World Trading System: World Trading System Theoretical Justifications/Benefits Movement from National to International based economies


Economic Base: Economic Base Theory of Comparative Advantage -David Ricardo Example: England Portugal $100 cloth 100men 90men $100 wine 120men 50men Total productivity is $400 ($200/country)


Slide3: England Portugal cloth 220men 0men wine 0men 140men Production $220cloth $280wine Trade -$100cloth -$100wine Net $120cloth $180wine Total productivity is $500 ($220 +$280) Each country is better off even after trading


Problems with Comparative Advantage: Problems with Comparative Advantage Assumes (capitalism): invisible hand of the market works capitalism is fair each investor/worker/consumer pursuing self interest creates most efficient global economy Money is the prime concern not people Doesn’t account for comparative disadvantages arising from colonialism


Bretton Woods : Bretton Woods July 1944 Bretton Woods, New Hampshire, USA 44 countries 26 “developed” 18 “developing” (mostly Latin American)


Bretton Woods Goals: Bretton Woods Goals Restructure devastated post war economies Move from nationally centered economic behaviour to international trade Provide stable international investment climate Coordinate, regulate and monitor trade


Bretton Woods 4 institutions: Bretton Woods 4 institutions 1. IMF-International Monetary Fund Lends $ to countries to meet short term financial needs “dollar-a-vote” basis Rich counties keep control U.S. 17% of money = 17% vote Structural Adjustment Program Imposes neo-liberalism (Washington Consensus) on needy countries Crunches timelines toward free trade Loan shark of the international markets


2. World Bank : 2. World Bank Officially, “The International Bank for Reconstruction & Development, etc Provides long term loans for investment E.g.. Development projects to build infrastructure such as hydro electric dams, Support capitalistic projects Sometimes guarantees loans made by private investors “dollar-a-vote” basis Bank President is always a U.S. citizen


3. United Nations: 3. United Nations Forum for making international political decisions Provide international military stability Forum for international conflict resolution Somewhat democratic – one vote per country in the General Assembly But “Big Five” each have a veto China, France, Great Britain, Russia & U.S.


United Nations - preamble: United Nations - preamble To save succeeding generations from the scourge of war To reaffirm faith in fundamental human rights To promote social progress Respect sovereign equality of all members Peaceful settlement of disputes Refrain from force contrary to UN purposes


4. GATT: 4. GATT General Agreement on Tariffs and Trade Rules for international trade in “goods” Promote freer trade among members Discourage trade barriers (subsidies, tariffs, quotas) Forum to negotiate trade policy Included in the WTO since Jan 1/95 Series of 38 international trade agreements Currently 149 member countries in WTO Independent institutional framework Resolves trade disputes Forum to negotiate trade policy Beyond just “goods” e.g. copyright/patent protection


Bretton Woods Struggles: Bretton Woods Struggles Competition between USA and England Economic leadership Values Developing countries wanted stable commodity prices US opposed – access to cheap resources US neoliberal agenda won out 1980s called “Washington Consensus” Reduce govt intervention in markets Privatize govt owned industries/services Reduce govt costs of services (health care, education) Reduce trade restrictions (subsidies, tariffs, quotas) Development occurs through economic growth Money the key instigator of growth, development US preferred to use the World Bank & IMF to foster development


International Trade Paradigm: International Trade Paradigm Multilateral agreements WTO – World Trade Organization; 149 countries Bilateral or Regional Trade Agreements NAFTA – North American Free Trade Agreement Canada, Mexico & USA since Jan 1/94 Previously just Cdn & USA (CUFTA) since 1989 National Treatment Govt can’t discriminate against foreign “like” goods ppm – process & production methods e.g. child labour, environmentally destructive Govt can’t subsidize or prefer domestic goods Limited, strict exceptions: e.g. if “necessary” to protect life Tuna/Dolphin, Hormones, gmo, Japanese apples Dispute Resolution Panels of trade experts are judges (biases, lack of diverse knowledge): free trade values trump environment or labour values Hearings are held in private


