SOCIAL SCIENCE essay
Development of economy and industry is only possible by “opening oneself” to the world market, as claimed by the WTO, International Monetary Fund (IMF) and World Bank (WB), adhering to the axiom that it is the liberalization of trade was a lever for the development of the industry for modern developed countries and for the postwar development in newly industrialized countries (Miller 37). Thus, they argue that all successful countries based their growth strategy on the traditional recipe of reforms of macroeconomic stabilization, trade liberalization, and market-based mechanisms. Fast and steady growth was only in the countries that progressively liberalized the protection from import: for example, Chile, Singapore, Hong Kong and Taiwan used free market principles.
However, the ideology used by the WTO, World Bank and IMF has no scientific and morally justified basis. Many theorists today argue that the rich countries at a time when their economy was only developing had been using protectionist measures themselves – for example, Britain and the United States. Newly industrialized economies (NIEs) in the period of industrial development also supported and defended their economies. Consequently, the assertion that the rich countries and the NIEs have managed to develop their industry and economy using free trade recipes is just a myth. This myth is used by the rich countries (“states of the center” in accordance with the terminology of MacDonald (16)) to prevent the industrialization of poor countries, because the appearance of production industry in the poorer countries would automatically reduce the markets for TNCs. And therefore, in the framework of the WTO the corporations of rich countries convince poor countries under pretence of economic development to move in the direction opposite to which they moved themselves. The developed countries that used protectionism in the early stages of their development, now forbid the others to use it. Thus, the Korean economist Ha-Joon Chang calls it “kicking away the ladder” (10), that is, the developed countries are kicking away the ladder by which they themselves got up, thus blocking the development of other countries.
Further in this paper, we will discuss these opposing viewpoints and finally prove that it is not morally justified for developed countries to urge less developed countries to adopt free trade. In our research, we will reveal the essence of free trade policies and their influence on both developed and developing countries, then show the inequalities and inconsistency these policies are bearing in their nature, and finally cover the duties the free trade agreement factually oblige developing countries to, in this way receiving the results which are mostly beneficial for developed countries and transnational corporations lobbying their interests.
Freedom and liberality of world trade
Let us consider the concept of “free trade” and the statement “world trade is liberal, free.” Like in the 19th century, today the European and American capitalists are trying to achieve the abolition and reduction of restrictions in international trade in Asia, Latin America and Africa, while closing their own markets, for example, from agricultural products from the “third world” countries, and support their TNCs, in particular, by reduction of taxes or exemption from taxation (Robbins 45). In present most developed countries the customs taxes used to be an important source of industry financing. Now, developed countries use the IMF and World Bank to prevent it in other countries, so that they did not have their own industrial production, and had to buy manufactured goods from Western corporations. The purpose of the predecessor of WTO, GATT and the World Trade Organization itself which emerged from the GATT agreement is to reduce the duties throughout the world. Trade liberalization (reduction of customs duties, abolition of import quotas) in many countries has become one of the causes of the crisis of government revenues and the decline of industries focused on the domestic market, worsening of the payments balance crisis, and job losses (Crump and Maswood 84).
The IMF and World Bank ideology of “free markets” conceals the fact that industrialization in the countries now considered rich was conducted by the protectionist model, and the state played a big role in trade, investment and subsidies (Crump and Maswood 101). The successes of industrialization in Asian countries (e.g., Malaysia, Singapore, and China) are also explained not by free-market model, but strong role of the state. The model they used included land reform, strict regulation of trade, state enterprises, state-funded researches and infrastructure, high tariff barriers to protect the new industries of these countries from foreign competition, strict control over monetary policy and capital flows, as well as subsidies and state-controlled investment in certain sectors of the economy (Ha-Joon 131).
In contrast, neo-liberal reforms in Asian countries led to the economic crisis. In the countries that opened their markets to foreign capital the wages fell. In almost all developing countries that have undertaken rapid trade liberalization the gap between salaries increased, most often due to falling employment of unskilled workers in industry and a large absolute decline of their wages by 20-30% in Latin America (Crump and Maswood 98). Trade liberalization leads to unemployment growth. Foreign firms often supersede national competitors.
