Consumers Are the Greatest Beneficiaries of Free Trade
SEPTEMBER 01, 2001 by PIERRE LEMIEUX
Filed Under : Free Trade, Free Markets
Pierre Lemieux is an economist and visiting professor at the University of Quebec at Hull.
The third Summit of the Americas, held in Quebec City (Canada) in April, was attended by 34 heads of state (or prime ministers) representing all North and South American countries except Cuba. It also attracted some 45,000 demonstrators against Free Trade Area of the Americas (FTAA), a project launched at the first Summit in Miami, in 1994. The demonstrators included a small fringe that clashed with the police, resulting in injuries to some 180 people and close to 500 arrests.
The alternative “People’s Summit,” which preceded the real thing, was directly subsidized by the Canadian government to the tune of $300,000 (Canadian). Presumably, the government wanted to channel dissent and to marshal support for its own agenda. The amount of indirect subsidies and union financing is unknown, but financial editor Terence Corcoran writes: “[T]his protest, and the People’s Summit that preceded it, is almost entirely a union affair. Big Labour provides the money, the organization, the office space, the global contacts and the momentum.”1 So the moving force behind the protests comes from special interests who fear the foreign workers’ competition.
Yet many protesters were college students who had no direct interest in preventing trade. Moreover, one would expect the fringe anarchist demonstrators to oppose state protectionism. The protesters were partly motivated by fear of change, like the eighteenth-century British Luddites, who destroyed machines to stop the Industrial Revolution. However, the Luddites were poor, while the modern protesters have cell phones and put up Web sites. Still, both groups share a glaring ignorance of what free trade is, how free markets work, and how they are related to individual sovereignty.
This can be seen in the following way. Let an antitrade demonstrator imagine that his ideal society stretches from the North Pole to Cape Horn. It does not matter whether it is anarchic or state-based, how income is distributed, or what level of diversity it shows. Just assume that our antitrade activist does not reject individual sovereignty—the idea that, as John Stuart Mill put it, “Over himself, over his own body and mind, the individual is sovereign.”2 Now suppose that one individual from, say, Alaska and another one from Argentina want to exchange their respective products. Or suppose the Argentinean wants to borrow something (or money) that the Alaskan legitimately owns and is willing to lend. Or suppose, for that matter, that the Argentinean decides to physically go and work for the Alaskan. It would obviously be a violation of individual sovereignty to enact laws, enforced by armed men, to prohibit such capitalist acts between consenting adults.
The appearance of trade intermediaries doesn’t change the argument. Instead of the Canadian coffee drinker and the Brazilian coffee producer having to arrange a deal between themselves, importers, wholesale distributors, and supermarkets import the coffee, package it, and make it conveniently available. Once we realize that free trade is but the liberty of individuals to associate and exchange across political borders, it is easy to see that forbidding it requires violence or threats of violence. You have to fine or jail the importer or the traveler who doesn’t abide by trade restrictions.
Many antitrade activists would object that since society is unjust, free trade would only deepen the injustices. The first part of the argument parallels the standard welfare-economics conclusion that market outcomes, and their normative value, depend on the initial distribution of income. Let us grant that we don’t start from the ideal society (although the nature of the injustices is quite different from what antitrade activists believe). There remains the second claim about whether free trade would improve or worsen the condition of individuals who are disadvantaged by the present system. Virtually all economic studies show that free international trade would increase the incomes of the poor in absolute terms if not in relative terms as well.
Why Stop with National Boundaries?
This is not surprising. If it were desirable to prohibit free trade between citizens of different countries, the same argument would apply to residents of different regions in the same country. If it were desirable to prevent trade between inhabitants of rich and poor countries, it would also be advisable to forbid the poor from exchanging with richer individuals in their own countries.
It is often unspecialized workers in poor countries who outcompete their counterparts in rich countries—and this is indeed what the latter’s labor unions fear. In turn, producers in developed countries specialize in more capital-intensive or knowledge-based goods and services. Increased demand for labor in poor countries leads to increased wages: while in 1960, the typical manufacturing wages in underdeveloped countries were 10 percent of the U.S. level, they have climbed to nearly 30 percent three decades later.3 In other words, international trade tends to bring income convergence at the same time as it generally pulls up average incomes.
Free international trade, then, is also desirable if we start from a non-ideal situation because it allows wider choice and opportunities for the disadvantaged. The ability to buy goods and services that don’t correspond to the national establishment’s preferences, or moral standards, is also liberating. So is the capacity to move one’s resources, however meager, to other countries, as Europeans realized when (until two decades ago) they were subjected to foreign-exchange controls and their credit cards were not honored outside their home countries.
Free international trade is just an extension of the general argument for free markets. Capitalist acts between consenting adults don’t stop at arbitrary national borders. As suggested by World Bank economist Keith Marsden, let’s consider, and update, the comparison between South Korea and Ghana.4 In the late ’50s and early ’60s, these two countries had similar economies, and both showed a real GDP per capita equal to 10 percent of the same income measure in the United States. Over the next three decades, the relative Ghanaian GDP per capita decreased, while the Korean GDP per capita reached 42 percent of the U.S. level (see figure). In fact, the World Bank now classifies Korea among the high-income countries. General free-market policies as opposed to the government intervention that Ghana experienced certainly played the major role in Korea’s success, but we can also see that the openness of the Korean economy (total imports and exports over GDP) increased, while the Ghanaian economy tended to become less open.
