The case against free trade – Part 4

I am travelling most of today and do not have much time. However, there were a few more issues I wanted to raise in relation to the ‘Free Trade’ mini-series of blogs but on Tuesday I ran short of time and thus I thought I would take this chance to round the discussion off. So this blog might be considered Part 4 in that series on free trade. In 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. In Part 2, I considered the myth of the free market, the damage that ‘free trade’ causes’. In Part 3, fair trade was considered along with so-called ‘free trade’ agreements. Today, some nuances and additional thoughts are provided. 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. There is also a video of my keynote presentation at UMKC in September 2016 available in this blog.

What’s new in Modern Monetary Theory – Kansas City Presentation – September 16, 2016

Here is a video of my Keynote presentation at the Post Keynesian Conference, held at UMKC in Kansas City in September. The title of the talk was “What’s new in Modern Monetary Theory” and covers the material that I presented in the following blogs:

1. Modern Monetary Theory – what is new about it?.

2. Modern Monetary Theory – what is new about it? – Part 2 (long).

3. Modern Monetary Theory – what is new about it? – Part 3 (long).

I produced the video from the live stream of the event, which means the production (video and audio) is not as good as it could be.

It runs for a little over an hour and excludes the Q&A that followed (only to reduce the size of the file). UMKC will make the full session available at some later date I guess.

Free trade and Modern Monetary Theory (MMT)

Some readers have seemingly thought that by discussing trade at all, and, specifically recommending import and capital controls in some instances, these blogs run counter to what Modern Monetary Theory (MMT) says about the external sector and its capacity to place limits on fiscal policy.

A major point of difference between Post Keynesians (in the New Cambridge tradition – Cripps and Godley etc) and the original proponents of MMT (which includes this author) is that a currency-issuing government is not constrained in its capacity to generate full employment through appropriate fiscal policy settings.

Accordingly, such a government can always use its currency-issuing capacity to ensure that all available productive resources that are for sale in that currency, including all idle labour, can be productively engaged.

That is, such a government can always, without exception, ensure there is full employment. The capacity of a currency-issuing government, for example, to introduce a Job Guarantee, is not compromised by the external status of the nation.

There is no financial constraint on such a government who desires to achieve that desirable policy goal.

While that might sound salutary, and, by comparison with the ambitions of most governments in this neo-liberal era, is light years ahead on any well-being index, it somewhat evades a further question as to whether achieving this desirable goal moves a nation out of poverty.

However, the worst-case scenario for a nation, irrespective of its government’s currency-issuing capacity, is defined by the real resources that such a nation can access.

If a nation can only access limited quantities of real resources relative to its population, then no matter what capacities the government might have, that nation, in all likelihood, will be poor.

The ultimate constraint on prosperity is the real resources a nation can command, which includes the skills of its people and its natural resource inventory.

Thus, even if the government productively deploys all the resources a nation has available, it will still be poor if its resource base is limited.

But it is here that we have some nuances as a result of trade.

In general, the balance of payments should not be an issue of concern for governments in their quest to maximise the well-being of their citizens.

The reality is that all open economies are susceptible to balance of payments fluctuations. What is usually not mentioned is that these fluctuations were terminal during the fixed exchange rate system for deficit countries because they meant the government had to permanently keep the domestic economy is a depressed state to keep the imports down so as not to run out of foreign reserves.

For a flexible exchange rate economy, the exchange rate does the adjustment. There is no balance of payments constraint facing a nation in this regard.

Is there evidence that fiscal deficits create catastrophic exchange rate depreciation in flexible exchange rate countries? None at all. There is no clear relationship in the research literature that has been established.

If you are worried that rising net spending will push up imports then this worry would apply to any spending that underpins growth including private investment spending. The latter, in fact, will probably be more ‘import intensive’ because most LDCs import capital.

Please read my blog from yesterday – Balance of payments constraints – for more discussion on this point.

What about a nation that has to import all of its essentials to sustain life?

Please read my blog – Ultimately, real resource availability constrains prosperity – for more discussion on this point.

