Trade, Development and Sustainability
in the Global Economy

The "free trade" question remains, as it has been for centuries, one of the most muddled and polemicized questions in all of public policy. That is not surprising, for it touches on two perpetual pressure points: economic opportunity, and national sovereignty/defense. In recent years, a third vital concern has been added to the list of things thought to be imperiled by "free trade": the environment. Now, therefore, a broad coalition of people are united in their distaste for "free trade". A great deal of well-publicized controversy has surrounded the implementation of the "Uruguay Round" of the General Agreement on Tariffs and Trade (GATT). Bitter controversy has also surrounded the issue of trade between the United States and nations it judges to be unworthy of support, such as China, South Africa, Cuba and Iraq. The US's record in such matters has been inconsistent, to say the least.

Clearly there is a strong constituency in favor of removing trade restrictions. But there is also a strong and growing backlash of people who, although perhaps not ready to support protectionism per se, are deeply suspicious of the perils they see in unrestricted international markets.

And perils there are. High-wage manufacturing jobs are lost. Manufacturing is done, more and more, by workers in developing countries where wages are vastly lower. Multinational corporations, seeking to lower costs and raise profits, "out- source" parts of their production lines to the places with the lowest costs of labor, safety and environmental regulation. The revolution in information technology makes such complex, interconnected production processes more and more profitable. The world's affluent nations are willing -- to a certain extent -- to impose costly limits on industry to protect wildlife. Such "luxuries" are not feasible for debt-ridden developing countries. The development pressure on the world's few remaining wilderness areas intensifies -- carried on mostly by marginalized peasants seeking access to whatever land they can find.

Henry George argued convincingly for free trade -- true free trade, that is -- in 1886, in a world that, though not without complexities of its own, must seem simple next to the mindbending interconnectedness of our own time. Are there not many more concerns, today, than George ever dreamt of? Can we responsibly support a "free trade" policy in today's world economy?

This supplement will examine three urgent questions in today's "free trade" debate. These are:

  1. Does free trade benefit multinational corporations at the expense of working people and communities?
  2. Does free trade hinder the economic progress of the world's less-developed nations?
  3. Does free trade contribute to further degradation of the environment?

As we have done so far in the course, our primary method will be to use reason to make deductions from basic principles. The basic economic definitions from Fundamental Economics will be used consistently. We will not, however, ignore the facts -- or the relevant contributions of modern-day political economists.

Free Trade and Multinational Corporations

The word "corporation" has become a very loaded one in today's political discourse; often "corporate" is used as a synonym with "evil" -- especially when it is combined with the word "multinational". And yet a corporation is merely a business. In assessing the ill effects of multinational corporations on people and the environment, we must be sure to clearly define our terms and identify causal relationships. What is it about corporations that makes them bad? Is it that they are too big? That they operate across national boundaries? That they bribe corrupt governments into granting them privileges? Or are they outgrowths of an inherently exploitative market system?

Corporations are merely business entities, or "firms", so what is true for corporations is true for all businesses. They are in business to make profit, and they do so by minimizing the cost of the factors they use in production (both the primary factors, land, labor and capital and secondary factors such as taxes and regulations), and then selling goods and services for as high as price as they can get.

Four ways in which firms can increase their profits are:

  • Using economies of scale: Businesses respond to competitive pressure by getting bigger when they can -- particularly in an economy where the burdens of rent and taxation are onerous. In such an economy (like ours today) conditions and very difficult for small businesses. We saw in Lesson 3, for example, how indirect taxation favors large businesses.
  • Increasing worker productivity: Historically, high-paid workers have always tended to be more productive. This is because wages are determined by the labor market, not the goods market. Where employers must pay high wages, they respond by investing in technology and training to get more production out of workers. In many cases today, however, highly-efficient technology, initially developed in high- wage markets, is being transferred to dveloping countries where wages are very low.
  • lowering their production costs: There is a great deal of extra cost associated with hiring labor in the West, particularly full-time labor. Employers must pay payroll taxes and health benefits, and must comply with safety and environmental regulations. Today, many businesses are taking advantage of the opportunity to relocate production to places where these costs are far lower.
  • securing higher prices for their wares: Goods can be exported to places where people are willing to pay higher prices for them -- this is a major advantage of international trade. But, well-funded corporate lobbies can also secure higher prices through privilege -- by tariffs or subsidies, often granted in return for large contributions to ever-more-costly political campaigns.

