International Trade and Globalization: Are Benefits Truly Mutual?

Yves here. To add to the points made in this post: The naive economic view that “more open trade is every and always better” is unsound. It’s based on the faulty premise that moving closer to an unattainable ideal state of frictionless, unrestricted trade is preferable.

But that notion was debunked over 60 years ago, in the Lipsey-Lancaser theorem, in their paper, “The Theory of the Second Best”. It found that moving closer to that unachievable position could make matters worse, not better, and (gasp!) economist and policymakers needed to assess tradeoffs, and not rely on simple-minded beliefs. And the example Lipsey and Lancaster used was in trade, a specific example where the country liberalizing trade would wind up worse off.

By Aabid Firdausi, a Master’s student at the Department of Economics, University of Kerala. He is interested in understanding the socio-spatial dynamics of capitalism from an interdisciplinary perspective. Originally published at The Minskys

The euphoria around international trade and the general consensus regarding capitalism’s inevitable sustenance among countries of the Global South is at least partly due to the absence of an alternative after the collapse of the Soviet Union. The politics of capitalism, with its expansionary dynamics, has assumed a truly “global” avatar by aggressively pursuing a neoliberal globalization agenda. Thus, we see much hype around the numerous trade treaties that governments around the world sign, claiming they would boost economic growth and create jobs. However, a critical examination of mainstream trade theories reveals several insights as to why there has been a hegemony of thought when it comes to attitudes around globalization.

The idea that “free” trade and globalization imply mutual benefits and prosperity for all the parties involved is simply accepted as common sense. Mainstream trade theories argue that if nations engage in international exchange, then all parties will be better off. Although this seemingly innocuous assumption is based on an unrealistic worldview, it has deep implications when translated into practice. This article provides a basic understanding of some of the areas that theories in mainstream international economics conveniently ignore.  

It is pertinent that we pause and critically question what we are told, taught, and made to believe – for nothing that is promoted with such great fanfare by economic elites can be free of costs. When it comes to trade treaties,  the devil often lies in the details, which often reveal policies that lead to the further immiseration of the working class and the peasantry, especially in the Global South. First, it is extremely important to understand trade in a historical perspective and how it has changed with different epochs within capitalism. The North-South trade in many instances was first a colonial tragedy (the British colonization of India, for example) and has now become a neo-colonial farce. This manifests itself in the myriad ways in how multinationals shape spheres of public and private actions from land-grabbing to a homogenization of consumption patterns.

Secondly, international trade theories blatantly disregard the asymmetric power relations that exist in the global political economy. Despite the dichotomous classification of nations on the basis of the degree of development, trade theories often assume that transactions between two unequal nations tend to benefit both. While it is naïve to discard any benefits at all from the process, it is essential that we ask who frames these trade policies and what sections of society receives the lion’s share of the benefits.

Third, mainstream theories often categorize labor and capital as homogenous and lump them together as factors of production. In reality, as it is obvious, labor and capital are far from homogenous. A critical reader looking at these flawed assumptions that most theories rest upon could easily conclude they would better suit interregional trade on an extremely local basis, than an international basis! The variations in factors on a local level would be significantly smaller than the variations and imbalances that exist on a broader scale.

Fourth, I would argue that trade theories commit a grave injustice in its treatment of labor, which shows the class nature of most theories and the subsequent policies that are influenced by it. Cheap labor is often hailed as a virtue of the Global South – and this is projected as an open invitation to set up sweatshops for global capital in the name of manufacturing competitiveness. Thus, the hegemonic narrative around the potential for trade is essentially dehumanizing in nature. Such trends that have been persistent since the vigorous promotion of mathematical economics have largely dissociated the discipline from the wider branch of social science.

Fifth, there exists a systematic misdiagnosis of the power relation between capital and labor. This is perhaps most evident in the asymmetries observed in the globalization of capital and the globalization of labor.  While the former has largely been internationally mobile, the latter has not been so. Though this can be partially explained by the existence of the state and its territorial boundaries, it would be foolish to discard the class dynamics of this asymmetric transnational mobility.

