International free trade, the WTO, and the third world/global south.

Author:Litonjua, M.D.
Position:THIRD WORLD PROBLEMS AND ISSUES IN HISTORICAL PERSPECTIVE - World Trade Organization - Essay
 
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INTRODUCTION

International flee trade is the bedrock foundation of the neoliberal globalization project. The World Trade Organization (WTO), established in 1995 to promote and manage international free trade, together with the World Bank (WB) and the International Monetary Fund (IMF), have come to be the global enforcers of neoliberal economic policies. The agreement establishing the WTO (1995) listed the following objectives the organization serves:

raising standards of living, ensuring full employment and a large and steadily growing volume of real income and effective demand, and expanding the production of and trade in goods and services, while allowing for the optimal use of the world's resources in accordance with the objective of sustainable development, seeking both to protect and preserve the environment and to enhance the means for doing so in a manner consistent with their respective needs and concerns at different levels of economic development. (1) Dani Rodrik points out that "it is clear from this preamble that the WTO's framers placed priority on raising standards of living and on sustainable development. Expanding trade was viewed as a means toward the end, rather than an end in itself.... In practice, however, these two goals promoting development and maximizing trade--have come to be viewed as synonymous by the WTO and multilateral lending agencies, such that the latter substitutes for the former .... However, the net result is a confounding of ends and means. Trade becomes the lens through which development is perceived, rather than the other way around." (2)

Still the distinction between promoting development and maximizing trade, with the former as the end and the latter as the means, serves as an excellent analytical lens to study the theory, the history, and the practice of international free trade. Development in the Third World/Global South is the lens and the goal through which to view and evaluate free trade.

THE THEORY

William J. Bernstein writes that "few other historical inquiries tell us as much about the world we live in today as does the search for the origins of world trade ... While other animals, particularly primates, groom and share food with each other, systematic exchanges of goods and services, particularly over great distances, have not been observed in any species besides Homo sapiens.... Ultimately, two deceptively simple notions anchor this book. First, trade is an irreducible and intrinsic human impulse, as primal as the needs for food, shelter, sexual intimacy, and companionship. Second, our urge to trade has profoundly affected the trajectory of the human species." (3)

The systematic explanation and scientific justification for international free trade, however, came with Adam Smith (1723-1790) and David Ricardo (1772-1823). Smith's theory of absolute advantage says that everyone's economic interests are served if each country specializes in those commodities that its endowments (natural resources, skilled labor, technology, etc.) allow it to produce most efficiently, then trades with other countries for their commodities that they, in turn, produce most efficiently. Trade therefore is founded on the division of labor and specialization of skills. England produces more efficiently woolens than port, while Portugal produces port more efficiently than woolens, so England specializes in woolens and Portugal specializes in port, rather than both countries trying to produce both products. The result is more efficiency and productivity with no additional inputs from their endowments.

Ricardo's theory of comparative advantage is not immediately intuitive. Instead of assuming, as Smith did, that England is more productive in cloth and Portugal is more productive in wine, Ricardo assumed that Portugal is more productive in both cloth and wine. Based on Smith's intuition, trade would not be advantageous for England. Ricardo demonstrated that if England specialized in producing one of the two goods in which it bad comparative advantage and if Portugal produced the other, total output of both goods could still rise. To identify England's comparative advantage good requires a comparison of production costs between England and Portugal, hot the monetary costs of production, nor the resource costs (labor needed per unit of output) of production, but the opportunity costs of producing cloth and wine in England and Portugal. England would have a comparative advantage in the production of cloth, for example, if it can produce cloth at a lower opportunity cost than Portugal. The opportunity cost of cloth production is the amount of wine that must be given up to produce one more unit of cloth. England would have the comparative advantage in cloth production relative to Portugal if it must give up less wine to produce another unit of cloth than the amount of wine that Portugal would have to give up to produce another unit of cloth.

Another way to define comparative advantage is by comparing productivities across industries and countries. Portugal is more productive than England in the production of both cloth and wine. If Portugal is twice as productive in cloth production relative to England, but three times as productive in wine, Portugal's comparative advantage is in wine, the good in which its productivity advantage is greatest. England's comparative advantage good is cloth, the good in which its productivity advantage is least. To benefit from specialization and free trade, Portugal should specialize and trade the good in which it is "most best" at producing, while England should specialize and trade the good in which it is "least worse" at producing. (4)

But, Will Hutton reminds us:

England, as Joan Robinson argued in the twentieth century and Alexander Hamilton in the eighteenth, gets the better of the bargain. It becomes a textile manufacturer and achieves the consequent technological and strategic advantages. Portugal meanwhile is locked into being an agricultural country, with a reduced chance of capturing the dynamic advantages of a developing industrial base. (5) More apropos for our discussion, Joseph Stiglitz and Andrew Carlton point out:

The theory of comparative advantage told South Korea, as it emerged from the Korean War, that it should specialize in rite. But Korea believed that even if it were successful in increasing the productivity of its rice farmers, it would never become a middle- or high-income country. It had to change its comparative advantage, by acquiring technology and skills. It had to focus not on its comparative advantage today, but on its long run, its dynamic comparative advantage. And government intervention was required if it was to change its comparative advantage. (6) In other words, countries supposedly trade to exploit the advantages of their natural endowments like climate, resources, skills, culture, and so on. However, as the young Paul Krugman, before he became a newspaper columnist and the 2008 Nobel Prize winner in Economics wrote, since World War II, "a large and generally growing part of world trade has come to consist of exchanges that cannot be attributed so easily to underlying advantages of the countries particular goods. Instead trade seems to reflect arbitrary or temporary advantages resulting from economies of scale or shifting leads in close technological races." (7) In an age of intense technological dynamism, comparative advantage can even be created, and if created, manipulated and corrupted. And who does the creating, the manipulating, and the corrupting? Generally, those who have the power. Thus, international free trade is built onto a hierarchy of economic and political power that becomes the key determinant of outcomes between sectors in developed and developing countries.

Adam Smith and David Ricardo described the overall benefits of international free trade; they gave the systematic explanation of and the scientific justification for world trade. They, however, largely ignored the fact that a significant minority of innocent people was usually harmed. The frameworks that identify who wins, who loses, and how they react in international free trade were provided by the Heckscher-Ohlin Theorem and the Stolper-Samuelson Theorem. The first theorem states that "a capital-abundant country will export the capital-intensive good, while the labor-abundant country will export the labor-intensive good." The critical assumption is that the two countries are identical, except for the difference in resource endowments, therefore the relative abundance in capital will cause the capital-abundant country to produce the capital-intensive good cheaper than the labor abundant-country, and vice-versa. The second theorem is the central result of the first and states that "a rise in the relative price of a good will lead to a rise in the return to that factor which is used most intensively in the production of the good, and conversely, to a fall in the return to the other factor." In other words, the Stolper-Samuelson theorem predicts that the main beneficiaries of increased trade would be the owners of the abundant factors in each nation: capitalists and laborers in England, landowners and farmers in the United States. The beneficiaries would favor free trade, while the owners of the scarce factor would favor protectionism. The theorem is "a framework that provides insight into the politics of global trade: who draws the long straw, who gets the short one, how the political fallout affects the fate of nations." (8)

More recently, a great transformation in the nature of world trade has been noted. Prior to the 1970s, developing countries overwhelmingly exported primary products rather than manufactured goods. Today, developing countries have recently become exporters of manufactured goods and even of selected services. Add to that is the emergence of China and India whose mere population figures skew quantitative data that...

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