New Internationalist

The world trading system is corrupt and unjust.

Issue 374

And free trade is compounding the problem. It’s time to change the rules, argues Wayne Ellwood.

Old Sir John would be rolling in his grave. John Alexander Macdonald was Canada’s first prime minister, a bibulous, quick-witted Scots-born lawyer who is generally regarded as the cornerstone of Canadian Confederation. Macdonald was a staunch Conservative but he was no free trader. The pitfalls of reciprocity, as free trade was then often called, were not lost on the leader of a youthful nation sharing a long border with the emerging colossus to the south. When Macdonald set out his ‘National Policy’ in 1878 he did so with the understanding that economic and political independence are interwoven. A threat to one is a threat to the other. For Canada to develop an independent economy he called for tariff barriers (customs duties) to restrict the northward flow of cheap, manufactured exports from the United States and the haemorrhage of labour south. Macdonald’s National Policy dominated Canadian political life for the next 50 years and was not completely undone until 1989 – when, ironically, his Tory successor, Brian Mulroney, inked a Canada/US Free Trade Agreement with then US President Ronald Reagan. There was furious opposition to the deal by trade unionists, economic nationalists, environmentalists and social activists in both countries. But the tantalizing promise of progress and prosperity carried the day; Sir John A’s vision of an independent Canadian state was unceremoniously shunted aside. Five years later, when Mexico joined its northern neighbours in the North American Free Trade Agreement, the rumble of opposition was growing louder. On New Year’s Day, 1994, the day NAFTA was launched, the Zapatista Army for National Liberation in Mexico’s southern state of Chiapas denounced the tripartite trade deal as ‘a death certificate for the indigenous peoples of Mexico’. In response they announced a campaign for self-determination and economic autonomy – a drive which continues today despite military harassment and relentless repression by the Mexican Government (see ‘http://www.newint.org/issue374/control-chiapas.htm>). Like Macdonald a century earlier, the Zapatistas sensed that free trade was a downhill slide into dependency and impoverishment. On the opposing side, supporters claim all will change once those tariff walls come tumbling down. Economies will expand, unhindered by pesky government regulation. Nations will prosper and citizens grow rich pursuing their ‘comparative advantage’ – a term first coined by David Ricardo, the 18th-century British economist. Ricardo believed that if each country specialized in producing what it does best and most efficiently, then all would prosper.

It’s an attractive theory but one which has lost all credibility. As ex-World Bank economist Herman Daly argues, the world has changed completely in 200 years. The notion of patient, rooted capital has vanished in an age of ‘hot money’ where speculators shift billions of dollars daily seeking instant profits. Says Daly: ‘Academic economists have become so enamoured of the logical argument for comparative advantage and find it so ideologically in tune with their unrelenting celebration of the free market that they are loathe to re-examine it. They have suppressed the fact that the empirical cornerstone of the whole classical free-trade argument, capital immobility, has crumbled into loose gravel.’1

Talk of ‘level playing fields’ and ‘pure competition’ obscures the evidence that poor countries are severely disadvantaged to begin with. Centuries of colonialism put in place a system of extreme dependency on a narrow range of commodity exports which remains to this day. According to the UN Conference on Trade and Development (UNCTAD), just three commodities account for 75 per cent of total exports in each of the 48 poorest nations. This might be tolerable if nations like Honduras, Kenya and Zambia earned a decent income from their sugar, tea and copper. Sadly, the opposite is true. Due to plunging ‘terms of trade’ commodity-dependent nations need to export more and more every year just to stay in the same place. In the short span of 1997 to 2001 the combined price index of all commodities fell by 53 per cent – raw exports lost half their purchasing power in terms of manufactured goods. It’s what the late Jamaican Prime Minister Michael Manley referred to as ‘running up the downward escalator’ – exhausting, and you never seem to get anywhere.

