blocks should not be forgotten amidst the talk of ‘globalisation.’ However, it has been shown by Anderson and Norheim that there has been no strong move towards regionalisation since the 1930s. Their results are summarised by Held et al:

While the intensity of intraregional trade rose in the postwar period (figures for Europe in the nineteenth century show virtually no intraregional bias), between 1979 and 1990 there was only a small rise in intraregional intensity within the EU and actual falls in Asia and America. Interestingly the intensity of intraregional trade is lower in Western Europe than in America or Asia, so that the institutionalization of regional markets does not necessarily appear to lead to closed regions.(27)

While G.A.T.T. has brought about greater trade liberalisation since the 1940s on a global level, this trend has by no means been universal. Furthermore, as explained below, it has been punctuated by reversions to protectionism by states, as and when it has suited their interests.

6. The 1970s: Retreat to protectionism

The difficult global economic conditions of the 1970s caused the major industrial nations to become more protectionist for a time. As Nossiter wrote in 1987: “Trade barriers had been coming down steadily through much of the postwar period, but once again, the 1973–74 oil shock and the sharp slump it produced turned history back on itself. Ever since, obstacles to trade have been rising steadily.” (17; p159)

Many of the G.A.T.T. rules were ignored during the 1970s:

the economic malaise of the 1970s weakened the GATT system. The rule of concerted agreement was ignored, and rich nations acted on their own to block fabrics, clothes, consumer electronics, steel, autos, and other products that newly industrializing nations export.(17; p18)

Nossiter cites a study by Sheila Page which estimated that “about 34 percent of all imports to the industrial world had to thread their way through non tariff barriers in 1974. Five years later,” Nossiter explains, “this had climbed to 41 percent. In 1984, Jan Tumlir, GATT’s chief economist, calculated that as much as 45 percent of all international trade was subject to cost-increasing barriers, not counting tariffs. This is a remarkable level for a world whose industrial rich profess the virtues of unimpeded trade.” (17; p18) This wave of protectionism even led to doubts about whether G.A.T.T. could survive. For example, Jan Tumlir, in an interview with Bernard Nossiter in Geneva in the 1980s said “GATT is becoming extinct. That’s how it looks. Deals on universal negotiations. That’s played out.” (17; p173—interview with author.)

Looking back on the strengthening of G.A.T.T. that took place with the Uruguay round in the 1990s we can now see that this move back towards protectionism during the 1970s was not to be as long lasting as Tumlir expected. The subsequent establishment of the W.T.O. has taken further the move towards reducing protectionist measures.

7. W.T.O. from 1995

the WTOis a much more powrerful institution in so far as its dispute panels have the authority-tomake binding judgements in cases where trade rules are subject to dispute or transgressed.In this respect the WTO is a sign;ficant ;nst;tutionatforce for trade liberalization (Hoekman and Kostecki. i995; Qureshi. 1996).p165

Further deregulation of trade followed after 1995 when the World Trade Organisation (W.T.O.) was set up by the Uruguay round of G.A.T.T. The W.T.O. was, as The Ecologist puts it, the result of the

U.S.’s assessment that the interest of its corporations were no longer served by a loose and flexible G.A.T.T. but needed an all-powerful and wide-ranging W.T.O.(20; p37)

Held explains the greater institutional power of the W.T.O., as compared to G.A.T.T., given that “its dispute panels have the authority-to make binding judgements in cases where trade rules are subject to dispute or transgressed”(28) What was known within G.A.T.T. as “special treatment” for developing nations, which enabled them to negotiate at least some special tariffs for industries they needed to protect, was eroded by the W.T.O. accord. Furthermore, the jurisdiction of the W.T.O. was extended to the Trade-Related Investment Measures (T.R.I.M.s) and Trade Related Intellectual Property Rights (T.R.I.P.s), measures which are explained below.

8. Agreement on -Trade-Related Investment Measures (T.R.I.M.s)

T.R.I.M.s outlawed certain forms of protectionism. One such outlawed practice was the regulation of exports to ensure that a certain percentage of the components used in the manufacturing of a product was locally produced.

As The Ecologist explains:

These rules were successfully employed by the Newly Industrialised Countries (NIC’s) to raise income from capital intensive exports, develop support industries, and bring in technology, while still protecting local entrepreneurs’ preferential access to the domestic market. In Malaysia, for instance, the strategic use of local content policy enabled the Malaysians to build a ‘national car’, in co-operation with Mitsubishi, that has now achieved about 80 per cent local content and controls 70 per cent of the Malaysian market. Thanks to the T.R.I.M.S. accord, these mechanisms are now illegal.(20)

9. Trade Related Intellectual Property Rights (T.R.I.P.s)

This accord was designed to enforce an international system of ‘intellectual property rights.’ Intellectual property can be defined as follows:

Intellectual property confers on individuals, enterprises or other entities the right to exclude others from the use of specific intangible creations.(https://www.southcentre.org/.)

