Vol. XI, Bulletin No. 9 September 25, 2006
Is U.S. Trade Policy a Big Fraud?
In a September 6 email, I challenged the editors of Foreign Affairs and its parent organization, the Council on Foreign Affairs, to launch a national debate on U.S. trade and investment policy. I was prompted to do so by the evidence contained in an article in the current issue of Foreign Affairs, and suggested that the theme of the debate should be "Is U.S. Trade and Investment Policy a Big Fraud?" Here is the text of my letter.
“Questions of Fairness: In Search of a Just International Economic Order,” the article by Robert H. Wade in the September/October issue of Foreign Affairs, is not just a critique of Ethan B. Kapstein’s new book, “Economic Justice in an Unfair World.” Carefully read, the article is also a devastating critique of U.S. international trade and investment policy. Professor Wade exposes the false assumptions underpinning much of Professor Kapstein’s defense of unfettered trade and investment. Those same false assumptions underpin U.S. trade and investment policy.
Professor Wade presents ample empirical evidence to support his position. If that evidence is indeed factual, it follows that the United States is promoting an unjust international economic order and that, therefore, the United States must initiate needed reforms. A good opportunity to do so arises with the expiration next year of the President’s Trade Promotion Authority, the legislation setting the substance of U.S. trade policy for negotiators.
The Administration is understandably concerned that Congress may not renew this law, once called Fast Track since it requires Congress to speed enactment of trade bills without normal hearings and without the possibility of any amendments. Though not opposed to trade, most Americans, according to poll after poll, oppose current U.S. trade policy. And they are opposing it not because they are mindlessly “protectionist” but because they recognize U.S. trade policy as unfair and unjust – or to put it bluntly, fraudulent.
Is our trade and investment policy truly a big fraud? That, dear friends at Foreign Affairs magazine and at the Council on Foreign Affairs, certainly deserves a public debate. Congratulations to you for opening it up. Please don’t neglect the opportunity – indeed your responsibility – to expand it beyond your letters pages into a national debate in every available forum.
Robert A. Senser
Editor and Publisher, Human Rights for Workers, at <http://www.senser.com>
If Foreign Affairs and CFR do not choose to pursue this vital issue, I am hoping that some other organization will.
Unjust Trade Policies: the Evidence
In his Foreign Affairs article, Robert H. Wade, professor of political economy at the London School of Economics, attacks the "current orthodoxy on free trade" because it assumes that "the empirical evidence on free trade as an engine of efficiency and economic growth is well established." The assumption is false, he insists, and goes on to underline his point: "The causal links between free trade (lower tariffs and fewer quantitative restrictions on imports) and faster trade growth, and between faster trade growth and faster economic growth, are not well established."
The evidence he provides to back up his point includes:
More on Why Free Trade Isn't What It's Cracked Up To Be
- "India's growth rate began to pick up in the 1980s, but most of the 'openness' reforms did not begin until the early 1990s."
- "Similarly, China's rapid reduction of the number of people in the country living in extreme poverty has had little to do with trade expansion and a lot to do with agricultural reforms."
- "Meanwhile, ever since most Latin American countries broke with their earlier import-substituting regimes and started emphasizing privatization, deregulation, trade, and financial liberalization in the 1980s, their growth has been roughly half of what it was in the decades of 'bad' import-substituting industrialization."
- "The evidence from the catch-up phases of Japan (1950-73), South Korean (1955-90), and Taiwan (1955-90) -- arguably the most successful developers in history -- is that these countries used protection well, as one of several instruments of industrial policies aimed at accelerating the diversification and upgrading of their economies faster that 'the free market' would have. They were also picky about incoming FDI [Foreign Direct Investment]; Japan and South Korea, in particular, tended to buy foreign technology rather than allow in foreign firms...."
