The Truth About Trade

The Real Impact of Liberalization

By Clive George

Zed Books Ltd

Copyright © 2010 Clive George
All rights reserved.
ISBN: 978-1-84813-298-6

Contents

Boxes, vi,
Preface, vii,
Acknowledgements, xi,
Abbreviations, xiii,
ONE | Agendas,
1 From the Corn Laws to Seattle, 3,
2 A matter for negotiation, 11,
3 Claims and counter-claims, 18,
TWO | Impacts,
4 Climbing the development ladder, 31,
5 Food for thought, 51,
6 Invisible earnings, 68,
7 TRIPs abroad, 86,
8 Filling the gaps, 97,
9 The rules of the game, 108,
THREE | Responses,
10 Outflanking measures, 125,
11 Rewriting the rules, 133,
12 An end and a beginning, 148,
Notes, 154,
Bibliography, 157,
Index, 172,

CHAPTER 1

FROM THE CORN LAWS TO SEATTLE

The proposal of any new law or regulation of commerce which comes from this order [those who live by profit] ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention. It comes from an order of men whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even to oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it. (Smith 1904 [1776]: 222)

The term trade liberalization describes the process through which countries negotiate and agree to ever tighter and more extensive rules of international trade. Adam Smith would not have approved. As an advocate of free trade he was deeply suspicious of any law or regulation introduced to govern it. In Smith’s view any trade rules proposed by commercial organizations warranted particular scrutiny, for what were liable to be deceitful attempts to increase their own profits at the expense of the general public.

Proponents of the current trade liberalization agenda claim that it is essential for globally sustainable development. This chapter begins with a review of the background to the research programme through which that claim has been evaluated. It goes on to examine the history of the sustainable development idea, and the even longer history of arguments for and against free trade. The classical economists of the eighteenth and nineteenth centuries were sharply divided in their views on the economic effects, with varying attitudes to the social and environmental ones. Their neoclassical successors have avoided the problems by taking a different approach. After reviewing the arguments the chapter concludes with a brief summary of the approach taken in the rest of the book.

THE BATTLE IN SEATTLE

In December 1999, the last month of the last year of the last century of the last millennium, the drive for what is called free trade was brought to a halt in a blaze of publicity. At the end of the previous month ministers and senior government officials from all around the world had met in Seattle to launch a new round of negotiations in the World Trade Organization, to be known as the Millennium Round. It never took place. The conference ended in chaos, with protesters blocking the streets and delegates from poor countries rejecting the proposals presented by rich ones.

Since the ‘battle in Seattle’ opinion has been divided on whether free trade is fair trade, and whether it helps or hinders efforts to reduce world poverty and halt unsustainable exploitation of the natural environment. One side of this debate takes the view that trade liberalization is essential for sustained growth of the global economy, that this growth drives the development of developing countries, and that it increases the resources available for protecting the environment. The other side argues that the growth due to trade has been unevenly spread between countries, that it has been associated with widening income gaps in both poor countries and rich ones, and that it has had damaging effects on the natural environment both locally and globally. The liberalization of world trade is seen on the one hand as being an essential component of sustainable development, and on the other as being detrimental to it. Intermediate positions argue that international trade can make a positive contribution to sustainable development, but that the opposite can occur if the rules by which trade is governed are inappropriate.

During the preparations for the Seattle conference the European Commission embarked on an ambitious attempt to clarify the issues. On the initiative of Trade Commissioner Pascal Lamy (later to become Director General of the WTO), an independent study was commissioned to assess the effects of the Seattle proposals on sustainable development. The study, known as a sustainability impact assessment (SIA), would show how big the benefits were and whether the public concerns were justified. Through a combination of consultative processes and technical analysis it aimed to contribute to a public dialogue that would, if possible, defuse the arguments. That first attempt achieved little. In terms of heading off the Seattle confrontation it achieved nothing. The study was of necessity highly superficial, having been rushed through in the few months leading up to the conference. It did no more than confirm that the potential benefits were genuine and that many of the opposing concerns were equally genuine (Kirkpatrick et al. 1999). Anything more useful would need a fuller examination.

After the failure of the Seattle conference the idea of evaluating the complex impacts of trade agreements before they are agreed was put on ice, until the WTO regrouped to revive the negotiations at the 2001 Ministerial Conference in Doha. Unlike Seattle in the USA, Doha, in the Gulf state of Qatar, is not an easy place to get into for banner-waving protesters. In parallel with the choice of location, European and American trade officials had taken note of the objections to the Seattle proposals and had amended them accordingly. The Doha agenda would be a development agenda, with the needs of low-income countries to the fore, along with the need for development to be environmentally sustainable. The conference proceeded smoothly, agreement was reached, and the Doha Round of negotiations began. Commissioner Lamy’s idea of undertaking sustainability impact assessments of the likely consequences was revived as well, now with sufficient time and resources to examine the issues in more depth.