Finally, the after-effects of (primitive) accumulation have largely been ignored in mainstream theories. The presence of regional endowments that creates a fertile land for foreign capital and the subsequent invitation of the so-called job-creating corporations ignore the displacement of the livelihoods of the peasantry. This dispossession that Marx referred to as the primitive accumulation has been rampant in the Global South. However, the compensation and rehabilitation provided to the dispossessed have largely been inadequate. This raises larger questions about what development actually is and whose interests it serves.

Thus, it is important that we see through the haze and understand the basis and implications of mainstream theories on trade, and who they truly favor. What is taught in classrooms shapes to a large extent convictions and the worldview of a large number of students. There is a pressing need to promote and develop alternative streams of thought that are “social” in nature amidst the contemporary backlash against capitalist globalization. It is necessary that an interdisciplinary perspective on globalization in general and international trade, in particular, is cultivated in academic institutions in the Global North and South. Only then can we undo the hegemony of the “globalization benefits all” narrative.

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  1. Thuto

    Since Obama threatened that “US poultry products must be on South African supermarket shelves by end March 2016 or else…”, the local poultry industry has shed thousands of jobs, with zero prospects of a near term recovery in the sector. The dumping of thousands of tonnes of surplus output from the US renders the local sector simply incapable of undertaking any harmonised competitive response, while the citrus fruit farmers whose access to US markets was preserved as part of the deal continue to pay sub-human wages to their labourers.

    Alas, the US poultry industry didn’t even have to parachute battle hardened lobbyists in to push this through, they relied on the official opposition demagogues to wage the fight on their behalf in the SA parliament (with said lobbyists almost certainly dictating strategy from afar). And that’s where resistance to unfettered access to markets in the global south by global north countries is often defeated, in the halls of policy making where global capital has planted its servile mouthpieces (and equipped them with the usual arsenal of propaganda, subversion, echo chambers in the mainstream press etc).

    I agree wholeheartedly with the takeaway from this post that the “mutual benefit” narrative that trade liberalization wraps itself in needs to be dismantled (along with the “economic growth and job creation” narrative used by its close cousin FDI, which pits countries against each other in a race-to-the-bottom show where “investment” goes to countries displaying the most fervour to enslave their labour force).

    1. Synoia

      South Africa used to aspire to be an Autarky.

      That aspiration was destroyed under a flood of bad advice.

      1. divadab

        Actually, under sanctions as an apartheid regime, South Africa was more or less an autarky. One exception was Israel, IFRC, which continued to trade with South Africa despite international sanctions.

  2. Ape

    Comparative advantage is wrong. Internally complex systems are more robust, in better negotiating positions and will have better control over their leadership – simply economies lead politicians to prefer satrapy. The underlying principles of the economics of international trade are as much nonsense as the rest of mainstream economics.

    And as always the error is in applying steady or semisteady state thermodynamic models with one fixed time base to economic systems. Coase shall be the death of is.

  3. Jim Haygood

    Would the US be better off if its states erected tariff barriers in place of the unrestricted, full-throttle free trade which prevails now?

    Would Canada be more prosperous with customs posts at each provincial border to “create jobs” for inspectors and customs agents?

    The burden of proof is on the anti-traders (who logically should worship Trump as a hero) to show why internal free trade hurts North America.

    1. whine country

      I believe the title of the article makes it clear that the author is referring to INTERNATIONAL AND GLOBAL trade. I must have missed the break up of the USA and Canada into nation states..

    2. lyman alpha blob

      Did you miss this part? –

      A critical reader looking at these flawed assumptions that most theories rest upon could easily conclude they would better suit interregional trade on an extremely local basis, than an international basis! The variations in factors on a local level would be significantly smaller than the variations and imbalances that exist on a broader scale.

