International Trade Ever Since Adam Smith Demonstrated

¶ … International Trade

Ever since Adam Smith demonstrated in The Wealth of Nations (1776) that individuals would be better off if they specialize, instead of trying to be economically self-sufficient, countries across the world have tried to apply the same principle to international trade. It is argued that all countries would be better off if they exchange the products and services that they are relatively good at producing for those things that other countries are relatively better at producing. David Ricardo (1772-1823), British economist and businessman, through his theory of Comparative Advantage went on to "prove" that it can be beneficial for two countries to trade, even if one of them is able to produce each item more cheaply than the other.

The colonialist powers, particularly Britain, had realized the benefits of international trade after its industrial revolution although it is highly debatable whether such trade was beneficial for the colonies as well. In the last two decades, international monetary institutions such as IMF and trade organizations, particularly the Word Trade Organization (WTO) have been at the forefront for promoting free international trade. Unrestricted international trade has been touted as the panacea for all economic ills and an agent of development. The results of international trade have, however, been mixed. While supporters of free trade point to several success stories such as China, others point to the growing inequality, economic shocks such as the Asian Economic Crisis of 1997, and the increasing poverty in Sub-Saharan Africa as "fruits" of increased international trade (also known as globalization). In this paper I shall examine the pros and cons of international trade in order to determine whether increased international trade is beneficial or detrimental for our world. I shall also attempt to analyze how the existing problems in international trade can be overcome so that a greater cross-section of the global population starts to benefit from increased trade.

Reasons Why Increased International Trade is Beneficial

Apart from Adam Smith's theory of specialization and David Ricardo's theory of comparative advantage, which enable the countries to devote their natural, human, industrial, and financial resources to their best uses, there are other reasons why increased international trade is supposed to be beneficial. For example, open markets and increased international trade gives people around the world more freedom of choice, which fulfills a basic human requirement of independence and freedom. Moreover, exposure to international markets is a strong stimulant for improvement in efficiency and transfer of technology including better management techniques to the less developed countries. Export-oriented jobs tend to pay more; thus increasing the general living standards of people, while increase in living standards in less developed countries create markets for the goods of the developed countries. All these factors combined, at least in theory, should prove beneficial to all.

Growing International Trade

Unprecedented growth and development in communications and Information Technology and in the last few decades have brought the people of the world closer than ever before. This "information revolution" has coincided with the collapse of Communism in the Soviet Union and Eastern Europe and the promotion of market economy in China. Increased international trade in such an environment was, perhaps, inevitable. As a result, the volume of world trade has expanded to over $7 trillion annually. This translates into a 16-fold increase in world-wide trade since 1950.

Pros:

Benefits of Increased International Trade

Supporters of increased international trade attribute such increased trade to a six-fold rise in Global GDP during the corresponding period. (Nordstrom and Vaughan, 1999). Moreover, in the quarter century between 1975 and 2000, the Foreign Direct Investment (FDI) has grown from $14 billion to $350 billion a year. According to the proponents of free trade and supporters of the "trickle down" economic theory, such increases have resulted in a significant reduction in poverty around the world during the last fifty years.

Growth in Countries that Adopted Free-Trade Policies

Several studies extol the virtues of free international trade which tell us that free trade shifts a country's resources into those goods and services in which its workers are most productive. According to one study reported on by Daniel Mitchell of the Heritage Foundation reveals that, during the 1970s and 1980s, developing open economies (those with relatively free trade), such as Chile and South Korea, grew on average by 4.5%, while closed economies (those with restrictive trade policies), such as India and Cuba, grew by only 0.7%. Another statistical study, based on a review of 123 nations, found that every percentage-point increase in total imports and exports leads to a 0.34% increase in per capita income (Vogel, 2000)

Proponents of free international trade point to the example of China which embarked on a path of trade liberalization in 1978 and in the next twenty years its imports and exports grew from $21 billion to $324 billion. During this same period, the country's per capita income increased by more than 8% per year. In the same period, India's growth rate, which continued to follow protectionist policies, high tariffs and restrictions on foreign investment was very sluggish and only began to improve after it adopted economic liberalization policy in the second half of the 1990s. (Ibid.)

