[to Goldsmith on Gatt, Part 1]

Q: What are your thoughts about the World Trade Organization?

That is the organization which is supposed to replace GATT, regulate international trade, and lead us to global economic integration, it is yet another international bureaucracy whose functionar ies will be largely autonomous. They report to over 120 nations and therefore, in practice, to nobody. Each nation will have one vote out of 120. Thus, America and every European nation will be handing over ultimate control of its economy to an unelected, uncontrolled, group of international bureaucrats.

If by wise policy or blind luck, a country has managed to control its population growth, provide social insurance, high wages, reasonable working hours and other benefits to its working class (i.e . most of its citizens), should it allow these benefits to be competed down to the world average by unregulated trade? This leveling of wages will be overwhelmingly downward due to the vast numb er and rapid growth rate of underemployed populations in the world. Northern laborers will get poorer, while Southern laborers will stay much the same. But the application of GATT will also cause a great tragedy in the third world. Modern economists believe that an efficient agriculture is one that produces the maximum amount of food for the min imum cost, using the least number of people. That is bad economics. When you intensify the methods of agriculture and substantially reduce the number of people employed on the land, those who be come redundant are forced into the cities. Everywhere you travel in the world you see those terrible slums made up of people who have been uprooted from the land. But, of course, the hurt is deep er, Throughout the third world, families are broken, the countryside is deserted, and social stability is destroyed.

This is how the slums in Brazil, known as "favelas", came into existence. It is estimated that there are still 3.1 billion people in the world who live from the land. IF GATT manages to impose worldwide the sort of productivity achieved by the intensive agriculture of nations such as Australia, then it is easy to calculate that about 2 billion of these people will become redundant. Some of these GATT refugees will move to urban slums. But a large number of the m will be forced into mass migration. Today, as we discuss these issues, there is great concern about the 2 million refugees who have been forced to flee the tragic events in Rwanda. GATT, if it " succeeds", will create mass migrations of refugees on a scale a thousand times greater. We will have profoundly and tragically destabilized the world's population.

Q: But why do third world nations themselves support global free trade?

We must distinguish between the populations on the one hand and their ruling elites on the other. It is the elites who are in favor of global free trade. it is they who will be enriched. In Indi a there have been demonstrations of up to one million people opposing the destruction of their rural communities, their culture and their traditions. In the Philippines several hundred thousand f armers protested against GATT because it would destroy their system of agriculture.

Vandana Shiva is an eminent Indian philosopher and physicist. She is Director of the Research Foundation for Science, Technology and National Resource Policy, and is the Science and Environment Advisor of the Third World Network. In India, she says, global free trade will mean a further destruction of our communities, uprooting of millions of small peasants from the land, and their migration into the slums of overcrowded cities. GATT destroys the cultural diversity and social stability of our nation ... GATT, for us, implies recolonization.

Q: Without global free trade, how could the developing nations emerge?

Those who wish to industrialize should form free trade areas, such as the trading regions currently being created in Latin America and South-East Asia. These areas should consist of nations wit h economics which are reasonably similar in terms of development and wage structures. Trading regions would enter into mutually beneficial bilateral agreements with other regions in the world. Freedom to transfer technology and capital would be maintained. Thus commercial organizations wishing to sell their products in any particular region would have to produce locally, importing capit al and technology, and creating local employment and development. That is the way to create prosperity and stability in the developing world without destroying our own.

Q: Some would say that Europe's employment problem is not GATT, but just the result of the old-fashioned diseases that one finds in uncompetitive, inflexible and spoiled societies. The welfare state is out of control; social costs borne by employers discourage the creation of new jobs; high government expenditure and taxation stifle the economy; state intervention is paralyzing; corporatism blocks remedial action, etc. Is that not true?

It is partially true, and those diseases must be treated forcefully. But even if the treatment is successful, it will not solve the problems created by global free trade. Imagine that we were able to reduce at a stroke social charges and taxation so as to diminish the cost of labour by a full third. All it would mean is that instead of being able to employ forty-seven Vietnamese or fort yseven Filipinos for the price of one Frenchman, you could employ only thirty-one. In any case, as we have already discussed, you must remember the example of France, where, over the past twenty years, spectacular growth in GNP has been surpassed by an even more spectacular rise in unemployment. This has taken place while Europe has progressively opened its market to international free trade. How can we accept a system which increases unemployment from 420,000 to 5.1 mi llion during a period in which the economy has grown by 80 per cent?

You must understand that we are not talking about normal competition between nations. The 4 billion people who are joining the world economy have been part of a wholly different society, indeed, a different world. It is absurd to believe that suddenly we can create a global free trade area, a common market with, for example, China, without massive changes leading to consequences that we cannot anticipate.

