If you take any introductory economics course, the instructor will explain to you a concept known as “comparative advantage.” The idea, famously described by David Ricardo in 1817, defends free trade on the grounds that even if one country is better at producing everything than another country, it is to both countries’ advantage to trade. Ricardo gives a hypothetical example involving England and Portugal, in which Portugal is able to produce both wine and cloth more efficiently than England. In England, it is harder to produce wine than cloth, while in Portugal it is easy to produce both. It is then cheaper still for Portugal to specialize in wine and import cloth, even though it is cheaper in absolute terms to produce cloth. This is because there is an opportunity cost to producing one product versus another.
There are several problems with this. First of all, as Herman Daly has pointed out, Ricardo was assuming the immobility of capital across borders. He believed that there was a “natural disinclination” among people to leave their country of origin to establish businesses abroad. He apparently could not have conceived of the globalized world today in which major corporations headquartered in the United States would outsource their manufacturing sites overseas to exploit cheap labor.
Additionally, the theory assumes that the state of comparative advantage is static. In reality, an underdog in a particular industry may end up overtaking the competition later on, as happened for the Japanese auto industry over the course of the twentieth century. This fact underlies the “infant industry” argument for protectionism. The issue is further complicated by transportation costs, transition costs, and the potentially destabilizing force of currency markets.
So, what has been the reality of globalization and so-called “free trade” agreements? The reality is that a small percentage of people have benefited enormously from it, but most people have not shared in its benefits, and many have been made worse off. GDP has risen in most countries, but that simply indicates that more economic activity has taken place, and does not say anything about the value of that activity or where the money is going. Much of the money is being siphoned out of the countries where production is taking place and into the hands of Western corporations. But even within the developed world, the gains from globalization are not being shared equally among the population. We see it in America, where manufacturing jobs have been outsourced, and unions broken in the process, pushing wages down.
This is all to say nothing of the environmental damage. Aside from cheap labor, another enticement which often brings multinational corporations to third world countries with weak governments is a combination of abundant resources and lack of environmental regulation. Frequently their projects for extracting resources cause considerable environmental damage, often poisoning the air and water, cutting down forests and destroying ecosystems.
Of course, let’s not pretend that so-called “free trade” really is what it claims to be. Free Trade agreements often revolve principally around intellectual property, which essentially means protecting legal monopolies abroad. Additionally, the IMF and World Bank have a history of enticing countries into debts they can’t pay off, and using the opportunity to restructure their economies in ways which benefit Wall Street, but often prove damaging to all but the most elite members of the countries in question.
Then there is the issue of transportation. To transport goods half-way around the world requires a lot of fuel, mainly from petroleum. The petroleum industry enjoys numerous government subsidies, especially from the United States. Without these subsidies, would it really be profitable to ship jobs overseas, produce them in a sweatshop on the other side of the world, and then ship back to one’s home country?
How, then, do we fix the problems of globalization? Can it be fixed? Or should we all turn to economic nationalism and widespread protectionism? Well, some degree of protectionism might be warranted as per the infant industry argument. But first let’s do a little acupuncture and look at where the process of international trade is not flowing right.
First of all, I mentioned earlier that the main flaw in Ricardo’s theory of comparative advantage is that it assumes the immobility of capital. The fact that capital is much more mobile today than he had anticipated is largely due to the rise of an entity of which there were few examples in his time: the multi-national corporation. In the 19th century, corporations were officially recognized as legal persons, with all the legal protections of the Fourteenth Amendment, but without the ability to be imprisoned for breaking the law, as a real person could be. They were given the right to free speech, the right to own property, and the right to buy and sell as they pleased. With all the benefits of personhood but none of the costs, corporate power expanded into the leviathan we see today, with tentacles stretching all across the globe, and profit margins larger than the gross national product of many of the countries in which they operate.
As all-powerful as they may seem, we know that corporations have an achilles heel: legal personhood. If we can take that away from them, then they easily brought back under the authority of the public that gives them their privileges in the first place. Corporations, after all, owe their existence to government-granted charters. Laws can then be passed requiring that any company wishing to incorporate in a country hire a certain percentage of its workforce in that country, limit its ratio of lowest to highest paid employees so as to ensure high wages for workers and prevent excessive CEO pay, and require that it abide by certain minimum environmental standards, regardless of the country in which it operates. This will ensure that differences in wages and regulation will not play a role in determining where corporations set up shop.