Wade proposes a simple test to show "just how far the current orthodoxy around free trade and neoliberalism has strayed from the empirical evidence." He asks, "Which countries have had the fastest sustained growth rates since World War II?" and answers:
"Japan (8 percent from 1950 to 1980), Taiwan (8.6 percent from 1960 to 1995), Hong Kong (7.7 percent from 1960 to 1995), Malaysia (6.9 percent from 1960 to 1995), Singapore (8.4 percent from 1960 to 1995), South Korea (from 8.1 percent from 1960 to 1995), Thailand (7.5 percent from 1960 to 1995), China (8.9 percent from 1980 to 2006), and India (6 percent from 1980 to 2006). Botswana, Ireland, and Vietnam are also in the same league.
"What is striking is that all but two of the 12 are in East or South Asia, and virtually all have maintained policy regimes that would mark them as serious failures by neoliberal criteria. Some of the worst pupils of neoliberalism have gotten high grades, while many of the best pupils have gotten low ones."
'Utterly Devoid of Any Economic Rationale' -- Just Mercantilism
Wade quotes Dani Rodrik, professor of economics at Harvard: "The rules for admission into the world economy...are often completely unrelated to sensible economic principles. WTO rules on anti-dumping, subsidies and countervailing measures, agriculture, textiles, trade-related investment measures, and trade-related intellectual property rights are utterly devoid of any economic rationale beyond the mercantilist interests of a narrow set of powerful groups in the advanced industrial countries." (See "No Template for Globalization: Economist" in HRFW's March 8, 2002, issue.)
In Wade's view, "justice requires -- for reasons pertaining to both sovereignty and a state's ability to make use of opportunities -- that there be more leeway for countries to choose how open they will be. This implies a major reform of the central rules of the World Trade Organization."
It follows logically (though Wade's article does not draw the conclusion) that there should be a major revision of U.S. trade and investment policies, which form the template for the WTO's unjust rules.
'Radical Thinking about Economic Policy'
Please read the following paragraph carefully, and then the question that follows it:
"Capitalists have rarely had it so good. In America, Japan, and the Euro area, profits as a share of GDP are at or near all-time highs. Corporate America has increased its share of national income from 7% in mid-2001 to l3% this year."Who said that? As a test, please choose from among the following sources:
If you chose Answer 4, congratulations. The quote appears in the September 16 Economist, perhaps the world's leading exponent of capitalism and the free market. You might assume it would be unabashed in welcoming what it calls "the redistribution of income from labor to capital." But it is somewhat abashed. Why? The Economist's 17-page survey of the world economy explains:
- A left-wing think tank putting its spin on a new study of wealth and income.
- A trade union magazine editor complaining about job losses.
- A politician resorting to a "populist" line to win in the November elections.
- A leading conservative weekly analyzing the effects of globalization.
"Rich countries have democratic governments, so continued support for globalization, will depend on how prosperous the average worker feels. Yet workers' share of the cake in rich countries is now the smallest it has been for at least three decades. In many countries average real wages are flat or even falling....For these and other reasons, "some radical new thinking about economic policy" may be required, the Economist argues. In fact, it takes the uncharacteristic position that "the traditional trade model needs modifying," The reason is a combination of factors -- including competition from immigrants, competition from doubling the size of the world labor force, and competition from the increased technological skills in poor countries -- all adding up to the fact that "the majority of workers are losing out" from globalization and hence opposing it.
"Thus the usual argument in favor of globalization -- that it will make most workers better off, with only a few low-skilled ones losing out -- has not so far been borne out by the facts. Most workers are being squeezed."
"Alan Blinder, an economist at Princeton University, believes that most economists are underestimating the disruptive effects of offshoring," the Economist writes.
Recommending Home-Care Palliatives while Ignoring Global Remedies
In spite of writing in one place that the trade model needs modifying (or, in another place, that "traditional theory may need modifying"), the Economist does not recommend any such modification.
For rich country workers not sharing the benefits of globalization, the magazine proposes "a temporary social safety net for workers who lose their jobs; better education to equip workers for tomorrow's jobs; and more flexible labor markets to encourage the creation of new jobs " Of course, far from being "radical," the "flexibility" proposal is part of traditional toolkits for whittling away the rights of ordinary workers. The other proposals are Band-Aids.