Ricardo’s theorem of comparative advantages proves indisputably that trade liberalization today also leads to economic growth (Horstmann 25). However, in circumstances where capital moves freely between countries, the IMF and World Bank dictating their own terms, require the “third world” countries to specialize in agricultural products and minerals, as low prices on goods from those countries and absence of their own industry is beneficial for the TNCs of the rich countries. World trade is structured so that the North (the states of the center, developed, rich countries – the EU, the U.S., Japan) mainly sells finished industrial products and services with higher value on the world market, while the South (Latin America, Africa, Eastern Europe, Central Asia, South Asia) mainly sells herbal products, minerals and products with a low degree of processing and value (Crump and Maswood 112; Hoekman and Martin 59).
In addition, since the 1970’s, the prices for goods sold by the South fell. After the WTO agreement came into force the prices for all unprocessed goods fell even more. About nine years after the WTO came into force, the price of all primary products except oil fell by more than a quarter (Ha-Joon 145). The Uruguay Round of the WTO canceled the agreements regulating the prices of raw materials which stabilized the world prices for these products. Now the prices are in free flight due to specialization imposed by the IMF and WB in all countries. It is beneficial to Western concerns. Having fallen in debt dependence to Western banks, governments and international financial institutions, the “third world” countries are forced to increase exports to repay the loans (MacDonald 70). However, since the “third world” countries specialize in the production of only a few types of goods, and many of them were oriented to produce the same goods, the growth of exports of similar goods from many countries reduces their price. This led to a further decline in prices for products of the “third world” countries (MacDonald 75; Merrett 134).
Thus, the assertion that the free market is the only means for the efficient allocation of resources is not completely reliable. There is a documentary proof of the fact that free markets lead to the rich getting richer and the poor poorer. The results of the study based on the collection of analyzes made in all the countries of the world showed that 1% of the world’s richest people possess 40% of the wealth of the planet, and only 10% of the world’s population possess 85% of global assets (Miller 63).
Richard Robbins confirmed it in his book “Global Problems and the Culture of Capitalism,” which was rewarded a Prize. He wrote that the establishment of capitalism represents a culture that is in many respects the most successful culture ever in terms of providing relative and absolute comfort and luxury to a large number of people (Robbins 318). However, it was not so successful in the integration of all people equally, and this failure is now one of its major problems.
Inequality in the distribution of wealth is not just a phenomenon typical of developing countries, but also a huge problem impacting even the developed countries. This was highlighted in the report from Harvard in 2005, where it was estimated that in the U.S. 60% of the earned income were received by two groups occupying top positions in terms of income level (Robbins 211). This means that most people in the United States received only 40% of the revenue. A similar situation is observed in the UK, where the rich possess 25% of the wealth of the country, and the poor who constitute half the UK population get only 5%, while 10% of the richest people in Britain possess more than 50% of the country’s wealth (Robbins 217).
Thus, under the guise of globalization and free trade, the industrialized countries of the world shield their economy from foreign competition, while developing countries are forced to leave their economies open in the name of globalization. Below is a list of existing trade barriers set by the world’s richest countries to other countries in order to protect their economies (Crump and Maswood 148-50; Bermann and Mavroidis 115-18):
– The USA spends more than $ 4 billion on subsidies for 25,000 American cotton farmers;
– Japan imposes a 490% tariff on rice imports for protecting its own rice farmers;
– A regular cow in Switzerland receives an annual equivalent of more than $ 1,500 in a form of subsidies, as the Swiss government seeks to protect its dairy industry from foreign competition;
– The EU spends 3,30 euros in subsidies for sugar exports, which costs 1 euro. In addition to 1,3 billion euro in export subsidies annually included to the budget, the EU provides hidden support making to about 833 million euros to the unsubsidized sugar exports;
– Subsidies for corn in the European Union make more than $ 85 billion per year;
– Import of leather shoes from China and Vietnam is imposed a fee of 16.5% and an additional tax in Europe at the rate of 10%, in order to enable European shoe manufacturers to compete internationally.
