Thursday, July 22, 2004

International Trade's True Picture

Doha is a Phoney Bill Of Goods 
By Marshall Auerback 

“The rules for admission into the world economy not only reflect little awareness of development priorities, they are often completely unrelated to sensible economic principles. For instance, wto agreements on anti-dumping, subsidies and countervailing measures, agriculture, textiles, and trade-related intellectual property rights lack any economic rationale beyond the mercantilist interests of a narrow set of powerful groups in advanced industrial countries.” – Dani Rodrik, “Trading in illusions,” Foreign Policy (123) March/April, 2001
The Doha round of multilateral trade negotiations is, yet again, on the brink of failure. We are told that a failure to resolve ongoing tensions between the developed and developing world will engender a collapse of free trade and a corresponding reduction in economic growth, particularly ominous given the apparent slowdowns increasingly manifesting themselves in the US and China.
Not so fast.  The doomsayers largely predicate their negativism on the so-called “Washington consensus” school of thought, which holds that the only viable option for developing countries is maximum integration into the world economy plus domestic reforms to stabilize integration and make domestic markets more efficient (including “good governance” reforms to bring the poor into the process). Sectoral-industrial policy, and anything intended to foster nationally controlled industries over foreign-owned, or to transfer technology beyond the speed desired by private foreign firms, is out.  It seems to us that this line of thinking has little to do with free trade and much to do with an increasingly discredited ideology that has done much to impoverish both American workers and the developing world it purports to help.

Within the realms of policy making and academia, there are finally some challenges being proffered in opposition to the market fundamentalism embodied in the Washington Consensus.  In recent co-authored work, Joseph Stiglitz, the former chief economist of the World Bank, argues that the development focus of the Doha round is a myth. He wrote in the FT on June 21: "Recent negotiations have not only failed to push an agenda that would promote development; they have included a host of issues that are of tangential interest, or even detrimental, to developing countries."

A real development agenda, argue Prof Stiglitz and Andrew Charlton, the Oxford economist, would be very different from the one on offer at the current talks. Above all, they argue, “trade negotiations must begin from the premise that the less developed countries are deserving of special and differential treatment, both because they have been disadvantaged in the past and because of differences in their current circumstances. This will entail a movement away from the principles of reciprocity and bargaining…It will entail unilateral concessions by the developed countries, both to redress the imbalances of the past and to further the development of the poorest countries of the world.”

The views of Stiglitz and Charlton may seem heretical to free trade ideologues, but their notions of special and differential treatment are consistent with successful growth strategies adopted by virtually every developing economy.  Britain was protectionist when it was trying to catch up with Holland. Germany was protectionist when trying to catch up with Britain.  Japan was protectionist for most of the twentieth century up to the 1970s, Korea and Taiwan to the 1990s. Hong Kong and Singapore are the great exceptions on the trade front, in that they did have free trade and they did catch up—but they are city-states and not to be treated as economic countries. By and large, countries that have caught up with the club of wealthy industrial countries have tended to follow the prescription of Friedrich List, the German catch-up theorist writing in the 1840s: “In order to allow freedom of trade to operate naturally, the less advanced nation [read: Germany] must first be raised by artificial measures to that stage of cultivation to which the English nation has been artificially elevated.”
Within the “transitional” countries (moving from communism to capitalism) the comparison between Russia and China provides the extreme case in point: Russia—massive liberalization and privatization (shock therapy), catastrophic economic performance; China—gradual liberalization and privatization, excellent economic performance (by standard measures). Within each region (central Europe, southeastern Europe, the former Soviet Union, East Asia), one finds that the more radical liberalizers performed worse economically in the 1990s than those that moved more gradually. Even in countries of comparable economic development and maturity, the claims made on behalf of economic liberalization per se ring rather hollow:  From 1984 to the late 1990s the New Zealand government undertook much more radical liberalization than Australia’s, and economic performance has been substantially worse.
The US itself embraced a more classically “protectionist” or “developmentalist” strategy in its early post-colonial phase. Alexander Hamilton, the first U.S. Secretary of the Treasury (1789–95), set out a strategy for building up American industry behind tariffs to the point where American manufacturers would be able to compete against foreign competition unaided, in Reports of the Secretary of the Treasury on the Subject of Manufactures, 1791.  The United States followed a protectionist industrial strategy for most of the period from then right up to the early post–World War II years, when U.S. industry had achieved supremacy. Only at this point did the U.S. government begin to champion free trade. Ironically, this is doing little for the American economy today, yet a resort to outright protectionism will likely doom the country to a bout of capital flight.

