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Free Trade Is Elites Betraying Their Own Populations

2015 October 5
by Ian Welsh

The odd thing about free trade is that it is both meaningless and vastly important. Comparative advantage, which is supposed to be a straight win for both trading partners, is a rounding error even when it works–if you don’t have full employment; it’s essentially meaningless. However, the ways in which free trade (and the free capital flows that are part of what we call “free” trade) is used to systematically undercut wages and working conditions and destroy environmental safeguards, make trade, as we practice it, vastly important.

(In light of the Trans-Pacific Partnership Trade Deal, I have put this back to the top–originally published Nov. 23, 2013.)

The classic case for trade is comparative advantage: You do what you’re best at, I do what I’m best at, we trade, and we both wind up with more stuff. The math on this is impeccable, but it works in the real world only under very specific conditions. The most important part is this: If I have the extra resources (both material and labor), I’m better off producing the goods myself, rather than trading with you–even if my production methods are less efficient than yours. I’ll still wind up with more stuff. In short, if I don’t have full employment, then free trade is a rounding error.

This is related to Ricardo’s Caveat, where the economist noted that, in his time, capital was not mobile. If it was not being used to do one thing in Britain or France, it would be redeployed to do something else in its own country. It would not be used to create  jobs in another country. In our system, with mobile capital, there is no reason to employ either capital or people in the country of origin if higher profits can be made elsewhere. In this case, free trade can lead to an actual loss of jobs.

One standard argument made for free trade is that it produces cheaper consumer goods, and that makes people in a country better off, even if jobs are being off-shored. This  is only marginally true. Most of the reduced cost of foreign goods is taken as profits, not passed on to consumers. The loss of jobs means that some people lose outright and completely: those who can’t find jobs or can only find low-paying, service jobs. But even those who keep their jobs are disadvantaged if trade means the labor market is not tight, because if the labor market is not tight, labor has no pricing power and gets almost no raises (this is why there have been no significant median wage raises since the mid-70s or so.)

The renunciation of tariffs and trade controls is a form of betrayal by in-country elites who have capital to deploy outside the country against everyone else in the country. If a foreign country has lower wages, worse environmental standards, horribly unsafe or coerced labor conditions, this is a comparative advantage. It is a comparative advantage even within countries, mind you.

If I pay less, or I work my workers like dogs, or I dump effluent into rivers, or I don’t bother to pay for fire escapes and sprinklers, I have an advantage over anyone who does these things. The standard solution to this is to legally mandate that I must pay a decent wage, not dump effluent, and pay for a safe work space. If everyone is forced to do so, no one is at a disadvantage.

This can only be done if there is a legal mandate over a territory and an enforcement mechanism. That means, usually, it can only be done within a single country.

Anyone outside the country can betray and can do any of these noxious things which increase their productivity at the cost of the environment or the people.

The standard response to this is to say: “Sure, you can do that, but if you do, we’ll just add it to the price of any goods you sell to us.”

Free trade agreements take the ability to do that off the table and force roundabout methods (like currency manipulation) which don’t work as well and instead of earning a government income, cost the government money. Alternatively, though it costs money, one can subsidize one’s own industry, but most free trade agreements make that illegal as well.

Free trade is harmful to the economy of nations. It is also not necessary for industrialization–rather, the reverse is true. Every nation larger than a city-state, other than Russia, has industrialized behind trade barriers of some kind and that includes the United States, Japan, Britain, and China. (There is an argument that mercantilism requires one party to have trade barriers and another party to have no barriers. However, a country with full employment can allow free trade for things it doesn’t produce itself, thus allowing foreign mercantilism.)

As long as the capital of a country is deployed within that country and the country has some access to markets, protected trade works. Sub-Saharan African countries had higher GDP growth in the 50s and 60s, under managed trade, than they did when their markets were forced open.

Often, the practical effect of free trade and free capital flows is to allow foreigners to buy out large parts of a nation’s economy, as when NAFTA was used to buy out Mexico’s major food producers. Foreign goods from other countries flood into whatever country is forced to, or agrees to, open its borders, destroying the local economy. This is most dangerous when food is involved. In Mexico, millions of farmers were forced off the land because of US subsidized agricultural products, post-NAFTA. African and Latin American countries forced their own farmers off the land so they could agglomerate agricultural land for cash crops, leading to food insufficiency, and because everyone was selling the same cash crops, they didn’t even get very much hard currency for it.

Once your country can’t feed itself, you are at the complete mercy of other countries and you have lost significant sovereignty–especially if you don’t generate sufficient hard currency to pay those who are selling you food (see Greece or Egypt).

Internal elites are often happy to sign destructive trade agreements because they win, even if their country loses. They get to skim off money from the loans, they are the ones who run the cash-crop farms, they are the ones who are able to sell whatever it is that foreigners want to buy, in exchange for hard currency.

