The case against free trade – Part 2

This blog continues my mini-series of free trade. In The case against free trade – Part 1 – I showed how the mainstream economics concept of ‘free trade’ is never attainable in reality and so what goes for ‘free trade’ is really a stacked deck of cards that has increasingly allowed large financial capital interests to rough ride over workers, consumers and undermine the democratic status of elected governments. The aim of this mini-series is to build a progressives case for opposition to moves to ‘free trade’ and instead adopt as a principle the concept of ‘fair trade’, as long as it doesn’t compromise the democratic legitimacy of the elected government. This is a further instalment to the manuscript I am currently finalising with co-author, Italian journalist Thomas Fazi. The book, which will hopefully be out soon, traces the way the Left fell prey to what we call the globalisation myth and formed the view that the state has become powerless (or severely constrained) in the face of the transnational movements of goods and services and capital flows. In Part 2, I consider the myth of the free market, the damage that ‘free trade’ causes and move towards a discussion of fair trade. I will complete the series in a third part soon.

The myth of the free market

There is no such thing as the ‘free market’. It is an obfuscation used by elites to distort the public debate and create the impression that state regulations, consumer and worker protections and the like are costly distortions which undermine our welfare.

What they really mean when they talk of the ‘free market’ is that these protections reduce their capacity to extract larger proportions of national income – larger than a progressive society would deem reasonable on any grounds of decency, equity, or sustainability.

In a New York Times Op Ed – Faith in an Unregulated Free Market? Don’t Fall for It – Robert Shiller (2015) wrote:

Perhaps the most widely admired of all the economic theories taught in our universities is the notion that an unregulated competitive economy is optimal for everyone.

In this optimal economy, each person is said to be a free actor who makes decisions purely in his or her own self-interest. Economists on both the right and left commonly say that these fundamental ideas tie our values of freedom and individuality to the success of our economies.

[Reference: Shiller, R.J. (1987) ‘Faith in an Unregulated Free Market? Don’t Fall for It’, New York Times, October 9. LINK.]

When we enter debates about free trade there is an underlying presumption that there is a free market out there that either allow to self-regulate according to textbook theory (the free traders) or seek to regulate it to attenuate what we might conceive to be the negative effects of the unfettered market.

The problem is the construction is a myth. When free traders talk of a ‘free market’ and appeal to the narratives that appear in undergraduate economics textbooks they are are deep in deception.

In fact, the ‘free traders’ do not actually believe in the textbook concept of a free market. Concepts such as the ‘free market’ get bandied around in the public debate as if they are verities.

But if you understand the textbook idea of a free market you will know that there are a multitude of very small-scale seller who sell an identical product at prices none of them can influence and end up with zero profit bar the minimum amount that is required to keep the seller in that activity (the so-called ‘normal’ profit or opportunity cost).

In other words, the difference between a firm’s total costs and its total revenue is zero in this ‘free market’.

No corporate leader aims to achieve that state. At a minimum, they aim to manipulate the ‘market’ they trade into to influence prices they can get and have to pay for inputs and end up with as big a margin on total costs as they can achieve.

They aim to create a unique product and drive competitors out of business as quickly as they can. If they can take over a competitor and increase their market share they will.

They seek to manipulate consumers into believing their product is best through advertising, which uses psychological tools that go well beyond the textbook idea that such interaction with the ‘market’ is just to provide ‘information’.

Robert Shiller (2015) wrote that “standard economic theory … usually ignores the fact that, given normal human weaknesses, an unregulated competitive economy will inevitably spawn an immense amount of manipulation and deception.”

Robert Reich (2015: xiii) wrote that:

Many of the most vocal proponents of the ‘free market’ – including executives of large corporations and their ubiquitous lawyers and lobbyists, denizons of Wall Street and their political lackeys, and numerous millionaires and billionaires – have for many years been actively reorganizing the market for their own benefit and would prefer these issues not be examined.

