Global Governance: Is Free Trade Really Free - Term Paper Example

Global Governance: Is Free Trade Really "Free" Table of Contents Overview Principles of Free Trade History of Free Trade 3 Global s 5 Why Free Trade in Not Free 7 How to "Liberate" Free Trade and Make it Work 9 Bibliography 11 Overview This paper discusses the proposition that "in part, free trade has not worked because we have not tried it" (Stiglitz, 2006). The first part briefly summarises the basic principles behind free trade as it has academically evolved over the years. The second part discusses the history of free trade and shows the successful and failed attempts of governments to apply basic economic principles and the rise of globalisation. The third part is about the global institutions that were established to manage the global economy. The first three parts make it easier to understand the last two parts of the discussion. The fourth part summarises the arguments in support of Stiglitz - that free trade has not worked in part because we have failed to abide by sound economic free trade principles for varied reasons - and discusses what these reasons are. The conclusion contains brief recommendations for action to make free trade really "free". Principles of Free Trade An initial look at the term globalisation implies that some "thing" or "phenomenon" is spreading throughout the globe and in the process becoming "global", or globalising. Whilst diseases, ideas, information, or even weather disturbances can go global, the current usage of the term "globalisation" is in reference to free trade in goods, services, and labour among the world's nations. Thus, globalisation and free trade are understood to be one and the same. Micklethwait and Wooldridge (2000) described globalisation (p. xvi) as the "integration of the world economy, reshaping business and reordering the lives of individuals, creating social classes, different jobs, unimaginable wealth and, occasionally, wretched poverty." Stiglitz defined it earlier (2002, p. 164) as "the integration of countries and peoples of the world brought about by the enormous reduction of transportation and communication costs, and the breaking down of artificial barriers to the flow of goods, services, capital, knowledge, and people across borders." The use of "integration" in both definitions implies a reference to a previous state marked by separation. Integration in the context of international trade signifies that economic and business laws, political systems, cultural differences, and all other factors that act as barriers to the economic relationship amongst nations are minimised or removed, made compatible and attractive enough for trade to take place. Free trade amongst nations is not a recent phenomenon. It has been going on for centuries, and as discussed in the next section, it has caused prosperity and poverty, sometimes becoming a prelude to wars as nations battled each other for supremacy. Trade amongst nations was pretty straightforward, regulated by the law of supply and demand and bartering. But as societies became complex and the control of wealth shifted from nobles to industrialists, the world's socio-economic order underwent a radical shift as the growth in populations increase the pressure for governments to satisfy the people (Yergin et al., 1998, p. 189). The driving force of free trade was Britain, the world's superpower in the 18th and 19th centuries. British goods were traded all over the globe, made from materials extracted from colonies that spanned an empire where the sun never sets. Law and order were maintained by a powerful army and navy that kept trade routes safe. London's financial system dipped its fingers into every business pie. Understandably, Britain sowed the intellectual seeds of globalisation and free trade, inspired by the works of Adam Smith (The Wealth of Nations, 1776), David Ricardo (On the Principles of Political Economy and Taxation, 1817), and James Stuart Mill (Elements of Political Economy, 1821). Smith emphasised the invisible hand of free markets that would guarantee economic efficiency, bringing down prices and ensuring supply would meet demand. He promoted trade and argued against protectionism, a form of misguided state intervention that affected the flow and pricing of goods and the growth and maturity of commerce. Ricardo proposed the concept of comparative advantage, arguing that free trade offered all countries, rich and poor, an opportunity to gain economically by specialising in what they do best and trading their surpluses. Mill reinforced Smith on the merits of free trade and attacked mercantilism, which argued that only exports are good for the economy (Micklethwait et al., 2000, p. 4-5). Free trade was founded on the invisible hand and minimal government intervention, comparative advantage, and the need for trade to sustain the efficiency of markets and derive benefits from specialisation. History of Free Trade History shows that globalisation is not an unstoppable force. John Maynard Keynes (1919, p. xx) enumerated a series of forces that led free trade into a grinding halt and brought the world to war: politics, militarism, imperialism, racial and cultural rivalries, monopolies, restrictions, exclusions, tariffs, and all unnecessary intervention from governments and businessmen who capitulated to selfish interests driven by greed. Globalisation was so free that until the late 19th century, immigration laws were such that people could travel anywhere without need for passports, and citizenship was granted to whoever (without a criminal record) requested it. Tariffs were low and goods were traded without fuss. Industries rose and fell as economies adjusted to demand, supply, and free market