The black box of “cultural factors” is not a sufficient explanation, as illustrated by the different levels of prosperity between North and South Korea, or between former East and West Germany.
The argument, often made by anti-FTAA activists, that only corporations—and especially multinational corporations—profit from free trade does not make sense. For if it were true, disadvantaged individuals would only have to buy shares of these corporations, thereby redistributing the gains. Large corporations are largely owned by ordinary people in developed countries through pension funds and other savings instruments. If the activists were right, they could play a useful role in helping inhabitants of underdeveloped countries create cooperatives and get loans to purchase shares in multinational corporations.
The truth is that the inhabitants of poor countries profit from private foreign investment, which brings jobs, higher wages, technology and know-how. The Africans’ problem is indeed that they don’t have enough of it—mainly because their institutions are poorly geared to a market economy. Total private investment in sub-Saharan Africa has stagnated at around 10 percent of GDP over the past 30 years, while private investment climbed from 15 percent to more than 20 percent (and, at times, more than 30 percent) of GDP in Korea.5 As leftist economist Joan Robinson wrote, “the misery of being exploited by capitalists is nothing compared to the misery of not being exploited at all.”6
It is true that free trade produces gainers and losers, but the losers are those who were previously able to exploit others through coercive barriers and monopoly power. Moreover, the gainers in today’s globalization include the poorest of all—unspecialized workers in poor countries—and the losers tend to be comparatively rich trade-unionized workers in developed countries. In a free economy, constraints facing individuals are the results of choices by other equally free individuals; in a managed economy, social and economic constraints are made of political authorities’ arbitrary diktats.
If free trade is a natural part of the interaction among sovereign individuals, managed trade is a very different animal. Managed trade is trade regulated by the state, or by a cartel of states.
Its aim is to assure that trade does not conflict with whatever happen to be the state’s public-policy objectives—that is, that it does not reduce state power. Existing trade treaties and organizations are often a mix of managed trade and free trade. The Summit of the Americas process that officially started at the 1994 Miami meeting—if not the eventual trade agreement itself—seems closer to the “managed” than to the “free” end of the continuum.
Besides FTAA, the Declaration of Miami contains a host of projects that are more akin to creating a cartel of states than to letting individuals trade freely.7 The Declaration espouses the shibboleths of “social justice” and “sustainable development,” and the heads of state pledge to “invest in people”—to increase their shares in us, as it were.
The accompanying “Plan of Action” talked about much more than free trade: “universal access to education,” “equitable access to basic health services,” “strengthening the role of women in society,” and a host of other coercive state agendas.8 Note this: “Governments will . . . [e]nact legislation to permit the freezing and forfeiture of the proceeds of money laundering and consider the sharing of forfeited assets among government[,] . . . [e]ncourage financial institutions to report large and suspicious transactions to appropriate authorities and develop effective procedures that would allow the collection of relevant information from financial institutions[,] . . . [s]trengthen efforts to control firearms, ammunition, and explosives to avoid their diversion to drug traffickers and criminal organizations.” All this under the objective of “strengthening democracy”!
Four years later the 1998 Declaration of Santiago put new emphasis on previously defined goals such as “progress towards social justice” under the so-called Universal Declaration of Human Rights, or “greater support to micro and small enterprises.”9 New statist objectives were added, such as “strengthen[ing] banking supervision in the Hemisphere,” and “promot[ing] core labor standards recognized by the International Labor Organization (ILO).” The updated Plan of Action included new ideas for exporting statism, like “internal rules that regulate contributions to electoral campaigns.”
With all this, the politicians and bureaucrats thought they had co-opted the government-subsidized activists. The Quebec City Summit demonstrated that they were mistaken, which did not stop them from showing more of their statist colors.
The worthy goal is still “trade, without subsidies or unfair practices, along with an increasing stream of productive investments and greater economic integration,” but the participants have other agendas.10 The updated Plan of Action, now 43 pages long, calls for “the effective application of core labor standards,” international redistribution, and “corporate social responsibility.”11 It adds tobacco and alcohol to the evils to be fought. Governments, the document states, will “[p]articipate actively in the negotiation of a proposed [World Health Organization] Framework Convention on Tobacco Control; develop and adopt policies and programs to reduce the consumption of tobacco products, especially as it affects children; share best practices and lessons learned in the development of programs designed to raise public awareness, particularly for adolescents, about the health risks associated with tobacco, alcohol and drugs.”
At the Summits of the Americas, as in other international trade meetings, state representatives behave as agents of their countries’ exporters. You give us this “concession” and in return we will allow your exporters to enter our markets; you stop trampling on your citizens’ liberty to import, and we will similarly liberate our own subjects! This approach misrepresents the nature of trade and a free economy, where consumers, not producers, are sovereign. The primary advantage of free trade is not that exporters will gain larger markets, but that consumers will have more choice—even if the former is a consequence of the latter. By presenting themselves as members of different exporters’ clubs, trade negotiators bring grist to the mill of the enemies of free trade.