John Weeks

[For more of this sort of thing, order my new book, Economics of the 1%: How mainstream economics serves the rich, obscures reality and distorts policy (Anthem Press)]

The Free Trade Hall in Manchester, England, was constructed in 1853-56 to commemorate the repeal of tariffs on agricultural commodities (“The Corn Laws”). Appropriately enough, it was built on the site of the Peterloo Massacre of 1819, when government thugs in military uniform charged a peaceful crowd of 80,000 demanding reform of parliament and extension of voting rights (killing 15 and injuring hundreds).

With the Obama Administration it really is “just one damn thing after another” (Arnold Toynbee on the banality of most history books).  While the president and his gang of merry men are assassinating people right-left-and-center (politically speaking), planning new wars and reducing social security benefits, you would think that they don’t have time to design new trade deals to screw the 99%.

But, even busier than workaholic beavers, they have something in the pipeline with the moniker “Trans-Pacific Partnership”, which would be NAFTA on steroids, or PED’s in 21st century lingo.  The basic idea of the TPP is corporate liberation, because it would de facto render legal and beyond regulation of any “partner” government a range of corporate criminality.  The appalling detail of this “end crime by making it legal” trade agreement can be found in the current Hightower Lowdown, which if you do not read, you should (see below).  So, how can the 1% sell the rest of us what Jim Hightower calls a “corporate coup d’etat”, with the etat in question that of which would represent the 99%?

Sort of like the Real News with a Texas accent. Subscribe! http://www.hightowerlowdown.org/

They sell it by calling it “free trade”, aka “trade liberalization”.  No matter that the TPP has little to do with trade and everything to do with liberating capital on a global scale.  Call it freer trade and watch it jump off the shelves.  In order to discredit this sales pitch I have to drive the stake through the heart of the Free Trade vampire.

First, it is important to know that trade liberalization is one of the few aspects of economic analysis and policy where we find agreement across the political spectrum.  Most conservatives endorse it with gusto, for centrists it is an article of faith, and many progressives accept it implicitly by their criticism of industrial country trade protection.   If you want to be an economist (who would, but that is another issue) and endorse trade restrictions one day of the year, you have to spend the other 364 (365 for leap years) apologizing for it (“covering your keister”, to use Ronald Reagan’s anatomy term).

One reason that the greatest economist of the twentieth century, J M Keynes, lost favor in the profession was because he recanted his support for free trade.  In a rarely quoted (suppressed?) passage in The General Theory, he wrote,

So lately as 1923, as a faithful pupil of the classical school who did not at that time doubt what he had been taught and entertained on this matter no reserves at all, I wrote: “If there is one thing that Protection can not do, it is to cure Unemployment. …” As for…mercantilist theory…we were brought up to believe that it was little better than nonsense. So absolutely overwhelming and complete has been the domination of the classical [free trade] school. (The General Theory of Employment, Interest and Money, 1936, Ch 23, Section 1)

The putative advantages of liberalizing trade are well-known.  It will increase welfare though a better allocation of production and consumption in every country (specialize in what you do best);  it will increase domestic competition and lower prices for consumers; and it will stimulate exports and employment as the mirror of the cheaper imports.  Better use of resources, cheaper goods and more employment.  What’s to be against?

The simple answer is, Everything.  First, as demonstrated over forty years ago by the world’s leading advocate of “free trade”, Jagdish Bhagwati (winner of the so-called Nobel Prize in economics), the assumptions required to reach the conclusion that free trade improves human welfare are absurdly restrictive and an insult to the intelligence.  They include, continuous full employment of all resources in all countries, all countries can produce all traded commodities, the consumption patterns of people of all countries are the same, and (my favorite) in every country the same technology is used to produce each commodity. [The true believer in free trade might wish to read: Jagdish Bhagwati (1964), “The Pure Theory of International Trade”, Economic Journal, 74, 1-78].