pricing systems. Economic growth in Europe and America increased the wealth of nations and its peoples, and the evidence showed that free trade was working (Yergin et al., 1998, p. 17-20). But there were signs of trouble as politics and business mixed, leading to higher tariffs and protectionist laws, appearing subtly as trade wars amongst rich nations. Italy, engaged in a trade war with France over steel and agriculture, gravitated towards Germany, which mixed politics and business through cross-shareholdings. England repealed protectionist corn laws and abnormally high tariffs on wheat but granted favourable concessions to more expensive but sub-standard local products over cheaper but higher quality imports. Several European nations raised tariffs against grain imports from America and Russia after a bumper harvest (Skidelsky, 1983, p. 170). On the other hand, abuses against labour (below subsistence wages), customers (sub-standard goods), and the environment (pollution and gross damage) showed the dangers of totally uncontrolled free markets. Marxist economics called for centralised government planning as the solution to the evils of laissez-faire, private property and wealth, and became an attractive alternative to the poor who felt powerless in the midst of wealth. It was around this period that Keynes (1919) made his mark, condemning how the Allies unjustly treated the Germans after the First World War. He had been a firm believer in free markets, but the war made him rethink his position as he saw the dangers of too much interdependence amongst nations and the virtues of self-sufficiency, otherwise called autarky or economic independence. As he saw industries devastated, economies bankrupted, and the violence of peoples, he turned into a believer in controlled immigration, protectionist policies to shield heavily damaged industries from unfair competition and exports from countries whose currencies were seriously depreciated, and the need to ensure that nations could survive on their own without depending on others (Micklethwait et al, 2000, p. 10). Free trade was good, but Keynes began thinking that there evidently were some instances when government intervention was necessary by using tariffs or legislation. He saw the need for government to prime the economic pump when markets failed, as it did in Britain and, soon after, in America during a Great Depression starting in 1929. Unemployment and poverty soared in the two nations that were until then the exemplars of capitalism driven by free markets and free trade. But the experience that followed went against expectations: the world economy collapsed, immigration ground to a halt, the quality of goods and services became so bad that commerce almost stopped and the black market for goods almost totally destroyed monetary systems, and two nations with ambitions of world domination - Germany and Japan whose economies were strengthened by free trade and had political axes to grind - ignited the Second World War. These renewed experiences led to Keynes' second conversion. Global Institutions The beggar-thy-neighbour economic policies of the 1930s marked by trade wars and economic slumps were disastrous for the world economy. The reconstruction after the Second World War became the venue for launching Globalisation 2.0, an event spearheaded by Keynes at Bretton Woods, where he played a key role in seeking solutions for governments to solve international problems and prevent another violent war. The conference gave birth to four new global institutions aimed at providing a forum to resolve differences and crises amongst nations. The United Nations (or UN, a League of Nations 2.0) is an international forum to resolve issues of political sovereignty. The International Monetary Fund (IMF) is designed to help governments achieve financial stability and acts as the lender of last resort to central banks. The World Bank/International Bank for Reconstruction and Development (WB/IBRD) helps nations escape poverty by developing their socio-economic systems. The UN, IMF, and WB/IBRD attacked the evils of international politics, financial instability, poor governance, and poverty. They helped globalisation and capitalism win over global communism (the USSR was part of the UN system but had its own WB and IMF counterparts for the Eastern countries). Globalised capitalism won, but in the process it gave rise to Globalisation or Free Trade 2.0 that, in the half century since its revival at Bretton Woods, had not been totally faithful to Keynes' prescriptions. Keynes' main argument at Bretton Woods was the total removal of barriers to foreign trade whilst imposing strict rules on the flow of speculative capital or hot money. He realised that hot money had a destructive force on stable businesses and needed to be controlled through a free exchange rate regime pegged to the American dollar (which in turn was tied to the gold standard), and tight controls imposed on the movement of investment capital. This global monetary system would be managed by a stabilisation fund overseen by the IMF (Skidelsky, 1992, p. 457). Keynes proposed an economic framework that promoted free global trade, and yet one in which governments could intervene through the global institutions that were created. The concept was powerful because nations dependent on each other could trade freely, cooperate with and temper each other, and work together to achieve social and economic prosperity. The reality, however, was quite far from the theory as the more powerful nations had a built-in advantage: UN, IMF and WB were financed by member countries which contributed funds according to the size of their economies. Following the corporatist model, the votes or veto power a