We have to acknowledge that if a nation has little that the world wants by way of its exports, and if that nation is dependent on imports for, say, food or energy, then the capacity of the currency-issuing government to alleviate poverty is limited.

An understanding of MMT should bring that point home.

First, where imported food (or other essentials) dependence exists then the well-being of the citizens in that nation cannot be solved within its own borders, especially if its export potential is limited.

Imposing austerity on these governments is no solution. The world has to take responsibility to ensure that it alleviates any real resource constraints that operate through the balance of payments.

Note, this is not a balance of payments constraint as it is normally considered. It is a real resource constraint arising from the unequal distribution of resources across geographic space and the somewhat arbitrary lines that have been drawn across that space to delineate sovereign states.

In this context, a new multilateral institution should be created to replace both the World Bank and the IMF, which is charged with the responsibility to ensure that these highly disadvantaged nations can access essential real resources such as food and not be priced out of international markets due to exchange rate fluctuations that arise from trade deficits.

I discussed the multi-lateral institutions in these blogs:

1. Reforming the international institutional framework – Part 1.

2. Reforming the international institutional framework – Part 2.

Second, there has to be international agreements to outlaw speculation by investment banks on food and other essential commodities.

Third, a further progressive policy intervention, which, ideally, should be agreed to at the international level should be to declare illegal speculative financial flows that have no necessary relationship with improving the operation of the real economy.

In the absence of such international commitments, nations should consider imposing capital controls where they can be beneficial bulwarks against the destructive forces of speculative financial capitalism.

Fourth, in some situations a case can be made to impose import controls on equity grounds where the export base is thin and a nation is struggling to amass sufficient real resources to ‘feed and clothe’ its people.

Please read my blog – Why capital controls should be part of a progressive policy – for more discussion on this point.

Fifth, as regular readers will recall, I do advocate import restrictions in some cases. This has nothing to do with fears that speculators will trash the currency and create hyperinflation through import price acceleration.

While imports are clearly a benefit and exports are clearly cost there are still equity implications involved in the mix of imports that a nation might enjoy.

I heard once that South Africa had the largest per capita ownership of BMW cars, which is astounding, if true, given the mass poverty of the majority of its population.

Selective import controls (especially those targetted on products consumed by the rich that are not essential to general well-being), if they can be effectively designed, can ensure that a nation with a limited export base can import goods and services that target the provision of benefits via imports to the poor in the first instance.

Fifth, in some cases it will be in the global interest to restrict the capacity of a nation to export. For example, I’m thinking of those arguments where it is better to leave the coal in the ground than to mine it and worsen the environmental damage already existing.

In those cases, a single nation should not be punished for the pattern of geographic resource distribution and a global response is needed to make sure the damage to that nation’s export potential does not impair its ability to import and fight poverty.

Further, my rejection of so-called ‘free trade agreements’ in no way is a concession that MMT’s downplaying of balance of payments issue is misplaced.

The concern is not about exchange rate dynamics at all. It is rather a reflection of my progressive bent, which tells me that corporate interests should never subvert the democratic standing of a nation state.

In all cases, the latter has primacy over the former. So there is never a case for so-called ‘Investor State Dispute Mechanisms’ in bi-lateral agreements between nations.

A nation state is defined by its legislature and that institutions sets the legal framework in which all activity within the sovereign borders engages.

Corporations have rights under that framework as do citizens. But the assumption is that the legislative framework should reflect the goals of national well-being.

There is never a case that a corporation should have institutional structures available that allow it to use ‘commercial’ arguments to subvert national legal positions.

Engagement or boycott?

A standard line from politicians in countries such as Australia is that even if a nation state is of pariah status it is better to use trade with them to maintain a ‘dialogue’, in order to generate social and political changes.

This ‘convenient’ justification is used to justify continued trade with China, for example, despite that nations abysmal human rights record.

So is engagement better than boycotts?

In Ferbuary 2014, the US Secretary of State, John Kerry, frustrated with Israeli resistence to any moves (by the US) to discipline the illegal settlments in occupied Palestinian territories, told an audience in Munich that (Source):

People are talking about boycott. That will intensify in the case of failure. We all have a strong interest in this conflict resolution. Today’s status quo absolutely, to a certainty, I promise you 100%, cannot be maintained. It’s not sustainable. It’s illusionary. There’s a momentary prosperity, there’s a momentary peace.

