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Free trade no answer to credit crisis, part 2

Written By: - Date published: 8:34 pm, November 25th, 2008 - 12 comments
Categories: economy, International - Tags:

I’m a bit concerned to see people welcoming APEC’s commitment to re-igniting the Doha Round of free trade talks as if they are a solution to the economic mess we are in now. I’ve already noted that more free trade, while desirable if done fairly, will not fix the problems that have lead to this crisis but, just as importantly, there is a not ‘more free trade’ button we can just push and feel the effects of straight away.

The Doha Round has been a mess for years now. Very, very basically, it is meant to open up the developing countries to more first world investment and, in turn, open up the agricultural production of the US, EU, and Japan to competition from the third world (and first world food exporters like us). It would do that by removing subsidies for farmers in the first world, which are absolutely massive.

The problem is, the farmers rather like their subsidies and, as in New Zealand, farmers present a lobby group with power out of all proportion to their numbers in the EU and US*. That barrier to the first world coming through on its side of the basic bargain that Doha is all about. And it is a barrier that has not disappeared.

Yet, let us imagine that somehow the EU and US do manage to overcome resistance from their farmers. Would we then have a massive economic boost from more free trade right away? No. Even if the outline of the deal could be agreed tomorrow, there would still be a months, if not years, long process of sorting out the details. These trade deals are incredibly complex and every element of them needs to get approval by the member countries, all 153 of them. Even once there is a deal signed off, it has to be ratified by a certain number of members before it comes into force, a process that also takes a long time (five years for Kyoto, I think it was). And, even then, reductions in trade barriers do not happen immediately. Typically, there is a lead-in period of several years so businesses can adjust before tariffs and subsidies are cut, and they are gradually cut in steps over periods of up to a decade.

The long and short of it is even if by some miracle they break the deadlock at the next meeting and Doha progresses forthwith, we’re not going to see any economic effect from it for years. To think a free trade deal that is years away can help us now displays the same level of economic understanding as thinking tax cuts can close the wage gap with Australia – ie. an all too common one.

In contrast, much needed reforms of the finance sector, breaking up the ‘too big to fail’ banks and dividing the operators in different markets off from each other, could take place in months and get the markets functioning again without the constant fear of another giant tumbling sending cascading failures through the other finance firms, which is what is paralysing the system now.

But, no, so much easier to turn to the free-trade panacea, instead.

*(ever wondered why we are suddenly all into converting food crops into ethanol for cars, a technology that has been around for decades and may not actually reduce greenhouse gas emissions? Because George Bush subsidised it to win crucial votes in the rural battleground states in the mid-West)

12 comments on “Free trade no answer to credit crisis, part 2 ”

  1. rave 1

    Free Trade is a total smokescreen.

    The main trading partner of the US is the US itself, or rather US corporates producing outside the US. Doha is about the US extracting more concessions from poorer countries to buy up their resources in exchange for more access to the US (or EU or Japanese) markets for their commodities. But when those ‘foreign’ commodity producers are increasingly US, EU or Japanese owned, then who is trading with whom? The price of commodities has almost nothing to do with traditional trade barriers and almost everything to do with how much leverage big multinationals have in dictating the prices of commodities they export to themselves.

    The current crisis arises out of an excess of US capital, despite the export of capital overseas to buy up the assets of other countries. This excess was invested in speculative assets such as housing. When much of this fictitious capital is eventually devalued, and the strongest banks survive, recapitalised by taxpayers dollars mortgaging future generations of workers, these big banks will own more of the world’s resources and profit stream.

    Trade barriers will arise when states acting on behalf of their respective monopoly banks and corporates restrict trade. States and cartels like OPEC can manipulate prices by regulating or restricting supply. Russia can do this with its gas. OPEC does
    with oil. Even little Bolivia does it in a small way by taxing the multinational oil and gas companies.

    But the fact is that as the biggest US banks will come out of this crisis much stronger and backed by the US state and the US dollar as ongoing reserve currency, so we have to expect that US imperialism will be able to drive harder bargains with its rivals and subordinates.

    When John Key sucks up to George Bush what he is really doing is saying, how can the rich pricks in NZ share in this bonanza at the expense of the poor. He will be trying to offer the big banks free access to NZ resources, low taxes, no RMA barriers, access to the state pension fund, guaranteeing the wholesale funds of Aussie branch banks in NZ so that the big US banks will lend to them, signing the US up to a P4-7 free trade deal that makes big concessions for US ‘financial services’, junking ETS and carbon taxes, locking up dissidents in private jails etc etc. to make NZ a safe haven for US investment and open up the country to total US corporate ownership.

    That’s what John Key was really doing in Lima having a chat with George Bush. What we need to be doing is chatting among ourselves and organising to stop National’s not so secret privatisation agenda from being unloaded on us behind the smokescreen of moderation, tax cuts, and FTAs.