      And “anti-traders” is a straw man. Not very many people I’m aware of are saying there shouldn’t be trade, they are saying it should be fair and not exploitative so the few don’t benefit at the expense of the vast majority.

    3. Altandmain

      Tariffs? I think so.

      I see them as protections for the middle class. It is not a coincidence than the US became powerful in the 19th century and in the era of what is now criticized by neoliberals as isolation is. Like labor laws, the only people who are eager to get rid of them are people who want the rich to get richer and to destroy the middle class.

      There would be a manufacturing sector and companies from abroad would have to set up branch plants in North America. By contrast, American corporations would find it very difficult to find ways to get their jobs outsourced.

      Very much yes. The current trade deficits are unsustainable and will someday lead to serious problems.

      I may disagree with Trump on many things, but I think that the Trump campaign had a point about Americans and I would argue Canadians getting screwed on trade. It is a disgrace, albeit one quite predictable that Trump has betrayed his economic despair base.

    4. djrichard

      Trade surpluses between one state vs another are re-balanced through the Fed Gov redistributing those surpluses back amongst the states. Both by taxing the entities that have hoovered up the surplus as well as giving them treasuries to hoard instead.

      In contrast to the eurozone where there is no Fed Gov to redistribute those trade surpluses. So Germany hoards the surplus and then loans it back out to the other “states” in the eurozone.

      With respect to international trade, we send our US currency to our trading partners for goods and services, and only some of it comes back for goods and services from the US. What happens to the rest of our currency? It gets repatriated into US assets: real-estate, stocks, bonds.

      One could argue that the same happens regarding trade surpluses between the US states as well. That a good chunk of the surplus is repatriated by asset purchases in states. But there’s only so much a state can sell off (beyond their municipal and state debt). In contrast, “states” in the eurozone like Greece are selling off bits of themselves, aren’t they.

      1. JTMcPhee

        And “states” in the US are busily, under Kochian rulership, selling off “bits of themselves” (actually the former bits of the “commons,” like parkland, extractable resources like water and minerals and “arable land,” “public utilities” and “infrastructure” like roads and waterways, and of course schools and prisons, and via the machineries of crapification and the Grand Corrpution, the organs of government themselves.

        But let’s hear it for the True Believers in Trade Triumphs! Some of them are personally doing very well for themselves. And that, in the contexts that matter to them, trumps all other issues and considerations.

        How many divisions does the working class have, after all? Too many of the one kind, and not enough of the other. Must continue to have free flow of PayPall dollars to China in exchange for the endless stream of “products” that flow back, all carefully styled and tuned to niche right into the “lifestyles” we are so carefully acculturated, us mopes, to want. To the point that we mopes mostly don’t have a clue about what we might actually NEED, or have any idea about how to meet those fundamental needs.

        But hey! I grow my own lettuce plants and a few other veggies at various times in the year, so I’m well on the way to individual autarky! And I RECYCLE, and COMPOST! And only use a cup of water to brush my teeth, and take Navy showers (sprinkle, shut off, lather up, sprinkle to rinse quickly.) Too bad I can’t make my own soap, or dig my own well, or even have any kind of significant ongoing exchanges with my neighbors, though I do give them the excess tomatoes and squashes I grow… and I have an IRA! Of tiny size, but still… and a “42-inch-class” Flat Screen TV! And a microwave and refrigerator and even a washing machine that I have learned how to repair myself! All made in China, so the free trade system obviously is working!

        Can I ask again, what the organizing principle(s) of all this activity, all this shipping and trucking and digging and fracking and burning, are supposed to be? Anything at all about “general welfare?” Or is it all just that fraud called “comparative advantage,” that works out only to “race to the bottom” and what we mopes and others have been cozened into just thinking of as “inequality,” which as a concept and meme is just about “getting more for me, to he77 with ‘society’ except as some of us can get together to lay claim to some of that ‘more’ and then fight among ourselves over division of that particular set of (what are so aptly called) spoils?”