Washington has been hoisted on its own petard.  Policy makers have embraced an unthinking acceptance of “free market” globalization.  The reality, however, is that America has becoming a hemorrhaging debtor nation compelled to retain its role as “buyer of last resort” for the global economy, even as it totters on the threshold of true bankruptcy.  The facts are not secret. Despite ebbs and surges, the gap between US exports and imports has been steadily widening across three decades.  The trade deficits of the early 1970s (due mainly to soaring oil prices) were trivial in size, but Americans were shocked in 1978 when the deficit hit $30 billion in one YEAR (TV sets and some cars were now made in Japan).

Needless to say, things have progressively worsened:  During the 1980s, the trade deficit expanded enormously, as Washington's strong- dollar policy crippled US manufacturers and companies moved jobs and production offshore in swelling volume. After a recession and dollar devaluation, the gap shrank briefly, but soon began expanding again.  For all of the positive spin placed on the latest monthly trade deficit figure of $46bn, this is still one of the highest monthly figures in history.  Annualized, it would still place the US perilously closer to third world debt trap dynamics.

American leaders and policy-makers remain uniquely dedicated to a faith in “free market” globalization, and they have regularly promised Americans that despite the disruptions, this policy guarantees their long-term prosperity. Present facts make these long-held convictions look like gross illusion. By 1998, the trade deficit was back to a new high and expanding ferociously, despite supposed improvements in US competitiveness. Last year it set another new record: $489 billion.

The latest Doha round will not solve this problem, nor will it do anything for the so-called “G-90” developing nations, which are mounting an increasingly unified and sophisticated campaign against what is on offer in the latest round of trade negotiations.  Indeed, to describe these talks as “free trade” negotiations is Orwellian sophistry at its finest.

Lowering tariffs and other trade barriers have been a minor aspect of global trade negotiations or any bilateral U.S. trade agreements such as those between the US and Chile and Singapore respectively (which place much more focus on the issue of free moving capital, in effect attacking the symptom of the current problem, namely America’s growing dependency on foreign capital flows as a consequence of decades of misguided trade policy). If free trade were the only purpose of these trade pacts, the agreements could be written on a few sheets of paper. Instead these deals fill large volumes. They contain chapter after chapter setting strict rules governing the treatment of investment, capital account convertability, and other areas of commercial law.

One of the main purposes of these agreements has been to impose U.S.type laws governing intellectual property claims (patents and copyrights) on nations throughout the world. The United States has used its full diplomatic and economic power to get nations from Latin America to China to respect U.S.-type laws in these areas. These laws are gross intrusions into the workings of a free market. As a result of this form of government protection, books, movies, music, and software that could be produced at virtually zero cost are instead sold at hundreds or even thousands of times the cost of production. (There are far less intrusive ways to finance the intellectual and artistic work that produces this material.)  It may be perfectably supportable to support intellectual property in this manner, but those who do so must also recognise the inherent contradiction whereby it is deemed perfectly acceptable to impose the big regulatory hand on foreign governments in order to enforce Microsoft’s intellectual property rights, but antithetical to free trade to enforce minimal environmental and labor standards on the developing world. 

This double-standard is not addressed in the most recent round of negotiations at Doha.  Indeed, high tech in particular seems to be accorded particularly sacrosanct protected status.  Any attempts by the developing world to nurture new industries and new technologies and to diffuse innovations to established industries—that might have the unwanted consequence of raising the competitive pressure on industries in the industrialized countries are frowned upon most severely.

