Covid-19 Straw Breaks Free Trade Camel’s Back

By Jomo Kwame Sundaram, a former economics professor, who was Assistant Director-General for Economic and Social Development, Food and Agriculture Organization, and who received the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought in 2007. Originally published by Inter Press Service

Economic growth is supposed to be the tide that lifts all boats. According to the conventional wisdom until recently, growth in China, India and East Asian countries took off thanks to opening up to international trade and investment.

Such growth is said to have greatly reduced poverty despite growing inequality in both sub-continental economies and many other countries. Other developing countries have been urged to do the same, i.e., liberalize trade and attract foreign investments.

Doha Round ‘Dead in Water’

However, multilateral trade negotiations under World Trade Organization (WTO) auspices have gone nowhere since the late 1990s, even with the so-called Doha Development Round begun in 2001 as developing countries rallied to support the US after 9/11.

After the North continued to push their interests despite their ostensible commitment to a developmental outcome, the Obama administration was never interested in completing the Round, and undermined the WTO’s functioning, e.g., its dispute settlement arrangements, even before Trump was elected.

To be sure, the Doha Round proposals were hardly ‘developmental’ by any standards, with most developing countries barely benefitting, if not actually worse off following the measures envisaged, even according to World Bank and other studies.

GVC miracle?

According to the World Bank’s annual flagship World Development Report (WDR) 2020 on Trading for Development in the Age of Global Value Chains, GVCs have been mainly responsible for the growth of international trade for two decades from the 1990s.

GVCs now account for almost half of all cross-border commerce due to ‘multiple counting’, as products cross more borders than ever. Firms’ creative book-keeping may also overstate actual value added in some tax jurisdictions to minimize overall tax liability.

WDR 2020 claims that GVCs have thus accelerated economic development and even convergence between North and South as fast-growing poor countries have grown more rapidly, closing the economic gap with rich countries.

Automation, innovative management, e.g., ‘just-in-time’ (JIT), outsourcing, offshoring and logistics have dramatically transformed production. Labour processes are subject to greater surveillance, while piecework at home means self-policing and use of unpaid household labour.

WDR 2020 Out of Touch

WDR 2020 presumes trends that no longer exist. Trade expansion has been sluggish for more than a decade, at least since the 2008 global financial crisis when the G20 of the world’s largest economies and others adopted protective measures in response.

GVC growth has slowed since, as economies of the North insisted on trade liberalization for the South, while abandoning their own earlier commitments as the varied consequences of economic globalization fostered reactionary jingoist populist backlashes.

Meanwhile, new technologies involving mechanization, automation and other digital applications have further reduced overall demand for labour even as jobs were ‘off-shored’. Trump-initiated trade policies and conflicts have pressured US and other transnational corporations to ‘on-shore’ jobs after decades of ‘off-shoring’.

Nonetheless, WDR 2020 urges developing countries to bank on GVCs for growth and better jobs. Success of this strategy depends crucially on developed countries encouraging ‘offshoring’, a policy hardly evident for well over a decade!

As the last World Bank chief economist, albeit for barely 15 months, Yale Professor Pinelopi Koujianou Goldberg recently agreed, “the world is … retreating from globalization”. “Protectionism is on the rise — industrialized countries are less open to imports from developing countries. In addition, there is by now a lot of competition”.

The Covid-19 crisis has further encouraged ‘on-shoring’ and ‘chain shortening’, especially for food, medical products and energy. Although the Japanese and other governments have announced such policies, ostensibly for ‘national security’ and other such reasons, Goldberg has nonetheless reiterated the case for GVCs in Covid-19’s wake.

Trade Does Not Lift All Boats

After claiming that “economists have argued for centuries that trade is good for the economy as a whole”, Goldberg has also noted that “trade generates winners and losers”, with many losing out, and urges acknowledging “the evidence rather than trying to discredit it, as some do.”

Following Samuelson and others, she recommends compensating those negatively effected by trade liberalization, claiming “sufficient gains generated by open trade that the winners can compensate the losers and still be better off” without indicating how this is to be done fairly.

Compensation and redistribution require transfers which are typically difficult to negotiate and deliver at low cost. Tellingly, like others, she makes no mention of international transfers, especially for fairly redistributing the unequal gains from trade among trading partners.

Interestingly, she also observes, “There are plenty of examples, especially in African countries, where wealth is concentrated in the hands of a few… even when the tide rises, only very few boats rise. Growth doesn’t trickle down and doesn’t improve the lot of the poor.”

