WTO-SEATTLE PREVIEW – Following is another in a series of special IPS features on the major issues at the WTO Ministerial Conference, Seattle Nov 30-Dec 3. TRADE: Free Trade Theory Takes a Beating

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Peter Costantini

SEATTLE, Nov 23 1999 (IPS) - The very foundations of the theory of free trade are rocking ahead of the World Trade Organisation (WTO) global negotiations, to be held here Nov 30-Dec 3.

A survey of top US economists finds that 97 percent of them agree with the statement: “Tariffs and import quotas reduce general economic welfare.”

However, in the wake of crises in Latin America, East Asia and Russia, a rising chorus is questioning the orthodoxies of trade liberalisation.

Contrary to the assertions of free-trade boosters, critics say that productivity and growth rates of industrialized economies have been halved during the past 25 years of liberalised global commerce – compared with the period before 1973 when trade was more regulated.

In the developing world, income growth has fared even worse.

Dissent has grown so strong that WTO Director-General Mike Moore recently lamented: “I thought the case had been made, but I guess we have to back up the truck and explain how we got here.”

The classical rationale for free trade took shape in 1817 in British economist David Ricardo’s doctrine of comparative advantage. He argued that nations would reap the most benefits if they specialized in the products in which they had the greatest advantage or least disadvantage compared to other countries.

As England was better at weaving cloth and Portugal at making wine, he reasoned, both would gain more if they concentrated on what they did best and traded with each other than if they each tried to produce both goods.

Ricardo’s successors elaborated his supposition into what they called the ‘Pure Theory of Trade.’

Free-trade theory was primarily developed and remains most popular in the dominant economic powers – Great Britain in the 19th Century and the United States in the 20th.

Comparative advantage originally meant that those who were “relatively most efficient in industrial production (by good fortune Britain) would continue to industrialise,” notes historian Douglas Dowd, “while the most relatively efficient hewers of wood and drawers of water would go on doing just that.”

In the 1840s, Ricardo’s followers promoted the opening of British grain markets in part as a way to alleviate the Great Famine in Ireland; but Irish peasants remained too impoverished to buy even cheaper grain.

In free trade’s first collision with skewed income distribution, one million people in Ireland died of hunger and disease.

Even the father of free-market economics, Adam Smith, recognised that restrictions on trade in critical sectors such as defense, navigation and public works were necessary for the development of national economies.

Indeed, no nation has industrialized successfully through unrestricted trade. All have sheltered their nascent industries from foreign competition, critics point out.

U.S. and German industries in the 19th Century grew behind protective walls constructed by Alexander Hamilton and Friedrich List. In this century, Japan rose to industrial preeminence by using its own brand of market leverage and managed trade. And the newly-industrialized countries of East Asia shepherded and subsidized their adolescent industries.

Specialising according to comparative advantage often makes sense. But the Pure Theory is based on a bevy of what Dominick Salvatore of Fordham University in New York calls “magnificent assumptions” – for example, that competition is perfect, capital cannot move between countries, and all resources are fully employed.

In other words, comparative advantage requires full employment, says Mark Weisbrot, research director of the Washington-based Preamble Center.

Otherwise “you can no longer say that each country is made better off through further opening up of trade,” because many workers displaced from losing industries will end up worse off.

The Pure Theory asserts that trade creates enough gains that everyone can benefit – so long as these are widely redistributed. It never promises that this redistribution will actually occur but rather predicts that there will be winners and losers in both countries, Weisbrot insists.

Thus, when U.S. President Bill Clinton in 1994 promised 1,700 dollars more yearly income for the average American family if Congress ratified the WTO treaty, political analyst William Greider likened this to promising that if your next-door neighbor wins the lottery, everyone on the block will get richer.

Instead, says Greider, the gains of increasing international trade have gone heavily to the wealthy. For the majority, wages and benefits have stagnated.

In 1997, former U.S. Treasury Department official William Cline estimated that trade had been the cause of 39 percent of the increase in wage inequality over the previous 20 years.

“There is in fact a respectable basis in economic theory,” he affirmed, “for the proposition that free trade will undermine real wages of those toward the bottom of the distribution.”

Another important problem with comparative advantage is that it is static; it accepts the current balance of power and wealth between countries and implies that developing nations should simply adjust to existing conditions.

Thus, says Weisbrot, it ignores their potential for growth and transformation.

After World War II, he recounts, Western economists told Japan that its comparative advantage did not lie in heavy industry, as it lacked important raw materials like coal and iron. Japanese planners wisely ignored this advice.

Exporting coffee and bananas or providing cheap labour for assembly plants may be the present comparative advantage of some developing countries. But relying exclusively on these sectors can stunt an economy’s capacity to grow in more productive directions, according to Richard Brinkman of Portland State University.

The International Monetary Fund constrains many poor countries to concentrate on agricultural exports, says Brinkman, but this may reflect what economists call a “fallacy of composition”: What’s good for one is not necessarily good for all. If too many producers try to increase their exports of the same commodity at the same time, the market becomes glutted and prices fall.

A more fundamental criticism of free trade is that it is not humanly or environmentally sustainable. David Morris of the Institute for Local Self-Reliance argues for local self- sufficiency and proposes giving up some marginal economic efficiency in order to promote more basic social and ecological values.

Theories aside, say some critics, the most powerful nations and corporations dominate world markets so much that, like high mountains, they make their own trade weather.

“Transnational corporations, particularly the largest, control directly or indirectly over two-thirds of world trade,” asserts French commentator Susan George. “What we call trade is at least one-third IBM trading with IBM or Ford with Ford, and a further third is transnational corporations trading among themselves.”

Business consortia like Transatlantic Business Dialogue dominate government trade decisions and negotiations, she adds.

What’s more, the powerful practice free trade only when it suits them.

At the same time that the Clinton administration was selling the North American Free Trade Agreement (NAFTA) and the WTO, Greider notes, it was also helping to create a worldwide aluminium cartel that curtailed production and propped up prices.