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Our problems cannot be solved without ending free trade

August 18, 2010

If we allowed companies to import Chinese and Indian workers into US factories and service centers and pay them pennies on the dollar with no benefits or regulation, those companies would have a tremendous competitive advantage and there would be rightful outrage.  How is this any different. though, than our existing paradigm that allows free trade with these countries?  The dynamic is the exactly the same.

Perhaps the most fundamental force of the ‘21st century economy’ is the ideology of free trade.  The ideology stems from Ricardo’s economic theory of comparative advantage but, like most of orthodox economics, it has a rather limited contact with reality.  In the actual historical world, ‘free trade’ was never free – it was always imposed upon the weak by the powerful.  We can see this in Great Britain’s domination of trade and finance throughout the 19th century and in the US domination throughout most of the 20th.  The global system of today is mostly attributable to US efforts since World War II to advance its  hegemonic position in industrial production and international finance.

The problem for Americans though is that foreign competition has inevitably caught up and the US corporation is no longer clearly dominant.   More importantly for the average individual in all developed countries, however, is that the nature of competition has changed due to tremendous advances in communication, information, and transportation technology.  Within the free trade paradigm, these technological advances open the gates to the near complete internationalization of production and services and inevitably lead to a competitive race to the lowest cost location.  The argument that free trade is beneficial to the average American was possibly true in the environment prior to the 1970’s but it’s no longer tenable as the US cost structure is simply not competitive.

Unlike Ricardo’s theory where, say, Portugal would merrily produce wine and England cloth, today’s comparative advantage arises almost entirely from differentials in wages, regulation, and working conditions.  There can be no doubt that the standard of living in high wage countries will decline under such conditions.  And what is predicted by plain logic can be seen happening throughout the developed world today.  We’re not witnessing rising prosperity; we see instead, as expected, stagnant and reducing wages, ever larger pressures against social spending and worker security, crumbling infrastructure, and widening inequalities.  These outcomes are direct outgrowths of the free trade paradigm.

Economists have their heads buried in Ricardo and endlessly defend a status quo that’s highly rewarding to large corporations and the wealthy elite.  They unfailingly proclaim their faith that somehow the globalized economy will generate enough high wage jobs to offset the forces of wage deflation.   This must be seen as foolishness.  Like the past, free trade is not free.  It’s being imposed on the weak by the powerful.

What’s the solution?  I think we need to completely reject the ideology of free trade and, at a minimum, set the rules of the game to be such that there can be no advantage arising from wage differentials.

From → Economics, Global

2 Comments
  1. You are the 66th comment on a “Billy Blog” string that has several comments from me. I interpreted your comment as confirming agreement with at least the last of my comments (comment #65). If I have that right, then thank you.

    And now, on to my comment on your blog (ending free trade). What I see happening is the harmonization of wage rates between the U.S. and those nation states that capitalists based primarily in the U.S. exported jobs to over the last few decades.

    My hope is that labour will also “go global”. The global labour leadership will arise in places like India and China. U.S. labour leadership is too co-opted by U.S. capital.

    After labour meets capital on the same playing field, the concentration of wealth will be constrained through the collective bargaining process. The middle class will re-emerge. Government will be the last of the three sectors of the economy to “go global”.

    Short term pain for the U.S. worker. Long term gain for the global village.

    What say you?

  2. I think it’s an interesting perspective. Capital has always benefited from a many nation world system in which it could quickly move to the lowest cost location. A ‘global village’ of labor would potentially end that ability and capital would finally be confined.

    I think the long term though would be longer than either of us would consider a reasonable period to wait. The pain for US and other rich country workers will be very great. And we must remember that capital has / is great power and they have an ace up their sleeve – job reducing technology which will continuously reduce the number of decent jobs. We face a future of robots. In any humane system, that would be a good thing – but not under capitalism.

    I think the far more likely scenario is that national politics in each country will move in a fascist / corporatist direction and international trade tensions will become ever greater. War seems like a real possibility.

    The bottom line is that I don’t see how a system that concentrates ownership into the hands of a very few number of people can be viable. I don’t see how capitalism can survive.

    (Also, not sure why Chinese or Indian labor leaders wouldn’t also get co-opted. Although China does have an interesting history of radical uprisings.)

    What say you?

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