Q: Why is it not possible to repeat our successes in enriching countries like Taiwan, Hong Kong, South Korea and Singapore?

The combined population of those countries is about 75 million people, so the scale of the problem is quite different. The US might be able to achieve a similar success with Mexico and, progressiv ely, Western Europe could accommodate Eastern Europe. But attempting to integrate 4 billion people at once is blind utopianism.

In any case each of those countries has been a beneficiary of the Cold War. During that period, one or other of the superpowers sought to bring every part of the world into its camp. If one failed to fill the void, the other succeeded. That is why very favorable economic treatment was granted by the West to South Korea after the Korean War, and to Taiwan, Singapore and Hong Kong while China was considered a major communist threat. Special economic concessions combined with their cheap and skilled labor made them successful. Over the past thirty years the balance of trade between these countries and the West has resulted in a transfer of tens of billions of dollars from us to them. The West has been hemorrhaging jobs and capital so as to help make them rich.

Q: What do you recommend?

We must start by rejecting the concept of global free trade and we must replace it by regional free trade. That does not mean closing off any region from trading with the rest of the world. It m eans that each region is free to decide whether or not to enter into bilateral agreements with other regions. We must not simply open our markets to any and every product regardless of whether it benefits our economy, destroys our employment or destabilizes our society.

Q: Does that not mean that wewill cut ourselves off from innovations in other parts of the world?

No. Freedom of movement of capital should be maintained. If a Japanese or a European company wishes to sell its products in North America, it should invest in America. It should bring its capita l and its technology, build factories in America, employ American people and become a corporate citizen of America. The same is true for American and Japanese firms wishing to sell their products in Europe. Think about the difference between the GATT proposals and those I have just outlined. GATT makes it almost imperative for enterprises in the developed world to close down their production, elimin ate their employees and move their factories to low-cost labour areas. What I am suggesting is the reverse: that to gain access to our markets foreign corporations would have to build factories, employ our people and contribute to our economics. It is the difference between life and death.

Q: But won't that reduce competition?

Competition is an economic tool which is necessary to promote efficiency, to apply downward pressure on prices and to stimulate innovation, diversity and choice. Vigorous competition needs a free market that is large and in which cartels and other limitations on competitive forces are forbidden. Europe and NAFTA are economically the two largest free trade areas ever created in history. Both are more than big enough to ensure highly competitive internal inlets. They are vast and open and free and welcome to innovations from anywhere in the world. Every significant corporation wo rldwide would have to come and compete, because no corporation could afford to bypass them - their markets are much too big and prosperous. But such competition would be constructive. not destructive.

Q: Many will answer you by saying that you cannot export to other regions if you maintain a regional economy. There would be retaliation.

Take a look at Japan: the Japanese have certainly been able to export over the decades during which they protected their economy. In any case bilateral trade agreements would allow for the exchange of products in a way which suited all parties. And our corporations would be free to invest and compete throughout the world.

Q: What other recommendations do you have?

I totally reject the concept of specialization. Specializing in certain activities automatically means abandoning others. But one of the most valuable elements of our national patrimony is the ex isting complex of small and medium-sized businesses and craftsmen covering a wide range of activities. A healthy economy must be built like a pyramid. At the peak are the large corporations. At the base is the diversity of small enterprises. An economy founded on a few specialized corporations can produce large profits, but because the purpose of specialization is to streamline producti on, it cannot supply the employment which naturally results from a broadly diversified economy. Only a diversified economy is able to supply the jobs which can allow people to participate fully in society.

It is extraordinary to read economists commenting on the state of the nation. They believe that the profits of large corporations and the level of the stock market are a reliable guide to the hea
lth of society and the economy. A healthy economy does not exclude from active life a substantial proportion of its citizens.

Q: You face a difficult problem in converting the British to these ideas. Britain has a long tradition of almost unconditional belief in free trade.

The origin of Britain's belief in free trade goes back to the early nineteenth century. It was in Britain, at that time, that the Industrial Revolution was born. The new industrial barons, whose power was growing in step with the expansion of British industry, needed ample and low-cost labor to populate their factories. The idea was that by importing cheap food from the colonies, Britis h farms would be unable to compete. This would result in an exodus of farm workers to the cities. At that time, 80 per cent of the British population lived outside urban areas. Once the farmers who had lost their livelihood reached the towns, they could be employed cheaply because cheap food was available from the colonies. What is more, the money that left Britain to buy the cheap food was recycled back to Britain to buy manufactured goods. At the time, Britain had a quasi-monopoly of manufacturing. Those were the dynamics which led to the repeal of the Corn Laws, which protec ted British agriculture, in 1846.

