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(to Part 2 of Goldsmith on GATT)
This document was originally provided to misc.act.progressive 12:17 PM Nov 18, 1994 by Jim Cook, MIT Center for Space Research Cambridge, Ma. Email: jcook@space.mit.edu.

It was downloaded, edited for clarity and due to several requests, reuploaded by Ronald Bleier, (rbleier@igc.org).

The following is the October 5 testimony of Sir James Goldsmith before the Senate Commerce Committee on the subject of the Uruguay Round of GATT:


Federal Document Clearing House Congressional Testimony
October 5, 1994

Global free trade has become a sacred principle of modern economic theory, a sort of generally accepted moral dogma. That is why it is so difficult to persuade politicians and economists to reassess its effects on a world economy which is changing radically.

The ultimate objective of global free trade is to create a worldwide market in products, services, capital and labour. Its instrument to achieve this is GATT, the General Agreement on Tariffs and Trade.

I believe that GATT and the theories on which it is based are flawed. If it is implemented, it will impoverish and destabilize the industrialized world while at the same time cruelly ravaging the third world.

Q: Remind us of the economic theory on which GATT is based.

The principal theoretician of free trade was David Ricardo, a British economist of the early nineteenth century. He believed in two interrelated concepts; specialization and comparative advantage. According to Ricardo, each nation should specialize in those activities in which it excels, so that it can have the greatest advantage relative to other countries. Thus, a nation should narrow its focus of activity, abandoning certain industries and developing those in which it has the largest comparative ad vantage. As a result, international trade would grow as nations export their surpluses and import the products that they no longer manufacture, efficiency and productivity would increase in line w ith economies of scale and prosperity would be enhanced. But these ideas are not valid in today's world.

Q: Why?

During the past few years, 4 billion people have suddenly entered the world economy, include the populations of China, India, Vietnam, Bangladesh, and the countries that were part of the Soviet empire, among others. Then populations are growing fast; in thirty-five years, that 4 billion is forecast to expand to over 6.5 billion.

These nations have very high levels of unemployment and those people who do find jobs offer their labour for a tiny fraction of the pay earned by workers in the developed world. For example, forty-seven Vietnamese or forty-seven Filipinos can be employed for the cost of one person in the developed world, such as France.

Until recently, these 4 billion people separated from our economy by their political systems, primarily communist or socialist, and because of a lack of technology and of capital. Today all that has changed. Their political systems have been transformed, technology can be transferred instantaneously anywhere in the world on a microchip, and capital is free to be invested wherever the anticipated yields are highest.

The principle of global free trade is that anything can be manufactured anywhere in the world to be sold anywhere else. That means that these new entrants into the world economy are in direct competition which the workforces of developed countries. They have become part of the same global labour market. Our economies, therefore, will be subjected to a completely new type of competition. For example, take two enterprises, one in the developed world and one in Vietnam. Both make an identical product destined to be sold in the same market, say the USA, Great Britain or France; both can use identical technology; both have access to the same pool of international capital, The only difference is that the Vietnamese enterprise can employ forty-seven people where the French enterprise can employ only one. You don't have to be a genius to understand who will be the winner in such a contest.

In most developed nations, the cost to an average manufacturing company of paying its workforce is an amount equal to between 25 percent and 30 per cent of sales. If such a company decides to maintain in its home country only its head office and sales force, while transferring its production to a low-cost area, it will save about 20 percent of sales volume. Thus, a company with sales of 500 million dollars will increase its pre-tax profits by up to 100 million dollars every year. If, on the other hand, it decides to maintain its production at home, the enterprise will be unable to compete with low- cost imports and will perish. It must surely be a mistake to adopt an economic policy which makes you rich if you eliminate your national workforce and transfer production abroad, and which bankrupts you if you continue to employ your own people.

Q: But the companies that move offshore are those which employ large labour forces. Surely the new jobs that will be created by the high- tech industries of the future will compensate.

High-tech industries can, indeed, survive and prosper under these circumstances, for the very reason that they are highly automated and therefore employ few people. Labour is no more than a minor item in the overall cost of the products they make. But obviously they cannot compensate for the lost manufacturing jobs: the fact that they employ few people means that they are incapable of employing very many. As soon as they need to employ a reasonable number, they will be forced to move offshore. For example, IBM is moving its disk-drive business from America and Western Europe to low labour-cost countries. According to the Wall Street Journal, IBM plans to establish this new site as a joint venture with an undetermined Asian partner and use non-lBM employees so that it will be easier ... to move to an even lower-cost region when warranted ... Moving from higher cost region, to Asia cuts in half the cost of assembling a disk drive. Mr. Zschau of IBM admitted that the moves will put IBM on only even footing with its competitors.