The cost of the Seattle study, including the amount spent on background research and developing the methodology, was about a hundred thousand euros. Since then the EC has spent around ten million euros on trade SIAs, accounting for about 10 per cent of the annual budget of its Directorate General for Trade (European Commission 2003a). Nearly one and a half million euros have been devoted to assessing the impacts of the WTO Doha agenda, with the rest spent on similar studies of Europe’s bilateral and regional trade agreements with individual countries or groups of countries. The level of expenditure reflects a decision of the European Council at its 2001 meeting in Goteborg, which committed the European Commission to assessing the impacts of all major policy proposals on globally sustainable development (European Commission 2001a), with particular emphasis on trade agreements (European Commission 2003b).

The impacts identified by these studies are many and complex. Some are good for some people but bad for others. Other impacts have the opposite effect. Some are good for some aspects of the natural environment while others are bad for other aspects. Most of the effects vary according to what policies governments choose to adopt in parallel. Throughout the SIA programme civil society organizations have kept on asking for an overall result. They want as much detail as they can get, but what is the bottom line? Are the proposals good or bad? Do the negotiated trade agreements make a positive contribution to sustainable development or a negative one? None of the studies has attempted to answer that question. We shall do here. We make use of the findings in such a way as to fill the gap.

SUSTAINABLE DEVELOPMENT

The idea of sustainable development emerged in the 1970s from a growing fear that the established pattern of development was approaching limits that would force it to a halt through major damage to local and global environments. Many scientists feared that the greenhouse gases produced from burning fossil fuels and other anthropogenic sources might cause catastrophic climate change, and were warning of similar effects from continuing loss of biological diversity. By 1972 these and other concerns had grown sufficiently serious for governments to meet in Stockholm at the United Nations Conference on the Human Environment. The background report for the conference argued that ‘technological man’ was ‘on a course which could alter dangerously, and perhaps irreversibly, the natural systems of his planet upon which his biological survival depends’, while most of the world’s population had still ‘hardly raised their claims on the planet above those of neolithic man’ (Ward and Dubos 1972: 46-7). During the conference India’s prime minister Indira Gandhi reminded delegates that the claims of the world’s poor should not be overridden by the environmental concerns of the rich. ‘Of all the pollutants we face,’ she argued, ‘the worst is poverty – we want more development’ (Sandbrook 1992: 16).

The subsequent quest for a new form of development that would be environmentally sustainable led to the World Conservation Strategy of 1980 and the 1987 report of the World Commission on Environment and Development, chaired by Norway’s premier Gro Harlem Brundtland. The Brundtland report, Our Common Future, had a dramatic effect in raising public awareness of the need for sustainable development (World Commission on Environment and Development 1987). The ideas that it expressed were subsequently elevated to the level of international agreements at the Rio Earth Summit of 1992 (the UN Conference on Environment and Development). This went a long way towards defining how sustainable development might become a practical reality, through its overarching Rio Declaration and the detailed proposals of Agenda 21, the Convention on Biological Diversity and the Framework Convention on Climate Change.

The follow-up conference held in Johannesburg in 2002 (the UN Conference on Sustainable Development) reported the same concerns as had been expressed three decades earlier at Stockholm in 1972 and then again at Rio de Janeiro in 1992. Little has changed since. Biological diversity is still declining, climate change has progressed from a concern to a reality, and the needs of the world’s poor have still not been met. Sustainable development is proving to be an elusive goal. Meanwhile, opinion remains divided on whether international trade agreements are part of the solution or part of the problem.

TRADE LIBERALIZATION

The trade agreements that are forged in the WTO or through regional and bilateral negotiations are among the main drivers of economic globalization, through which the world economy has become increasingly integrated. The food that we eat, the clothes that we wear and the cars that we drive now come from anywhere in the world. The income from our savings and pension funds can come from anywhere too. Goods and capital both move around the world with little restraint, though still not as freely as they might. Trade agreements aim to reduce the remaining barriers and ultimately eliminate them, to extend international trade even further.