Trade liberalization just makes matters worse. Farmers are encouraged to grow more for export, which leads to over-production and lower prices, to which farmers respond rationally by again increasing their production. Added to this desperate cycle is the black hole of debt: countries in hock have been forced by World Bank and IMF structural adjustment edicts to ratchet up primary exports to service their debts. There’s even a new term circulating among critical economists to describe the phenomenon: ‘immiserating trade’.2 The more you trade, the poorer you get.

Rich nations preach free trade while hypocritically rigging the rules in their favour. Poor countries looking to export their rice or textiles frequently find the door barred – on average they face tariffs four times the size of those faced by industrialized nations.

Massive subsidies

Industrial countries also spend a billion dollars a day on agricultural subsidies. The EU with its Common Agricultural Policy subsidizes sugar beet exports by 300 per cent. The US pays its 25,000 industrial-style cotton farmers a 100-per-cent subsidy which translates into a 40-per-cent share of the world cotton market. Meanwhile, Mali’s three million small-scale cotton farmers barely scrape by. In 2002 the West African country received $37 million in aid but lost $43 million as a result of lower export earnings due to US subsidies.3 In Burkino Faso, Chad, Mali and Benin, farmers can produce a kilo of cotton at half the cost of subsidized growers in Texas but they recoup only 60 per cent of their costs on the international market. Countries like the US and Britain also spread the myth that free trade was the recipe for their own prosperity. It’s a case of ‘do what we say, not what we do’. They conveniently forget that their economic success was built by protecting domestic industry. Wiping out Western trade barriers, and increasing ‘market access’ for Southern producers, would be an enormous step in the right direction. But it would not solve the problem of an unjust global trading system. Even if subsidies vanished tomorrow the dynamic of cut-throat competition plays into the hands of those with most power and greatest access to resources. This is what researcher Gerald Greenfield calls the ‘social violence of the market – the constantly escalating pressure on farmers and workers to produce more for less.’4 This is especially true in agriculture where small players are crushed by the implacable logic of ‘efficiency’. In Brazil, the amount of land devoted to large-scale soy production has jumped from 200,000 hectares to 12 million over the past 30 years. In the US and Canada, corporate agribusiness is expanding aggressively, eviscerating rural communities and poisoning the land with agrochemicals. In the United States, 500 small farmers go bankrupt every week.

Democracy and the rule of law are being challenged by the rule of the market

Corporate control of the food sector is a huge barrier to reforming the rules of global trade. Just two companies, Philip Morris (Altria) and Nestlé, control more than half the world market in roasted and instant coffee. Four companies, Cargill, Tyson, ConAgra and Farmland National, control 81 per cent of the global beef market. What sort of ‘competition’ is embodied in a free trade agreement that pits massive integrated corporations like Cargill and Nestlé against a Mexican campesino with a few hectares of land, a mule and a sharp hoe? A decade after the signing of NAFTA the answer is clear. The economies of Mexico, Canada and the US are more intertwined than ever. Yet corporate and government élites are pushing for ‘deeper integration’. In Mexico, a decade of free trade has seen poverty increase, along with rural unemployment and overall inequality. Fifteen years ago Mexico was self-sufficient in maize. Now it’s the world’s third largest importer (see ‘http://www.newint.org/issue347/people-corn.htm>’). According to Carlos Ling, an Oxfam worker in Central America, free trade has made poor Mexicans ‘dependent on imported corn flour’ and ‘pushed indigenous farmers away from their traditional forms of agriculture – sustainable for thousands of years – to produce monoculture cash crops’, making them ‘dependent on bought seeds, on controlled and unequal markets and on powerful middlemen’.5

In the US and Canada, the promise of free trade has also melted away – replaced by the raw reality of corporate power. In Canada, pressure by business to become ‘efficient’ and ‘competitive’ has led to what free-market fundamentalists call ‘a downward harmonization in social policy’. Translation: tax handouts to corporations and wealthy élites financed by cuts to social programmes and public services. In the US, the NAFTA lure of economic growth with well-paid jobs and better benefits has also proven illusory. Wages have stagnated and income inequalities have increased, while most new jobs have been in the insecure, poorly paid service sector. And even those jobs are beginning to ‘outsource’ in search of cheap labour overseas, mostly in India and China.