If you want a country that’s self-sufficient and which is also heading towards economic prosperity, you must have elites and a population which do not want foreign luxuries, or who are at least willing to forgo them. When Korea was modernizing, foreign cigarettes, for example, were demonized. Every bit of foreign exchange was used not for luxuries, but to buy capital goods which could be bought only with hard currency. If your elites want a Mercedes-Benz, a vacation on the Riviera, a flat in London, to see shows on Broadway–if they want things which can only be bought in hard currency, they will sell you out and you will not industrialize or modernize. The tastes of the elites and the population must be for whatever your country produces or whatever can be bought in your currency from partners with whom you do not have a significant trade deficit.

None of this is to say that trade is always bad, it is important and necessary. But trade must always be managed. Just as you don’t want resource prices to increase your currency to the point where your manufactured products are uncompetitive (thus destroying your manufacturing base), you don’t want trade to destroy your sufficiency in food or to lock you into a low tier of production forever. Comparative advantage screams, “Do what you’re good at,” but if what you’re good at is growing soybeans, you may not want to do that for eternity. You may want to do what you’re not good at and get better at it. If Korea or Japan had taken Western economists’ advice, as Ha-Joon Chang has pointed out, they’d still be growing silk and rice, which is where they had an advantage, instead of making some of the best cars in the world, which is where the US had a comparative advantage.

No country can do everything and every country will need to trade for the resources it cannot obtain otherwise, but trade should be rationally managed so that a country has a manufacturing sector and enough self-sufficiency that it doesn’t absolutely require another country’s goods, if that can at all be avoided. (It can’t always, we don’t all have oil.) At the very least, a country should be as close to able to feed itself as possible, something which was long understood by statesmen as an absolute priority.

Internally, free trade is used to create betrayals. Trade deals do not allow environmental protections, do not allow high wages, and do not allow fair treatment of workers. Otherwise, you aren’t competitive and the usual remedies, like tariffs and subsidies, are not allowed by those same trade deals. This allows oligarchs in every country involved in the deal to put downward pressure on wages, regulations, benefits, and even standards of humane treatment, in the name of “competitiveness.”

A wise society, including a global society, takes certain types of behavior “off the table,” by just forbidding them. Absent that, they make it so that those who do such things are not rewarded. Fail to do either of these things and you find yourself in a race to the bottom.

Note, again, that this is in oligarchs’ best interest EVEN if their country loses. Greek oligarchs, post-crash, are doing just fine. African potentates walk away with multi-million dollar bank accounts even as their own citizens starve to death. Business owners want to push down wages and costs, no matter where they are. This devastates countries and even the citizenry of many of the winning countries (like the US), but it benefits the few a great deal in relative terms. They’d be better off, as a class, in absolute terms if they took this behaviour off the table, but they wouldn’t be as rich relative to everyone else, or as powerful, and they value that relative wealth and power more than absolute wealth and power. It isn’t enough that they win, their own populations must be poor and weak, too.

Free trade is a bad idea. Free capital flows are a worse idea. Managed trade is a good idea and slow capital flows are a better idea (there is no evidence that foreign capital develops countries, as an aside, see Ha-Joon Chang on that).

Free trade, as we practice it, is about our country’s elites betraying their own populations.

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26 Responses
  1. Dan Lynch permalink
    November 23, 2013

    Excellent essay, Ian. Shared and bookmarked.

  2. Celsius 233 permalink
    November 23, 2013

    COP 19 and the TPP are excellent examples of elite complicity and criminality.
    We’re living in an inverted world; everything is upside down, everything…

  3. S Brennan permalink
    November 23, 2013

    Exactly Ian.

  4. EGrise permalink
    November 24, 2013

    Except they’re not really their own populations, right? Just interchangeable masses of peasants, as far as they’re concerned. The elites seem to believe they belong to a stateless, nation-less class.

  5. November 24, 2013

    YES YES YES. I have been banging this drum from the very beginning. Agreement with *every.* *Word.*

  6. Celsius 233 permalink
    November 24, 2013

    @ Mandos
    November 24, 2013
    YES YES YES. I have been banging this drum from the very beginning.
    Yes, I have as well since NAFTA and GAT. And before that, the Vietnam War and before that…
    I’ve included a link to a 5 part talk by the late Doris Lessing and every human on this planet should listen to this.
    Last Friday’s Moyers and Company replayed an interview Moyers did with Lessing 10 years ago and her responses were telling; nobodies listening to the real thinkers.
    Time for the talking/writing to end and action to begin; revolution; pure and simple. All is lost…

  7. Celsius 233 permalink
    November 24, 2013

    Note the date of the talks, 1985…

  8. November 24, 2013

    Ross Perot was, for the most part, an idiot, but the “giant sucking sound” is a phrase that mocks every administration from Clinton onward.