He later denied he was advocating boycotts but was, rather, arguing that the pressure for boycotts was mounting, given the success of these strategies to achieve substantial political changes in the past.

He was no doubt thinking of the boycott imposed by the Danish Danske bank that broke commercial relations in early 2014 with “Israel’s largest bank, over the financing of settlements built across the old 1967 border in breach of international law.” The trade restrictions were motivated by what the Danske Bank referred to as “ethical and legal conflicts” (Source).

The Israeli government claimed any boycotts would be “immoral and unjustified” and was “antisemitic”. The claim of immorality was a bit rich given that in January 2014, we learned that Isreali soldiers had shot two young West Bank footballers in the foot, a deliberate act to terminate their sporting careers.

The Nation article (March 3, 2014) – After Latest Incident, Israel’s Future in FIFA Is Uncertain – which was one of many reports in the world media about this incident, reported that two teenage Palestinean soccer players:

… were on their way home from a training session in the Faisal al-Husseini Stadium on January 31 when Israeli forces fired upon them as they approached a checkpoint. After being shot repeatedly, they were mauled by checkpoint dogs and then beaten. Ten bullets were put into Jawhar’s feet. Adam took one bullet in each foot. After being transferred from a hospital in Ramallah to King Hussein Medical Center in Amman, they received the news that soccer would no longer be a part of their futures …

This is only the latest instance of the targeting of Palestinian soccer players by the Israeli army and security forces. Death, injury or imprisonment has been a reality for several members of the Palestinian national team over the last five years. Just imagine if members of Spain’s top-flight World Cup team had been jailed, shot or killed by another country and imagine the international media outrage that would ensue. Imagine if prospective youth players for Brazil were shot in the feet by the military of another nation. But, tragically, these events along the checkpoints have received little attention on the sports page or beyond.

The article goes on to promote the isolation of Israel in international soccer.

International sport is an aspect of trade between nations (for example, merchandising and tourism that are associated sporting contests). It is clear that such trade restrictions are considered to be an appropriate strategies to pursue in order to gain political traction against pariah states.

The obvious example of such actions was the – Sporting boycott of South Africa during the apartheid era.

While it was unclear what the aim of these boycotts were (end sporting segregation or apartheid in general), the boycott was expressed via a UN General Assembly policy and clearly helped end the apartheid system in South Africa.

The Abu Dhabi-based National newspaper article (July 21, 2014) – As South Africa proved, sporting boycotts work – wrote:

Divestment and boycotts are familiar tactics from the international anti-apartheid movement, but they didn’t match the psychological power of the sports boycott: rugby was an essential part of the identity of the South African regime’s base, and denying their ability to compete on an international stage was one of the most painful sanctions in the minds of many apartheid supporters.

The rugby bans were particularly powerful.

I was one of the five-odd thousand people who protested at Melbourne’s Olympic Park on July 3, 1971 as part of a highly co-ordinated ‘Stop the Tours Campaign’.

The protests severely disrupted the 1971 Springbok rugby tour of Australia. The Melbourne protest was a very violent protest with many arrests by a vicious police response. I will leave the personal aspects aside here.

The authorities erected barbed wire barriers to stop ground invasions but bolt cutters became the preferred tool of the protesters and ground invasions could not be stopped.

While the conservative governments at the time (Federal and State) did everything they could to keep the Tour going (declaring an unprecedented state of emergency in once state), the reality was that this Tour marked the end of Australia’s sporting relations with South Africa until apartheid finally fell as a result of internal pressure within South Africa.

The protesters in 1971 knew that we couldn’t stop the rugby tour (although it was severely disrupted) but the real aim was to stop the upcoming South African cricket tour.

The strategy was successful. The Australian Cricket Board knew they couldn’t guarantee the security of the cricket grounds in the face of growing protests and cancelled the tour in late 1971, saying “we will not play them until they choose a team on a non-racist basis”.

