5:31 AM Jun 10, 1994

PERILS OF "FREE TRADE"

by Solon Barraclough

Geneva, June (TWN) -- Understandably, the working/discussion paper, "An Ecological-Economic Assessment of Deregulation of International Commerce under GATT", begins with a strong disclaimer -- "The views here presented are those of the authors and should in no way be attributed to the World Bank or its affiliated organizations."

It was prepared by two of the Bank's leading environmentalists, Herman Daly and Robert Goodland. Daly has since resigned his position as senior economist and taken up a teaching assignment at Maryland University.

The two authors question the neo-liberal dogma that unregulated trade would bring advantages to all nations, a dogma that has been invoked by the Bretton Woods organizations for decades to help legitimize their policies.

The authors argue that global economic integration via free trade will favour privileged minorities at the expense of majorities in both industrial and developing countries, and cite in support John Maynard Keynes (1933): "I sympathize with those who would minimize, rather than those who would maximize, economic entanglement between nations. Ideas, knowledge, art, hospitality, travel -- these are things which should of their nature be international. But let goods be homespun whenever it is reasonably and conveniently possible; and, above all, let finance be primarily national."

The authors argue that existing trade regulations often serve narrow interests. They reject policies aimed at achieving national autarky as these contribute to unnecessary poverty and environmental damage. They agree that international trade offers opportunities to improve welfare while trade induced competition often stimulates improved productivities. But they call attention to the social and environmental dangers associated with trade deregulation of the kind being pursued under GATT auspices.

In a world where capital is increasingly mobile between nations and in which prices do not reflect social or environmental costs, "free trade" could be harmful for nearly everyone.

The authors remind us that cost reductions occur not only through improved efficiency but all too frequently through lowered social and environmental standards. Deregulation encourages increasing concentration of international trade, finance and production in the hands of a few giant transnational corporations. These are centrally planned from their head offices usually located in the rich industrial countries. Trade regulation by governments, that could potentially be made accountable to ordinary citizens through political processes, is replaced with regulation by transnational monopolists and monopsonists.

The issue is less one of regulated versus unregulated trade than one of how trade is regulated and for what purposes. There is no a priori reason to believe that corporate officials responsible to stockholders and guided by their perceptions of opportunities for short-term profits can do a better job at regulating trade in the public interest than can officials of democratically accountable political institutions.

The case that trade deregulation is environmentally and socially harmful constitutes the bulk of the paper. The authors believe that the widely accepted presumption that free trade should be considered advantageous unless proven otherwise should be replaced by one favouring national production for domestic markets. The burden of proof relating to specific deregulation measures should be shifted from those opposing freer trade to those advocating it.

They marshal their arguments under the headings of allocative efficiency, distributive equity and ecologically sustainable scale, which they believe should be the goals of all economic policy. They discuss 15 issues and highlight conflicts between GATT rules and these idealistic policy objectives for each issue.

Under the heading Mainly Allocation Issues the authors point out that countries attempting to internalize environmental costs into their prices (the Polluter-Pays Principle) will be at a disadvantage in trading with countries ignoring these costs. "Therefore," they say, "national protection of a basic policy of internalization of environmental costs constitutes a clear justification for tariffs on imports from a country that does not internalize its environmental costs.

The same, they say, is true with "environmental dumping" in which products such as timber are exported at prices that represent only a fraction of true production costs if externalities and replacement are taken into account. Toxic waste dumping is particularly harmful as it removes incentives for producers to internalize costs of waste disposal while endangering poorly informed recipients. "Social dumping" in which exports are produced by exploiting child, slave or other workers in contravention of United Nations and International Labour Organisation conventions is actually protected by GATT rules that forbid importing countries to discriminate for such reasons.

GATT, none the less, allows countries to discriminate against imports produced by prison labour. The authors believe this to be an important exception. There are good reasons for allowing similar discrimination against products and services that involve other forms of social and environmental dumping, in contravention of international agreements.

Under Mainly Distribution Issues the paper argues that it is a fallacy to confuse absolute advantage (profitability) of international trade with comparative advantage. The latter presupposes the existence of economically meaningful national boundaries that restrict the international mobility of capital and labour but leave them mobile within a country. If capital is fully mobile, the distinction between comparative and absolute advantage in trade disappears, as Ricardo himself recognized when he first expounded the doctrine. The gains or losses from a particular trade deal become open questions that have to be investigated empirically case by case.

If the nation is not a true community buttressed by institutions that diffuse the benefits from trade among its diverse social groups and regions, gains by one party will prejudice others. Historically, promotion of domestic self-reliance by nationalist elites was usually prominent among the forces leading to modern nation states. Where effective institutions encouraging a sense of shared national welfare and identity were weak or absent, the state remained a fragile shell. Profits from trade that are not widely perceived as potentially benefiting diverse social groups within a national collectivity tend to fuel social conflicts.

