Free Trade, Raw Deals

Introduction

This paper discusses the following publications:

• David Ransom, The No-Nonsense Guide to Fair Trade

• Third World Network, The Multilateral Trading System: A Development Perspective

• Bhagirath Lal Das, WTO: The Doha Agenda: The New Negotiations on World Trade

• Third World Resurgence, (various articles regarding the Fifth WTO Ministerial Conference, Cancun, Mexico, September 2003)

The Prospect of Fair Trade

Ransom uses the term “fair trade” in the sense of international trade being conducted through networks that facilitate the payment of higher prices to direct producers of primary commodities in developing countries. This can be accomplished via cooperatives of producers developing and maintaining direct and long-term relationships with importers/distributors in developed countries. Usually such trade is conducted on the basis of niche markets for higher quality products than those available through free-trading transnational corporations (TNCs) dealing in mass volume. Thus, fair trade avoids directly competing with the lower-priced, lower-quality free-trade producers, and is able to command premium prices, with a higher percentage of the price being returned to the producers. In some cases, such as the example of Ghanaian chocolate, there is the also the opportunity to climb the value-added ladder and manufacture consumer products rather than merely export raw materials to be processed in the developed world.

The emergence of such networks certainly demonstrates that fair trade is possible. The question is really how much volume—how much market share—can fair trade grow to represent. Essentially, this is a function of both the affluence and the global social consciousness of First World consumers: they must understand the benefit of fair trade to the Third World, and they must be able to support such trade by paying higher prices. The problem is that such progressivist affluence is a rare combination (how many Marin Counties are there?) in comparison to the mindless middle-class consumerism that is carefully cultured (as in a Petri dish) by the brainwashing of the corporate media. Taking this into consideration, it would be astounding if fair trade ever amounted to more than five or ten percent of total volume for any given line of business.

Ransom is a journalist, not an economist as are Edwards and Stiglitz. Ransom’s book obviously lacks the academic rigor of Edwards’ Fragmented World, nor does it delve into the policy issues of the world financial and trading systems that Stigliz discusses in Globalization and Its Discontents. Still, in my view both Edwards and Stiglitz would applaud the spirit of Ransom’s book. Edwards might characterize fair trade as a Third World attempt to apply cost-of-production theory in the face of declining terms of trade that are trending below the cost of production for primary producers. Stiglitz discusses the international financial system rather than trade, but he does note the importance of encouraging indigenous economic solutions, and there is certainly that component to fair trade.

Ransom’s book is a report from the field, a set of “ground truth” data points regarding how the global system of free trade has impacted various corners of the developing world, and documents efforts at escaping the free trade trap of underdevelopment through fair trade. The book offers a valuable perspective on how enterprising people, operating outside the policy arena that is Stiglitz’s focus, are networking to produce positive economic outcomes. Ransom’s work underscores the point that international trade is more than about economic theory and public policy. It is also about private enterprise. Ideally, it is about the application of theory via policy to facilitate enterprise to the benefit of all.

Tragical History Tour

Section 2 of the Third World Network’s report makes the point that the multilateral trading system began as an initiative among the capitalist great powers toward the close of the Second World War and has operated as their private club ever since. The General Agreement on Tariffs and Trade (GATT) and its World Trade Organization (WTO) successor have been mechanisms for advancing the trade agendas of the rich and powerful, to the detriment of the poor and powerless. The high-flown rhetoric of free trade is an enormous fig leaf behind which hides a monstrous hypocrisy. In actual practice, “free trade” is selectively, conveniently, and narrowly defined. The reality of free trade is that it is the apotheosis of the collect call: free for the First World, expensive for the Third World. The developed nations preach free trade to open markets in the developing world to their manufactured products and financial services, but keep barriers high in sectors of export interest to the developing world.

Even if there really were such a thing as free trade, it would only be appropriate among developed countries, where comparative advantages would have a higher probability of averaging out to near-zero net capital flows. It cannot possibly be appropriate between developed countries and developing countries. Developed countries enjoy overwhelming advantages in most high value-added sectors, while developing countries usually only have “natural” advantages (either comparative or absolute) in far cheaper primary products. Thus free trade incentivizes the growth of primary product exports and disincentivizes industrialization in the Third World, and has actually led to cases of deindustrialization, particularly in Africa. Also to be considered is that these incentives have led to oversupply of primary products, leading to declining prices relative to high value-added goods and services. At some point primary product prices drop below their level of elasticity, at which point developing countries can no longer compensate for declining prices by increasing production; such oversupply will not be cleared at any price. As a result, there has been a secular decline in the terms of trade between the First and Third Worlds. The rhetoric of free trade has had the effect of forging new and invisible chains of exploitation that are no less effective than the visible bonds that were dissolved during decolonization.

The rhetoric of free trade conveniently ignores the history of those countries that espouse it. There are no notable examples of countries that developed in a free trade environment, whereas history is replete with examples of nations that developed behind high trade barriers protecting nascent industries until they could hold their own against foreign competitors. Thus the international trading regime’s principle of reciprocity in inherently unfair to the developing world since it can ill afford to negotiate away its precious quo’s, and the developed world has more than enough quid to spare.

All of the above objections to free trade would apply even if the negotiating environment were on the level, which it never has been. Time and again, the “fix is in” at the “Green Room”—painted in the color of venality—where WTO officials collude with trade representatives from developed countries to craft documents that reflect their agendas and ignore issues of interest to the developing countries.