[Reference: Reich, R.B. (2015) Saving Capitalism: For the Many, Not the Few, New York, Alfred A. Knopf.]

Reich (2015: 3-5) argued that:

Few ideas have more profoundly poisoned the minds of more people than the notion of a ‘free market’ existing somewhere in the universe, into which government ‘intrudes’. In this view, whatever inequality or insecurity the market generates is assumed to be the natural and inevitable consequence of impersonal ‘market forces’ …

There can be no ‘free market’ without government. The ‘free market’ does not exist in the wilds beyond the reach of civilization. Competition in the wild is a contest for survival in which the largest and strongest typically win. Civilisation, by contrast, is defined by rules; rules create markets, and governments generate the rules …

A market – any market – requires that government make and enforce the rules of the game. In most modern democracies, such rules emanate from legislatures, administrative agencies, and courts. Government doesn’t ‘intrude’ on the ‘free market’. It creates the market.

It is little wonder why the corporate power brokers – their lawyers and lobbyists – vehemently pursue governments to agree to pro-corporation clauses in these so-called ‘free market’ agreements’. They know that without government support and agreement to tilt the playing field towards them and away from workers and consumers they will be forced into more equitable sharing of the national income produced in each nation.

As we have consistently argued in this discussion – while the Left somehow have convinced themselves that globalisation has rendered the state powerless in the face of global capital, the neo-liberals worked out long ago that they had to work within the legislative environment established in each nation they wish to operate within.

They allocate large volumes of funds to duchess, hector and bribe governments to get their own way so that the ‘market’ is more easily manipulated in their favour.

There is ample evidence that large multinational companies engage in criminal activity (such as bribery, kickbacks etc) to get an inside running on tenders and other contracts with domestic and foreign governments and/or to evade legitimate tax obligations.

Despite the OECD introducing an Anti-Bribery Convention in December 1997, the evidence is that the practice is rife.

A 2013 Report from the organisation Transparency International – Exporting Corruption Progress Report 2013: Assessing Enforcement of the OECD Convention on Combating Foreign Bribery – found that of the 39 countries that are signatories to the Convention, 30 (making up 38.2 per cent of world exports) have “limited” or “little or no enforcement”.

[Reference: Transparency International (2013) Exporting Corruption Progress Report 2013: Assessing Enforcement of the OECD Convention on Combating Foreign Bribery, . LINK]

Australia, one of the richest nations in the world, has seen some recent notable scandalous examples of criminal behaviour on the international stage by Australian companies.

For example, in 2011, “two companies … one … partially and the other wholly owned by the Australian Reserve Bank”, which were involved in printing of banknotes, bribed “public officials in Indonesia, Malaysia, Nepal and Vietnam” (Transparency International, 2013: 13) in order to secure contracts.

Another Australian company has been involved in making “improper payments” to foreign governments (for example, Iraq) to garner contracts relating to the construction of wharfs (Transparency International, 2013: 14).

The practice is widespread.

One of the consequences of the recent wave of fiscal austerity has been the public cuts to key public institutions that police this sort of corruption.

For example, between 2008 and 2014, fiscal cuts in Britain saw the budget of the UK Serious Fraud Office, which is the major institution fighting bribery and corporate corruption, fall from £52m to £32m. The cuts brought into “question the ability of the agency to pursue complex white-collar crime” (see Binham, 2014).

[Reference: Caroline Binham (1987) ‘UK’s Serious Fraud Office seeks £19m emergency funding’, Financial Times, January 31. LINK]

At a time when the pressure is mounting for comprehensive ‘Investor State Dispute Settlement (ISDS) mechanisms’ to be embedded in international trade agreements, which increase the power of corporations to contest the legal frameworks established in nations they operate in, fiscal cuts are reducing the capacity of the public agencies to fight corporate crime.

Binham (2014) notes that the funding cuts in the UK were implicated in the failure of the SFO to successfully prosecute the Tchenguiz brothers over alleged corruption in their dealings with the collapsed Icelandic bank Kaupthing.