As well as the impact on jobs and living standards, free trade has seriously eroded the scope of governments and citizens to shape their own development. Democracy and the rule of law are being challenged by the rule of the market – the main purpose of agreements like NAFTA is to give private investors unregulated access to markets and resources. They’re more about ‘investor rights’ than they are about trade.

This has severely crimped the capacity of all three governments to control domestic policy. Political options and constitutional mandates have been constrained at the national level – without a trace of accountable democratic institutions at a continental level. Meanwhile, hard-fought battles for ‘side agreements’ on labour and the environment have failed to protect either in the face of corporate bullying legalized under the ‘investor-state’ provision of NAFTA’s Chapter 11. Under this rule, companies can sue governments for policy initiatives or regulations they feel may jeopardize potential profits. There have been nearly 30 of these cases so far, many of them attempting to scupper tougher environmental regulations.

Popular resistance

The same mechanism is included in the Free Trade Area of the Americas (FTAA) which may become law late next year. The continent-wide agreement is part of a broad process of trade liberalization being pursued by the US, its Western allies and those multilateral institutions under the sway of the US – the WTO, the World Bank and the IMF. This framework is now widely referred to as ‘neoliberalism’ or the Washington Consensus. The formula is familiar: privatization, unregulated foreign investment, unrestricted movement of capital and a reduced role for the state. The FTAA is an essential part of the move to construct an integrated global economy. But it is by no means a done deal. There is massive popular resistance across Latin America and growing opposition from governments in Brazil, Venezuela and Argentina. As a result, the US and other industrial nations (the EU, Canada and Australia) are looking to sew up bilateral and regional free trade agreements. US Trade Representative Robert Zoellick calls this alternative strategy ‘competitive liberalization’ – pitting one nation against another in an attempt to lock into place trade rules that are more stringent than either the FTAA or the WTO. Nor are the Americans shy about using bilateral agreements to bolster foreign policy goals – another reason independent-minded Southern nations are wary. Zoellick has said poor countries wanting access to US markets ‘must pass muster on more than trade and economic criteria… at a minimum these countries must co-operate with the US on its foreign policy and national security goals.’6 Like the FTAA these pacts include strict intellectual property rules that limit access to knowledge and technology, and benefit Western transnationals which control the bulk of patents, research and development. For example, under the proposed Central America free trade deal the price of basic medicines would skyrocket. It is estimated that Costa Rica’s social security budget would jump by $70 million. Recent bilateral agreements with Chile and Singapore go much farther than the WTO or NAFTA in restricting the use of capital controls – one of the few tools governments have to fend off destabilizing flows of speculative investment. The global economy is becoming more integrated under rules written by rich nations, mostly benefiting their own big corporations. Selling the gospel of free trade is a fundamental part of that process. But trade can never be an end in itself. The international system must be changed to benefit developing countries – and especially the poorest within those nations.

Market access is critical but it is not enough.

In a world of lopsided and unequal power there must be an implicit understanding that no country has the right to impose its ideology on others. Trade needs to allow for diversity – countries have the right to protect their own cultural and social institutions as well as their development priorities. With free trade that can’t happen. It’s time to change the rules.

  1. For the Common Good, Herman Daly and John Cobb, Beacon Press, Boston, MA, 1989.
  2. The Least Developed Countries Report 2004, UNCTAD, UN New York and Geneva, 2004.
  3. ‘Malian cotton farmers welcome WTO ruling on cotton subsidies’, http://www.christian-aid.org.uk/news/stories/040520s.htm
  4. ‘Free market freefall’ by Gerald Greenfield, Focus on the Global South, http://www.focusweb.org/
  5. Oxfam Connections, ‘Fair Trade vs Free Trade’, September 2002, http://www.oxfam.org.au/publications/connections/september_2002/fairtradevsfreetrade.html
  6. ‘Zoellick says FTA candidates must support US foreign policy’, Inside US Trade, 8 May 2003. Quoted in Global Economic Justice Report, Vol 2, No 4, 2003. http://www.kairoscanada.org

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