It may be noted that industrial workers in the less- developed countries are often eager to take the jobs that are offered by multinationals, even though those jobs are seen as slavery-like conditions from the perspective of the wealthier nations. Indeed, the poverty of much of the world is so extreme that corporations see a nearly irresistible advantage in making use of the cheapest labor available.

Furthermore, many developing countries are saddled with huge foreign debt. A great deal of money was loaned to the governments of developing nations, under the assumption that their lack of development could be remedied by a huge infusion of capital. But the capital was not productively used, in most cases. It lined the pockets of corrupt government officials, or purchased weapons, or got spent on pork barrel projects that actually did nothing to increase wealth production. But now the loans have to be paid back, so "austerity programs" are inflicted on the taxpaying people of those countries -- the second hit of a one- two punch against development. Under such conditions, these countries have no incentive to impose health, safety or environmental regulations on foreign businesses that bring capital and jobs into their countries. And, the ruling elites in those nations have a strong incentive to quash -- often with brutal repression -- any effort of workers in their countries to organize and strike for higher wages.

These, in brief, are the opportunities that are profitably exploited by today's multinational corporations.

The problems of poverty in the world's poor countries predate the arrival multinational corporations, who merely used underlying conditions to their advantage. Therefore, although it is true that the amoral actions of businesses in response to those underlying conditions have done little or nothing to improve them, removing the multinationals would not solve the problems.

Many people see the suffering and want in which so many people live in these "days of miracle and wonder" (as Paul Simon put it) and blame the economists, as if slavish devotion to the law of comparative advantage and the logic of markets were what had created the whole mess. Yet the law of comparative advantage works as well as it ever did. Privileged interests can undermine its benefits, however. Consider the example of sugar. The United States can, with its world-leading agricultural technology, produce sugar more cheaply than various poor Caribbean nations. However, there are a great many products for which the US has a far greater comparative advantage. Economic theory would lead us to expect that a mutually profitable exchange would be made between the US and Caribbean sugar producers. But, alas, special interests exert an influence on US trade policy: tariffs on imported sugar and price supports for domestic sugar producers wipe out the gains of comparative advantage. US consumers pay a bit more for sugar, but the burden is widely spread, and is tolerable to our relatively affluent society. The effects on the Caribbean sugar producers, however, are devastating. This is clearly a case of market failure, brought about by privileges granted to a special interest: an example not of free trade, but of protection.

Roadblocks to Development

The typical land tenure in Less Developed Countries (LDCs) is the ownership of much of the land as large estates by a few land owning families, who are closely connected with the military and government. The farmers typically rent or own small plots of land, and often must supplement their subsistence crops with income earned in commercial plantations, where coffee, bananas, and other crops are grown for export. Women are usually dominated by men, who control much of the property. Wars, civil strife and oppression have made sheer survival the main priority of many of the people in these countries, as malfunctioning economies feed political instability, which then prevents development.

In fact, the governments of most LDCs have placed barriers against investment. High taxes, legal restrictions, complicated permit requirements, and massive bureaucratic procedures have stifled domestic and foreign enterprise. Often, corrupt government officials require a bribe to obtain a permit. Some governments impose costly and time-consuming visa requirements for foreign visitors, or make travel impossible.

Unemployment in LDCs, as in other countries, is caused by such barriers between labor and resources. In many cases, the ruling elites of such countries are uninterested in economic development, because they stand to collect the overwhelming majority of what little wealth is produced. This is one reson why there is so much military investment, and so much repression, in these countries. The ruling elites' main objective is not to develop their economy but to maintain their privileged status quo. Furthermore, in Eastern Europe and in some LDCs, organized crime plagues enterprise, making businesses pay protection money. The government, including members of the police and border guards, are often allied with the racketeers and share in the loot. A truly free economy cannot be established unless such crime and corruption is rooted out.