The aircraft manufacturer Boeing has announced that it will transfer some of its production to China. The sort of companies that created Silicon Valley, like Hewlett- Packard and AdvancedMicro Devices, are also shipping employment to low-wage countries. Proponents of global free trade constantly say that exporting such high-tech products as very fast trains, airplanes and satellites will create jobs on a large scale. Alas, this is not true. The recent 2.1 billion dollar contract selling very fast French trains to South Korea has resulted in the maintenance, for four years, of only 800 jobs in France: 525 for the main supplier and 275 for the subcontractors. Much of the work is carried out in Korea by Asian companies using Asian labour, What is more, following the transfer of technology to South Korea, in a few years' time Asia will be able to buy very fast trains directly from South Korea and bypass France.

As for planes and satellites, the numbers employed in this industry in France have fallen steadily. Over the five years from 1987 to 1992, they have declined from 123,000 to 111,000 and are forecast to fail to 102,000 in the short term.

One of the big, mistakes that we make is that when we talk about balancing trade we think exclusively in monetary terms. If we export one billion dollars' worth of goods and import products of the same value, we conclude that our overseas trade is in balance. The value of our exports is equal to that of our imports, But this is a superficial analysis and leads to wrong conclusions. The products that we export must necessarily be those which use only a small amount of labour. If not, they would be unable to compete with products manufactured in low labour-cost countries and so would be unexportable. The number of people employed annually to produce one billion dollars' worth of high-tech products in the developed nations could be under a thousand. But the number of people employed in the low-cost areas to manufacture the goods that we import would be in the tens of thousands, because these are not high-tech products but ones produced with traditional levels of employment. So, our trade might be in balance in monetary terms, but if we look beyond the monetary figures we find that there is a terrible imbalance in terms of employment.

That is how we export jobs and import unemployment. But many economist believe that the growth in service industries will compensate for lost jobs in manufacturing. Even service industries will be subjected to substantial transfers of employment to low-cost areas. Today, through satellites, you can remain in constant contact with offices in distant lands. This means that companies employing large back offices can close them and shift employment to any other part of the world. Swissair has recently transferred a significant part of its accounts department to India.

Q: Still, certain services cannot be transferred overseas, such its health and education.

Indeed, but let's think that through to its practical conclusion. A nation's economy is split into two broad segments, one which produces wealth and the other which dispenses it. That in no way means that the latter is inferior, it includes such vital activities as health and education. Despite the fact that both kinds of activities are measured by GNP, one cannot reduce that part of our economy which produces wealth and expect to be able to maintain the other part which dispenses it. You must earn what you spend.

The exchange rates between various currencies also have a substantial impact on the power to compete. When Ricardo calculated comparative advantage, he did so in money terms. If a product costs X French francs in France and Y US dollars in America, all you need to do is to convert dollars into francs at the going rate of exchange and it will be clear where the advantage lies. In other words, the nation in which the product is cheaper is the nation that has the comparative advantage.

But this calculation can be brutally and suddenly transformed by a devaluation or a revaluation of one of the currencies. In 1916, one dollar was worth 4.25 French francs, by 1985, the dollar had risen sharply and was worth 10 French francs; by 1992, it had fallen again and was worth only 4.80 French francs. So take a product which in 1981 had the same cost whether manufactured in America or in France. Four years later, in 1985, it became more than twice as expensive in America as in France. This was no more than a reflection of the changing value of the dollar relative to the franc. Yet, according to Ricardo, each nation is supposed to specialize in those products in which it has a comparative advantage. If you followed this reasoning, industries on which you might have concentrated in America in 1981 would have had to be abandoned in 1985. And the reason would have been that the comparative advantage would have disappeared purely for monetary reasons. Then as the dollar fell again in 1992, the theory would have required that you recreate the industry in the United States. This is obvious nonsense. No one should sacrifice and recreate industries merely to be in rhythm with fluctuations in exchange rates.

Q: Of course, those who believe in global free trade reject your arguments. Firstly, they cite the joint study published by the OECD and the World Bank which states that the application of the GATT proposals would increase world income by 213 billion dollars a year. How can we turn down such growth?