Unlikely Pan-Africanist

After decades of World Bank promotion of the ‘East Asian miracle’ for emulation by other developing countries, especially in Africa, Greek-born American Goldberg insists that what worked for growth and poverty reduction in China will not work in Africa today.

Echoing long time Bank critics, she argues, “If trade with rich countries is no longer the engine of growth, it will be more important than ever to rely on domestic resources…to generate growth that does trickle down and translates to poverty reduction.”

Instead, as if supporting some contemporary pan-Africanists, she argues, “Africa needs to rely on itself more than ever. The idea that export-led industrialization as it happened in China or East Asia is going to lead growth in Africa becomes less and less plausible”.

She argues that “the African market is a very large market with incredible potential. It has not been developed yet. So, regional integration might be one path forward. Rather than opting for global integration, which may be very hard to achieve these days when countries are retreating from multilateralism, it might be more feasible to push for regional trade agreements and create bigger regional markets for countries’ goods and services”.

Acknowledging “We are still a very long way from there because most countries are averse to this idea — they see their neighbors as competitors rather than countries they can cooperate with”, not seeming to recognize the historical role of the Bank and mainstream trade economists in promoting the ‘free trade illusion’ and discrediting pan-Africanism.

 

 

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21 comments

  1. Ignacio

    I have mixed feelings with this article, being confusion the most salient of these. It may well be the case that my written English comprehension skills have bottomed in a very low level. First confusion is when I read that Obama’s admin was not “interested on completing the round” but at the same time and, as far as I can recall, Obama was pushing hard for all kinds of trans-regional partnerships plus TISA with their embedded ISPS agreements attached. Is it true that all those treaties meant something different that completing the Doha round?

    Then it goes with some North vs. South (shouldn’t it be Corporate vs. the ROW?) jingoist approach “despite an ostensible commitment with developmental outcome” but “hardly achieving this by any standards” my confusion increases.

    The most striking for me it that yet describes pushes for the same Doha approach but with “difficult to negotiate compensation and redistribution transfers” (probably impossible) and later focus (something I find much more sensible) on “African countries relying on themselves” and by the way regaining control on, for instance, land management and food supply. It seems to me the article is criticizing Goldberg’s claims (correctly in my opinion) and at the same time trying to be too polite.

    Reply
    1. H. Alexander Ivey

      Your confusion is entirely correct. But your analysis is 180 degrees off (often the case for those of us outside the Washington Beltway or Westminster spheres). You are confusing the English used to understand our world and express ourselves with the English used by the 10%ers who are speaking to the 1 %ers.

      Reply
      1. chuck roast

        hear him, and hear him…
        Econospeak at its best. Filled with cliches and “on the one hand(s).” This articles perfectly describes why social distancing can ultimately be a boon to mankind. This fellow Sundaram can self isolate at home and still get a paycheck. He can begin puttering about in his garden and start growing his own food. Eventually, he will find this activity to be far more rewarding than cogitating on the various cost and benefits of the international value chains, and will be spending more and more time in his garden. UBI will kick in. He will decide to disengage from “globalization” and being a public nuisance and adopt this new, socially beneficial lifestyle permanently. By doing “piecework at home” he will add to real gross domestic product, and he, the economy and the rest of the planet will be immeasurably improved.

        Reply
    2. The Historian

      Good analysis. But part of my confusion with this article started with the headline: “Covid-19 Straw Breaks Free Trade Camel’s Back”

      What free trade? Nothing in the article discusses free trade and I doubt that there has ever been free trade for a very long time. Is this more Econospeak?

      I do agree with the author that the way trading is done now, however he defines it, has not risen all boats.

      Reply
      1. Amfortas the hippie

        Regarding the existence of “Free Trade”
        I watched this in real time when Nafta passed(i was agin it, and voted for Perot accordingly, both times)
        I knew a middle class mexican american guy…father of a friend of mine. His business, pre-Nafta, was going to his extended familia’s ranch/farm(100 acres) in Tamaulipas, and returning with fruits and veggies and vanilla and a whole bunch of “junk”…like that metal yard art and terra cotta birdbaths and such.
        had a dually pickup and a 20 foot trailer.
        Post Nafta, this was suddenly illegal…he wasn’t part of the Club, and went to work as a cook along side me and his son.
        since that time, I’ve heard essentially the same story from numerous mexican american folks who used to do similar stuff.
        nafta killed that small time cross border trade…and the only “Freedom” involved was for the Maquiladora-owners, US Welfare Corn Corporations and the Cartels.
        anecdata, of course, but still…
        if “they” were really for “free trade”, they’d allow me to legally sell a frelling egg or tomato…or grow some weed, for that matter(high demand, low quality unstable supply).

