October 1996, U.K.

Globalisation and Free Trade

Contrary to the hopes of the 'small is beautiful' environmentalists, capitalism is becoming increasingly globalised, with attempts to regulate world trade being brushed aside.

The 'Benefits' of Free Trade

Environmentalists have often joined the anti-free trade lobby, pointing to the current global trading system as a cause of many social and environmental problems. If we compare the world trading system now to fifty years ago it has certainly been 'liberalised' in many areas, with the removal of many trade barriers. International agreements, notably the General Agreement on Tariffs and Trade (or GATT rounds) have enshrined the principles of free trade in international law.

The environmental lobby are right to point out that free trade leaves no room for restrictions on imports of goods that have been produced by environmentally or socially damaging means such as causing pollution, paying low wages, etc (though it could be argued that capitalism never left much room for environmental concerns, even in the days when trade was more restricted.) Still, as shall be argued here, a look at the reasons behind the tendency towards a free-trading world raises a further question: is free trade itself to blame or should it be seen as an inevitable outcome of our current economic system?

Free trade is the exchange of goods at their free market price, in the absence of distortions. Such distortions include tariffs (adding to the import price), import quotas (restrictions on the amount a state will allow to be imported) and export subsidies (so exports can be sold at a deliberately lower price). These are examples of what are known as 'protectionist' measures (so-called because they are put in place by governments to improve the terms of trade for domestic industries.) Protectionism often has an associated cost for the nation that adopts it, given that its trading partners will be likely to introduce their own protectionist measures in retaliation. While protectionism might favour the short term interest of a state, it raises the possibility of retaliation and hence a trade war. Such a trade war obviously reduces the amount of trade between nations which can damage the interests of all the nations involved.

The theory of the benefits of trade was founded upon Ricardo's theory of 'comparative advantage'. He argued that a nation can maximise its profits by specialising in those industries in which it has the greatest advantage in efficiency (i.e. profitability) relative to other nations. This means that, even if Nation A is less profitable than Nation B in all sectors of the economy, the profits for both A and B will be maximised if each specialises in the areas in which it is best (or least bad) and trades with the other.

Ricardo's theory is supported by empirical evidence. For example, a recent study by J.Sachs and A.Warner took a sample of 111 countries which they classed as either 'open' or 'closed' according to how far they had liberal terms of trade. They discovered much faster growth (i.e. more profits - see (Where Profits Come From) among the 'open' economies.(1)

It is not hard to see the benefits of free trade to the hugely powerful transnational corporations (or 'TNCs'). These now account for one third of global output and their global annual sales have reached 4.8 trillion dollars (which is, incidentally greater than the total level of international trade.)(2) The largest 100 multinational corporations alone control about one third of all foreign direct investment. The world trading system can be seen as having adapted itself to meet their needs, particularly in the last forty or fifty years.(3)

Post-War Globalisation

As Sklar argues, there was, in the aftermath of the Second World War, an especially concerted effort among USA, Europe and Japan to establish worldwide economic hegemony. The liberalisation of capital and goods markets was an integral part of their strategy. The USA and Britain agreed to start cutting down on tariffs in 1944 as part of the famous Bretton Woods agreements. Further measures were then taken such as in 1949, when 30 per cent of European trade was freed from restrictions.

The reduction of tariff barriers after the formation of the EEC in 1958 increased trade by the order of 25-35%. Within EFTA, (the free trade zone formed by seven of the non-EEC European countries, including at that time the United Kingdom) lower barriers resulted in extra imports of around 10-15% for the countries concerned.(4)

The USA was somewhat slower to lift trade restrictions given that there was already a high demand for US goods after the war. As is pointed out by Armstrong et al, it was Kennedy in the later sixties "whose round of cuts saw the average level of tariffs on manufacture falling by one third and by half on machinery and vehicles."(5)

Very high rates of tariff covering about 7% of goods in the United States and United Kingdom almost disappeared, and the proportion of trade (excluding agriculture and fuels) which attracted tariffs of 15 per cent or less rose from 54% to 85% in the USA, from 37% to 85% in the United Kingdom and from 71% to 97% for the EEC.(6)

World trade grew by an average of 8.7% between 1963-72. This growth then slowed sharply from 1973 (it averaged 3.8% per year from 1973-88.) In 1973 the Trilateral Commission was founded, to continue the work of building what Sklar calls the 'new economic order.'