Similarly, “free trade” is not interpreted as meaning that bright students from Mexico, India, China, and elsewhere will be able to come to the United States to finish their education and compete on an even footing with our doctors, lawyers, accountants, and other highly paid professionals. The immigration and professional licensing restrictions that rule out this competition are rarely serious topics of trade negotiations, especially post 9/11.

“Free trade”, therefore, has come to mean having U.S. manufacturing workers compete against the poorest workers in the developing world, while highly paid professionals remain protected, and the concept of “intellectual property” is used to restrict flows of commerce around the world.  Capital, on the other hand, is not to be restricted at all, despite the fact that most developing nations have been adversely affected by the premature removal of restrictions on free capital mobility, legitimized by the U.S. Treasury and the imf.  
Taken in aggregate, the WTO, as currently constituted, neither helps US workers (who find themselves persistently subject to wage pressures as more and more compete against the poorest workers of the world), nor the developing countries, which are precluded by the same rules to enable their governments to pursue most of the industrial policies successfully implemented in East Asia.  In the words of Professor Robert Wade from the London School of Economics:
“Before the Uruguay Round (1986–94) the international trade regime recognized the right of ‘special and differential treatment’ for developing countries, and allowed this to qualify the basic norm of  ‘no discrimination’ (no discrimination between suppliers based in different countries, as in the ‘most favored nation’ principle). At that time the policies of developing country governments and the thrust of multilateral trade and investment negotiations concerned the terms on which goods from developed countries would get access to developing country markets. But during the Uruguay Round and the negotiations of the three capstone agreements—the Trade-Related Intellectual Property agreement (trips), the Trade-Related Investment Measures agreement (trims), and the General Agreement on Trade in Services (gats)—all this changed.
The agreements at the end of the Uruguay Round represent a basic change of norms governing world trade. ‘Reciprocity’ eclipsed ‘development’; or more exactly, ‘reciprocity,’ ‘uniform rights and obligations,’ and ‘all countries (except the smallest and poorest) as equal players’ eclipsed ‘special and differential treatment for developing countries.’ At the same time, the earlier norm of ‘no discrimination’ between national suppliers became the norm of ‘no (trade and investment) distortions.’  The ‘no distortions’ rule makes it against wto rules for a government to use policies that “distort” trade and investment flows—including performance requirements on incoming foreign direct investment (such as local content requirements, trade balancing requirements, export requirements, technology transfer requirements, r&d requirements, joint venturing requirements, public procurement tied to local suppliers, and the like).  As a specific example, Article 27.1 of the trips agreement says that a ‘patent shall be available and patent rights enjoyable without discrimination as to … whether products are imported or locally produced.’  This makes it illegal for a government to curb a patent for a product whose domestic production the government wishes to encourage but whose producer refuses to establish a local production facility, thus blocking the process of import replacement.” – Governing the Market, Creating Capitalisms: Introduction to the 2003 Printing.    
From this set of premises, the whole process becomes a “heads I win, tail you lose” proposition for the developing world.   So when commentators, such as Martin Wolf dispute the notion that demands for liberalization by developing countries are economically harmful, he is only looking at this issue within the narrow confines of free trade parameters traditionally designed by the apologists for organizations such as the WTO, rather than looking at the broader issues raised by Wade and others.  Wade’s work in “Governing the Market” provides ample illustrations which refute the notion that the creation of efficient, rent-free markets coupled with efficient, corruption-free public sectors is even close to being a necessary or sufficient condition for a dynamic capitalist economy.  His book provides numerous examples to show how all now-developed countries went through stages of industrial assistance policy before the capabilities of their firms reached the point where a policy of (more or less) free trade was declared to be in the national interest. 
And, in the greatest irony of all, today’s “free trade” is doing nothing to help the US economy in slightest, except insofar as any future “trade liberalization” agreements enshrine America’s ability to satisfy its unremitting reliance on capricious, unregulated global capital flows.  Perhaps, therefore, the collapse of Doha is what is required in order to devise a development/growth agenda focused on creating capitalist systems able to generate mass affluence and a decent quality of life, whilst discarding this misplaced economic shibboleth that, liberalization, deregulation, strengthening participation and eliminating rents and corruption is all that is required to get us all back to the road to prosperity. ...Link


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