As Robert Reich (2015: 6) concluded “The ‘free market’ is a myth that prevents us from examining” how these lobbying efforts and subsequent deregulation work to advance the interests of the financial elites.

The corporations don’t seek to play by the rules. They are continually seeking to change the rules to advance their own interests, irrespective of the impact on other stakeholders (workers, consumers, local communities etc).

We always need to remind ourselves that (Reich, 2015: 6):

It is no accident that those with disproportionate influence over these rules, who are the largest beneficiaries of how the rules have been designed and adapted, are also among the most vehement supporters of the ‘free market’ and also the most ardent advocates of the relative superiority of the market over government. But the debate itself also serves their goal of distracting the public from the underlying realities of how the rules are generated and changed, their own power over this process, and the extent to which they gain from the results. In other words, not only do these ‘free market’ advocates want the public to agree with them about the superiority of the market but also about the central importance of this interminable debate.

In discussions about ‘free trade’ versus ‘fair trade’, the misnomer of free markets must always condition the debate.

Costs of trade manipulation under the guise of the ‘free market’

In the context of international trade and capital flows, there is no ‘free market’. The assumptions that underpin the textbook models of international trade based on comparative advantage can never hold in reality. Which means that the use of these textbook ‘models’ and their conclusions as authority to enter so-called ‘free trade’ agreements is invalid.

There is no such authority. The real world bears no relation to the textbook theories.

Further, free trade does not exist. Capital flows do not respond to notions of comparative advantage but rather chase labour that is cheaper than elsewhere.

The world trade patterns are dominated by a combination of concentrations of economic power and the old imperial forces that continue to deny wealth to the poorest nations, despite plundering their considerable resources.

The deregulation that governments have been bullied or complicit in providing to the elites under the guise of eliminating so-called ‘unfair’ barriers to trade and lifting the poorest nations out of poverty have led to a number of negative outcomes.

The process of deindustrialisation that began in the 1970s and has hollowed out whole regions and cities in the advanced nations arose, not from any notion of comparative advantage.

Rather, it was the race-to-the-bottom dynamic that sees the ‘market’ divorced from society. This is an ‘absolute advantage’ process, where capital shifts productive activity around the globe chasing low wages, poor workplace and environmental protections, and tax advantages.

Conservative British political philosopher John Gray argued that when this separation between the ‘market’ and the needs of society occurs, the ‘market’ fails.

[Reference: Gray, J. (1998) False Dawn: The Delusions of Global Capitalism, London, Granta Books.]

Governments, increasingly co-opted by the owners of capital, have adopted two positions with regard to their declining manufacturing.

Initially, they might bow to the pressures to subsidise the foreign owners of the plants and claim they have agreements in place to ensure the long-term viability of the operations.

But that sort of approach is typically short-lived and the foreign owners either up the ante or announce closure. The recent history of the Australian car manufacturing industry provides ample evidence of this process.

Faced with industrial decline, the mainstream economists rattle on about natural market forces and the politicians turn a blind eye.

However, as the more recent ‘trade theories’ (so-called New Trade Theory) show that the presence of increasing returns to scale, where output rises proportionately more than any increase in inputs, coupled with network effects, where the creation of critical mass provides significant benefits to consumers, can justify the protection of local industry (for example, see Krugman, 1979).

[Reference: Krugman, P.R. (1979) ‘Increasing Returns, Monopolistic Competition, and International Trade’, Journal of International Economics, 9, 469-479.]

For example, this literature helps explain the state-motivated development of industry in South Korea (such as, The Heavy and Chemical Industrialisation (HCI) program), which would never have occurred if self-regulating markets were prioritised. Other examples, include the watchmaking industry in Switzerland).

Ha-Joon Chang (2007) rejects the ‘free market’ explanation for Korean development.