The authors note the crucial importance of this socio-political foundation of international trade and deride the notion of individuals operating autonomously in a cosmopolitan globe where national boundaries have no economic meaning. "Economically, the world would become just one big nation without any government, laws or institutions of mutual responsibility".

Their principal focus, however, is on the social and environmental implications of current globalization processes accompanying trade deregulation.

The authors suggest that large reserves of cheap labour augmented by population growth in poor countries would largely annul positive employment and wage impacts of trade induced foreign investments, except for small minorities. Moreover, expansion of primary commodity exports frequently alienates vast numbers of peasants from their lands before alternative livelihoods are available.

Meanwhile, in industrialized rich countries, workers are increasingly being forced to compete directly with low wage workers elsewhere. Unions (in both the North and the South) are ineffective in checking this trend towards depressed wages and lower social-environmental standards under the pressures of competition among employers and governments to attract mobile capital.

The developing countries subsidize consumers in rich countries by exporting underpriced commodities and services that fail to reflect depletion of natural resources and social externalities. This tendency is reinforced by transfer pricing practices of transnational corporations. Terms of trade for primary commodities continue to worsen in the short term as a result of numerous poor countries attempting to increase their exports simultaneously.

These factors have contributed to worsening income inequality. The authors cite UNDP's 1992 Human Development Report, suggesting the richest fifth of the world's population, by nation, were earning over 60 times more than the poorest fifth in 1990 as compared with 30 times more in 1960.

They believe that to include Trade-Related Intellectual Property Rights (TRIPs) and Trade-Related Investment Measures (TRIMs) under GATT as urged by the United States, Japan and the E.C. would exacerbate these negative trends.

They reject the notion that these issues could be resolved by rapid global economic growth. On the contrary, they agree with Economics Nobelists Jan Tinbergen and Tygve Haavelmo that "... continuing with the prevailing growth path is blocking (global) chances for survival ... What the world needs least is an increase in national income ... The highest priority is to halt further production growth in rich countries."

The pessimism of Daly and Goodland concerning benefits from accelerated global economic growth (as conventionally measured) stems partly from the social polarization accompanying current growth paths. Perceived ecological constraints reinforce their doubts.

They deal with global ecological constraints under Mainly Scale Issues: "... the economy really is an open subsystem of a materially closed, finite and non-growing ecosystem with a limited throughput of solar energy. The proper scale of the economic subsystem relative to the total system really is a very important question." Increased global trade and specialization tend to accelerate economic growth of a kind antithetical to sustainable development.

International trade globalizes the ecological crisis accompanying human overuse and wanton destruction of natural resources. Small, heavily populated but wealthy countries such as The Netherlands, Japan or Singapore can preserve, and even temporarily improve, their natural environments by shifting the burden of unsustainable natural resource consumption to others through trade.

The inevitable environmental collapse accompanying this style of economic growth instead of being sequential and location specific will tend to become simultaneous and global. The scale of natural resource throughput has to be reduced in order to avoid disaster. Otherwise, global absorptive and regenerative capacities of the natural environment will be severely over-extended.

The authors tell us that present accounting practices encourage this trend by registering environmental depletion as increased economic growth. Conservation practices such as substituting bicycles and public transport for private vehicles or adopting clean production processes are reflected by slower growth rates in national accounts. An increasingly interdependent global economy is becoming correspondingly more fragile and vulnerable. Probable global climate change and the reduction of biodiversity are early symptoms of impending disaster.

This analysis of the problem is followed by several recommendations. The authors favour balanced trade that limits foreign indebtedness to realistic repayment capacities taking into account natural resource degradation. They recall that most international trade does not comply with GATT criteria of unregulated trade anyhow (e.g., it is regulated by non-tariff barriers such as "voluntary" import quotas).

They believe the goal of harmonization of environmental and health standards in the Uruguay Round of GATT negotiations will tend to lower environmental standards to the lowest common denominator. There is a brief analysis of eight specific current controversies in which environmental criteria conflict with GATT rules. These range from tropical timber exports and those of Mexican tuna to the proposed World Trade Organization. In each case, compliance with GATT rules would imply more environmentally and socially harmful outcomes than would otherwise occur.

The authors recommend amending GATT rules to permit regulation of international trade towards goals of environmental and social sustainability. They write: "Regulating trade may not be the most efficient way, but it may be the most feasible".

They believe emphasis should be placed on encouraging efficient production for domestic markets, plus reasonable trade. The North should ease restrictions on labour-intensive imports from the South. At the same time it should avoid weakening the capacities of developing nations to control their own economies. Externalization of environmental costs should be recognized by GATT as constituting inadmissible subsidies. All trading agreements should be subject to environmental and social assessments.

GATT, The World Bank and other international organization practices should be reviewed using realistic social and environmental criteria to ascertain the extent they really help or harm developing nations. Developing countries should be helped in obtaining available information and in human capital formation. GATT should cease to presume that trade restrictions designed to minimize environmental damage are wrong unless proved otherwise. It should encourage unilateral leadership by concerned nations towards improved environmental and social standards.