Politics had come to sport – where, of course, it had always been, despite the denials of the conservatives who opposed the apartheid boycotss.

It is the same sort of arguments that ‘free traders’ use to defend trade with pariah states – economics should not mix with politics they say.

To which I say, economics is political and bringing economic pressure on nations to generate political change that advances the well-being of citizens and the planet should always be a core progressive strategy.

A more nuanced argument relates to issues such as the whaling bans against Japan, Norway and Iceland. Again, these are attempts to restrain trade.

The so-called International Whaling Commission set out regulations for whaling aimed at conserving the resource – the so-called Convention. The problem was it allowed whaling for “scientific purposes”, which Japan, in particular has exploited, despite evidence that its practices in the Southern Ocean go well beyond anything that might be consistent with scientific research.

The Japanese also claim cultural rights to whale meat, which is hard to dispute, given their long history. But that is the point – do nation-specific ‘cultural’ practices usurp all other concerns, including human and animal rights?

The Australian government (of all political persuasions) has been a vehement opponent of Japanese whaling in the Southern Ocean and was instrumental in getting the matter heard before the International Court of Justice.

Eventually, the International Court of Justice banned whaling in 2014 with little impact on Japan, who have defied the ruling.

Representative of the Australian view was this claim by a conservative political advisor (Source):

We can’t succeed alone … [but we] … can use Australia’s soft power influence to pressure Japan’s far bigger trading partners, the United States and the European Union, to enforce apparently impotent ICJ and IWC rulings by other means – by exerting their powerful economic and political pressure on Japan, and any other nation contemplating similar courses of action.

In other words, trade and other economic restrictions.

The hypocrisy is that while Australia has taken a valid moral and environmental position to restrain international trade in the context of whaling it refuses to take similar positions with respect to nations such as China, Myanmar etc who breach the rights of workers and human rights in general.

One might suspect it is the scale of the issue that dominates. Clearly, if we took a consistent progressive position, Australia and other nations who espouse the primacy of human rights would not tolerate China, in the same way, they eventually brought pressure on South Africa to end its hideous apartheid system.

But then the corporate involvement in China is very large and principles have a way of giving way to dollars. A truly progressive position should not be so compromised.

I would thus impose trade boycotts on China even though it would reduce the availability of low-cost imports that help workers in advanced countries enjoy a higher real standard of living.

The huge issue for Australia, of course, is the arguments surrounding coal exports, which generate huge volumes of export revenue for Australia (Newcastle, where I live is the world’s largest coal export port) and China is a major market.

There are two arguments for closing down the coal export industry. First, the environmental case. Second, the human rights case outlined above.

A truly progressive agenda would close the coal sector down. But, then it would have to be recognised that this would have significant effects on working class communities in the coal producing areas.

I discussed this issue in relation to the ‘second machine age’ in this blog – Is there a case for a basic income guarantee – Part 4 – robot edition.

A progressive policy framework has to allow all workers access to work even if it explicitly destroys jobs as part of an overall strategy to redress matters of concern (whether to advance labour, environmental or broader issues) and allow the poorest members in each nation opportunities for upward mobility.

Part of these transition arrangements might also include more generous foreign aid to ensure that trade constraints do not interrupt international efforts to relieve world poverty.

The devil is, of course, in the detail.


That ends my series on trade.

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.

63. The case against free trade – Part 3.

64. The case against free trade – Part 4.

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.

This Post Has 9 Comments

  1. You said at the beginning of the series you planned one on “fair trade.” I have bee eagerly awaiting that but now you say your series is over? I am disappointed.

  2. Dear Bill

    The essence of your position is that we should be pragmatic about international trade and not be dogmatic supporters of free trade always and everywhere. I quite agree. What amazes me is the large number of people who believe that free trade is good because we can then export more and thereby create more jobs, and who seem to believe that more international trade is always better than less.

    The argument that foreign trade is good because it creates jobs is of course nonsense. Production for the domestic market also creates jobs, and more trade also means more imports and therefore fewer jobs in import-competing sectors. Conversely, less foreign trade means fewer jobs in the export sector but more jobs in the import-competing sectors. Moreover, it isn’t only jobs that counts but also the goods and services that those jobs produce. Every good and service exported is no longer available to us.