Developing a Third World Negotiating Strategy

Lal Das admonishes developing countries to stop giving away the store under pressure from the developed countries. The Third World needs to organize (adding a new connotation to the term “trade union”) and to band together for the purpose of engaging the First World in collective bargaining in the WTO. Then, Lal Das prescribes positions and strategies for the developing countries on various issues on the Doha agenda. He notes where the Work Program (comprising the Doha Ministerial Declaration and other WTO documents) contains language to their possible advantage, as well as pitfalls to avoid. Despite the fact that the Doha documents contain largely intact the language transmitted from the Green Room at WTO Headquarters in Geneva, they contain some glimmers of hope for the Third World, if the developing countries can operationalize them.

First of all, new areas for trade negotiation, principally the “Singapore issues” of investment, competition policy, transparency in government procurement, and trade facilitation, should remain on the back burner while work continues on the clarification of existing areas of trade agreements and on problems of implementing these agreements. Meanwhile, the Third World needs to do its homework to fully understand the existing agreements and where they have been materially harmed by them, drive hard bargains in the mandated reviews of these agreements, and be persistent in their calls for clarification in areas of ambiguity.

Above all, the developing countries must reserve to themselves flexibility of economic policy within their own borders to foster development as they see fit. WTO rules increasingly intrude into areas that are either entirely or only tangentially trade-related, and rather than the international system stopping at the border, it now reaches inside the border to constrain more and more domestic policy options. This must be stopped, and in some cases, reversed.

Such a Third World “trade union” would be perfectly in keeping with cost-of-production theory, representing the organization of yet one more power center in the multicentric organization of the global economy. Of course, the subjective preference theorists would be appalled, just as the look with horror on labor unions as being distortions of the labor market. It is noted with interest that this school is far more muted in its criticism of corporate mergers and strategic alliances, being simply smart business decisions. So, call Lal Das’ book a call for the developing countries to form a strategic alliance, for the business of the Third World to be business. As for the abstract labor theorists, they look upon any governmental effort ostensibly on behalf of its people in the context of the capitalist world-system with great skepticism. Which people are these governments trying to help? Trade is conducted between corporations, not workers; thus this is just another example of governments acting as the central committee of the bourgeoisie. On the other hand (to use a well-worn phrase in realm of economic policy), they would be hard pressed to criticize the strategy’s goal of organizing the periphery for the purpose of extracting a better deal from the core and constraining its ability to exploit.

My own observation is, that while the developing countries and their advocates raise cogent arguments in defense of their claims to special and preferential treatment, this principle ought not to be limited to small or disadvantaged countries. Even in the First World there are small, disadvantaged, minority-owned, and women-owned businesses. Why should Third World firms deserve exclusive special treatment by virtue of their geographic location in a disadvantaged country? Trade is, after all, carried out not by countries, but by companies. In order to preserve competition in the face of the free market’s propensity to capture market share, drive out competition, merge, and consolidate, all such small or disadvantaged businesses deserve some protection from the predators. The small fish—of all countries—must survive to get a chance at growing into big fish and becoming the new competitors to the bigger fish. Such protective measures cannot properly be viewed as barriers to competition, but rather as the incubators of future competition.

The Business, As Usual

The reports in Third World Resurgence make plain that despite the rhetoric of globalization with a human face, the promises of reform, and the calls for transparent processes, the First World is intent on giving the Third World the business, as usual. The WTO remains a private club whose agenda is driven by the major developed countries. Following the step backward taken at the Third Ministerial in Seattle, the small step forward taken at the Fourth Ministerial in Doha was cause for guarded optimism. At the Fifth Ministerial in Cancun, much of the progress made and the goodwill achieved in Doha was undone; in many ways it was a return to Seattle, and in terms of its abrupt ending, it was even more of a debacle. Once again, the developed countries attempted to force the opening of negotiations on the Singapore issues rather than focus on the clarification of existing issues and existing problems in their implementation. This time, however, the developing countries were able to hold together a sizeable coalition, and to make clear that they would have none of it. The WTO stands embarrassed, and for the near future at least, there will be questions as to its viability. With two of the last three ministerial conferences now having ended badly, the WTO may need two or three consecutive happy endings before confidence is restored.

The collapse at Cancun has served notice that the Third World will no longer tolerate the same old games, the same old back channels, the same old exclusive Green Room deals. While there are ambiguities and generalities in the language of the Doha documents, developing countries will increasingly insist on interpreting the Doha agenda, if not entirely in their favor, in a reasonably balanced manner. The survival of the WTO depends on this.

Economic Federalism

As a postscript, I note that the political units that constitute the United States of America have been characterized as “laboratories of democracy” in that, within certain limits enumerated in the federal Constitution, they are free to conduct their independent experiments in self-government. Yet, as diverse as the states are, if these were the only experiments running, if there were no world outside the United States, one might question whether the states have become too much alike to ensure the continued progress of democracy as a stand-alone system. To what extent is the American set of experiments influenced from without by other democratic ideas and practices in the world?

The “one size fits all” mentality of the Bretton Woods institutions runs counter to this wisdom of strength in diversity, “E pluribus unum.” In particular, the inexorable extension of the WTO’s purview into progressively more areas of international economic activity enforces a universal economic orthodoxy that strangles the marketplace of economic ideas and smothers competitive visions of capitalism. Such universalism is nothing other than economic Empire, and empires unchallenged from without eventually decay from within. If individual experiments in self-government are necessary to the health and development of democracy, it must be a legitimate proposition that individual experiments in political economy are necessary to the health and development of capitalism.