Opposition to “free” trade is clearly growing — both the progressive and the corporate elements of the Democratic Party are now critical of agreements like the North American Free Trade Agreement and the Trans-Pacific Partnership. Less clear are the alternatives to free trade that might emerge. As progressives continue to build power inside and outside of the Democratic Party, we must clarify our understanding of the international political economy, and imagine and begin to build real alternatives to free trade. Building these alternatives must become an essential component of a more progressive US foreign policy.
The conventional wisdom says that if you oppose free trade, you must support protectionism or economic nationalism. This is misleading. There is no such thing as “free” trade. People create all of the systems that govern our political economy. These systems inevitably favor certain human activities over others, and we can design them to act any way that we want. The important question is: For whom are trade policies “free”? Put another way: Who do trade policies favor?
Debunking “Free” Trade
“Free” trade is free only for capital owners: the plutocratic few who own and control multinational corporations. When countries enter into free trade agreements, the governments of both countries effectively agree that their laws will not favor businesses from their country over businesses from any other countries. The main way that free trade does this is by attempting to reduce all tariffs to as close to 0 percent as possible, to eliminate import quotas that countries can use to limit the amount and types of goods imported from specified countries, and to discourage countries from more directly subsidizing their own businesses.
Far from promoting freedom for everyone, “free” trade empowers multinationals from the global North to control the world political economy in two important ways. First, free trade facilitates global North multinationals to maintain the unequal trade they established with the global South during colonialism. This increases inequalities of power and wealth between global North and global South. Second, free trade empowers global North multinationals to plan the world economy alongside global South multinationals, the junior partners of the global North multinationals, and to pit working-class people in the global North and global South against one another.
Thus, free trade is the modern form that imperialism takes. Throughout US history, the US government has used military force to expand free trade throughout the world. For more than a century, US-backed military coups and US-backed military dictatorships have led to partnerships between the US government, US multinationals and local elites across the globe that are built around creating trade that concentrates wealth for multinationals. This remains a core source of violence in the world with many implications. Today, for instance, Central American refugees at the southern US border are criminalized for fleeing a history of US military coups and intervention in Central America and the neoliberal trade policies that US multinationals and local elites created in their aftermath.
Colonialism and the History of Unequal Trade
In the 1950s, the Argentinian economist Raúl Prebisch and the German economist Hans Singer developed “dependency theory,” which describes the unequal terms of trade that the global North established with the global South during colonialism — the same unequal economic relationships that free trade protects today. Prebisch and Singer attacked the mainstream trade theory of “comparative advantage,” which holds that countries naturally produce the goods that they are most efficient at producing. Core to the idea of comparative advantage — and to mainstream economic theory today — is the idea that the “invisible hand” of the market guides these natural choices.
However, during colonialism, global North colonizers did not rely upon the market’s “invisible hand.” Instead, they ensured — through physical violence and use of tariffs that they still prevent global South countries from using today — that they would have a monopoly on the production of manufactured and high-tech goods, the most profitable sectors of the economy. Global North corporations sold these goods to people in their own countries and to people in global South countries, while making sure that global South corporations lacked the capacity to make such goods on their own.
The global North turned the global South into an exporter of raw materials — a position from which they are still largely unable to escape — so that they could have access to an ever-expanding supply of low-cost raw materials that they needed for manufactured goods. Global North countries, by reorganizing global South economies to become raw material exporters, also ensured access to global South markets. Throughout colonialism, and to a somewhat lesser extent today, global North corporations have been able to own and capture the profits from global South corporations that produce raw materials, in addition to owning global North corporations that produce manufactured goods.
It is important to note that global North governments have used protectionism to maintain these unequal economic relationships developed during colonialism. For example, the British used tariffs and subsidies to help their corporations become the colonial world’s dominant producer and exporter of textiles and the machines of the early Industrial Revolution, the most profitable manufactured goods of the day. They didn’t stop using protectionism, even while attempting to impose free trade on all other countries, including their American colonies, until they had become the dominant producer of manufactured goods during the 1800s. Similarly, the US relied extensively on tariffs until becoming the dominant producer and exporter of manufactured goods during the early 1900s.
This hypocrisy continues today. More powerful global North governments do not even honor the spirit of their own free trade agreements, as they frequently favor their own industries, especially their agricultural, pharmaceutical and digital technology industries. At the same time, global North governments use free trade agreements to demand that global South countries cannot use the same tools that global North governments have used to propel their corporations to their dominant economic position of today.
