Free Trade isn't free

   Free-traders contend that exports foster economic growth, an argument so widely accepted as to constitute a truism in the minds of most people engaged in the world trade debate. If it is valid, then growth in world trade should correspond with growth in world GDP.

Let's take a recent period when world trade was increasing at a rapid rate and for which statistics are available: 1990 - 1998. Whoever cares to examine the data will discover that while trade sky-rocketed world GDP grew at snail's pace.

 Moreover there doesn't even appear to be a solid relationship between the two sets of figures. In other words, the correlation between the growth of world trade and world GDP is so low as to be statistically insignificant. Yet it is precisely this correlation which lies at the heart of free trade theory. The relevant statistics are available from the World Bank, the UN and the WTO, so anyone can conduct the analysis for themselves. For a more comprehensive debunking of globalization myths, you can download a report by the Centre for Economic Policy Research here.

Unsurprisingly, history records that the developed economies - without exception - achieved their success under managed trade regimes: protection of targeted sectors at home coupled with aggressive export policies. Trade liberalization has always been a call-to-arms (literally and figuratively) of the powerful; never of the weak.

The current obsession with free trade is viewed with suspicion by less-developed countries - and even by weak sectors in the First World - for good reason. Although much of this suspicion is intuitive, and although it runs counter to the thinking of conventionally-trained economists, it is supported by the few studies that have bothered to examine the effects of liberalization on Third World economies.

One such study published by ANPEC (National Association of Post-Graduate Centres for Economics - Brazil) makes instructive reading. In a careful analysis of Brazilian industry between 1987 and 1998, a period of trade liberalization, the study shows that for every 10 percent increase in imports, employment in industry fell by approximately 1%. More than half a million jobs in industry were lost - equivalent to 7% of the industrial workforce. On the export side, every 10% increase in manufactured exports resulted in a 5% decrease in real salaries. Competitiveness in the international marketplace was achieved, not by technological efficiency, but by squeezing employee incomes.

Chilean economist Fernando Fajnzylber who had observed this phonomenon in several Latin-American economies, described it as spurious competition. It is widespread in the Third World as other studies have shown; and it suggests that trade liberalization is not a good option for any country until it has reached a level of development at which it is able to generate technological advances, has a well-educated, well-trained workforce, political stability, and considerable social mobility. This is the same as saying that countries need to manage their trade UNTIL they have achieved the profile of a developed economy. That this is how the rich countries developed is exhaustively documented and convincingly argued by Ha-Joon Chang in his historical study Kicking Away the Ladder (highly recommended).

Those who defend the promotion of Third World agricultural exports, often argue that import barriers and export and production subsidies in the First World mean that their taxpayers and consumers pay more than they would in a freely competitive market. This may be true, but it is far from certain that a less tilted playing field would enable most developing countries to increase their exports.

Economies of scale and scope, superior infrastructure, quality control demands, technological dynamism, lower transportation costs, market knowledge and marketing know-how would continue to give established producers a competitive edge. The successful newcomers to world agricultural trade are mostly those with high general levels of education and productive enclaves of First World quality: Israel and Chile are two examples.

In manufacturing, China and India are now cited as export-led success stories and even as threats to western economic hegemony. Neither country, however, operates a free-market system. China's economy is highly directed; and both India and China operate a complex web of barriers to imports (tariffs, bureaucratic impediments and, not least, manipulation of exchange rates). Moreover, the growth of their exports has resulted in hundreds of thousands of job losses in other developing countries - a demonstration that, like war, international trade can cause terrible collateral damage to people least able to defend themselves against attack.

Neo-liberals respond to such effects by passing round doses of their standard medicine: labour flexibility and economic readjustment. Both taste vile, but the label on the bottle warns: there's no gain without pain. It's a fair bet, however, that none of these self-styled health workers ever suffered the pain of poverty and unemployment in Third World conditions. Their prescriptions are for others.

Overall, the evidence suggests that export-led growth doesn't work as a development strategy in most cases. Moreover, because of its high capital investment requirements, it tends to marginalize independent producers - whose natural market is local not international. What these producers need is not access to First World markets, but protection from subsidised imports.

Many commentators (including in Open Democracy) have pointed out the undemocratic nature of the WTO; but they fail to mention the underlying problem, which is that democracy and neo-liberal capitalism make uncomfortable bedfellows. All the UN finance agencies (World Bank, WTO, IMF) operate according to the needs of multinational business - and at the top levels tend to be run by corporate executives. To a greater or lesser extent the same applies to so-called western democracies. US corporations notoriously purchase political influence with donations in order to profit from the decisions of politicians. It remains to be seen whether the Obama administration will be able to resist their blandishments. In the UK, the process is less overt, but the influence on government of corporations and their executives is nonetheless very powerful.

And we should note that corporations are not interested in preserving or strengthening democracy, but in diverting the instruments of governance - national and international - to their own ends. Therein lies the fundamental challenge not just for the WTO but for western democracies in general.

A couple of final thoughts.

Regardless of the economic arguments for and against free trade, in the eyes of most governments, trade is a zero sum game. The aim of that game is to hoover up as much of the world market as one can. Yes, we all know about David Ricardo, and guns and roses and butter. Unfortunately, comparative advantage turns out not to be static - as neo-classical economics suggests - but highly fluid, capable of moving from country to country and region to region at the drop of a government subsidy, a new public investment, a currency devaluation, or a policy of keeping social and environmental standards as low as possible.

In reality, the world market for most products could be satisfied by a handful of countries or, to be more exact, by a handful of multinational corporations. There is no need for most of the 190 or so countries of the world to be involved at all - except perhaps as suppliers of whatever raw materials they possess.

It follows that much of the international labour force is surplus to production requirements; though its redundant status almost certainly helps to keep down labour costs. By the same token, if several billion of the world's poorest consumers suddenly fell into a fissure and were lost, the fact would barely register in the financial results of the world's major corporations (the ones who account for about 75% of world trade). A huge proportion of the population is simply not needed for the smooth functioning of the neo-liberal capitalist system. This is the unkindest cut of all. Most peoples of the Third World don't matter in capitalist market terms. And Free Trade - the insidious heart of the push towards global market domination by multinationals - will ensure that there's nothing any of us can do about it.