As Sklar puts it:

the (Trilateral Commission) planned and encouraged an utter restructuring of the world's political and economic agenda with much of its new power arrangements built to favour transnational corporate activity.(7)

As Sklar shows, the objectives of the Commission are evident in their various reports and policy documents. A call for the lifting of restrictions on capital mobility is made in Towards a Regenerated Economic System:-

countries that want economic development would be well-advised to welcome foreign firms on appropriate terms(8)

You do not need a degree in economics to work out what might have been meant by 'appropriate' in this context. It is made clear in the following statement by D.Rockefeller, one of the leading U.S. politicians in the Trilateral Commission:

international bankers, corporations, and investors have little need for tariffs and other trade barriers. Their interest lies in finding the most efficient, profitable, productive, and convenient spot for their investment(9)

George Ball, undersecretary of state for Economic Affairs in the Kennedy Administration and a director of Lehman brothers Kuhn Loeb, a large investment house, told the British National Committee of the International Chamber of Commerce in 1967:

In these twenty postwar years, we have come to recognise in action, though not always in words, that the political boundaries of nation-states are too narrow and constituted to define the scope and activities of modern business... (10)

This realisation of the benefits of globalisation did not mean that the move towards free trade was supported by all nations all of the time.

US President Nixon disregarded US GATT obligations when it suited him and slapped a 10% surcharge on most imports into the US:

Through the fall of 1971 Nixon stepped up the attack on imports by virtually ordering Japan, South Korea, Taiwan and Hong Kong to reduce the pace of their imports of textiles into the United States. Japan and the common market were also asked in no uncertain terms to allow more US goods to be sold at more competitive prices in their respective marketplaces.(11)

It is notable that transnational financial powers soon responded to Nixon's protectionism, speaking out against it in a series of articles and conferences. Although there has always been the possibility of protectionism re-emerging in certain circumstances, as occurred in US/Japanese trade during the 1980s, there has been a definite tendency towards free trade since the war. Those protectionist measures that are still employed are increasingly taken at the block level (e.g. by the European Union or North American Free Trade Agreement) rather than by individual states.

100 multinational corporations alone now control about one third of all foreign direct investment. The world trading system can generally be seen as having adapted itself to meet their needs, particularly in the last forty or fifty years.


The General Agreements on Tariffs and Trade (or 'GATT' rounds) also had an important role in the move towards trade liberalisation.

Six rounds of General Agreements on Tariffs and Trade (GATT) negotiations, from 1947 to 1967, for example, brought tariffs on all dutiable US imports down from their 1932 high of 59.0% to 9.9% in 1970.(12)

GATT was founded after the Second World War - an institution to regulate world trade. In the first forty years it was concerned primarily with tariffs and related matters.

At the beginning of the Uruguay round, a new set of concerns was introduced. Multinationals demanded to be free to invest anywhere in the world with no restrictions. However, as Lori Wallach has shown, the original articles of GATT when it was founded in 1947 contain the basic principles that were gradually put into practice. Most notable are the following:

Article One establishes the rule of 'Most Favoured Nation' - one country cannot discriminate between domestic products and 'like products' imported from another GATT country.

'Like products' were defined in 1971 to be limited to consideration of product characteristics; does not allow consideration of how product is produced or harvested.

Article Three contains the principle of 'National Treatment' which states that:

one GATT country may not use tariffs, taxes or any regulations to provide different treatment to imports than it would provide to domestically produced goods.(13)

Environmentalists had hoped that Article 20 would allow for exceptions to the above principle in the case of environmental protection. It allows for "measures necessary to protect human, animal and plant health or life." Article 20(h) allows for waivers "undertaken in pursuance of obligations under any intergovernmental commodity agreement."(14) Again, this had encouraged environmentalists who hoped it might be extended to international environmental agreements and protocols.

The well-publicised tuna-dolphin case, in which the Mexican government appealed against the U.S. Marine Mammal Protection Act of 1972, put the hopes of environmentalists to the test:

in August 1991, a three-person, secret GATT dispute panel in Geneva ruled that the (1972 act) was an illegal barrier to trade because it restricts importing tuna into the United States that are caught using techniques that kill large numbers of dolphins.(15)

As Ralph Nader puts it,

GATT and NAFTA set out rules limiting countries' ability to exclude imports on the basis of labour, human rights, or environmental conditions in the country of production.(16)

The judgement in the dolphin-tuna case was just one of the many such examples. The agreements allow another country to challenge as infringing upon the trade environmental, health or safety laws such as those of the U.S. They therefore have the effect of 'harmonising' environmental and safety standards, a euphemism for bringing those nations with more stringent regulations down to the level of the least stringent.