        Reply
        1. Susan the other

          I voted for ross perot too. I even went across the street and talked to my neighbors – the last time I did that – as they always say, it’s like staring into the eyes of a chicken – oh so “liberal” at the time – To them Ross Perot was just an insufferable hick. But I loved the guy. And he was right. I think he lived in the same neighborhood as little George in Dallas – but Ross didn’t want us to spread our resources too thin whereas little George saw MidEast oil as our best security. So now that that has blown up, it’s regionalism v. globalism. It’s a brake on turbo trade. It’s not a fix. We don’t want to be lulled into thinking we’ve achieved something like a trade balance and an environmental balance – that will take a century – and only if we stop fibbing to ourselves.

          Reply
          1. Bsoder

            I worked for Ross, for a while post GM (1987). I liked him very much, although we fought quite a bit. Mostly, I agreed with his public policy outlook, when I didn’t and it came up I told him. He didn’t surround himself with the wights that the Orange Menace does. Striking -he was very loyal to people in his orbit. NAFTA had protections for labor, unions, & the environment they just never were enforced. There must be some ‘law’ that says anything neoliberal turns into a racket over time, so it was with NAFTA.

            Reply
            1. Left in Wisconsin

              The NAFTA protections for workers were just hand waves. Lance Compa, who is at Cornell, ran the US office trying to get the labor provisions (weak as they were) enforced. As I recall, they were never able to bring even a single case forward.

              Reply
            2. Ed Miller

              Bill Clinton enforce such a law? After he (indirectedly) killed Bill Black’s prosecutions lined up from the S&L Crisis. Then (also indirectly) told poor Bill (in charge of prosecuting white collar fraud) to not spend even one second looking for white collar fraud….. ROFLMAO

              Note that Bill Black, who with Edwin Gray lead the prosecution of Charles Keating and others, got pushed into a backwaters institution instead of an Ivy League plum job. He should have been treated as an American hero. At least that is the way I see it.

              No good deed goes unpunished – quite the understatement in this case.

              Reply
        2. Adam Eran

          “Free” trade means removing regulations and tariffs. As Michael Hudson reminds us, in Classical economics, it used to mean free of the unproductive burdens of the rentiers.

          As for NAFTA, one might figure shipping a bunch of subsidized Iowa corn down to Mexico would impair the income of Mexican farmers.. The NAFTA treaty compensates the big ones.

          Corn is only arguably the most important food crop in the world. The little (uncompensated by NAFTA) Mexican farmers were only keeping the disease resistance and diversity of the corn genome alive with the varieties they grew….But they weren’t making any money for Monsanto… So they were hung out to dry…and migration to “Gringolandia” increased dramatically…not all of it “legal.”

          In the wake of NAFTA, not only did Mexico experience capital flight (remember the Clinton administration’s $20 billion bank bailout?), Mexico’s real median income declined 34%. (Source: Ravi Batra’s Greenspan’s Fraud).

          One has to go back to the Great Depression to find that kind of decline in the U.S. Of course that provoked no great migration… Oh wait! The Okies!

          Imagine the Okies exiting the dust bowl to go to California where they would be caged, separated from their families, and ultimately shipped back to Oklahoma, where they would either be very miserable or even starve. That’s what we’ve been doing to the Mexican refugees U.S. actions created…never mind the fact that U.S. military and political attacks on its southern neighbors have been going on for literally centuries. (Between 1798 and 1994, the U.S. is responsible for 41 changes of government south of its borders).

          Incidentally, the Harvard-educated neoliberal, Carlos Salinas Gotari, the Mexican president who signed NAFTA, was so despised he had to spend at least the initial years of his retirement in Ireland.

          It’s not for nothing that the guys who stand up to the Yanquis (Castro!) are heroes in the South.

          Reply
  2. taunger

    It’s amazing how economists can focus solely on economic activity, and the thought that something like climate change or politics might make their pronouncements useless isn’t even rebutted.

    Reply
    1. John Wright

      This reference: https://www.scientificamerican.com/article/why-co2-isnt-falling-more-during-a-global-lockdown/

      Has that one of the Covid-19 lockdown effects has been a fall in expected incremental CO2 added to the atmosphere in 2020 relative to 2019:

      “Forecasters expect emissions to fall more than 5% in 2020, the greatest annual reduction on record. But it’s still short of the 7.6% decline that scientists say is needed every year over the next decade to stop global temperatures from rising more than 1.5 degrees Celsius.*.