Example of the United States

The benefits of free-trade are most vividly reflected in the economic success of the United States. Soon after its establishment in 1789, the U.S. Constitution prohibited states from restricting trade with other states. This one act alone, helped to create a large and efficient domestic market that soon made the United States one of the richest economies in the world. The secret of its success lies in the application of free trade. All the states in the U.S. are not self sufficient in everything. Some of them which possess favorable weather conditions and rich soil produce the bulk of food. Others are more efficient in producing industrial goods. All of them benefit by importing and trading among themselves without any trade barriers. The same rule of "free trade" applies for trade between countries and all countries which participate in such trade can benefit economically just as the U.S. states have benefited by trading among themselves.

More recently, the unprecedented growth in the U.S. economy during the 1990s can also attributed to increased international trade and globalization as between 1980 and 1998, U.S. exports increased from $272 billion to $934 billion, and its imports grew from $292 billion to $1,100 billion. (Ibid.)

Cons:

The Disadvantages

Opponents of the free trade Laissez Faire policies and the trickle down economic theory vehemently oppose these "globalization" policies as is evident in the widespread demonstrations at every WTO meeting. The opponents of WTO's free trade policies assert that it unfairly favors corporations at the expense of consumers, workers, and the environment. They also argue that these policies are heavily tilted against the poorest sections of the world's population and have contributed in increasing poverty and inequality.

Policies Based on Corporate Interests

According to such anti-globalization and free trade theorists, the policy making in organizations such as the WTO, the IMF, the World Bank and the OECD

is dominated by corporate interests and adheres to a neo-liberal, free-trade agenda. (Moore, 1999, Part I) These centralized bureaucracies are mostly manned by private bankers and corporate employees who watch out for the interests of the elite. In a post-communist world, any opposition to the free market, unregulated laissez faire economy is derided and dismissed. The WTO wields great authority through free-trade treaties; the IMF wields similar power by attaching conditions to the loans which it grants, while the OECD serves as a global elite think-tank. A combination of the three organizations has become an all-powerful official world government at the expense of the sovereignty of individual governments. (Ibid.)

Removing the Guiding Hand

The nineteenth century saw the unfettered adoption of Adam Smith's laissez faire economics minus the "guiding hand" by the United States and most other western countries particularly Britain. Information technology and communications technology was not as well developed as they are today to result in widespread international trade. The result, however, was the era of the "robber barons," naked exploitation of workers by the industrialists, and repeated "boom and bust" cycles. The severe global economic depression of the 1930s was the logical outcome of runaway capitalism without the necessary regulations in place. This followed a period of greater government controls and social security programs, which lasted until the 1980s. In this period, the Bretton Wood institutions provided the "guiding hand" for the global economy. Under pressure from the powerful multi-national corporations (MNCs), the "guiding hand" started to weaken in the 1970s. President Nixon took the U.S. off the gold standard, floated the exchange rates and control of international finance shifted from elected governments to private banks, investors, and speculators. (Moore, 1999, Part I)

Margaret Thatcher's policies in Great Britain and President Reagan's Reaganomics in the U.S., accelerated a reversal to Laissez faire policies of the 19th century. The difference was that this time the reach of the Free Market policies was global and its results are magnified. Privatization, deregulation, and economic reform became the buzzword around the world, resulting in accelerated transfer of assets, revenues, and power from elected governments to corporations. Let us now look at the negative effects of free international trade and globalization over the last few years.

How International Free Trade Policies Favor Big Corporations

Free trade policies are perceived by many to favor big business interests. Consider the following examples:

a)

The WTO rules forbid a citizen of a third world country to copy a compact disc made in a developed country without paying a fee to the company that sells the compact disc. However, the WTO rules allow a company from the same developed country to make compact discs in a third world country despite the fact that its manufacturing process may pollute the air and water and exploit the workers.

b)

The U.S. Environmental Protection Agency (EPA) issued a rule in 1994 to ensure that all gasoline sold in the United States met certain levels of cleanliness. Oil companies in Venezuela and Brazil complained to the WTO that the rules would put them at a disadvantage. The WTO ruled against the United States, which then had to change the rules, despite the fact that such a change would compromise the environmental standards in the United States.

c)