He writes (2007: xx-xxi):

This neo-liberal establishment would have us believe that, during its miracle years between the 1960s and the 1980s, Korea pursued a neo-liberal economic development strategy …

The reality, however, was very different indeed. What Korea actually did during these decades was to nurture certain new industries, selected by the government in consultation with the private sector, through tariff protection, subsidies and other forms of government support (e.g., overseas marketing information services provided by the state export agency) until they ‘grew up’ enough to withstand international competition. The government owned all the banks, so it could direct the life blood of business-credit …

The Korean government also had absolute control over scarce foreign ex- change (violation of foreign exchange controls could be punished with the death penalty). When combined with a carefully designed list of priorities in the use of foreign exchange, it ensured that hard-earned foreign currencies were used for importing vital machinery and industrial inputs. The Korean government heavily controlled foreign investment as well, welcoming it with open arms in certain sectors while shutting it out completely in others, according to the evolving national development plan …

The popular impression of Korea as a free-trade economy was created by its export success. But export success does not require free trade, as Japan and China have also shown. Korean exports in the earlier period – things like simple garments and cheap electronics-were all means to earn the hard currencies needed to pay for the advanced technologies and expensive machines that were necessary for the new, more difficult industries, which were protected through tariffs and subsidies. At the same time, tariff protection and subsidies were not there to shield industries from international competition forever, but to give them the time to absorb new technologies and establish new organizational capabilities until they could compete in the world market.

The Korean economic miracle was the result of a clever and pragmatic mixture of market incentives and state direction.

[Reference: Chang, H-J (2007) The Myth of Free Trade and the Secret History of Capitalism, London, Bloomsbury Press.]

Indeed, the normal model of economic development, which has enriched the advanced nations such as Britain and the US, was not built on a ‘free trade’ platform – the IMF/World Bank ideology.

Rather, they developed into rich nations through the use of industrial protection and government controls and supports.

None of the advanced nations would have achieved that status if they followed the IMF/World Bank approach.

So it is hard to justify the ‘race-to-the-bottom’ model, where workers in poor nations are paid poverty-level wages and work in appaling and dangerous conditions (including a return to C18th child labour), while regions in developed nations are hollowed out with entrenched unemployment and increasing poverty and social alienation.

The World Trade Organization (WTO) admits that its “agreements do not deal with labour standards as such” (see WTO, 2016).

[Reference: World Trade Organization (2016) Labour standards: consensus, coherence and controversy, LINK.]

In December 1996, the WTO held its Ministerial Conference in Singapore (December 9-13) with the aim of strengthening “the WTO as a forum for negotiation, the continuing liberalization of trade within a rule-based system” (WTO, 1996).

On the topic of “Core Labour Standards” the WTO concluded:

… We believe that economic growth and development fostered by increased trade and further trade liberalization contribute to the promotion of these standards. We reject the use of labour standards for protectionist purposes, and agree that the comparative advantage of countries, particularly low-wage developing countries, must in no way be put into question.

[Reference: World Trade Organization (1996) Singapore Ministerial Declaration, December 13. LINK]

When we talk about labour standards we are referring to “a wide range of things: from use of child labour and forced labour, to the right to organize trade unions and to strike, minimum wages, health and safety conditions, and working hours” (World Trade Organization, 2016)

But while recognising these core labour standards, the WTO rejects the use of “trade actions … to impose labour standards” (WTO, 2016).

The WTO has consistently avoided further conclusion on the issue of labour standards and maintains its view that low-wage countries attract capital as a result of their comparative advantage and it is this that leads to development. The evidence is not supportive of that belief (see Chang, 2007 for case studies).

The large capital interests resist any inclusion of labour standards in these ‘free trade’ agreements because they know they would undermine their ‘race-to-the-bottom’ strategy of profit capture.

Under ‘fair trade’ principles, which we will turn to in Part 3, a nation allowing capitalist firms to deny basic workers’ rights becomes a sufficient condition to block trade with that nation.