nation had over proposed policies in effect depended on their financial contributions. Thus, it stood to reason that America, Britain, and France had more power than Germany, Japan, and smaller countries. Victorious nations that grew richer, poor nations (China and Italy) that became rich, nations (Germany and Japan) that lost the war, and victors that became poor (Russia) were trapped in an unbalanced power structure that stayed fixed to the results of the last war, affecting how global decisions are made to this day. This imbalance was carried over to the last institution established, even though its mandate was the (more important) first half of Keynes' proposal at Bretton Woods: the World Trade Organisation (WTO) which aimed to provide a forum for nations to negotiate trade-related issues (standards, tariffs, and procedures). It took fifty years for the WTO to be born, primarily because of resistance from developed countries, notably America and France, for the usual reasons not worth repeating. Why Free Trade in Not Free The WTO, created in 1995 with headquarters in Geneva, is a rules-based organisation that helps member countries (currently numbering 150 states and customs territories and which account for over 90% of global trade) negotiate trade with each other, lowering customs tariffs in order to liberalise trade in goods. The WTO's most fundamental rules of goods trade involve non-discrimination, both in the form of national treatment which prohibits discriminating on the basis of nationality, and most-favoured nation treatment which is the principle of providing to all trading partners the same customs and tariff treatment given to the so-called most favoured nation. Many other rules ensure market predictability, wider coverage of goods, better understanding of technical issues such as customs valuation, trade remedies, product standards, sanitary and phyto-sanitary standards, subsidy disciplines, trade-related investment measures, import licensing procedures, rules of origin, pre-shipment inspection, and activities by state trading enterprises (WTO, 2003, p. 70). As would be expected in a global institution with member countries at different levels of economic development (with each country having a political system that its ruler(s), if democratically elected by the people, find most appropriate for it), decisions although reached by consensus would be decided by the balance of economic power. This advantage of richer nations over poorer nations is the root of Stiglitz' argument as to why "free trade has not worked because we have not tried it". Statistics show that whilst the level of free trade is substantially greater than what it was previously, the figures are still a far cry from the ideal because the playing field is not levelled. Rich countries enter into negotiations with an obvious advantage: they can field negotiators that are better educated in the ways of the organisation because their bureaucrats were the ones who drew up the rules, and more experienced because they have been products of an economic system that had been engaged in free trade for centuries. Many rich nations (even China) trace their experience in free trade to Globalisation 1.0, their collective know-how giving them an edge in trade negotiations with less developed countries with their inferior legal, educational, and economic systems. As one absurd example showed, America considered it a generous free trade concession to retain high tariffs on textiles in exchange for lowering tariffs on airplane imports from Bangladesh, which does not even have an airplane industry (Hertel et al., 2004, p. 435). Another reason is that market models differ from one country to another. The American free market model is more liberal compared to the market models of Japan, UK, and Germany, where governments assume social welfare responsibilities like health services, unemployment insurance, and retirement pensions. In China, where the state owns everything, the market is probably only now diminishing its level of freedom with the assistance of more government regulations and standards. Therefore, inherent differences in what makes markets work from one country to another make it difficult to accept conditions that may not apply to all. Two rich countries can negotiate for a resolution, but if one country is rich and the other is poor, the result is often one-sided. Take, for example, the issue of nets used to catch fish. Rich countries have environmental groups that go against importing fish caught using fine nets that catch dolphins and endangered turtles. Poor nations cannot afford sophisticated nets that meet this "green" standard, so their fishes could not be sold to developed countries that are kinder to turtles than to fishermen. This double standard is also exemplified by agricultural subsidies in rich countries, which require poor nations to abolish subsidies and tariffs and open up their markets to imports. All these demand that greater advocacy be exerted in rich countries to win over big business sympathy, making them realise that in the long-term, greed and selfish interests are bad for free trade and bad for the economy. By not allowing poor countries to trade freely and improve their capabilities, domestic businesses would not earn sufficient profits that would build their capabilities to compete globally. When these domestic businesses close down, the big ones step in, take over the processing of resources, and end up dominating business and controlling prices. In the end, it is the rich nations and their people who would be on the losing end. How to "Liberate" Free Trade and Make it Work Change in governance, Stiglitz argued (2002, p. 226), is the most fundamental change required to make