  9. Jerome Armstrong permalink
    November 24, 2013

    On Amazon.

    There’s a comment there: Except they are NOT losing money globally. That’s the WHOLE POINT. It’s 20th
    century thinking to be worrying about what profits a company like
    Amazon records in one country. They are a multi-national that juggles
    their finances constantly in order to cheat, I mean, minimize, their tax
    liability. As long as everyone short-sightedly considers their
    finances on a country-by-country basis they will continue missing exactly what Amazon is getting away with.

  10. Podargus permalink
    November 24, 2013

    This is the best concise put down of the free trade/globalization scam I have seen.

    In the West all the governments have been bought,lock,stock and barrel, by the oligarchy.
    Democracy is not working because enough of the sheeple,in their ignorance, are happy in their pens next to the shearing shed.

    A revolution is needed and is inevitable.Whether it will be a peaceful or a bloody one remains to be seen.

  11. Bruce Wilder permalink
    November 24, 2013

    Podargus: . . . the sheeple, in their ignorance, are happy in their pens next to the shearing shed

    Well, they hope its a shearing shed, and not a meatpacking facility.

  12. Mary McCurnin permalink
    November 24, 2013

    “A revolution is needed and is inevitable.Whether it will be a peaceful or a bloody one remains to be seen.”
    True enough, Podargus. The problem is the massive number of guns owned by Baggers (not Firebaggers). The baggers have been set up to take out the thinking folk.

  13. Beleck3 permalink
    November 24, 2013

    First they will get the armed nuts to get rid of the “opposition” and then the armed nuts will be next. just like what happened in Nazi Germany. the “divide and conquer” strategy has world really well so far.

    the Sheeple are so easy.

  14. Beleck3 permalink
    November 24, 2013

    has worked really well.

  15. 123 permalink
    November 24, 2013

    Except they’re not really their own populations, right? Just interchangeable masses of peasants, as far as they’re concerned. The elites seem to believe they belong to a stateless, nation-less class.

    Rather, they all owe their allegiance to Washington, as it has all the economic levers, all the signals intelligence, and all the firepower. What could their own populations do to them that could possibly be worse than what Washington could do to them? It’s simple self-preservation. Go off your lead and you’ll be removed in a putsch of some sort; if you manage to avoid that then your country will be “destabilized” until you comply, if that doesn’t work it’ll be starved or bombed or both.

    The U.S. doesn’t spend more on weapons than every other country combined for no reason. In the last few years the Pentagon has largely neutralized the last remaining vestiges of MAD, so even Russia and China have only a few dregs of sovereignty left–just enough to stay out of the very worst crap like the TPP (but for how long?) but not enough to pull their weight on the UNSC or go against the neoliberal order in any really meaningful way. China couldn’t even protect Edward Snowden beyond a few hours of stalling over a typo in his extradition form.

  16. DF Lickiss permalink
    November 25, 2013

    This is why globalization is setting the stage for a planetary government. Marx predicted that communism would be possible only if industrialization was global – that the low wage worker in England was in sympathy w/ the low wage worker in India.

    Global free trade will make it necessary for nations to agree on international regulator regimes and those will eventually develop into a planetary government. And if that planetary government is set up in such a way as to secure individual rights from governmental intrusion – that will ultimately be a good thing. If it is set up in manner as to promote centralized planning of all sorts then it will be for the worse.

  17. bystander permalink
    November 25, 2013

    I’m reasonably sure that I have pointed to this before. Apologies for being redundant.

    …“the political trilemma of the world economy”: economic globalization, political democracy, and the nation-state are mutually irreconcilable. We can have at most two at one time. Democracy is compatible with national sovereignty only if we restrict globalization. If we push for globalization while retaining the nation-state, we must jettison democracy. And if we want democracy along with globalization, we must shove the nation-state aside and strive for greater international governance. – Dani Rodrik

    I don’t imagine our elites willing to gracefully forfeit their elevated status as governors of the nation-state, ergo, by this theory, democracy is toast.

  18. November 25, 2013

    A very informative post and one that highlights the problems of not only NAFTA but with the next version of NAFTA, the Trans-Pacific Partnership (TPP) now being negotiated behind closed with the Obama administration, 7 Pacific nations and the corporate partners who stand to get the advantage here over citizens’ rights.

  19. Celsius 233 permalink
    November 25, 2013

    @ bystander
    November 25, 2013
    …I don’t imagine our elites willing to gracefully forfeit their elevated status as governors of the nation-state, ergo, by this theory, democracy is toast…
    Yes, that seems apparent…
    The question is; what is to be done to rectify that?
    Revolution is the only course I see as a solution.
    Far to much debate, far to much civility, far to much discourse.
    Do or do not…there is no trying (Yoda).