As a result, contrary to the slogan of the WTO (“WTO Eliminating Poverty”), poverty in the countries which have recently joined the WTO has increased. Despite promises on the entry into the WTO, the share of developing countries in the world trade not only didn’t increase, but in some cases decreased (Miller 93). On whole, the efficiency of free trade for developing countries can be easily put under doubt. In this respect, Laura Tyson proved three main provisions:
1) There is a number of anomalies in the international economy (Tyson distinguishes more than 50 of these anomalies (37)), due to which the free trade worsens trade conditions of a significant number of developing countries which cannot be explained by the widely applied theory of competitive advantages (Tyson 39);
2) The trade policies of developed countries makes it difficult for developing countries to use their competitive advantages, which is leading to the obtainment by the developed countries of the lion’s share of profits from trade (Tyson 60);
3) Although free trade leads to the creation of more workplaces in developing countries in the short term, in a long-term perspective, its impact on employment is not determined; at the same time, free trade leads to the lowering of social and environmental standards in all countries because of the growing international competition (Tyson 84-85).
On the other hand, according to Paul Roberts, specialization based on comparative advantages of countries and allowing the obtainment of gains from trade by all countries is undermined by the high mobility of factors of production (58). Instead of structural adjustment of the economy, developed countries carrying out the policy of free trade are rather experiencing an outflow of production factors to the countries with the highest performance. Thus, the greatest productivity of production factors is inherent to countries with absolute advantages, which changes the nature of foreign trade significantly (Roberts and Stratton 61-63).
Historically, there existed significant barriers to international mobility of production factors, but nowadays, the change of political systems in Eastern Europe and Asia has opened to Western TNCs an access to a significant number of low-cost human resources, while the development of telecommunication technologies has led to the opportunity of integration of employees in the service sphere and high-tech industries, regardless of their physical location. All this has enabled TNCs to replace expensive Western human resources by the cheap human resources from developing countries. The difference in wages between developed and developing countries has led to the emergence of absolute advantages for developing countries, and the international mobility of production factors – to a shift in both benefits from foreign trade and inflow of production factors to developing countries. Generally, according to Roberts and Stratton the presence of a significant number of low-cost human resources in the Third World countries means that the situation will continue in the long run, in the absence of corrective public policies (105). At the same time, unemployment rates increase, outflow of production factors and further reduction of the wealth and decrease of living standards will now take place in developed countries.
It may seem that such a development of events is favorable to developing countries. However, the analysis of the results of profits distribution, held in the frameworks of school of the resource-based theory of economic development, shows that the standard of living in developing countries is increasing insignificantly with the influx of Western factors of production in the form of foreign investment (Horstmann 76). Moreover, the loss of social capital through reducing social and environmental standards due to severe competition of developing countries for foreign investments is often overriding the benefits of receiving them. A significant number of unemployed human resources in developing countries allow TNCs to hold low wages rates for the resources involved, while low customs duties often imposed due to entering international trade agreements by the developing countries, low taxes for TNCs and repatriation of capital by them prevent developing countries from receiving basic benefits of competitive advantage (Merret 237; MacDonald 172). Thus, due to the reduction the wealth of developed and, at best, a slight increase in the wealth of developing countries in the long run, the rapid growth of the wealth of international monopolies is performed, which are controlled by globalist economic elites, dictating their rules through world free trade organizations.
The rights and obligations dictated by entering free trade zones
The laws of the free trade organizations are above the national laws of states, and provide the only possible way economy development. For example, WTO members are obliged to liberalize, privatize, and deregulate (open access to TNCs and banks) the spheres of their economy one after another (Ha-Joon 43).
The state that entered into the WTO is no longer able, as a sovereign state, just to change its policy. Abandoning WTO commitments on liberalization or amending the terms is only possible in three years after the entry into force of these treaties, and only after paying compensations to the trading partners who have suffered losses. For example, if a state wants to nationalize again the privatized health care system, it will face trial in the WTO and huge penalties. In contrast to the reforms carried out by the country unilaterally, the government cannot just cancel the obligations taken by a country in the WTO if it does not want to open its market to foreign trade and foreign direct investment to such a degree (Bermann and Mavroidis 202-04; Crump and Maswood 126).
If a state has entered into an agreement on facilitation of trade with any country, that agreement must be also valid for investors of other countries. The state cannot introduce any quantitative and qualitative restrictions on access to their markets for foreign corporations and banks (such as quotas, embargoes, bans, and introduction of minimum prices for exports and imports) (Crump and Maswood 129).