Today the circumstances are precisely reversed. Now only 1.1 percent of the British workforce is employed in agriculture; instead of a need for labour in the towns, there is chronic unemployment; and the money that leaves Britain to pay for imports no longer returns to buy British manufactured products. It goes to Japan or Korea or anywhere else in the world. The result is that Britain ha s a trade deficit in practically every major category of manufactured goods. And even though some of the large companies make good profits, 25 per cent of all households and nearly one child in three live in poverty.

One of the greatest fallacies in economic thinking is that the funds that flow away from a nation as a result of a negative balance of trade, or of capital outflows, will automatically be recycled. They believe that the money that goes out must return, usually in the form of inward capital investment or loans, but that is naive. When funds leave a nation, those who receive them are free to invest anywhere in the world. And they will invest wherever the anticipated returns are highest. They will not necessarily choose societies which are bleeding to death. When a system is valid in one set of circumstances, it is extremely unlikely to be valid in diametrically opposite circumstances. One would hope that this observation alone might prompt the British political elites to reassess their economic doctrine with an open mind. We seem to have forgotten the purpose of the economy. The present British government is proud of the fact that labour costs less in Britain than in other European countries. But it does not yet understand that in a system of global free trade its competitors will no longer be in Europe but in the low-cost countries. And compared to labour in those countries, Britain's labour will remain uncompetitive no matter how deeply the British government decides to impoverish its people. In the great days of the USA, Henry Ford stated that he wanted to pay high wages to his employees so that they could become his customers and buy his cars. Today we are proud of the fact that we pay low wages. We have forgotten that the economy is a tool to serve the needs of society, and not the r everse. The ultimate purpose of the economy is to create prosperity with stability.

Q: What do you mean by stability?

Stability does not mean ossification or standing still. A stable society can accommodate necessary change, without social breakdown. A stable society can benefit from responsible economic growth without destroying itself.

Q: How would you convince Germany of the merits of regional trade in view of the German elites' commitment to globalism?

The Germans should understand that by far their largest customers are their neighbors; about 70 per cent of Germany's exports are sold within Europe. Germany cannot want to see its principal customers impoverished as a result of hemorrhaging jobs and capital. German prosperity depends on the prosperity of the other nations of Europe; Germany's social stability will be deeply influenced by that of its neighbors, and, no matter how advanced its industrial skills, Germany will suffer from the transfer of production to low-cost areas, just like the rest of the developed world. What i s more, under GATT, Germany will have to share its residual markets with imports from Japan, Korea and others.

Q: How would you sum up the effects of regional free trade?

Let us imagine that Europe returns to the original concept of the Treaty of Rome, which was the basis for the creation of Europe. Economically, its purpose was to establish the largest free market in the world. Within Europe, there would be no tariffs, no barriers, and a free and competitive market. Trade with nations outside Europe would be subject to a single tariff. This concept was known as community preference. In other words, priority would be given to European jobs and industry. About twenty years ago, quietly, the technocrats who run Europe started to alter this fundam ental principle and move progressively towards international free trade. Ever since, unemployment in Europe has swollen despite growth in GNP. The Treaty of Maastricht enshrines this change and makes global free trade one of the fundamental principles on which the new Europe is to be built. If we were to return to the ideas of our founding fathers and reimpose community preference, overni ht all the enterprises which have moved their production to low-cost countries would have to return. They could no longer competitively import products manufactured outside Europe. Factories would be built, Europeans would be employed, the economy would prosper and social stability would return. What is more, international corporations wishing to sell their products within Europe would also have to build, employ and participate in the European economy. From being a community which, at the moment, reeks of death, it would all of a sudden become one of the most exciting places in which to invest and participate, and European corporations would go out to invest and contribute to the prosperity of regions throughout the world.

The same is true for North America. Insofar as free trade areas consisting of developing economics are concerned, they also would prosper. For example, currently free trade areas are being formed in Latin America and in South-East Asia. Most North American, European and Japanese corporations will wish to sell their products in these large markets. To do so, they will have to transfer capital and technology, build factories in Latin America and South-East Asia and employ Latin Americans and Asians. By participating in these economies, they would encourage development. GATT must be rejected. It is too profoundly flaw ed to be a stepping stone to a better system. The damage it will inflict on the communities of both the developed world and the third world will be intolerable.


This document was originally provided to Usenet newsgroup: misc.act.progressive 12:17 PM Nov 18, 1994 by Jim Cook, MIT Center for Space Research Cambridge, Ma.