  20. November 26, 2013

    “If you want to have a country which is self-sufficient and which is also heading towards economic prosperity, you must have elites and a population which do not want foreign luxuries, or are at least willing to forgo them.”
    More precisely, you must not have elites which do want foreign luxuries . . . this latter formulation leaving open the option of not having elites at all. A difficult trick, admittedly, but worth aspiring to.

    I too have been claiming roughly this for some time, that free trade between places that internally have different rules moves investment to the place with the worse rules, the rules that allow harsher exploitation and greater externalities. But I’ve never been able to articulate it this well–and by that I mean both express in an articulate fashion, and give the argument articulation, linkage of the bits.

  21. December 3, 2013

    Good piece. It’s nice to see that there are people out there who recognize the damage done to our economy by our laissez faire trade policy.

    I’d like to offer yet another reason that free trade isn’t working for us – the inverse relationship between population density and per capita consumption. Beyond some critical level, as societies grow more densely populated, per capita consumption begins to erode as over-crowding makes it impossible for consumers to utilize space-intensive products. Dwellings shrink because there is no room for anything larger, and thus the consumption of household furnishings, lawn and garden equipment and other products shrinks as well. Cars are eschewed in favor of mass transit because roads are too crowded and there is nowhere to park. Aside from food and clothing, the consumption of nearly every product is similarly affected.

    One of the consequences of this relationship is that free trade with badly overpopulated nations becomes a sure-fire loser. When two nations combine their economies through free trade, the work of manufacturing is spread evenly across the combined labor force, but the disparity in per capita consumption remains. In the case of trade between the U.S. (with a population of 300 million) and China (with a population of 1.3 billion), this means that 80% of the work of manufacturing will be done in China. That would be fine if China also accounted for 80% of the consumption. But it doesn’t – it can’t – it never will. It is impossible for people living in such overcrowded conditions to consume at that level.

    Proof of this can be found in America’s balance of trade. With those countries with population densities below the world median (half of all nations), America has a healthy trade surplus in manufactured goods of $153 billion. But, with the half of nations above the median population density, America has a trade deficit of $577 billion.

    The inverse relationship between population density and per capita consumption goes unrecognized by the field of economics because, in the wake of its Malthus debacle, the field of economics swore to never again give any credence to the notion that population growth poses any economic problems.

    The only hope for restoring a balance of trade lies in a return to the use of tariffs to compensate for the population density effect.

    Pete Murphy
    Author, “Five Short Blasts”

  22. Monster from the Id permalink
    April 26, 2015

    Riffing on what 123 said:

    If our neocons and their plutocratic masters really think they can bully Russia, I strongly recommend that they use their favorite search engines to look up the names “Napoleon” and “Hitler”.

  23. S Brennan permalink
    April 26, 2015

    “if that planetary government is set up in such a way…[insert a fantasy here]”

    If the powerful were just…they would not be powerful…so let’s close that drawer full of wishful thinking and face reality…k?

  24. bob mcmanus permalink
    October 5, 2015

    Excellent essay

  25. Hugh permalink
    October 6, 2015

    Free trade, like free markets, does not exist. The question always comes down to who is controlling the trade (or market) for whose benefit. And the answer is always the same, not you, not me, not any of us in the bottom 80% of the population, –or 99% if you prefer that terminology.

    The TPP is such a fundamental betrayal that we really should call it what it is, treason, and we should understand what this means about its supporters in business and in government, in the Congress and the Presidency. These are not well-meaning people who got it wrong, again. They are not even people with bad intentions. They are traitors and should be treated as such. You might say that this is a call to violence, and we should all reject violence. I would say that the TPP is violence. In our inverted Orwellian use of language, the violence that our elites do to us, the ceaseless class war they have been waging against us for the last 35 years, must never be called violence, no matter how many of our lives are lost or ruined. At the same time, any resistance, especially effective resistance, to their plans will be depicted as “violent”. Let us not be hypocritical about this, any effective reaction to the depredations of our elites will be violent. The truth is they have simply stolen too much, committed too many crimes. They are not going to go quietly. They are never going to allow us to remove them without violence. Get used to it.

  26. James permalink
    October 7, 2015

    Borders, and consequently countries, are made up lines by elites. Historically borders have represented the furthest that a group of powerful individuals can defend their property. Think about tyrants, they have only been able to oppress people within the boundaries of their reigns.

    So “free trade” is actually just “trade”, it only becomes “free trade” when you introduce the notion of “countries”.

    In my opinion creating countries is a net bad, and the fact that you can have “Managed trade” as you put it, will never offset all the problems that come with it.

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