globalisation work and make free trade freer. If the regulating institution of world trade is defective, it needs to be fixed. The first solution discussed in the previous section is to build the capability of developing countries to negotiate with developed countries. Though WTO decisions are made by consensus and each member nation is entitled to one vote unlike in the IMF, developed countries have more bargaining power over poor countries. But whilst the WTO helps poor countries improve their negotiating skills, free market forces make it difficult for experienced negotiators from developing countries to stay in the public sector as trade officials or negotiators, because as soon as they gain experience, they are lured away by the private sector for higher pay. Such inequality could also be addressed by establishing think tanks that study important issues of interest and help developing countries in setting priorities and strategies for development. An alternative would be to encourage non-government organisations or civil society groups in rich countries to assist in the negotiations with position papers, or to oppose interest groups from rich countries funded by big business. WTO may also hire top lawyers and negotiators from rich countries to help poorer countries level the negotiating playing field. Advocacy efforts in rich countries can help poor countries gain the concessions they need to be able to compete. Equally promising are advocacy efforts to convince poor country governments to abandon non-viable economic sectors and develop safety nets that focus on their comparative advantage. An example is Indonesia's aircraft manufacturing industry (a pet project of a well-known Suharto crony) that had to be scaled down and abandoned so that the funds could be used where it could be more productive. Another strategy that would help free trade become freer is to push for more transparency and openness at the WTO, where leaders are not publicly elected and are not accountable to the public, closed-door negotiations are kept secret from the public, and where big business and special interests definitely influence decision-making. All deliberations must be open to public scrutiny, not only to trade officials or NGOs. The Internet can be a useful channel for these deliberations to be monitored from anywhere in the world by those who would be affected by decisions made in Geneva, Doha, Hong Kong, or New York. The WTO should exercise a stronger hand in getting rich countries to toe the line of free trade. As the IMF does to poor countries, so should the WTO do to rich countries whose governments are beholden to big business interests. This idealistic solution is almost impossible to implement because the WTO depends on funding from rich nations. What is needed is for one rich nation to exercise the moral leadership necessary to get other nations to follow the rules: abolishing costly subsidies, opening up their domestic markets to cheaper goods from poor countries, tempering the greed of big business by finding ways to diminish their political power, and controlling environmental groups from rich nations from being overzealous in caring for animals (Lindauer et al., 2002). The rise of the billionaire and multimillionaire philanthropists (Gates, Soros, etc.) who benefited from free trade may offer solutions that may not be obvious at present but that could help address the WTO's funding moral hazard (Economist, 2006). Free trade has accomplished a lot, creating abundant wealth, getting millions out of poverty, and allowing cheaper goods to be enjoyed by a growing share of the world's population. But, equally, it has destroyed environments, societies, industries, and the livelihoods of millions of people. Free trade is a double-edged sword that not only cuts both the good and the bad. It can also kill those who wield it (Economist, 2005). Globalisation is not a one-way street. As history has shown, it always threatens to rear its ugly head, taking advantage of greed and selfish interests in a free market capitalist system that could be strong and vicious enough that it could convert a free-market intellectual like Keynes to hold back and campaign for protectionism and closed markets. It could fuel resentment from poor nations and provide them with an excuse to resort to terrorism and other ideological short-cuts to get back at the rich nations and their people. As developed nations experience dwindling populations and poor nations see their populations growing, inequalities in free trade (including strict immigration policies) if left unchecked would lead to rich nations ending up with small domestic markets and large and poor international markets without enough resources to trade. If the rich do not learn to temper their greed, they are sowing the seeds for the fruits of resentment to grow, threatening the world with another bloody war where there would be no winners, just losers. Defending the freedom to trade is the best way to ensure that the world would stay free. Bibliography Economist (2005, Nov. 5) "Trade and poverty: Tired of globalisation." The Economist, p. 11. Economist (2006, Jul. 29) "In the twilight of Doha." The Economist, p. 67-68. Hertel, T.W. & Winters, A.L. Eds. (2004) Poverty & the WTO: Impacts of the Doha development agenda. New York: Palgrave Macmillan. Keynes, J.M. (1919) The economic consequences of the peace. London: Macmillan. Lindauer, D.L. & Pritchett, L. (2002) What's the big idea The third generation of policies for economic growth. Economica, 3 (1), p. 1-40. Micklethwait, J. & Wooldridge, A. (2000) A future perfect: The challenge and hidden promise of globalization. New York: Crown. Skidelsky, R. 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