    5. Synoia

      Would Canada be more prosperous with customs posts at each provincial border to “create jobs” for inspectors and customs agents?


    6. rd

      Both Canada and the US have internal redistribution payment across provincial and state borders to help ease the “free trade” impacts. One of the challenges the EU has is that this in not built into their system through Congress or Parliament. So they have a single currency but no normal model for internal rebalancing of wealth.

      Canada doesn’t allow deduction of provincial and local taxes on federal income tax, but healthcare, unemployment etc. benefits across the country are much more similar to each other than in the US, so there isn’t the same race to the bottom for provincial taxes.

      The US has had the SALT deduction since the early 1900s. Largely eliminating it is going to set off a complex set of reactions with an unclear end. One of the things that will likely occur is that the representatives from higher tax states are going to be less likely to support redistribution of federal income tax to poorer states since many of the high tax states currently have net negative contributions of federal tax. So a reasonably balanced system has just been thrown out of kilter.

    7. P Fitzsimon

      IntraNational trade is not in the same category as International trade. The former implies common labor laws, environmental laws, common currency, common financial regulation, common legal codes and criminal jurisdictions and yes a common tax environment.

    8. Jeremy Grimm

      I think some of your comments are intended to stimulate others to comment in ways beneficial in elaborating the discussion. ;-)

    9. Oregoncharles

      The US makes financial transfers, via taxes, to cushion the losers. Those don’t happen internationally. The EU started out doing that, but decided to exploit its eastern and southern regions, instead.

      And despite those transfers, first the former Confederacy and now the “rustbelt” are examples of huge areas that are damaged by free trade.

  4. Norb

    Looking to Karl Polanyi’s concept of embeddedness seems to shed light on the current debate. Free Marketers/traders continue to ignore the human and natural costs imposed by the unrestricted movement of capital, continuing to believe in the utopia of disengaging the economy form the larger social system of which it is a part. This is an impossible dream, which the lower classes have no difficulty understanding, since they are the ones bearing the brunt of the destruction wrought from not focusing on the overall health of society and just on individual profits.

    Bailouts of the financial and corporate sectors clearly reveal the utopian nature of the unrestricted free market argument. If it worked, no bailouts from the broader society would be needed. But by parasitically draining the lifeblood from the broader society, sooner of later, breakdowns are inevitable. Labor and resources are then marshaled by force to restore the broken system.

    The economy must be subordinate to the larger goals of the society, not the other way around. Taking this position requires continuous diligence and effort- it is inherently an act of creation. An ongoing effort to build a society in some image.

    Free traders are more akin to raiders and pillagers. Good work if you can get it, especially if you don’t have to personally do the dirty work. Bad for everyone else, as those in the real economy know.

    1. JTMcPhee

      And that gets to one nub of “the problem of human survival:” What, exactly, are “the larger goals of society” that “the economy” (itself a purely notional construct, I would offer, that was created to set boundaries around and cut the hamstrings of honest debate and resolution) is supposed to be subordinated to? I’m hoping that are such goals, and that they embody what I personally would hope for in the way of “justice” and “comity” and “fairness” and all that. But it looks to me that as soon as any of us get the better of any of us, all those “social goals” get drowned in the bathtub in the mansions we quickly build ourselves.

  5. stefan

    Is the problem the freeness of trade or is it the rapidity of change? If the mobility of capital could be slowed down to the speed of the mobility of labor, wouldn’t that do the trick?

    Turbo-capitalism requires people to adapt to changes at speeds that outstrip their abilities to do so.

    Furthermore, as regions get hollowed out by the loss of productive activities, the likelihood of their being revitalized diminishes, as we are seeing across broad swathes of the country.

    1. lyman alpha blob

      How about one global currency?

      Our current system is grossly skewed in favor of predatory capitalists precisely because we do have the ability to rapidly interact on a global scale and yet for some reason we continue to use multiple currencies to account for all those interactions. Pretty good system though if your aim is to play one nation against the others or the rich against the poor.