  2. PK 2

    Heh Rave

    Sorry I can’t go along with the enormous conspiracy theory that you seem to perceive the world of trade is but I do agree that Free Trade isn’t free trade and is a red herring in relation to the current crisis but not for the reasons you propose.

    A couple of examples …… OPEC’s share of oil production is about 40% and it’s a bit difficult to be the price setter when you have less than 50% share (and when member states cheat on the side, which often happens) and as the US, EU and Japan are huge net importers of oil the jumps in oil price really hurts them. They are unable to get ownership of oil reserves as the bulk are nationally owned in OPEC (OPEC has largest reserves but not largest production) and other countries. Can’t see a US/EU/Japan commodity ownership situation there.

    Similarly, the US, EU or Japanese (or their companies) do not own other commodities eg SA and China between them have the bulk of the gold production in the world and neither are huge friends of the western world. Both have rules about foreign ownership. SA is using black empowerment (BEE) to get ownership of assets in to black hands, for instance. The largest copper producer in the world is the Chilean state owned company Codelco. China is the largest tin producer. India produces as much milk as the US and between them they produce the majority of milk in the world. Beef is produced mostly by US and the EU but beef does not make the world economies live or die really. There is a case to say Anglo American has a large influence on various mineral commodity prices but considering they are historically SA based and with the current BEE activities I struggle with that.

    The current credit crisis can more likely be attributed to the US government via the Federal Reserve’s approach over a significant period. Its very low key approach to regulation (self regulation is an oxymoron) and constant priming of money supply and credit and interest rates to prevent the normal ebbs and flows of markets has meant that the current bubble is a damn site bigger and nastier than it should have been. The US government also pretty much mandated the high risk lending on the residential property market.

    There is one rule of markets – they have bubbles and the bubble pops – the trick about bubbles is to try not to make them too large so that the pop is not too painful. Frankly, the current support of financial and other large corporates is b****dy stupid as it removes moral hazard (ie the fact that if you take big risks and it fails you should then lose your money) and doesn’t allow the bubble to pop properly and supports organisations such as GM who have been disfunctional for many years. It’s a bit like pulling a tooth really slowly without pain killers – you’re still going to lose the tooth but in a much nastier way. Similarly, they are giving the money to the people who screwed up – stupid!

    The scary thing is that the US and to a lesser extent EU and even to some extent NZ with its bank guarantees are not making the risk takers suffer for their excessive risk taking. NZ frankly did not need the loan guarantees put in place by Helen and Cullen just before the election, particularly as the bulk of the recipients of this largesse are foreign owned and did not take part in the leveraged high risk stuff that led to all those bad loans. A bit of knee jerk reaction that under pressure I feel. Would have been better to see if they were about to fail and see whether the government can get the companies at fire sale prices.

    The concept of Free Trade is great. The economic theory is that the most efficient producer of X sells their specialist produce so overall everyone benefits as things are cheaper and everyone is richer. The problems start with the fact that there is b***er all Free Trade except into places like NZ (tariffs and limits abound into the wealthier markets) and that it doesn’t take in to account sunk costs and transition costs (particularly the social transition costs). By sunk costs I mean if you’ve built the factory to make widget X and it cost a gazillion dollars then if someone else is better than you at making X you end up having to chuck away the gazillion dollars ouch! Similarly, NZ was crap at making cars for a bunch of reasons. But when NZ stopped making cars a whole bunch of people did not have a job and cannot always successfully transition to another job as they may not be easily employable or re-trainable or whatever. So trade barriers do need to be removed with the appropriate support mechanisms in place to limit the transition pain. They do need to be removed, however. As stated earlier Free Trade is also a very slow mechanism to kick in and will not have effects fast enough to make a difference on the current crisis.

    On the US banks etc the US has an enormous amount of debt in US$. It needs to devalue the US$ to export its inflation to reduce the real cost of its debt so making the US$ strong and a reserve currency will cause more pain for the US economy.

    Couldn’t sleep I can now

  3. RedLogix 3

    I was tempted to cut and paste a huge section from the following page, but I would likely incur the wrath of the bot, so I will content with a linky thing, and a short quote:

    10 Worst MultiNationals in 2008

    Thirty years ago, most developing countries produced enough food to feed themselves. Now, 70 percent are net food importers.

    Thirty years ago, most developing countries had in place mechanisms aimed at maintaining a relatively constant price for food commodities. Tariffs on imports protected local farmers from fluctuations in global food prices. Government-run grain purchasing boards paid above-market prices for farm goods when prices were low, and required farmers to sell below-market when prices were high. The idea was to give farmers some certainty over price, and to keep food affordable for consumers. Governments also provided a wide set of support services for farmers, giving them advice on new crop and growing technologies and, in some countries, helping set up cooperative structures.