As GATT's history and its legal status as an international treaty do not lend themselves to these changes, they suggest that absorption of GATT by UNCTAD or UNDP might help redress the North/South imbalance in trade negotiations.

One cannot do justice to their arguments and examples in a short review. They make a powerful case for better regulated trade. Their paper should be widely circulated and taken very seriously.

It raises several questions, however, that merit further attention.

The analysis, and the language, seem to be addressed primarily to World Bank and associated technocrats (together with their academic colleagues). They are fair targets as mainstream economists constitute the priesthood responsible for legitimizing the current dominant neo-conservative ideology. But as they are for the most part already intellectually or opportunistically convinced of the virtues of free trade, the authors' arguments are likely to fall on deaf ears. Political and civil society leaders plus well informed laypersons might be more easily persuaded if the socio-political issues mentioned peripherally in the present paper were to become a major focus of analysis. Such an orientation could also contribute to suggestions of politically relevant alternatives.

The warnings of imminent global environmental collapse induced by continued rapid economic growth (as conventionally measured) are probably justified. But the case against free trade would be more convincing for sceptical readers if the authors recognized explicitly the many uncertainties involved. Those who foresee infinite human capacities for technological and social adaptations to cope with environmental degradation can cite a great deal of historical evidence in support of their positions. Optimistic assumptions about the future, however, are at least as metaphysical as are catastrophic ones. In any event, the case against unregulated trade does not have to rest primarily upon ecological arguments, as is clear in the paper.

The authors' implicit assumption that GATT could be reformed, or subsumed in a supranational agency such as UNCTAD, to be more sensitive to social and environmental issues confronting poor countries and poor people seems rather utopian. Globalization through trade and other processes has been proceeding for several centuries. The evolution of the world system is not likely to be much influenced by a few reforms relating to trade. These could only help if they were part of a much more profound restructuring of social relations globally, nationally and locally. What social forces could bring about such reforms is the key issue.

That GATT could be an effective instrument in guiding trade towards goals of more sustainable development appears improbable. Its rules can only be amended by a two thirds majority of its members which excludes it from assuming a leadership role. Although 90 per cent of international trade is accounted for by GATT members, only about one tenth of their trade is "unregulated".

Moreover, GATT has virtually no enforcement powers. Its Disputes Panel can authorize an aggrieved member to take retaliatory measures against the offending party. Authorizing trade retaliation of weak members against strong ones can be about as effective as a civil court authorizing an abused child to retaliate against its adult abuser.

What is needed to promote more sustainable development is an effective international body capable of overseeing, regulating and taxing international capital movements and trade, taking into account environmental and social criteria. Only the most powerful nation states are now able to influence the global activities of transnational corporations. These already control some 70 per cent of world trade and can move billions of dollars instantaneously from one country to another.

International regulation of transnational corporations in the interests of the world's peoples, and especially its poor, is imperative. Such a regulatory body would have to be democratically constituted and accountable.

Politically, it seems unlikely in the present context. The United Nations Centre on Transnational Corporations was abolished after the mild code of conduct it had negotiated failed to gain approval even after it had been watered down to such an extent that many observers called it a code of privileges. Mobilizing the social forces required to create democratic institutions designed to steer the world economy more coherently and sustainably is a challenge that social scientists and statespersons should place among their highest priorities.

If economic growth continues following past trends, social polarization would increase. This would generate political tensions, civil conflicts and wars. Development would be socially unsustainable. Population growth would exacerbate these trends, but it would be a rather minor factor in environmental degradation as the poor consume very little.

Human society would be likely to extinguish itself in the flames of conflict long before it exhausted its sources of sustenance or suffocated in its own waste. On the other hand, to the extent more and more people adopt life styles of the present day rich industrial countries, and of the wealthy in poor countries, pressures on the environment would worsen.

The only way out of this dilemma is for the nature and content of what is called "development" to change in practice. Poor majorities in developing countries will continue to strive for survival against heavy odds. If they achieve minimal security, they will demand the conveniences and pleasures of those who are better off. The burden of adjustment towards sustainable development will necessarily fall primarily upon the rich.

Global patterns of production, consumption and distribution will have to be radically reformed and global demographic growth brought to a halt. Sustainability will be out of reach until what are now poor majorities have achieved genuine social development. This implies a major redistribution of wealth and power.

These kinds of structural adjustments are far more urgent for humanity's future than are current adjustment programmes pushed by international financial institutions aimed at enabling rich creditors to recuperate their bad loans. The rich, however, can probably only be persuaded to adjust if faced with intolerable pressures emanating from environmental degradation, internal contradictions and increasingly organized groups of the poor.

(Solon Barraclough is a political economist and expert on agrarian matters and his recent publications include An End to Hunger. This review article is reproduced from South Letter. The paper and the review were written before the conclusion of the Uruguay Round and the Marrakesh agreement)