Trade theory vs practice: Trade theory vs practice 1. WTO is democratic in theory One vote/country (110/149 are developing countries) But: A) smaller/poorer countries can’t afford to send delegates to all meetings Hong Kong Summit 2005: EU(832);US(356);Bolivia(7) Rwanda(7);Gambia(2) B) rich countries can afford trade experts, lawyers, economists, etc (modest help for poorer) C) old boys network – negotiation, agenda setting at “invitation only” meetings D) Rich business groups, corps, individuals influence govt e.g. 93% of the 742 official external advisors to US trade dept represent business interest – Monsanto, Haliburton, etc


Theory vs practice: Theory vs practice 2. Agreements claim to promote free trade But the reality They are complicated rules based trade agreements True free trade agreement – 2 sentences long e.g. Subsidies are theoretically not allowed Govt financial assistance to business/industry 1990’s US and EU negotiated exemptions to allow continued agricultural subsidies (promised to phase out) US approx 30%; EU approx 25%; Cdn approx 21% $1 billion/day spent by rich countries on ag subsidies Poor countries Ag represents much of their export base (cost them $50 billion/year) Can’t afford subsidies Most can’t subsidize because of conditions on IMF and World Bank loans (structural adjustments) e.g. Mexico within 1year of Nafta became dependent on US corn Subsidies distort the “invisible hand” of the market US and EU keep promising to reduce ag subsidies Minimal changes Main reason for breakdown of Doha round of trade negotiations Cdn beef farmers lobby to continue subsidies


Multilateral vs Bilateral/Regional: Multilateral vs Bilateral/Regional WTO – 149 countries Mostly “developing” - majority of votes Modest provisions to help Least Developed Countries (LDC) Global context Bilateral/Regional US pursuing bilateral trade agreements Several signed 55 in negotiation as of 2005 Use economic clout to extract more favourable trade terms Bilateral agreements with Central American countries require the elimination of subsidies and tariffs on rice, beans, corn, dairy,etc Cdn has 3 bilateral agreements (Israel, Chili) China/India negotiating a regional agreement (2.5/6 billion people) Future superpowers? Problem with calls to “Junk the WTO” WTO better than bilateral/regional for weaker countries What will replace WTO?


Need for Global Agreements: Need for Global Agreements Environment Global commons: food source; pollution– oceans, air, water Invasive species forests Labour standards Working conditions – health & safety, hours Child labour, prison labour Comparative advantage global efficiencies Harmonization Quality control – pesticides Need to move beyond colonialism People centered trade/development Need to fairly coordinate trade with non-trade issues Resource allocation issues – food, oil, medicines Recognition(entitlement), distribution


Negative Consequences of Current Free Trade Era: 1980-present: Negative Consequences of Current Free Trade Era: 1980-present Commodity prices dropped significantly until 2007 1980 -2001 commodity prices(1990 $US) Coffee $4.11/kg to $ .63/kg Sugar .80/kg to .19/kg Cotton 2.61/kg to 1.10/kg Cocoa 3.31/kg to 1.11/kg Poorest countries dependent on commodity prices Need exports to repay loans to IMF and World Bank Farmers encouraged to switch from sustenance to export crops Poorest countries: 90-100%of all exports are commodities 70 poorest countries derive >50% exports from 3 or less commodities Gap between rich and poor increased 1980 – 1997 debt increased for poorest countries: $567 to $2,000 billion Poorest countries paid $2,900 billion in interest For every $1 in aid received the poorest countries paid $3 in debt repayment


