Free trade and globalization

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By Wang Di and Ron Matthews (China Daily)
Updated: 2009-10-09 08:09

A July 2009 World Bank report shows that anti-dumping, safeguard and other trade barriers are currently in vogue, despite the fact that state leaders vowed at the London G20 summit not to do so in the wake of the global economic crisis. The report warns that the present year-to-date pace of new safeguard investigations is likely to make 2009 the second most prolific year since the WTO's inception in 1995. Not surprisingly, the surge in domestic protectionist pressures stems from the negative impacts of free trade on income disparity, as evidenced by worsening inequality in about two-thirds of the countries between 1990 and 2005. Rising impoverishment alongside burgeoning largesse of the already rich, poses a major threat to global social harmony.

Free trade is essential for maximization of global economic welfare, rewarding "factors of production" according to their productivity, thus allowing nations and individuals to exploit respective "comparative advantages". Free trade also frees individuals from the shackles of local tyranny, tradition and provincialism. Globalization is a sine qua non for free trade, promoting benefits that are ubiquitous, compelling, and incontrovertible. Globally, a stunning 135 million people escaped dire poverty between 1999 and 2004; this being more than the population of Japan or Russia, with favorable impact on more people, more quickly, than at any other time in history.

Although developing countries' income levels have been catching up with rich countries in this globalization era, the problem is that income disparity is widening within nations and between individuals. Within-country income distribution has become worse virtually everywhere. In China, for instance, urban-to-rural household per capita income in 2004 was 3.2 times, and the coastal-to-inland GDP per capita was 2.4 times; these differentials being amongst the highest in the world. Moreover, China is but a microcosm of increasing global income disparities. For instance, over the past decade, inequality has increased in 13 out of 18 Asian countries.

There are three lines of explanation for free trade/globalization failing to narrow country and global income inequalities, as theory would suggest. First, the assumption of "perfect competition" is an ideal, rather than a reality. Even the father of free-market economics, Adam Smith, admitted that government restrictions on trade, particularly in critical sectors, such as defense and, more broadly, the public sector, are essential for national development. Ironically, globalization's greatest evangelists are the very same country officials that stealthily erect protectionist trade barriers (via import quotas and tariffs) and under-cut competitive forces (through subsidies). This unfair competition creates "artificial" comparative advantages, destroying free trade benefits, and imposing high costs on local consumers and developing country exporters, alike.

The second explanation for the growth-equity paradox is that the search for comparative advantage is based on factor endowment; the so-called Heckscher-Ohlin theorem. The reality, however, is that this development strategy can best be described as a "race to the bottom" by poor economies. These states seek to attract foreign direct investment (FDI) with promises of cheap labor and big competitive tax breaks. The result is suppressed poverty wages, often below subsistence levels, in developing countries. As a consequence, the average wage of US' top 10 trading partners fell between the 1980s and 1990s, somewhat tarnishing globalization's luster. In contrast, senior managers in less developed economies are left with more disposable income when compared to their Western counterparts, further stressing income disparity in emerging countries.

The final explanation, more worryingly, is that even if the international trade system runs exactly as theory suggests, the existing global financial architecture remains problematical because it represents a division of labor favoring rich-country knowledge-intensive exporters, whilst emerging economies mainly concentrate on exporting raw materials and low value-added goods. This "static" comparative advantage causes unacceptably high unemployment, the loss of potentially efficient industries, and results in irresponsible resource exploitation in emerging economies; the latter, as a consequence, face the dilemma of needing a buy-in to the globalization phenomenon, but by doing so, suffer from exclusive reliance on low value-added sectors.

The danger of widening income disparities is that a tidal wave of rage against globalization is building. Yet, the greatest threat to globalization does not come from the awakening of working people in developing countries, and the poor in advanced ones, but, perversely, from the rich and powerful states failing to address the perceived and real deficiencies and "unfairness" of the present international trading and financial system. Bubbling to the surface are the twin evils of protectionism and economic nationalism. The policy response has been to more equitably share the gains from globalization, and some truly innovative policies have been introduced, such as the "UN Millennium Development Goals", social safety nets, and a variety of humanitarian assistance programs. These measures aim to transfer resources from rich to poor countries; they are thus meaningful, but only time will tell whether they will provide full or just partial economic antidotes to poverty.

For emerging economies, social policy is the "flip-side" of an open economy. To avoid trading-off poverty reduction by chipping away the benefits of globalization, social policy should have a dual function: it must enhance social engagement in decision-making, but at the time same, give social direction to poverty reduction. Such a flexible, more socially responsible, approach to trade and development enables anti-globalization "radicals" to obtain a legitimate voice in support of greater social enterprise.

Moreover, organizations and charities aligned with the anti-globalization movement should be entitled to participate in global conferences. Such fora would provide excellent opportunities for pushing advocacy goals in civil society and democratizing global policy-making, hence compensating losers from globalization. Violent protest, made worse by non-involved anarchist groupings, would thus, hopefully, give way to peaceful and constructive dialog.

Harmonious development demands the evolution of "social enterprise" without jeopardizing profit-driven business models. The social enterprise concept embroiders "blended" value objectives into mission statements, focusing on sustainable profit but not at the cost of social and environmental imperatives, critical for securing poverty reduction. Moreover, as a form of social enterprise, micro-credit banks have been designed to combat poverty in developing countries.

Wang Di is a researcher at the S. Rajaratnam School of International Studies (RSIS), Nanyang Technological University. Ron Matthews is a professor and deputy director of the Institute of Defense and Strategic Studies at RSIS.

(China Daily 10/09/2009 page8)