Free Trade Imperialism: Continuing the Unequal Trade of Colonialism
With mass global South resistance to colonialism increasing in the early 1900s and intensifying in the aftermath of the world wars, global North corporations and governments no longer needed colonialism. From their perspective, moving toward the international economic model that would become free trade was much more cost-effective. As the US sociologist Johanna Bockman writes of US government and business elites in the aftermath of the second world war, “[They] supported neither free trade nor globalization imagined as a level playing field with flows moving evenly around the globe. Instead, they supported the international neocolonial system through the [General Agreement on Tariffs and Trade (GATT)], while using the rhetoric of free trade and modernization to support US national interests.”
Roughly 70 years after the global North created the post-second world war international order, global North corporations continue to own and control a disproportionate amount of the most profitable industries in the global economy. Though many US commentators warn of the rise of Brazil, Russia, India and China, US corporations, in 2013, still had leading positions in 18 of the 25 most profitable industries. Moreover, US corporations are dominant in the most profitable advanced industries, including banking and financial services, aerospace and defense, chemicals, computer hardware and software, insurance, pharmaceuticals, heavy machinery, and oil and gas. While the US has roughly 5 percent of the world’s population and 25 percent of the global share of gross domestic product, US corporations likely control far more than 25 percent of the profit-producing capital in the world. These profits are concentrated among the shareholders of multinationals incorporated in the US, which, according to one estimate, are at least 85 percent owned by US citizens. These profits are not being shared with vast majority of people in the world, most of whom do not own any wealth, let alone shares in corporations.
Global North and US multinational dominance of the world economy is not an accident, as global North governments and multinationals have used the international institutions they created following the second world war to continue to dominate the world economy. These institutions include the United Nations; the GATT, which has since become the World Trade Organization (WTO); the International Monetary Fund (IMF); and the World Bank.
The WTO is the main international institution that makes and enforces trade policies. The core GATT/WTO principles are “non-discrimination” and “national treatment.” Non-discrimination means that countries will not use their trade policies to discriminate between goods that are produced in different foreign countries. National treatment means that countries will not use their trade policies to favor products produced in their own country over products produced in any other country.
As described above, global North countries used their trade policies to promote the products of the corporations based in their countries for centuries. The free trade principles of non-discrimination and national treatment deny the ability of any country to use those same policies today. This allows global North corporations to ensure that global South governments will not create policies that can help their own corporations develop the wealth they need to compete. Additionally, since the GATT/WTO free trade framework facilitates continued global North corporate control over advanced industries, global North corporations are far more likely to develop the high-tech industries of the future, as they own the profits from today’s advanced industries which they can invest in research and development.
As Lawrence Summers, economic adviser to the Clinton and Obama administrations, points out, the GATT/WTO free trade regime has been so successful that today’s free trade agreements aren’t even about the traditional obstacles to free trade, as these obstacles are already effectively eliminated in most countries. Instead, today’s agreements involve protecting the property rights (especially the intellectual property rights) of multinationals and harmonizing the regulatory regimes across countries with which multinationals must comply. In other words, today’s free trade agreements are about enforcing the unequal economic relationships that global North corporations have continued to enjoy since the times of colonialism.
The most egregious example of global North countries using the WTO to codify their colonial unequal economic relationships is the Trade-Related Aspects of Intellectual Property Rights (TRIPs), an agreement that is part of the WTO. TRIPs extend patent, copyright and trademark protections to all WTO members — effectively the entire world economy. However, the global North is a net intellectual property producer and the global South is a net intellectual property consumer. TRIPs’ intellectual property protections extend to goods like pharmaceuticals, digital technology hardware and software, and most art and media entertainment. Intellectual property protections allow the global North corporations that own the patents, copyrights and trademarks for these products to maintain monopoly control over them. Global North corporations can charge high prices for pharmaceuticals and digital technology to global South consumers, transferring wealth to global North corporations. Further, intellectual property protections make it impossible for global South corporations to compete with global North corporations to produce these goods, meaning that global North corporations can continue to monopolize the profits.
Since the post-WWII restructuring of the international economy, global South countries have needed to find capital to develop their own industries. The GATT/WTO free trade framework bars global South countries from creating policies that can help their own industries develop their own surplus capital, as described above, so global South countries have resorted to borrowing money from the financial sector. The IMF and the World Bank have promoted and subsidized global North banks lending to global South countries, and have only made capital available to global South countries if they accept the conditions of the North’s free trade policies, as well as privatization of any state-owned businesses and deregulation of their economies.
Through the work of GATT/WTO, the IMF and the World Bank, global South governments and corporations have been kept in the unequal economic position developed during colonialism. As Vijay Prashad explains, US and Western militaries have also helped to expand free trade throughout the world by supporting military dictators and military coups throughout Asia, Africa and Latin America. This economic and military violence is the visible hand the global North governments and corporations have used to concentrate the world’s wealth.