      Yes, the earth’s climate is one of the uncompensated losers of the world’s current system of economic growth.

      Economists seem to be forever optimizing for the GDP measure, while giving lip service to “uncompensated losers” such as workers and the earth’s climate.

      Reply
  3. TomDority

    Me, being a cynic and all – I thought the way trade worked in the real world (not the one described by well paid economists) was a multi step process
    1) target developing country by undermining their core farming, self sustaining activity and export industries through cheap importation of grains and crops and other goods – thus making it impossible for locals to survive through their own industry
    2) simultaneous loans (investment) to the country (economic aid) and corruption of political leaders designed to enable step three
    3) Whence said country is indebted – force country to export whatever (mineral) wealth onto a glutted market to pay back its debts – this is easily done as the labor component is ripe for the picking/ fleecing
    4) crush the country into economic austerity for as long as it takes to enslave its citizens and grab everything of value from the country
    5) pretend that the IMF etc did such a great job – but the countries people (victims) or government did not do enough and must take care of themselves better

    Reply
    1. The Rev Kev

      I think that you covered the Standard Operation Procedure here in better detail than I could. I would only add to point 2) that the bankers will go to these local leaders and show them how to hide their money and help them set up accounts in a place like the Caymans as part of the service.

      And if that economist wants to find where all of Africa’s wealth is going, he might want to start in the City of London and New York first.

      Reply
  4. David

    I share the general sense of confusion. I’m not quite sure what the point of this essay is. It’s full of wild generalisations like:
    “According to the conventional wisdom until recently, growth in China, India and East Asian countries took off thanks to opening up to international trade and investment.”
    I don’t think that’s ever been conventional wisdom for Japan, Korea and China, for example, whose economies were (and in part still are) highly protected. Industrialisation in those countries was not “export-led”.
    It also confuses “trade” in the old sense, of countries importing things they couldn’t produce and exporting what they could, with “trade” in the new sense of moving stuff around the world largely for financial reasons. Trade in the classic sense may have benefited the country as a whole (though this is debatable) but trade in the current sense was never intended to. Likewise I hadn’t heard that globalisation had fostered a “jingoist backlash” – jingoism after all means aggressive calls for war. But then the whole article is clumsily written and badly constructed.
    And the idea that Africa should rely on itself is fair enough, but runs counter to every piece of advice given to Africa since independence: remember, the World Bank master plan was for African countries to grow cash-crops for export to generate cash for industrial development? We know how that worked out. And yes the African market has enormous potential but it’s desperately lacking in infrastructure, which makes trade between eve adjacent nations desperately difficult. You need to fix that first.

    Reply
    1. Thuto

      There’s a growing realisation on our continent that outsiders aren’t going to lead us to the promised land. The obstacles to effective intra-african trade that you identify will have to be cleared before Africa’s potential can be realised, and as an African I have to believe they will be, challenging as that will be. The overthrow of Omar Al Bashir in Sudan has shown that people in Africa are agitating for real, lasting changing, liberation from the rule of corrupt leaders and true, not pseudo independence from the West and increasingly China as well. Other leaders have taken notice of this, as have ordinary citizens across the continent. It will take time, ther’ll probably be a few false starts, we’ll wobble a bit but in the end I believe we’ll get there.

      Reply
  5. a different chris

    “trade generates winners and losers”, with many losing out, and urges acknowledging “the evidence rather than trying to discredit it, as some do.”

    I don’t known who “discredits” it.

    What I see is that everybody important acknowledges it, but does squat about it. This redistribution never happens, the rich get richer in a role reversal of “I’ll gladly pay you Tuesday for a hamburger today”. Any attempt to have the rich share the hamburger is greeted with a “not now!” and a assurance that if the rich stop continuously getting richer at this particular point in time then everything will collapse.

    The poor, of course, ain’t got until this mythical “Tuesday”.

    Reply
    1. HotFlash

      “the African market has enormous potential”

      Indeed! Very few Africans have IoT sous-vide sticks yet, or Smart doorbells. I’ll bet they are way behind on fast fashion, too. Vast market to sell them things no-one needs and that wreck the earth on credit. Just gotta get those roads built so Jeff can deliver stuff to them in 2 days.

      Reply
      1. Bsoder

        The best understanding of what is going on in Africa I got from Jared Diamond – book, “Collapse: How Societies Choose to Fail or Succeed”. And for background – “Guns, Germs, and Steel”. Global climate heating is going to destroy Africa, already is. The usual story, no water, no forests, too much heat and humidity. It’s a terrible reckoning. And largely not of their making.

        Reply

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