As Henry George explained, poverty is caused by low wages at the margin of production -- low productivity on the worst land being used. The remedy is to both increase productivity at this margin and to move the margin towards more productive land. The community collection of the land rent will induce the most productive use of land, so that the margin will be at the best available unused land. The removal of taxation on labor and enterprise will then enable workers to keep the full product of their labor and will encourage investment in more productive enterprise. The removal of restrictions will also enable farmers and small business persons to obtain credit and create enterprises.

Those countries which have developed have had relatively free-market oriented policies grounded initially in land reform. Japan in the 19th century and Taiwan after 1950 removed the old aristocracy and turned land over to the farmers, combined with a substantial tax on the land rent. As Fred Harrison (1983, p. 154) states, "within two decades Japan had completed the transition to modern economic growth and was ready to take on all comers!" Land rent was used to develop the infrastructure, which further increased productivity and rent. Funds from agriculture were used to develop export-oriented industry.

The engine of development is the desire of people to improve their lives. Where labor has equal access to natural resources and is able to keep its product, thus having the incentive to invest much of it for future gains, development will happen. With freedom also will come a sea of foreign investment seeking the most productive fields.

And of course, those peoples who do not wish to change their way of life, particularly the primal and tribal peoples in the rain forests and the nomads of the deserts and dwellers of the Arctic -- they have the right to continue their cultures unmolested by the onslaught of commercial nature-wreaking development. Human beings did not start out poor, hungry, needing development. Primal man had natural wealth from the bounty of nature. Only after humanity turned to agriculture and conquerors took the land did the brave hunter become a lowly peasant working for a wage pittance from dawn to dusk while the lord dined on wine and game hens under chandeliers. Only after the descent to serfdom does development beckon with the promise of increasing productivity. And then, unless workers are liberated from bureaucracy and taxation, and unless the yields of land are shared by the community, the road of development will be a long, hot, stony journey.

True Free Trade and the Environment

If, however, international trade permits businesses to shirk the social costs of pollution by setting up shop in unregulated places, is this not a very serious ill effect of free trade?

A major problem with international trade is the unequal environmental policy among countries. For example, as US companies relocate south of the border in search of cheap labor, some companies have dumped toxic waste into the Rio Grande, causing serious health and water-supply problems in the area. But such pollution is not part of free trade. A truly free market consists of voluntary exchanges, and dumping pollutants is not voluntary to the victims. Polluting is an act of force unless it is agreed to. In a free market, polluters must be charged for the social costs. This charge is a type of rent for the use of land (including water and air as economic land) as a dump.

The problem in free trade is then to equalize such pollution charges, otherwise some countries will have an unjust advantage. Those with lower pollution charges will have lower production costs, but these are really environmental costs being imposed on others. Free trade thus requires an international agreement on common charges for environmental destruction. A comprehensive agreement would include fees, fines, and other charges on any use and abuse of natural resources, including pollution, the destruction of wildlife, deforestation, and soil erosion.

This notion of the air, soil and water as "dumping ground" may seem far-fetched at first glance. But it is entirely consistent with the essential character of land as a factor of production.

How Can the Costs of Pollution Be Assessed?

The oceans and the atmosphere are a type of common pool (although some local pollution can be separated out). Since those resources are part of our natural resources, or economic land, those who dump pollutants into the sea or the air are obtaining a benefit from the use of this land, and thus gain a rent. Humanity as the owner of the oceans and atmosphere is therefore entitled to collect this rent, which ideally would compensate all future generations for the damages.

However, it is difficult to estimate the amount of damage committed by the pollution of a large area such as the upper atmosphere or the oceans, especially since the damage lasts into the indefinite future.

The central problem is that government policy has not marketized most of our air and water, so users and abusers of the environment have not paid for the social cost, the damage being done to health and the global climate. By treating the atmosphere and oceans as free goods, there has been no incentive to protect it. Municipalities also are able to use rivers and oceans as dumps for sewage.