The power of corporations under free market rules is also evident in a case in which the U.S.-based Ethyl Corporation forced Canada to backtrack on its decision to ban the chemical MMT after scientists found it to be a dangerous neurotoxin. Ethyl claimed that it was a case of "trade discrimination" and Canada, rather than bear the futile expense of contesting the claim capitulated. (Moore, 1999, part I)

Corporations are Exempt from Free Market Discipline

Despite the pro-free market stance of giant corporations and speculators, they are first to exempt themselves from the harshness of free-market discipline when things go wrong. In the wake of the Asian Economic Crisis in 1997, the IMF injected its so-called "rescue funds." Guess where the money went: not into any national treasury or the relieve the sufferings of the people who were impoverished or the unemployed but to the speculators, investors and fund-managers who had actually helped to bring about the collapse.

So the new IMF policies of free-market support can be summarized as: "austerity programs for the masses, bailout programs for corporations and investors, and destabilization programs for national economies." (Ibid.)

Inequality

The wide gap between the rich and the poor is revealed by the fact that the richest 1% people of the world receive as much income as the poorest 57% and the richest 5% of the world's population have incomes 114 times those of the poorest 5%. (Dollar and Kraay, 2001) Even more disturbing is the increasing trend of inequality revealed in several recent studies. Critics of 'globalization' attribute the increasing inequality between the 'haves and the have-nots' to the world-wide adoption of free trade policies. Socio-economic inequality is one of the most formidable challenges facing the world in the 21st century as it results in social tensions and instability. Some analysts also believe growing inequality to be a major reason behind global terrorism.

Rural Poverty

More than 200 years ago after the Industrial Revolution, approximately half of the world's population still relies on the rural economy for its livelihood. A large majority of these people remain mired in appalling poverty and the living standards of the rural population, particularly the Sub-Saharan Africa, have worsened in recent years.

The main reason for this is that poorest countries in the world rely heavily on the export of primary commodities (food and raw material) to pay for their imports and according to UNCTAD figures, prices of 41 of the leading 46 primary commodities fell between 1997 and 2001.

The major reason for the fall in commodity prices are the 'liberalization' policies and the unfair trade rules enforced by WTO and the international lending agencies. While the developing countries have been forced to open up their markets to imports and concentrate on things they can sell abroad, the rich countries have continued to subsidies their agricultural sector and failed to remove trade barriers in areas which suit them. Large farm subsidies by the United States and the European Union lead to dumping of agricultural products on the international market below their logical prices drive the poor countries out of the export markets. For example, the U.S. government provided a subsidy of $2.3 billion to its cotton sector in 2001-02, which depressed the world cotton prices by 20%. As cotton is the main cash crops of a number of poor countries, particularly in Western Africa, the low cotton prices hurt them directly. The EU too gave 819 million Euros worth of subsidies to 6 leading European sugar processing industries in 2003 that led to direct losses to poor African sugar producers such as Malawi and Mozambique. ("Rural Poverty Trap" 2004)

Trade and Environment

The over-riding concern of almost all business conglomerates is to maximize their profits. The big multi-nationals are particularly notorious in their greed. Free trade policies give these corporations a free rein in setting up industries wherever they can maximize their profits. Unfortunately, the desire for maximizing profits is in direct conflict with the life-support systems of the Earth. Ozone depletion, global warming, overuse of pesticides, destruction of top-soils and rainforests, unrestrained logging, pollution of air and water, exhaustion of fisheries are being accelerated by unregulated trade around the world.

Analysis of the Arguments

After having carried out research on the pros and cons of free international trade, I have come to the conclusion that increased trade between countries does create wealth. However, the rules of the trade game are such that the wealth being generated by increased level of international trade does not reach all sections of the world in a fair manner. Here are the reasons for my conclusion:

The statistics about a 16-fold increase in world-wide trade since 1950 (present value of well over $7 trillion) and a six-fold increase in the GDP during the period is indicative of the extent of international trade and the wealth it generates. Some parts of the world and a number of people have no doubt benefited from this creation of wealth. Foremost among these are the developed countries, large corporations and the elite. The reason for this is simple: the developed countries (and multi-national conglomerates) have the greatest "comparative advantage" in the production of most goods for obvious reasons. They have an edge in technology, resources, political and military power. They exert the greatest influence in organizations such as the WTO, which make the rules governing international trade. The end result of this is that socio economic inequality is increasing despite the net reduction in poverty.