If you accept these absurdities, the most that can be demonstrated is that some trade is better than no trade (autarky in the economics lingo).  It cannot be demonstrated that more liberalization is an improvement on less.  To repeat it cannot be proved analytically that trade liberalization has a positive effect on national welfare. [This point is the infamous “Principle of the Second Best”, the name of which indicates how economists play fast and loose with the English language.  Check out the nonsense at http://en.wikipedia.org/wiki/Theory_of_the_second_best]

Second, protection (tariffs and quotas) rarely acts to reduce competition from foreign suppliers.  If effective, tariffs and non-tariff measures increase the prices at which imports sell.  This does not prevent competition from being intense in the protected domestic market.  As part of an industrial policy, trade protection can be designed to foster competition, as in South Korea.  And, of course, it is quite common in small countries for the allegedly competing imports to be marketed by the domestic producers of the same product (who have production facilities abroad).

Third, there is no theoretical basis for the argument that freer trade stimulates domestic production and employment.  It is quite impossible to produce such a theoretical conclusion, because trade models assume full employment.  Adam Smith made the argument that trade provided a demand outlet for a country’s surplus production (“vent for surplus”).  Subsequent economists rejected this sensible idea as naïve and simplistic.

As well they would.  If domestic demand were insufficient for full employment, increased public expenditure or private domestic investment would resolve the problem as well as export demand would.  The exception would be if a country requires a demand stimulus when it simultaneously suffers from an unsustainable import level.  However, by letting in more imports trade liberalization make that problem worse, not better, as many African countries discovered in the 1990s under World Bank “adjustment” programs.

Always lurking in the wings is the argument that developing countries benefit from the elimination of industrial country protection, especially on agricultural products.  Since the developing countries cannot expect the developed ones to liberalize unless they do, a general liberalization would be good for all.  Perhaps the most surprising thing about this argument is that anyone other than a true believer in free trade would take it seriously.

Most agricultural products protected by rich countries are not grown in the poor countries.  The benefiting countries could be middle income (e.g., Argentina), where the agricultural population (and, therefore, beneficiaries) is small.  Second, for those few products which are produced by low income countries (cotton in Mauritania is invariably cited), the most likely beneficiary of a production decline in the United States and the European Union would be China, not a poor country in sub-Saharan Africa. In any case, domestic consumption of these products and diversifying exports might be a considerably better outcome than mutual trade liberalization.  Better that Mauritania gins its cotton to make thread to clothe its population, than export it and buy the clothes from Walmart.  The apparent tit-for-tat trade liberalization has been the death blow to industrialization strategies in many if not most poor countries.

Imagine if governments of low income countries throughout the world were offered the following choice:  1) the industrial countries will liberalize their trade when you liberalize yours; Or, 2) there will be no industrial country liberalization and you are free to pursue whatever industrial policy you wish in order to diversify your economy.  In the days before the WTO and NAFTA, most countries that enjoyed successful development, employment growth, and diversification chose the latter. [see the excellent book, Ha-Joon Chang, Kicking Away the Ladder: Development Strategy in Historical Perspective, 2002].

Finally, consider a counterfactual world in which in 2008, in response to the global financial collapse, all the major countries of the world had combined strong fiscal stimulus packages with temporary import and capital controls to prevent economic growth from generating unsustainable trade deficits and/or currency depreciation.  As these countries approached full potential by expanding domestic demand with steady exchange rates, it is almost certain that even with the import restrictions, world trade would have grown faster than was actually the case.  Actual growth of trade was an anemic 3.3 percent in 2008, a disastrous minus ten percent in 2009, and a barely-breathing one percent during 2010.  The recovery to 5 percent in 2011 fell far below the average for 1980-2007, and returned to a pathetic 2% in 2012.

There is a lesson here.  A world with free trade should come after not before global full employment.  And a world with the corporation-liberating TPP should not come at all, ever.

John Weeks

John Weeks is Professor Emeritus and Senior Researcher at the Centre for Development Policy and Research, and Research on Money and Finance Group at the School of Oriental & African Studies at the University of London.