    The logical conclusion of the argument that more international trade is always better than less is that a country should export everything that it produces. It then has to import everything that it consumes. Suppose that people in Italy don’t go to Italian doctors and dentists but to those in France. The French, in turn, all go to doctors and dentists in Italy. Absurd? Not at all if you believe that more foreign trade is always better than less.

    Regards. James

  3. Thank you for writing this series on trade. It does a good job of recognizing some of the nuances in the benefits and costs of exports and imports. Up till now this was perhaps my biggest disagreement with MMT. Even though you had done a fine job pointing out how in theory exports are always a cost, and how imports are a benefit, I could not agree with it except in theory. Especially given the lack of anything like a job guarantee anywhere in my country. Or anywhere else that I know of.

    Too often “free trade” has been used to encourage a race to the bottom on hard won labor and environmental standards of all sorts. We need government to consider what is the interest of all their people when deciding under what standards trade will be conducted.

  4. How many other countries as well as China should progressive governments boycott for
    human rights abuses?
    As you mentioned above Israel is a possibility.What about Saudi and many other Middle East
    countries who deny rights for women or hang gays? INclude Russia and much of the major
    energy suppliers would be boycotted(Venuzwela for imprisoning political prisoners).Whilst
    global warming is a real threat countries denying themselves energy is a radical plan.
    Torture must rank as the worse human rights abuse and clearly during the war on terror
    the USA practiced torture my own government in the UK was complicit too . Australia’s
    treatment of its indigenous people and would be migrants is reprehensible.
    If there is a case to boycott China a case can be made to boycott most of the world.

  5. When it comes to free trade the most important take out for me from this mini series is
    that it does not exist.
    Classical economics is faith in an illusion.A religion.

  6. great blog,

    but end trade with china and close down the coal mines?
    It would be of interest to see the level of policy creativity required to
    mitigate the negative consequences of those policies.
    energy shortages and price increase,goods cost increase and mass unemployment.
    I think it would require preparation of a decade to gradually restructure the Australian economy
    so that it could implement these policies without adversely affecting the domestic population economically.

  7. Dear Kevin Harding (at 25/11/2016 at 5:11 pm)

    The point you make is exactly the nuance I was trying to get across when it comes to determining what fair trade might actually mean. Trying to operationalise it is riven with difficulties of culture, definition, and self-incrimination.

    But just as the UN Declaration of Human Rights and related charters sought to come to terms with a universal understanding, it should be the role of progressives to force the debate instead of just conceding that it is too difficult and money interests determine everything.

    best wishes

  8. Dear jake (at 25/11/2016 at 9:47 pm)

    Have you read the research on renewables?

    Some years ago my research group did a major study for Greenpeace – A Just Transition to a Renewable Energy Economy in the Hunter Region, Australi – where we modelled the employment losses that would result from a closure of the coal-fired powered industry in the Hunter/Wyong region (which is a major supplier of electricity to NSW).

    We also modelled the total jobs that would be generated by a switch to known and viable renewable energy electricity production techniques and developed some policy parameters to assist the Hunter region in the industrial restructuring from coal-fired power to renewable energy.

    The conclusion (and if you are interested you might like to read the report in full – it is quite long) was that in making this transition there would be major benefits to region. Shifting from coal-fired power generation to a clean, renewable energy economy would result in a net gain of 5,760 and 10,650 jobs depending on assumptions made about market reach and manufacturing input.

    The net job creation would result in well-paid jobs in the research, design, manufacture, installation, maintenance and export of energy efficiency and renewable energy technologies.

    We refined that research in subsequent reports (not publicly available) which reinforce the gains that the nation as a whole would make by altering the energy mix away from coal.

    So getting rid of the coal industry in Australia will not destroy our prosperity. But it will do wonders for the world’s natural environment.

    The more recent research reinforces that conclusion.

    You might like to update your reading before tolling the bells of doom.

    best wishes

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