Conclusion

In Part 3, I will consider further negative aspects of the current organisation and operation of trade through the WTO. Specifically, I will discuss issues including, environmental damage, cultural attrition, community tensions and more.

We will also discuss the Investor State Dispute Settlement issues.

The series so far

This is a further part of a series I am writing as background to my next book on globalisation and the capacities of the nation-state. More instalments will come as the research process unfolds.

The series so far:

1. Friday lay day – The Stability Pact didn’t mean much anyway, did it?

2. European Left face a Dystopia of their own making

3. The Eurozone Groupthink and Denial continues …

4. Mitterrand’s turn to austerity was an ideological choice not an inevitability

5. The origins of the ‘leftist’ failure to oppose austerity

6. The European Project is dead

7. The Italian left should hang their heads in shame

8. On the trail of inflation and the fears of the same ….

9. Globalisation and currency arrangements

10. The co-option of government by transnational organisations

11. The Modigliani controversy – the break with Keynesian thinking

12. The capacity of the state and the open economy – Part 1

13. Is exchange rate depreciation inflationary?

14. Balance of payments constraints

15. Ultimately, real resource availability constrains prosperity

16. The impossibility theorem that beguiles the Left.

17. The British Monetarist infestation.

18. The Monetarism Trap snares the second Wilson Labour Government.

19. The Heath government was not Monetarist – that was left to the Labour Party.

20. Britain and the 1970s oil shocks – the failure of Monetarism.

21. The right-wing counter attack – 1971.

22. British trade unions in the early 1970s.

23. Distributional conflict and inflation – Britain in the early 1970s.

24. Rising urban inequality and segregation and the role of the state.

25. The British Labour Party path to Monetarism.

26. Britain approaches the 1976 currency crisis.

27. The 1976 currency crisis.

28. The Left confuses globalisation with neo-liberalism and gets lost.

29. The metamorphosis of the IMF as a neo-liberal attack dog.

30. The Wall Street-US Treasury Complex.

31. The Bacon-Eltis intervention – Britain 1976.

32. British Left reject fiscal strategy – speculation mounts, March 1976.

33. The US government view of the 1976 sterling crisis.

34. Iceland proves the nation state is alive and well.

35. The British Cabinet divides over the IMF negotiations in 1976.

36. The conspiracy to bring British Labour to heel 1976.

37. The 1976 British austerity shift – a triumph of perception over reality.

38. The British Left is usurped and IMF austerity begins 1976.

39. Why capital controls should be part of a progressive policy.

40. Brexit signals that a new policy paradigm is required including re-nationalisation.

41. Towards a progressive concept of efficiency – Part 1.

42. Towards a progressive concept of efficiency – Part 2.

43. The case for re-nationalisation – Part 2.

44. Brainbelts – only a part of a progressive future.

45. Reforming the international institutional framework – Part 1.

46. Reforming the international institutional framework – Part 2.

47. Reducing income inequality.

48. The struggle to establish a coherent progressive position continues.

49. Work is important for human well-being.

50. Is there a case for a basic income guarantee – Part 1.

51. Is there a case for a basic income guarantee – Part 2.

52. Is there a case for a basic income guarantee – Part 3.

53. Is there a case for a basic income guarantee – Part 4 – robot edition.

54. Is there a case for a basic income guarantee – Part 5.

55. An optimistic view of worker power.

56. Reforming the international institutional framework – Part 3.

57. Reforming the international institutional framework – Part 4.

58. Ending food price speculation – Part 1.

59. Ending food price speculation – Part 2.

60. Rising inequality and underconsumption.

61. The case against free trade – Part 1.

62. The case against free trade – Part 2.

The blogs in these series should be considered working notes rather than self-contained topics. Ultimately, they will be edited into the final manuscript of my next book due later in 2016.

That is enough for today!

(c) Copyright 2016 William Mitchell. All Rights Reserved.