        1. lyman alpha blob

          Well myself of course ;)

          All kidding aside, my extremely idealistic preference would be a world with no money at all. Or better humans.

          Other than that, I really don’t know what the answer is. As you point out there are drawbacks to any possible solutions although I don’t necessarily think a single currency implies single sovereignty. It may come about once we decide to do away with the notion of any person or institution having any sovereignty at all. Maybe the answer to “Who gets to print the money?” will someday be “We all do”, although not in the sense of that old thought experiment with the guy on an island with a money printing press.

        2. UserFriendly

          Keynes Idea was to make a new currency that would be the global reserve currency to balance trade. That would fix a few things like requiring the US to run a trade deficit. All Currencies could float against the global reserve instead of against the USD so no countries would give up their sovereignty.

    2. JTMcPhee

      Re rapidity of change: first, where and what is the power that could slow down your turbo-capitalism? Second, what rate of change, to which parts of ordinary life, are humans expected to be capable of? And third, what gives capitalists the right (obviously they have the power) to impose the burden of adaptation to greed-driven change on the rest of us, especially since it looks like whatever rate of change occurs, it’s increasingly likely that we adaptable apes will eat our seed corn and suck up the last drop of water in adapting and changing?

  6. Tony Wikrent

    This is a useful summary of key faults in the doctrine of free trade and globalization. But what I really want to see is a study of the status of Global South countries using measures of physical economy that simply are not used often. For example, proponents of ft&g like to point out that incomes for the poorest of the poor has doubled–from one dollar a day to two. As if another dollar a day allows people to buy a 3 bedroom house in the suburbs. Particularly important I think, is to look for increasing percentage of population having access to clean water, waste disposal, decent health care, and sufficient caloric intake, and so on. More people using one or two cell phones in a village’s simply not as important as having a distributed clean water system.

  7. djrichard

    Just want to point out that us anti-free traders aren’t against free-trade per se. We’re against imbalanced trade, in particular imbalanced trade in goods and services.

    Let’s look at KSA (Kingdom of Saudi Arabia). KSA pumps oil out of the ground and sends it to the US. We in turn send them US$. A good chunk of those US$ are sent back to the US for the goods and services that the US pumps out of its factories. But only a chunk. The rest is repatriated for assets in the US.

    If only the US could pump out assets instead. To some degree the US does do this: with debt and stock. One could call this a virtuous cycle: the US sends US$ for goods and services pumped out by our trading partners and they repatriate it back for assets pumped out by our financial sector. But notice the “supply chain” involved. If you’re in the financial sector, you’re in happyville. If you’re in the goods-and-services sector, you’re in pain city.

    And it’s not like the US is pumping out stock now-of-days. If anything stock buy backs have been reducing the float of stock in circulation. Similarly, QE reduced the float of debt in circulation. So instead of pumping out these assets, what’s instead happening is a pumping up of the price of those assets – the wealth effect. Again, if you’re holding these assets, you’re in happyville. If not, pain city. Especially if you want to buy another asset which is being driven up in price: real-estate (a home). As they say in real-estate, “they’re not making any more land”.

    By the way, this also has salutary effects on another entity which is in the pump biz: the Fed Reserve. That wealth effect leads to greater demand for their product: more currency (debt) to “invest” in those assets.

    Anyways, same thing with China, Japan and the rest, except instead of pumping goods from out of the ground, they pump it from out of their factories. Just like the US does. But again, where we used to have balances in trade of goods and services, we no longer do. Our pumps in goods and services are on the losing end of the stick compared to their pumps in goods and services.