‘Intangible’ here means an idea or piece of information that can be incorporated into a tangible object rather than simply the object itself. The T.R.I.P.s accord applied, for example, to industrial designs such as semi-conductors and computer chips. It granted a ‘generalised minimum patent’ protection of twenty years.

Transnational corporations in particular stood to benefit from the accord as it was in the main, their goods that this accord enabled them to patent. As The Ecologist observes, “the T.R.I.P.s accord is a victory for the U.S. high-tech industry, which has long been lobbying for stronger controls over the diffusion of innovations.” (20; p37) The United Nations Conference on Trade and Development (U.N.C.T.A.D.) describes the accord as a “premature strengthening of the international intellectual property system… that favors monopolistically controlled innovation over broad-based diffusion.”

It has therefore been argued by critics that T.R.I.P.s is not actually ‘free trade’ legislation at all but is instead a licence enabling large multinational companies to appropriate ‘intellectual property’ that originated in the countries of the South. That it is a reflection of the interests of multinational companies of the North rather than an impartial set of rules is pointed out by the website Southcentre.org T.R.I.P.s legislation was not applied to certain types of rights (namely “utility models” (mechanical designs) and “breeders’ rights” (e.g. for new plant varieties). SouthCentre.org states:

The absence of these two categories may be explained by the relative lack of interest on the part of the major industrialized countries (and the industrial.

lobbies that actively promoted the TRIPs negotiations) in these categories.(29)

It is pointed out that T.R.I.P.s make illegal the exact practice that was key to the industrial development of countries such as the U.S.A. and Gernmany. As the Ecologist explains:

A key factor in their industrial take-off was their relatively easy access to cutting edge technology. The U.S. industrialised, to a great extent by using but paying very little for British manufacturing innovations, as did the Germans. Japan industrialised by liberally borrowing U.S. technological innovations, but barely compensating the Americans for this. And the Koreans industrialised by copying quite liberally and with little payment U.S. and Japanese produce and process technologies.(20; p37)

10. Anti-Dumping

The Anti-Dumping agreement is another treaty that is said to be used by the North (and the U.S.A. in particular) as a means of protecting their industries against those of the South. It allows governments to prohibit exports with a price that is said to be ‘unfairly low.’ This provides a convenient level of ambiguity for the U.S.A. to shut out very competitive exports from countries where labour costs are far cheaper and it has been argued that U.S. use of the anti-dumping law has predominantly been for this reason:

One study of the U.S.’s anti-dumping law, conducted by the right-wing Cato Institute, found that, of 107 affirmative anti-dumping findings between 1995 and 1998, only two could be deemed to have been real causes of dumping. The others were simply exporters whose prices were too competitive.(19; p9)

The evidence of the T.R.I.P.s and Anti-Dumping agreements being skewed towards the interests of multinational companies, as well as the history of states reverting back to protectionism when it suits their interests both show that the implementation of international trade agreements reflects the powerful sets of interests that determine them. As is shown below, transnational companies are central to this set of interests.

11. Transnational Corporations

A reduction in protectionist policies has tended to suit the hugely powerful transnational corporations (or T.N.C.s). By 1994, T.N.C.s accounted for one third of global output and their global annual sales had reached 4.8 trillion dollars (which is, incidentally greater than the total level of international trade.)(2) These corporations are responsible for a large proportion of world trade today. By 1997, T.N.C.s as a whole carried on two-thirds of world trade (12; p112)

These corporations often divide up their productive operations across the globe, choosing different locations according to factors such as the different skills, labour costs, taxation regimes and environmental regulations. For this reason, nearly half of the trade of T.N.C.s takes place within their company networks. (12; p112) Both the internal and external trade of T.N.C.s has profited greatly from the liberalisation of trade.

More detail from Global Transformations

T.N.C.s have also profited from the removal of many restrictions on foreign investment. By 1997, the largest 100 multinational corporations alone controlled about one third of all foreign direct investment. Increasingly, the corporations are able to ‘shop around’ for the most favourable country for them to set up their operations. Typical of the ‘globalised’ outlook is the comment by Volkswagen boss Ferdinand Pisch who in 1994 calmly blocked wage demands presented by his Czech workforce. Skoda, he warned, must not lose its comparative local advantage, otherwise “we would certainly have to consider whether production in somewhere like Mexico would not be more profitable” (12; p131 )

12. Is it really so ‘free’?

In spite of the free trade rhetoric used by the United States and the E.U., these nations and the companies whose interests they so often represent have shown themselves quite capable of reverting to protectionist strategies when it suits their interests. As Bello points out, certain trading activities of T.N.C.s are themselves ‘distortionary’ in that the price involved is not the true market value of a good. This occurs, for example, in the ‘internal’ trade of TNCs when goods are sold at artificially depressed prices to a subsidiary company. (10; p85) This might be done, for example, to avoid payable duties on such trade.