If you study the report, you will find that the increase is forecast to come about in ten years' time. Yes, 213 billion dollars is a large sum of money, but to assess its significance you must compare it to the world's GNP as it is forecast to be in ten years' time. 213 billion dollars represents no more than 0.7 per cent. What is more, the General Secretary of the OECD described the figure in the report as being "highly theoretical". it is also claimed that global free trade means that consumers will benefit from being able to buy cheaper imported products manufactured with low-cost labour. Consumers are not just people who buy products, they are the same people who earn a living by working, and who pay taxes. As consumers they may be able to buy certain products more cheaply, although when Nike moved its manufacturing from the US to Asia, shoe prices did not drop. Instead profit margins rose. But the real cost to consumers of cheaper goods will be that they will lose their jobs, get paid less for their work and have to face higher taxes to cover the social cost of increased unemployment. Consumers are also citizens, many of whom live in towns. As unemployment rises and poverty increases, towns and cities will grow even more unstable. So the benefits of cheap imported product swill be heavily outweighed by the social and economic costs they bring with them.

Q: I understand your argument about increased unemployment, but why should earnings be reduced?

According to figures published by the US Department of Labor, since 1973 real hourly and weekly earnings, in inflation- adjusted dollars, have already dropped respectively by 13.4 per cent and 19.2 per cent, and that was before the most recent GATT negotiations known as the Uruguay Round. If 4 billion people enter the same world market for Labour and offer their work at a fraction of the price paid to people in the developed world, it is obvious that such a massive increase in supply will reduce the value of labour. Also, organized labour will lose practically all its negotiating power. When trade unions ask for concessions, the answer will be: If you put too much pressure on us, we will move offshore where we can get much cheaper labour, which does not seek job protection, long holidays, and all the other items that you want to negotiate.

Global free trade will shatter the way in which value-added is shared between capital and labor. Value-added is the increase of value obtained when you convert raw materials into a manufactured product. In mature societies, we have been able to develop a general agreement as to how it should be shared. That agreement has been reached through generations of political debate, elections, strikes, lockouts and other conflicts. Overnight that agreement will be destroyed by the arrival of huge populations willing to undercut radically the salaries earned by our workforces. The social divisions that this will cause will be deeper than anything ever envisaged by Marx.

It is interesting to note that many US economists believe that the inflation forces which normally follow a period of lax monetary policy will not occur in the same way on this occasion. They believe that the continued lowering of earnings resulting from global free trade, including the first effects of NAFTA will restrain inflation despite the fact that the Federal Reserve has maintained a loose monetary policy for one of the longest periods on record. In other words, the workforce will bear the brunt of the consequences of a prolonged policy of easy money by accepting reduced earnings to compensate for its inevitable inflationary effects.

Q: Who will be the losers and who will be the winners under a system of global free trade?

The losers will, of course, be those people who become unemployed as a result of production being moved to low-cost areas. There will also be those who lose their jobs because their employers do not move offshore and are not able to compete with cheap imported products. Finally, there will be those whose earning capacity is reduced following the shift in the sharing of value-added away from labor.

The winners will be those who can benefit from an almost inexhaustible supply of very cheap labor. They will be the companies who move their production offshore to low-cost areas, the companies who can pay lower salaries at home; and those who have capital to invest where labour is cheapest, and who as a result will receive larger dividends. But they will be like the winners of a poker game on the Titanic. The wounds inflicted on their societies will be too deep, and brutal consequences could follow.

The new phenomenon of our age is the emergence of transnational corporations, with the ability to move production at will anywhere in the world, in order to systematically benefit from lower wages wherever they are to be found. Trasnational corporations now account for one-third of global output; their global annual sales have reached 4.8 trillion dollars, which is greater than total international trade, The largest 100 multinational corporations control about one-third of all foreign direct investment. The globalization of the market is vital to them, both to produce cheaply and to sell universally. Because they do not necessarily owe allegiance to the countries where they operate, there is a divorce between the interests of the transnational corporations and those of society.

You must remember that one of the characteristics of developing countries is that a small handful of people controls the, overwhelming majority of the nation's resources. It is these people who own most of their nation's industrial, commercial and financial enterprises and who assemble the cheap labour which is used to manufacture products for the developed world. Thus, it is the poor in the rich countries who will subsidize the rich in the poor countries. This will have a serious impact on the social cohesion of nations.


to Part 2 of Goldsmith on GATT