The ideal solution is to have the polluter pay for the use of the environmental service. The "polluter pays principle" was adopted by the OECD, the Organization for Economic Cooperation and Development, in 1974. This intergovernmental organization recognized that the marketization of the environment requires an international agreement, so that firms which use costly anti- pollution devices do not suffer a competitive disadvantage. A pollution charge would also encourage inventions and investments in anti-pollution technology and in less-polluting techniques such as solar energy.

Some proposed environmental taxes do not directly charge for pollution, but for products whose usage is currently polluting. For example, "carbon tax" has been proposed, based on the carbon content of the fuel used: a higher charge for coal than for oil and a lower one still for natural gas. But this is more directly a tax on consumption. It is economically more efficient and morally less coercive to place a charge directly on the pollutant, such as carbon monoxide, in proportion to its damage. Such a charge would not be a tax on the consumption of carbon, but rather a fee for the use of air as a dumping place for the pollution created.

There are at least three ways to set such a pollution charge. The first method is to measure the economic impact of environmental damage, and set the charge equal to that cost. For example, air or noise pollution can reduce real-estate values. When direct measurements are not available, one can use the contingent valuation approach. People are asked either what they would pay for an environmental benefit or what they are willing to receive as compensation for some reduction in environmental quality.

The second method is to assume that the total damage from pollution is infinite (considering the effects on future generations for all time to come), so any amount charged will but compensate a little for the damage. The charge is then determined by budgetary desires. Assuming the charge were set high enough to make it worth the polluter's while to get rid of it, the effect of the charge would be to reduce the pollution, and so the fee per ton could be increased for the next period, which would then reduce pollution even more.

The third way to charge would be to treat the ocean or atmosphere as private property, and maximize the revenue for dumping into it. For example, suppose some corporation were assigned ownership of the North Atlantic ocean, with rights to collect fees for pollution dumping. The firm would set the rates per pollutant, given some list of pollutants and relative charges by a governing authority. It would try to maximize its profits and would set a rate that would most likely be so high it would substantially reduce the pollution. This company in turn would pay its rent, which would be most of its revenues, to some governing authority, such as the United Nations, providing it an independent source of revenues. If the revenue is greater than the budget of the agency, the funds could be distributed to the member nations. To keep the process efficient and honest, provision should be made for members to be able to secede from the organization and form alternative international organizations which would also share this rent.

A combination of these methods would include the natural environment in a global market economy, so that the social costs of enterprise would be borne by those obtaining the benefits.

Trade and National Boundaries

Once the land, the resources and opportunities of the natural world, are rightfully understood as common property, to which all human beings, now and in the future, have an equal share, the concept of a "national boundary" takes on a different character. We see that the arrangements that societies have made in this regard are provisional, politically motivated, and finally without either moral basis or economic rationale.

In Protection or Free Trade, Henry George notes that if it benefits individuals, families, towns and states to trade with one another, why then would it benefit nations to restrict trade? He also observes the utter lack of compunction with which people evade customs duties -- because they feel that there is no wrong in carrying duly-purchased goods across imaginary boundaries.

Indeed, the boundaries are imaginary, as can clearly be seen in the Apollo Astronauts' photos of the Earth from space. They exist for political reasons; they delimit spheres of influence and control. The earth is the same on either side of a national boundary; the weather makes no announcement when a border is crossed.

This seemingly poetic insight is one that the business community has long recognized. Business has so effectively become a global phenomenon that national governments in many places are scrambling to find ways, at the domestic level, to regulate the behavior of multinational corporations. International "free trade" agreements, influenced by the lobbying of international business, go as far as to impose sanctions on nations who seek to improve their environmental or safety regulations. As was explained above, such maneuvers are not part free trade; they are actually grants of privilege.

Ross Perot heard a "giant sucking sound" -- but he did not correctly identify its source. It wasn't international trade, but the collection of unearned wealth by the holders of land and other monopolies. Truly free trade begins with the recognition of humanity's common right to the natural opportunities -- and the individual's right to keep the wealth that he or she produces. When nations implement this basic key to economic justice and prosperity, the pressures on their national boundaries will no longer be so intense. The needed reforms are far-reaching, and their implementation will not be easy -- but a comprehensive solution does exist. The first step is to make sure that people understand it.

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