Is free trade working for everyone?

Dear Jagdish Bhagwati,

It is generally assumed that Adam Smith's The Wealth of Nations published in 1776, provides an irrefutable justification for free trade as it is practised today. Nothing, of course, could be further from the truth. It was not just free trade as such that Adam Smith advocated, but free trade in very specific - largely hypothetical conditions - those that could conceivably have prevailed in some areas at least at the time when Smith wrote his famous book, but which could not be more different from those that prevail today.

Adam Smith assumed that the market would be in the hands of small companies - too small to influence the market price of the commodities exchanged - a price that was fair both to the buyers and sellers. He assumed that these small companies would continue to compete without seeking to bankrupt their competitors or buy them out. He abhored monopoly power, which he defined as the power to maintain a price above its "natural price". in particular when achieved by protecting trade secrets. He also assumed that investors would run their own businesses, being more motivated to do so properly than would paid managers. They would also invest at home rather than abroad, both out of patriotism and so as to be able to assure their managerial functions.

Smith would have been horrified by the global free trade economy we have now set up under the auspices of the World Trade Organization, dominated as it is by increasingly massive, powerful, and uncontrollable transnational corporations, which derive their funding from all over the world, no longer have any obligations to the society they are based in, are willing to move to anywhere on the globe where costs are lower, environmental controls laxer, subsidies higher, and that actually promote government intervention in the economy so long as it serves their interets, for instance, by protecting investments in particular 'trade secrets' or 'intellectual property' as it is called today.

He would have been shocked by the near monopoly power that these corporations are acquiring, not only in their own countries, but within the world as a whole. he would have been shocked too at the total indifference with which they view the impoverishment, malnutrition, and social and ecological degradation that their activities are giving rise to throughout the world.

I will try to show why today's version of free trade must necessarily be so terribly destructive.

Free trade is seen as establishing a level playing field on which rich countries and poor countries, huge transnational corporations and small local companies compete as equals. Of course they are far from equal and to remove the protection that small countries and small companies have usually benefited from is to seal their fate. If I had to confront Mike Tyson I would certainly not want to do so on a level playing field - or clearly my fate would be sealed too.

Significantly, free trade was first preached and imposed on the trading nations of the world by Britain in the middle of the 19th century. At that time Britain was the workshop of the world. According to Eric Hobsbawn [1] we already produced about two thirds of the world's coal, perhaps about half its iron, five sevenths of its steel, half of its factory-produced cotton cloth, 40 percent (in value) of its hardware, and a little less than one third of its manufactures. In addition the City of London was the world's financial centre and was alone capable of financing the industrial expansion that free trade would make possible.

In the 1970s free trade was largely abandoned. There had been a prolonged economic depression and also Britain was losing its competitive edge over its rivals. New markets had to be found abroad and companies turned towards the markets of Africa, Asia, Latin America and the Pacific.

As Fieldhouse [2] notes, the answer was to take over those countries where goods could be sold at a profit without having to worry about competition from more efficient European countries. Hence, the scramble for colonies. They provided a means for the powerful to open up markets for their goods and services and to gain access to sources of cheap raw materials and cheap labour - precisely those advantages that free trade previously provided. Promoters of colonialism made no bones about it. As Cecil Rhodes wrote

"we must find new lands from which we can easily obtain raw materials and at the same time exploit the cheap slave labour that is available from the natives of the colonies. The colonies would also provide a dumping ground for the surplus goods produced in our factories."

The colonial system however could not last indefinitely and it became clear before the last war broke out that a substitute had to be found. By this time it was the United States, not Britain, that dominated the world politico-economic scene. Britain and the other European industrial powers had been ruined by the war, their economies lying in tatters. The same could be said for Japan. This explains why foreign policy professionals and heads of large corporations began meeting in Washington DC as early as 1939 under the aegis of the US Council on Foreign Relations.

The object was exactly how the post-war, post-colonialist world economy, could best be shaped so that it would satisfy the interests of American corporations. The answer was to 'develop' the Third World. The pretext was to fight poverty and make Third World coountries wealthy like us, the reality was to open up their markets to American and other Western corporations and to gain access to their cheap labour and cheap raw materials.

Three institutional instruments were set up for achieving this goal. The first was the World Bank, whose role it was to finance the physical infrastructure required by the Third World countries so that they could provide effective though easily dominated trading partners. The second was the International Monetary Fund, whose role it was to tide over any of these Third World countries that might run into balance of payment difficulties, which indeed they had to. The third was the General Agreement on Tariffs and Trade (GATT) now the World Trade Organization (WTO) Its role was to impose free trade by preventing Third World countries from restricting Western investments and from erecting trade barriers and import quotas.

In other words there is total continuity between the free trade of the middle of the 19th century, the colonialism that followed and lasted until the last war, and the free trade regime foisted on the world via the World Bank, the IMF, the GATT, and now the WTO. In none of these cases was the goal to assure the optimum allocation of resources which free trade is supposed to do, but to assure instead the expansion of US and European corporations into the Third World and the steady flow of funds to the rich countries and the transnational corporations that they harbour. However, the meaning of free trade has undergone another drastic change with the signature of the Uruguay Rounds in 1994.

It is no longer achieved by simply eliminating tariffs, which had already fallen from an average of 40 percent after the war to about 5 percent before the Uruguay Rounds started. It now means eliminating 'non tariff barriers', which means any regulations that can be construed as interfering with trade by increasing costs to industry or by reducing the market for its goods and services - regulations the majority of which were passed to protect human health, the poor, the unemployed, the old and the inform, local communities, local economies, and of course the natural environment. Whether a regulation constitutes a non-tariff barrier, what is more, is decided by a secret panel of the WTO and so far every decision has been in favour of the corporations in their efforts to make themselves more 'competitive' regardless of human, social, and ecological costs.

In this way, it is not so much trade that is being freed, but the corporations that control it. What they are rapidly acquiring is the freedom to cut down virgin forests in order to produce plywood, lavatory paper and the Sunday edition of the New York Times. It is the freedom to erode, salinize, waterlog, compact and desertify agricultural land so as to produce the cheap raw materials for the food-processing industry. It is the freedom to pillage the oceans with vast trawlers that literally anihilate fish populations with 'wall of death' drift nets that are often 60 miles long.

It is the freedom to churn out ever greater amounts of ever-more toxic chemicals to spread on our fields, release into our rivers and ground waters, dump into holes in the ground, or inject under pressure into deep bore-holes - from where they find their way into our food and drinking water. It is the freedom to increase poverty and misery, malnutrition and disease, to extinguish tens of thousands, if not hundreds of thousands of species of living things every year, all in order to satisfy the short-term interests of the multinational corporations and the bureaucrats and politicians who live off them.

Those are the freedoms that free trade provides today. I wonder what Adam Smith would have thought.