    This was not a perfect system by any means, but it looks pretty good in retrospect.

    It’s a long page, and most of it is very interesting, but for the strictly OT section, scroll down to the second item: Cargill Food Profiteers.

    As others have said, “Free Trade” is just a slogan. The real question is “Free for whom?”.

  4. NickC 4

    SP if all you are going to do is come up with really pathetic excuses to oppose free trade then why bother throwing in the occasional “I think free trade is a really good idea in theory”?

    Your first arguement against free trade was completely debunked, there is no way of showing that the removal of tarriffs and subsidies some how opens up the currency to speculative attacks. This isnt really much better, just because a free trade deal normally takes a few years to proccess doesnt mean it isnt worth pursuing given the huge mutual economic benefits.

    Clearly the main reason that everyone doesnt get togeather and agree to remove all tarriffs and subsidies overnight is political, politicians dont want to lose votes. Your George Bush example at the end of the post is perfect evidence of this. Its the same with the European farmers, the politicians dont want to lose their votes so they keep the subsidies, even though they do vastly more harm then good.

    So really its people with the same attitude as you that stop free trade, people too ignorant to look beyond the present and recognise the enormous benefits. If the vast majority of the population supported free trade i guarentee that the politicians would get behind it as well and things like Doha might actually work.

    Redlogix: Quick reply; this problem is largely created by european subsidy of farmers, not the fact that trade barriers are removed.

  5. NickC, care to elaborate on what those ‘enormous benefits’ are?

  6. Phil 6

    ever wondered why we are suddenly all into converting food crops into ethanol for cars, a technology that has been around for decades and may not actually reduce greenhouse gas emissions? Because George Bush subsidised it to win crucial votes in the rural battleground states in the mid-West

    It is ignorant and/or deliberately misleading to pin the blame solely on Bush. If you look at the 2004 election in particular (but also 2000) candidates were wholeheartedly endorsing these subsidies in the Primaries.

    Why? Because it’s hard to keep your campaign for nomination going if you lost big-time in early states like Iowa.

  7. bill brown 7

    Yeah, poor old w, he’s just so misunderstood – he means (meant?) well, really.

  8. Pascal's bookie 8

    Ahh but Phil, if GWB was one for standing true to his campaign statements then he woulda restored honesty and dignity to the White House, run a humble foreign policy and be remembered as a compassionate conservative with no time for the partisan divisions that so tore the US apart during those dark, dark, days known as the Clinton Presidency.

  9. NickC 9

    No problem leftrightout.

    1) Lower prices and better selection of goods. If you are trying to fight cheap imported goods in order to prop up local industries then consumers will miss out on the benefits of those imports

    2) It enables us to more efficently use our resourses, not only as a country but as a planet. If we distort price signals by imposing tarriffs/subsidies then we use resourses inefficently. e.g. European farmers have massive subsidies to combat the fact that farming in europe is inefficent. So farming is encouraged by government payment even though it is not the best use of resourses.

    3) More employment. People often talk about protecting local jobs but we will gain more jobs from free trade than we lose in industries which overseas countries place tarriffs on (e.g. our agriculture industries).

  10. PK 10

    Another massive missive – I must be bored

    On Free Trade – it’s one of the few things the majority of economists agree on as a good thing.

    Based on some of the comments made here it’s worth distinguishing between Free Trade, Fair Trade and Current Trade.

    Current Trade – As I stated earlier there is b***er all Free Trade out there – devoid of quotas, tariffs, subsidies or procedural or regulatory trade barriers. We even have some distortions in the CER, one of the cleaner Free Trade agreements around – fire blight and apple imports to OZ and the treatment of imputed company tax by the Ozzies for Kiwis come to mind. You have the ludicrous situation of poor countries putting large tariffs on food imports for instance thus pushing up the price of food for their own people!!! The huge farming subsidies, quotas etc in the US and EU damage the ability for poorer countries to grow food and earn income. I also liked the Japanese response when they agreed (under pressure) to allow product X (I forget which) into the country with no quota. They made sure there was one understaffed office in the entire country to process all imports for that product 🙂

    Free Trade should help poorer countries by allowing them markets for low $ service cost goods but that brings me on to Fair Trade. Often the so called Free Trade agreements are not that and are not Fair as they have lots of caveats and one of the countries entering the agreement loses out. The agreement between OZ and the US was seen in many cases as favouring the US in key areas such as Agriculture (US huge offender here), Pharmaceutical, and Expansion of the IP laws see http://www.tradewatch.org.au/AUSFTA/Index.html So, unfortunately Free Trade is under the current processes often neither free nor fair.

    Fair Trade is Free Trade where it’s equitable and across the board allow time for existing trade barriers to be removed in a manner to reduce the transition pain but still do it.