Perhaps realizing that, the Economist advocates "redistribution" through taxes and benefits: :
"More controversially, governments made need to redistribute the benefits of globalization more fairly through through the tax and benefits systems....For instance, one reason why opposition to offshoring is less vocal than in America is that European health-care systems tend to be independent of employment, whereas in America losing your job means losing your health insurance too In a riskier labor market, there may be a stronger case for health care to be financed by the state rather than by firms."
Wow! Anything to save globalization. Anything except to reform the global trade and investment policies that now redistribute wealth and power to the rich in both poor and rich countries.
Still Partially Blind, 13 Years Later
Back to the future. In its September 11, 1993, issue, the Economist was joyfully lyrical about the world's future. Except, that is, for a discordant note sounded by Lee Kuan Yew, former Prime Minister of Singapore. "Globalization," Lee said in a section on "The Future Surveyed," "will widen income differences with each society."
Specifically, "America's top 10% will still enjoy the highest incomes in the world. But the wages of its less educated citizens will drop to those of workers in developing countries with equal or higher educational standards. Telecommuting will widen income differences within each society."
I quoted Lee in an article of mine in the September/October 1994 issue of Freedom Review, then published by Freedom House. I commented as follows on Lee's words:
"For a self-confessed Social Darwinist like Lee, that trend is no cause for alarm. Hence both he and his government ardently oppose a worker rights dimension in the WTO. For many others, however, the trend means that something is out of kilter in the world's modernization process and that the rules for world trade cry for updating to take worker rights into account, just as [the WTO has already done] for intellectual property rights."
It has been 13 years since Lee made his prediction. Only now has the Economist opened its eyes, partially, to the unbalanced redistributive effects of the world economy. Better late than never. It's good that the Economist has finally seen the light as to the problem, but it remains blind to the remedies.
Protection and Its Big Beneficiaries
"Software Patent Kills Innovation." So read a banner unfurled by a group of computer programmers who last year were lobbying against a European Parliament bill to make the patent protection policies and enforcement office of the European Union prevail over those of EU member countries. The protesters, organized as the Foundation for a Free Information Infrastructure, are now opposing another bill that would pretty much do the same thing -- create a special EU patent appeals court to enforce EU-wide (and U.S.-style) standards on patent protection.
The Foundation, with 3,500 companies as members in 20 European countries, is dedicated to developing "information goods for the public benefit, based on copyright, free competition, open standards," says the group's mission statement. Its founder, Hartmut Pilch, a part-time software programmer, told the Wall Street Journal that software is already adequately protected from theft by copyright laws and that adopting U.S.-style patent laws and bureaucracies would only hamper innovation by multiplying lawsuits over digital rights.
Opposing Pilch are Microsoft Corp., Siemens AG, and many other giants of industry, while some others, including Red Hat Inc. and Sun Microystems Inc., favoring more openness, are on his side.
So why isn't the whole business world rallying around the cause of openness? After all, business sees the free market as a friend, and sees regulations and bureaucracies as enemies. The answer, of course, is that business strongly favors restrictions on the free market and favors regulatory bureaucracies when they promotes the interests of business.
A Global Playing Field That Is Badly Tilted
I agree that intellectual property rights do require a measure of cross-border protection. (So does Mr. Pilch; his argument is that U.S.-style patent protection goes much too far.) But when will business and governments realize that the rights of others also require such protection? The current self-serving imbalance -- and the glaring failure to correct it -- goes far to explain why the public is so hostile to the present global trade and investment system. It lays down many protections for business but denies them to workers and other legitimate interests in society.
As a result, the present global system confers on business a wide range of rights, privileges, and powers without corresponding responsibilities or accountability. The chief architect of that system has been the U.S. government under both Republican and Democratic administrations. So the chief responsibility for repairing it belongs to the U.S. government.
The inequities need urgent attention because they inflame other acute problems of today's world, especially the volatile lack of trust among nations.
Human Rights for Workers: Bulletin No. XI-9 September 25, 2006
Robert A. Senser, editor
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