Why has “free trade” failed: Why has “free trade” failed 1. It is not true free trade Note that true free trade would also be very disruptive but the LDCs could better compete with US and EU grains, cotton and mfg e.g. US charges higher tariffs against countries with low labour costs Bangladesh 14.1%; Cambodia 15.8% France 1.1% US subsidizes its cotton farmers $4billion/year If Africa, Asia and Latin America could increase exports by 1%, 128 million people would be lifted out of poverty 2. Rules for comparative advantage apply to countries not private investment Multinational corps follow absolute advantage Extra profits (surplus value) from comp. adv. accrues to private corps – not govt or local people Little or no trickle down effect


Slide20: 3. Multinationals have gained monopoly like control of the global economy in many sectors Per Adam Smith monopolies distort the invisible hand of the market Multinationals control 70% of global trade 12 companies control 90% of poultry stocks 4 companies control 85% seed stocks Profit not people is their motive


Slide21: 4. Ricardo assumed capital was not mobile internationally Ricardo assumed English winery switching to cloth mfg, would be located in England However, current rules allow full capital mobility Therefore English winery owner invests in cloth mfg in Bangladesh not England Increases the labour disruptions within countries Capitalists follow LDC preferences and then leave as soon as they expire (e.g. Lesotho Dec 31/04) Capitalists follow absolute advantage, cheapest labour, environmental controls – “race to the bottom”


Slide22: 5. Flaws in unregulated capitalism compound economic devastation of colonialism Under capitalism, investors (bourgeoisie) make most choices Based on profit motive When, what country, what industry to invest in When to withdraw investment, profits Affects people lives but doesn’t show on the balance sheet - Comparative advantage disrupts peoples lives Workers are commodified and compete internationally Disposable, weakest labour laws, weakest health & safety Unions illegal or culturally discouraged Lowest wages, insecurity, minimizes trickle down opportunities


Free trade/capitalism failure - 1: Free trade/capitalism failure - 1 Capitalist/investor goes where taxes are lowest Governments or countries now compete for investment Govts/countries are commodified Lower taxes = increased profits/surplus value to capitalist Lower taxes means that less of the surplus value of the comparative advantage (cheap labour, resources) remains with the locals Lower taxes means govt must reduce spending on social services (e.g. health care, education, inspections) Loss of education continues cycle of oppression


Free trade/capitalism failure - 2: Free trade/capitalism failure - 2 Capitalist/investor goes where resources are cheapest and environmental laws are weakest able to rape the land for short term profits Poor country/people are left with: Depleted resource base Toxic wastes Polluted waterways, aquifers, land Health consequences Loss of cultural integrity


Some proposed fixes: Some proposed fixes 1. increase transparency at WTO 2. election of international trade reps 3. allow subsidies with social purpose (improve labour conditions or environmental standards) 4. set minimum labour standards 5. create a system connecting factory wages to retail prices 6. Create Nafta like environmental side agreement but make it enforceable Minimum Standards and timeline/$ for developing countries to comply Global environmental agreements trump trade rules Allow countries to use precautionary principal instead of risk management model Allow reasonable discrimination based upon ppms


Slide26: 7. Phase out agricultural subsidies for export products 8. Keep services (water, education, health care, electricity, etc) outside of world trade 9. Global carbon taxes to offset abuse of cheap oil 10. Restrict capital mobility 11. Connect trade rights to environmental/labour standards 12. Buy local/fair trade/organic ($ per vote?)


NAFTA Chapter 11: NAFTA Chapter 11 Gives foreign investors (multinational corps) the right to sue gov’t if the gov’t: Expropriates property or profits of foreign investor, directly or indirectly e.g. Ethyl Corp v. Canada (MMT) Intimidates gov’ts from improving environmental, labour and other laws Gives foreign investors >rights than domestic investors Free gift – no reciprocal obligation on foreign investor


Loss of Sovereignty: Loss of Sovereignty Each sovereign nation has relinquished it’s sovereignty to some extent Less for powerful countries because they ignore their own breaches or protect themselves with bilateral agreements Gov’t has agreed to abide by its international obligations Erosion of democratic vote domestically yet no democratic access to trade bodies Frustrates activist attempts to improve environmental or labour laws/practices