    To put Free Trade in to perspective how would you feel if you were a market gardener living in Northland and were told that as you don’t live in greater Auckland you had to pay a tariff of 50% to bring in your carrots and you could not sell more than 100kg a week even though you grow better and cheaper carrots than the farmer from Rodney district? The end result is the customer pays more for carrots and there is a net transfer of wealth to the Rodney farmer from the customer. There is a reduction in competition and there is no incentive for the Rodney farmer to improve his efficiency or quality. The Northland farmer is punished because he doesn’t live in greater Auckland. Does it feel fair when it’s seen as a neighbour being punished especially when the average Northlander is probably worse off than the average Aucklander?

    RedLogix on food a key effect on food production in developing countries is actually due to no Free Trade. The US and EU have significant subsidies and the US, in particular, under its guise of promoting Free Trade pressures smaller countries to drop or lower tariffs without addressing their own trade barriers such as subsidies or quotas.

    A case in point, China and sub Saharan Africa have some of the poorest people on the planet. Sugar production is historically done well in places like parts of China and Swaziland. The EU has significant quotas, tariffs and subsidies on sugar and depresses world prices, which is affecting China’s and Swaziland’s sugar industries. Swaziland produces sugar very efficiently. Its sugar production is estimated as twice as efficient as the EUs. With Free Trade Swaziland could expand its exports and make the country better off. So the argument is for Free Trade.

  11. Pascal's bookie 11

    True Free trade would also include getting rid of “Immigration Departments” which are just barriers to trade for people who sell their labour.

  12. rave 12

    PK:

    Free Trade is not even an ideal we should seriously entertain. It cannot work in the global capitalist economy and in times of crisis such as now, it is even more remote. Arguing that free trade can do anything to solve the current crisis is pious piffle.

    The reality is that the world market is dominated by transnationals, not national states, which are in fact “owned” by the transnationals. These states implement policies that serve the interests of the TNCs (banks and industrial corporates). There is no conspiracy, its called looking after ‘business’. Or as the conservative General Eisenhower once called it, the “military industrial complex”. There are shuttle limos running top personnel between business, state and military.

    The so-called multilateral agencies like the IMF, WB and WTO promote the interests of the dominant MNCs forcing developing countries into debt and buying up their assets. Bilateral “FTAs” are just deals done between LDCs and the imperialist powers to rip out the resources and labour of the LDCs. “FTAs” in this sense means “forced trade agreements”.

    The current crisis in the US is not the result of the wrong state policy allowing the banks to run out of control. The state deregulated banking at the behest of the banks because if they did not speculate in assets like housing, their excess capital would have devalued. And after each bubble burst the state bailed out the strongest, nationalising their losses at the expense of the taxpayers. The current bailout is socialising the losses of the biggest banks and allowing them to consolidate and concentrate their power and wealth our the expense of weaker banks, taxpayers and workers.

    The biggest TNCs are those of the biggest imperialist countries, the US, EU (which consists of a bloc of nations) and Japan. By comparison SA, China, Russia, while potentially rich nations, are not in the same league.

    Apparent exceptions to the rule of MNCs such as gold production in SA and China are not exceptions at all. SA gold production has always been dominated by MNCs and today Anglo-Gold Ashanti which is a subsidiary of the huge MNC Anglo-American is still the NO 1 gold corp. The ANC has sold out to the MNCs notwithstanding the rise of a black bourgeoisie.

    China is an emerging market and far from restricting foreign investment is rapidly opening up gold production to FDI. The BRIC countries are already big battlegrounds where the rival MNCs fight for more control.

    The example of state owned CODELCO in Chile shows that MNCs can still dominate the No 1 world copper producer through loans from US banks and JVs with Japanese and US corporates. It is no accident that CODELCO was nationalised by Allende in 1971 and kept nationalised by General Pinochet. MNCs can easily dominate without private ownership as the case of nationalised Iraqi oil also proves.

    This is why this crisis cannot be resolved in favour of the masses of people by any of the rescue operations or reforms proposed at bosses’ forums like the G20 and APEC.
    All of these measures are designed to make the weaker nations and the masses of the world pay for the crisis with job losses, wage cuts, inflation, backed by state repression.

    Key is part of the problem not the solution. We need to oppose all the MACTIONAL policies designed to transfer wealth upwards to the MNCs. This means fighting for immediate actions to provide decent jobs, boost wages, and defend our unions and political rights. We need to oppose bosses’ bank bailouts that come out of our wages and savings. Tax cuts for the poor and tax hikes for the rich.

    Today in many parts of the world, the left is rallying around the slogan “We will not pay for their crisis”. This is naturally a defensive slogan but it is a good place to start.

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  • Speech to LGNZ Conference
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  • NZ-PNG Sign Statement of Partnership
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  • Prime Minister's Speech to NZIIA Annual Conference
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