The economic case for free trade rests mainly on the economic theory that any interference with the free market economy reduces its efficiency and stops it achieving what would otherwise be an optimal distribution of scarce resources. Trade economists refer to any impediment to free trade as a trade distortion, which has to be removed if the perfect outcomes of a perfect market are to be achieved. Trade liberalization also has other theoretical benefits. The removal of a trade barrier results in an increase in trade, so that continually reducing the barriers produces continually increasing trade. This contributes to global economic growth, for as long as it takes for all the barriers to be removed. Once the barriers have all gone there can be no further gains, but until that point is reached everyone should, in theory, benefit. If every country’s trade grows in the same proportion as global trade, its economy will grow in the same proportion as the global economy. One of the many tasks of sustainability impact assessment is to assess the extent to which these theories apply in practice.

Trade negotiations aim to reduce or eliminate import taxes, export taxes, legal and administrative restrictions on either imports or exports, and any kind of subsidy for products or services that can be traded internationally. All of these impediments to perfectly free trade hamper other countries’ economic ambitions and impose some form of economic cost on the country that applies them. This is the price of obtaining whatever benefits they confer. Trade barriers are introduced for a wide variety of economic, social or environmental reasons. Social and environmental reasons include preserving the character of rural areas, ensuring the security of food supplies, promoting equitable income distribution, generating government revenues for social, environmental or other expenditure, or, just as commonly, responding to the demands of powerful interest groups. Economic reasons generally relate to a country’s long-term goals for its economic development, which may outweigh the shorter-term costs of forgoing cheap imports or subsidizing domestic production.

The costs and benefits of barriers to free trade have been a hot topic ever since the arguments for and against repeal of the British Corn Laws in the late eighteenth and early nineteenth centuries. Adam Smith played an important role in the debate. As can be seen from the quotation at the beginning of this chapter, Smith was less of an enthusiast for the workings of the free market than is widely assumed. Nevertheless, despite his distrust of the profit-seeking motives of international traders, he decided that in this case they were right. Smith joined the debate on the side of repeal, followed by the second of the great classical economists, David Ricardo. Thanks in part to their advocacy, the protectionist laws governing Britain’s agricultural trade were eventually abolished in 1846. The reforms occurred in parallel with the Industrial Revolution, reflecting a progressive transfer of influence from the country’s landowning gentry to its newly emerging business elite. They made an important contribution to Britain’s transformation from a largely agricultural economy into the world’s dominant industrial and commercial trading power.

As well as supporting the abolition of British agricultural protectionism, Ricardo promoted the argument that other countries would benefit from removing their barriers to Britain’s industrial exports. He showed how, as well as consumers benefiting from cheap imports, entrepreneurs in all countries would obtain higher profits if the market were allowed to steer investment towards their most competitive industries. It was this principle of comparative advantage, he argued, ‘which determines that wine shall be made in France and Portugal, that corn shall be grown in America and Poland, and that hardware and other goods shall be manufactured in England’ (Ricardo 2001 [1821]: 90). The German economist Friedrich List was unconvinced. He accepted that this would be a consequence of free trade, but not that it would benefit any country but England. He countered Ricardo’s advocacy with the observation that

any nation which by means of protective duties and restrictions on navigation has raised her manufacturing power and her navigation to such a degree of development that no other nation can sustain free competition with her, can do nothing wiser than to throw away these ladders of her greatness, to preach to other nations the benefits of free trade. (List 1885 [1841]: 252)

List’s own preaching was no more altruistic than Ricardo’s. He was an even stronger advocate of German imperialism than Ricardo was of the English version. Similar economic arguments to theirs, for the removal of trade barriers by other countries and against accepting the advice, continue to this day.

TRADE, ENVIRONMENT AND POVERTY

Neither David Ricardo nor Friedrich List was unduly concerned about the social and environmental effects of expanding world trade and global economic growth. Both sided with Karl Marx in condemning the gloomier analysis of Thomas Malthus. This suggested that the combination of population growth and environmental constraints would make it impossible for economic growth ever to eliminate world poverty. John Stuart Mill sided with Malthus. He proposed alternative principles of political economy which, he believed, would allow perpetual improvement in the quality of human life while conserving the natural environment.

As the strongest advocate of individual liberties among the classical economists, Mill was also a strident environmental conservationist. He drew little satisfaction from

contemplating the world with nothing left to the spontaneous activity of nature; with every rood of land brought into cultivation, which is capable of growing food for human beings; every flowery waste or natural pasture ploughed up, all quadrupeds or birds which are not domesticated for man’s use exterminated as his rivals for food, every hedgerow or superfluous tree rooted out, and scarcely a place left where a wild shrub or flower could grow without being eradicated as a weed in the name of improved agriculture. (Mill 1909 [1848]: bk 4, ch. 6)

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