Bello provides another clear example of the pro-T.N.C. bias in the G.A.T.T. legislation:

While the areas of great interest to Northern transnationals have been largely resolved in their favour in the G.A.T.T., there has been little movement in textiles, where change toward freer markets would benefit the South.(10; p85)

Thus, the U.S. have shown themselves capable of reverting to protectionism when it suits the interests of U.S. multinationals. Another case in point was the stance of the U.S. government in a trade dispute with the E.U. on the export of Chiquita bananas. Chiquita, a U.S. multinational company exporting bananas grown in Central America, used their political muscle to combat the European Union’s (E.U.) favourable trade terms for rival Caribbean firms. They persuaded the U.S. government to slap 100 percent duties on such products as sheep’s cheese from the E.U. to the U.S. The American Financial Group, who own Chiquita, have gave $1 million to Democratic and Republican politicians to fight the Caribbean preference which the they claim has lost Chiquita $1,000 million in earnings since the E.C. ruling of 1983 in favour of Caribbean bananas.

Behind the threats and counter-threats of this trade war the U.S. and the E.U. are playing for higher stakes than are represented by bananas and sheep’s cheese:

Andrew Hughes Hallett, professor of economics at Strathclyde University, believes we need to peel back the skin on this row to understand it. ‘I suspect it isn’t about bananas at all and it isn’t about protecting poor farmers either in St. Lucia or Honduras. It’s about political pressure in Washington and Brussels… In the EU this dispute is tied up with the power of the agricultural lobby. It’s like a bargaining chip. France is prepared to support Britain which is keen to get a favourable deal for its former colonies, so Britain will be more supportive of France on other issues affecting French farmers.(21)

This Chiquita bananas example illustrates the huge influence of transnationals in the U.S. political system. Occasions such as these, where the North reverts to protectionism when it suits its interests, not to mention periods such as the 1970s when the U.S.A. reverted to a protectionism on a larger scale, reveal a strategy that is not one to satisfy Ricardian purists. They reveal that ‘free trade’ in itself is not the primary goal of the developed nations under capitalism. The primary goal is, of course, profitability.

The European Union have also shown that they are capable of reverting to protectionism. Since the founding of the W.T.O., the E.U. have imposed duties on a range of imports, such as those from Asia, which contradicts the ‘free trade’ principles that they often espouse.(12; p149)

Due to the size of the transnational companies in relation to the global economy as a whole, it is their profitability that has been such a major factor both in the decisions of national governments, as well as in the development of international frameworks such as the G.A.T.T. and more recently the W.T.O.

The goal of profit cannot be anything other than the key determinant of economic decisions within capitalism (Why Profits Get Priority) which explains why a combination of both free trade and protectionism have been embraced by nations since capitalism arose, the post-war period being no exception.

However, there has, as has been shown, a general trend towards trade liberalisation since the war, as this has been seen to create a climate conducive to profitability for capital, or at least for capital based in the rich north. In terms of economic growth, industry based in the South also grew as a result of the increase in trade. Developing countries’ share in world exports of manufactured goods rose from 10% in 1980 to 22% in 1994. (From Third World to World Class—Emerging Markets, P. Marber p94)

Higher growth rates (which mean higher profits under capitalism) were, for example, expected to follow the Uruguay Round of G.A.T.T., as shown by a study published by the Organisation for Economic Co-Operation and Development (O.E.C.D.) This predicted that world Gross National Product (G.N.P.) would rise $213 billion in 10 years as a result of the Uruguay Round of G.A.T.T.—an increase of 0.7%.(8) As Phillipe Legrain, special advisor to Mike Moore, director-general of the W.T.O. writes:

a new W.T.O. round could bring even bigger benefits. The Tinbergen Institute estimates developing countries would gain $155 billion a year from further trade liberalisation—over three times the $43 billion in average annual overseas aid.(22)

Yet critics of globalisation argue that the benefits of this increase in world output disproportionately favoured the North. It is also pointed out that the profits generated by the growth of exports from the South were often not sustainable. The work of the international agencies that have been set up with an aim (or at least a purported aim) of spreading the ‘benefits’ of growth to the South therefore need to be examined.