    Last point, we used to have a balanced trade in goods and services with our trading partners up til we went off the gold interexchange standard in 1971:

  8. djrichard

    And some of those trading partners are also pumping out something else: their currency. By pumping out their currency, their central banks are keeping a peg to the US dollar, which does three things:
    – it keeps their currency perpetually cheaper compared to the US dollar (which stimulates their exporters)
    – it has the salutary effect of eliminating the currency risk to US corporations to outsource their supply chains to said countries. Can you imagine if the currency exchange rate truly fluctuated? That’s the type of risk that global supply chains can do without.
    – the increased currency float (monetary base) ultimately stimulates their local economy. It creates a wealth effect there just like it does in the US. [In the case of China, think ghost cities. They may not be creating more land in China, but they’re certainly creating more real-estate there.]

    Anyways, our trading partners do this by having their central banks print their currency to buy some of the US dollars hoovered up their exporters; just enough to keep a peg. So they’re effectively engaging in perpetual QE. And that’s who ends up buying our treasuries in foreign countries. It’s not the importers or other businesses. It’s the central banks there. The US Treasury actually had to send trade delegations to KSA, Japan and China to tell their central banks to repatriate the US $ they had been purchasing back into the US by swapping the currency for US treasuries. So the currency could be recycled back into the US economy.

    This is one way currency pegs are maintained. Another way is to unleash capital controls and let the US dollars get repatriated into US assets. China has unleashed their capital controls (more or less, as required for the Yuan to be part of the SDR basket), and so now the bulk of their peg is maintained simply by repatriation of US $ into US assets. When there’s too much repatriation (capital flight), the central bank of China will offset this by actually doing a reverse QE: sell the US treasuries it has in hand for US dollars, then use those US dollars to sell to the local demand for US dollars (to those engaging in capital flight) in exchange for their Yuan. Again, to the degree necessary to maintain the peg.

    By the way, this reverse QE by the foreign central banks can be gamed by the wealthy and elite there. They simply engage in enough capital flight to force their central banks to exhaust their reserves of US treasuries (and US currency). At that point, the central banks would have no option but to let their currency get weaker. At which point, the wealthy elite’s positions in US-based assets are that much more valuable and can then be unwound (if they desire) back into that much more of the local currency. But at this point, their central banks too will have lost control of the peg. It’s that peg that was the golden goose for the wealthy elite there, it’s what gave them their wealth in the first place. I can imagine the wealthy elite don’t really want to kill that.

  9. Jeremy Grimm

    All economic arguments aside — I think ‘free-trade’ is very bad for all parties. It creates long logistics chains and many of those chains are for goods and services vital to the welfare of our societies. It builds further fragility into already unstable and fragile structures. It has undermined the ability of many nations to feed themselves. It has dispersed capital so far and wide that small local impacts on production or delivery create global impacts. Carry-on with economic arguments and make theoretical proofs — ignoring the second best theorem, ignoring winners and losers — and what kind of benefit and gain, what kind of optimality does ‘free-trade’ confer? As we transition to a new age — NOT the “Age of Aquarius” — but an age of diminishing petroleum with its associated cheap transportation diminishing and an age of populations greater than the local capacity to feed them — I feel the economics-math for free-trade is very wrong or has some strange notions of optimality.

  10. marku52

    But wait, all those sweat shop workers are really happy to have those jobs, right? That’s what we’re told, anyway. Some one investigated this idea, and found it to be (family blog).

    “To our surprise, most people who got an industrial job soon changed their minds. A majority quit within the first months. They ended up doing what those who had not gotten the job offers did — going back to the family farm, taking a construction job or selling goods at the market…

    …quitting was a wise decision for most. The alternatives were not so bad after all: People who worked in agriculture or market selling earned about as much money as they could have at the factory, often with fewer hours and better conditions. ”

    Free Trade! Everybody Benefits!

  11. Oregoncharles

    “The euphoria around international trade and the general consensus regarding capitalism’s inevitable sustenance among countries of the Global South is at least partly due to the absence of an alternative after the collapse of the Soviet Union. ”

    An alternative:
    Syndicalism, aka worker ownership. A concept that’s been available all along, first came to my attention in 1976.

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