It is also essential that countries maintain sovereignty over their financial markets. Whatever benefits may accrue from opening a country’s markets to imports and exports of goods, there is no evidence of similar benefits from opening one’s capital market to foreign speculators. Every developing country that has done so has paid a steep price for it. Market volatility rises, and it becomes easy for Wall Street to manipulate the country into doing its bidding by financially punishing any country that does something they don’t like. In addition to keeping such markets closed to outside interference, it is incumbent upon the international community to pass a Tobin tax on the currency exchange market to protect countries from the destabilizing effects of currency speculation.
As I mentioned, much of the international trade agreements center around intellectual property. To make these part of trade agreements goes completely against the original purpose of intellectual property. Intellectual property is designed to grant a temporary monopoly so as to encourage the development of the arts and sciences. Making people in Africa pay higher prices for HIV medication has nothing to do with this purpose. Additionally, genetically modified crops have been used to extract rents from third-world farmers. At the very least, we have a litmus test for whether patents need protection abroad in order to encourage innovation. We should also be looking for alternatives to intellectual property, such as a prize system, in which the government gives financial incentives for certain discoveries, and then makes those discoveries public domain. A more comprehensive platform for intellectual property reform put forward by Dean Baker can be read here.
To prevent the exploitation of their natural resources, as well as keep the revenues within their own country, governments should have severance taxes for their resources, ensuring that the full social and environmental cost is paid by those extracting the resources. The revenues from these taxes, as well as land value taxes, can fund infrastructure which will allow the country to develop toward into a more technologically developed nation. They can then process their resources into manufactured goods, rather than confining their exports to raw materials.
The need for protectionism would be greatly reduced by these measures, although it still may be needed for some developing countries to develop infant industries. The problem in today’s world is that protectionism is practiced by the developed countries, who then interfere with developing countries protecting their industries. Joseph Stiglitz has suggested that future trade agreements allow countries to put up tariffs against more developed countries, while opening their markets to less developed countries. For example, a country like Egypt could put up tariffs against the European Union, but would have to open its markets to Mozambique. This helps countries develop their infant industries while providing clear and concise guidelines for market liberalization.
However, there is a deeper, more existential problem with globalization. In relying so much on foreign trade, civilization has lost its connection to its local surroundings. There was a time when buildings were built from local materials, and food was locally grown. In a hyper-globalized world, this is becoming increasingly rare. On a practical level, this is unsustainable. It requires much larger amounts of fuel to transport goods and materials across oceans than it does to grow them at home. Access to oil is running out, and while there are promising alternatives out there, none of them can do the job oil does without complementary gains in fuel efficiency.
On a deeper - dare I say “spiritual” – level, there is a sort of illness of the human soul when it is disconnected from its environment. We have become alienated from our food sources, and thus have turned a blind eye to how it is produced, including the pesticides and genetic modification, as well as the cruel conditions on factory farms. We have created houses and communities that are carbon copies of houses and communities throughout the world, rather than paying attention to the ecological demands of the local climate and environment.
To remedy this problem, we really do need to start thinking more locally. The increasing scarcity of fuel may force us to this point, but we can get there more smoothly through local planning. We can furthermore reduce and eventually eliminate subsidies for oil, sending a market signal to localize our economies, without the sudden shock of the fuel supply running out. In the meantime, we need to rediscover local wisdom, and sustainable living. This should become an educational priority for training architects, engineers, and city planners. With the right price signal and the right education, we can start moving toward a more local, sustainable economy.
Where, then, does that leave trade? Should we not trade at all? No, that would be silly. There is much to be gained from international commerce. What we should do is produce what we can locally, import those things which it is uneconomical to produce, and export surpluses of local goods. Most of all, we should have free trade in ideas. Information is the ultimate public good. It can be multiplied indefinitely, and make everyone better off. This reinforces the fact that we must seek alternatives to intellectual property, so that information can be shared as freely as possible.
Through a globalization of information, we can become a world community. If we localize economies, we then become a community of communities. The right balance must be struck between the local and the global, with neither overwhelming the other. Then we can move beyond the Information Age and into the Wisdom Age.
