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:
- Does free trade benefit multinational corporations at the
expense of working people and communities?
- Does free trade hinder the economic progress of the
world's less-developed nations?
- Does free trade contribute to further degradation of the
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
- 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
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
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
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
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
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
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
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
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Progress & Poverty - Definitions - Capital - Law of Rent - Booms & Busts - The Remedy