The state has also no right to regulate the level of foreign exchange costs and cannot tell investors which part of the profit they should invest in this country, as well as which part of goods they can withdraw from the country. States are forbidden to compel investors to use the products produced in the country, or oblige them to employ people of this country. GATT treaty also prohibits the ban for importing goods on environmental reasons or regulated production conditions (Bermann and Mavroidis 209). This deprives the country of a theoretical possibility to prohibit, for example, imports of goods, the production of which had caused significant harm to the environment or used child labor.
Each country can be accused before the court the WTO. If the country wants, for example, impose restrictions on the export of its resources, it “violates the law of the WTO” and the “free-trade rules” (Bermann and Mavroidis 123). In the WTO, the adoption of laws is not tied to the state to which they relate. Now, at the legal level, the interests of the international commercial capital, the interests of international corporations and banks are above the interests of the people of the WTO members. Governments of the member states and regional administrations are obliged to obey the law of the WTO, otherwise the “accused” country will face litigation, laws against this country, and withdrawal of invested funds (Hoekman and Martin 114; MacDonald 222).
Although the WTO is an agreement between the states and formally it is states that address the WTO with the requirements to change the law of another country, as a rule, TNCs stand behind such statements, when the laws of some country “bothers” their business in it (Ha-Joon 136). In the WTO, a group of trade representatives of countries-members of the WTO (not selected by the people, but appointed by their governments) make decisions on the rules of the WTO. These people become the world’s most powerful court and legislative body, whose decisions must be executed by the courts and the parliaments of the WTO countries. Thus, in the U.S. corporations have access to the U.S. Trade Representatives to the WTO (Bermann and Mavroidis 297).
For example in the interests of corporate profits, standards of health and food safety can be lowered. WTO makes member countries import genetically modified products. WTO has no anti-monopoly laws, the WTO can ban the regulation of capital movements adopted in some countries, or cancel the ban for speculative derivatives. For example, the EU through the WTO demanded from Thailand to repeal the law banning the activities of banks located in offshore areas, where taxes are washed. Thus, NAFTA regional economic treaty includes investment agreement, according to which Mexico was sentenced to a fine to an American concern, because Mexico banned the construction of toxic landfill near a protected nature reserve (MacDonald 197).
Thus, the objective of WTO rules is to take away the right of states to regulate their economies, and even theoretical possibility to carry out reforms in the interests of its people. At the same time, the results of trade liberalization have provided vast rights to TNCs.
Conclusion
IMF, World Bank and the WTO promote the focus on exports and try to make the economies of the periphery specialize in the sectors beneficial for the corporations behind them. At the same time the WTO, IMF and World Bank use the theory of “domestic resource costs” (DRC) to maintain the “center-periphery” system. The DRC theory considers the conditions prevailing in the global market to determine how the country should behave in order to buy or to save a dollar. This means that the production is export-oriented and based on world commodity prices. The embodiment of this theory in the policy should ensure that the country of the periphery will remain in the same position. WTO principle of the “equal rights of national and foreign investors” makes the support of domestic industries, both private and theoretically state, illegal.
Deregulation of trade under WTO rules followed by an extension of protection of Intellectual Property Rights (TRIPS Agreement) allows the TNC to enter the national markets and expand their control over virtually all sectors of the national productive sectors, agriculture and service sectors. TNCs have already divided the world market and their purpose is not to share with others, but to win even more. According to the FAO research, since 1994 in the “third world” countries the volume of imports of agricultural products has increased, rather than exports.
In this way, presently, foreign investors are already interested in the abolition of various government requirements: on investments regulation, on the amount of foreign capital involvement, quotas for compulsory employment of the local labor force, or the use of local raw materials, commitments to form joint ventures with companies in this state, the implementation of local labor and environmental legislation, as well as requirements related to trade and balance of payments. Their goal is to make sure that there is no foreign trade imbalance because of too large proportion of semi-finished products, or too large profit withdrawal. The states today already reduce the environmental and social standards, seeking to attract capital. Investment agreements are further restricting the right of states to take measures on protecting labor and environment, while private investors – mostly, TNCs – get the opportunity to accuse the states if they impose their own regulation under the guise of international law. The developed countries demanding the opening of markets from other countries restrict access to their markets through customs, subsidies and the use of sanitary and phytosanitary standards, which factually cannot be considered morally or economically justified.