This visible hand explains how global North, and especially US, corporations continue to own and control a disproportionate amount of the most profitable industries in the global economy.
Learning From Past Efforts to Reform International Institutions
Before more deeply exploring the alternatives to free trade that we can create today, we should focus on two post-WWII efforts to change the established international political economy order: John Maynard Keynes and E.F. Schumacher’s attempt to create an International Clearing Union (ICU) in the 1940s and the Non-Aligned Movement’s effort to create “structural adjustment” in the 1960s and 1970s.
During the 1940s, the economists Keynes and Schumacher advocated for an international system of capital controls, and economists including Yanis Varoufakis and Paul Davidson have revived this effort today. Keynes and Schumacher considered their proposal for an ICU as a solution to two key problems with the international financial system.
First, global North multinationals and banks extract profits from the global South. This extraction reduces the global South’s relative purchasing power, as profits are not recirculated within the global South, which makes the global South increasingly reliant on importing advanced goods, the purchase of which depletes their currency. Eventually, this dampening of purchasing power around the world creates global recessions.
Second, national governments cannot simply increase their country’s purchasing power through public spending. If national governments spend, creating money in their own currency, their currency depreciates relative to other currencies as the supply of their own currency has increased, making imports even more expensive, further depressing the country’s purchasing power. Keynes and Schumacher were effectively arguing that the rules of the international financial system depressed purchasing power and caused recessions because the rules allowed global North multinationals to concentrate capital that they refused to redistribute. Without redistribution, global South purchasing power remains too low in order to incentivize global North multinationals to invest at high enough levels required to avoid recession.
The solution, according to Keynes and Schumacher, was to create an ICU, which would effectively act as an international bank through which all currency exchanges would occur. The ICU would track global North trade surpluses, and if such surpluses exceeded certain amounts, the ICU would effectively tax the global North currency and redistribute the amount of money taxed to the global South country to increase its purchasing power and to help its country build its own productive capacity. This system, Keynes and Schumacher argued, would recirculate profit throughout the world and keep aggregate demand high enough to avoid the instability of recessions. Today, calls remain for a similar system, with the main difference being that economist Varoufakis prefers that the surplus redistribution be managed by a transparent digital distributed ledger (the technology at the core of Bitcoin and other digital cryptocurrencies), rather than by international bureaucrats.
The key insight from the ICU proposal is that global North multinational corporate concentration of capital creates international economic instability, and that we need an international institution to redistribute global North profits.
UNCTAD’s Vision for Reforming the World Economy
Another alternative worth examining is the effort by the Non-Aligned Movement to create “structural adjustment” of the world political economy in the 1960s and 1970s. The Non-Aligned Movement — a group of global South countries claiming independence from the US and the USSR, led by Indonesia, India, Egypt, Tanzania, Yugoslavia, Cuba and others — created the United Nations Conference on Trade and Development (UNCTAD), for which Prebisch, the Argentinian economist who developed dependency theory, was the first secretary-general.
The Non-Aligned Movement attempted to use UNCTAD to create what they envisioned as structural adjustment of the international political economy. (The IMF would later co-opt the term to help impose the free trade Washington Consensus throughout the global South.) The UNCTAD structural adjustment program called for new policies and institutions that shifted control of capital from the global North to the global South, including marketing cartels that pooled global South multinational corporate power; grants from the global North to provide financial and technological assistance to global South multinationals; and minimum market share agreements, whereby global North countries agreed to buy certain amounts of advanced goods from global South multinationals, giving them access to markets.
The short answer for why UNCTAD’s efforts failed is because global South countries lacked the required political power; they could not create the program on their own and their unity could not withstand the global recession of the 1970s.
The key insight from UNCTAD’s structural adjustment program is that the current terms for economic competition between global North and global South multinationals are unequal, and deliberate policies for transferring capital, technology and market access to the global South are required to reverse these unequal terms, just as deliberate global North policies were required to create these unequal terms in the first place.
But a key problem with UNCTAD’s structural adjustment plan is that it does not address inequalities of wealth and power within countries. UNCTAD’s program was designed to shift power between the wealthy and powerful in the global North and the global South. It wasn’t necessarily designed to create a democratic political economy throughout the world that shifts power to the grassroots masses and away from the elite few who own multinationals.
We can, however, begin to build alternatives to “free” trade that both shift power and wealth from the global North to global South and from the elite few to the grassroots masses throughout the global North and the global South. Building upon the insights from Keynes and Schumacher’s attempt to create the ICU and the Non-Aligned Movement’s attempt to use UNCTAD to reform the world economy, we can work toward a progressive international political economy that promotes material dignity and freedom for all the people of the world.