Two recent agreements have further enforced the principle of free trade. The Uruguay Round of GATT, concluded in 1992, brought new economic sectors, most notably food, agriculture and services such as banking, insurance and shipping, within the remit of the GATT. The North American Free Trade Agreement (NAFTA), involving Canada, the U.S. and Mexico, was, as Nader puts it:

basically a mini-GATT, except that NAFTA offers even greater privileges to business and allows for fewer restrictions on corporate operations in the three countries.(17)
In 1988, the United States and Canada entered into a free trade agreement. Although Canadian wages, social policies and environmental standards were only slightly stronger than U.S. policy, the agreement has had devastating effects on Canada's economy and social and environmental protection.(18)

Can You Shrink the Inevitable?

The move towards free trade can be clearly seen as an outcome of the drive for profit, as companies increasingly operate on a global basis and expect to be able to import and export goods at their free market price. Higher growth was an expected outcome, as was evident in an Organisation for Economic Co-Operation and Development (OECD) study which predicted that world GNP would rise $213 billion in 10 years as a result of the Uruguay Round of GATT - an increase of 0.7%.(19)

The anti-free trade lobby are right to point to the conflict between the drive towards free trade and other environmental and social needs. After all, if the purpose of free trade is to increase profits, such a conclusion is quite predictable. As Larry Elliott puts it, writing in The Guardian:

In reality, globalisation... represents the final triumph of capital over labour, since the corollary of the deregulation of finance is the shackling of trade unions . It means the national governments are left powerless in the face of multinationals who will relocate at the first whiff of interventionist policies.(20)

The environmentalists do not usually dispute that the drive for profit underlies the move towards free trade. Instead, they argue for a 'fairer' system of world trade in which other environmental and social needs are accounted for. For example, L.Wallach refers to the 'Group of 250' non-governmental organisations who wrote a letter to the U.S. government. They call for sanctions to ensure compliance with regulations, funding for their enforcement, taxes and duties on environmentally damaging practices and so on. In other words, they expect that the goal of increasing profitability (which is what GATT and NAFTA are all about) can be compromised.

Others, such as James Goldsmith (well known businessman, self-styled environmentalist and now leading light in the British 'Referendum Party') call for a still greater compromise. He advocates that those areas "with economies which are reasonably similar in terms of development and wage structures" should each form trading regions with little or no imports or exports of goods between them. He suggests that:

Trading regions would enter into mutually beneficial bilateral agreements with other regions in the world. Freedom to transfer technology and capital would be maintained. (However)... commercial organisations wishing to sell their products in any particular region would have to produce locally, importing capital and technology, and creating local employment and development. That is the way to create prosperity and stability in the developing world without destroying our own.

"(To) gain access to our markets," he continues, "foreign corporations would have to build factories, employ our people and contribute to our economies."

The presentation of this 'model' of regional trading areas raises two questions. First, how could it be brought about? Second, how could it be maintained? The protectionist measures that Goldsmith calls for each region to enforce would hinder the ability of successful companies to export their goods. This, in turn, erodes their profits especially since such companies operate on an increasingly transnational basis. What would possibly make them agree to such measures? Indeed, the huge influence they currently have upon world trade negotiations suggests that the proposals would never be implemented for this reason alone.

Even if Goldsmith's proposals were somehow accepted on a world basis, there would be a continuous incentive for producers and governments alike to break the rules. If overseas producers offer goods to a region at a lower price than their own equivalent, how could a government stop such goods being purchased on the black economy? The difficulty of establishing restrictions on ozone depleting chemicals has proved to be a case in point (Ozone depletion). A black market in CFCs has developed, in spite of many large multinationals now investing in alternative, less damaging chemicals. In contrast, Goldsmith's system would lack any such vested interest to back it. It seems that it would only take one company to infringe Goldsmith's rules before the rest also reverted to the task of maximising profits, through operating on a global basis.

Author: DG

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