Myth 5: Everyone wins under free trade

Toilet paper shortages, bread queues, black markets, North Korea – we are told that all of these things are what we face if we abandon free trade. But the truth is very different. Some of the countries that have most zealously pursued free trade have suffered while others who have resisted opening up their markets have done very well indeed.

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If growth is seen as the panacea to social problems, trade is seen as the way to get growth. Countries are told by international institutions like the World Bank and International Monetary Fund, ‘open your markets, reduce your tariffs and quotas, and watch the money flow in’. They point to South Korea and Japan as examples of countries that emerged from poverty through such free trade policies. 

But they’re wrong.

If anything, the evidence suggests the opposite. Some of the countries that most wholeheartedly imbibed the free trade doctrine pushed by the World Bank and IMF have done much worse than the countries that have dared to be different.

South Korea and Japan feature prominently among the ranks of the different. These countries did indeed open their markets and reduce tariffs, quotas and subsides. But they only did so after a lengthy period of protecting their industries and agriculture from external competition. Until 1964, Japan effectively subsidised all of its export industries by totally exempting them from tax. It also imposed huge tariffs and quotas on imports. South Korea conducted a similar policy.

This policy took guts, even in the post-war era. When a US delegation approached the Japanese in 1955 to convince them to drop their tariffs on American cars because war-torn Japan would never be able to compete in such a high-tech industry, they were rebuffed. The Japanese negotiator curtly told the Americans that they wouldn’t be reduced to exporting tuna while the USA got to export high value goods like automobiles. 

Japan is one of the world’s biggest exporters of cars and high-tech goods. 

The same could be said of the USA and Europe in the 18th and 19th centuries, when they imposed stringent tariffs on foreign goods. Even today, measures like the Common Agricultural Policy in the EU subsidise European and American goods in a flagrant breach of free market dogma. The EU has even raised tariffs against India and Vietnam, ostensibly to help even poorer countries, although an independent study has shown that the main beneficiary was the USA.  

Contrast this with the experience of sub-Saharan Africa, Latin America and Asia. During the 1980s and 90s, many countries were persuaded to open their economies up as part of the now infamous structural adjustment programmes pursued by the World Bank and IMF. The result was a disaster. 

Sub-Saharan Africa enjoyed healthy growth in the 1960s and to a lesser extent in the 1970s, but far less in the 1980s and 90s. World Bank ‘star pupil’ Ghana totally liberalised, following an ultra-free market policy and was rewarded by having a lower per capita GDP in 1994 than it did when the structural adjustment programme started in 1983. Where increased growth was achieved, this was often at the expense of severe cuts in basic services like health and education, and increased poverty. 

Further east, the late 1990s Asian financial crisis caused turmoil across south-east Asia. One country recovered quicker than others though – Malaysia. Unlike its neighbours, Malaysia reacted to the crisis by introducing strict capital controls and protecting its currency.

In the former Soviet Union, ultra free market ‘shock therapy’ applied at the end of Communism led to the region’s economy falling off a cliff. A few wealthy oligarchs successfully appropriated state property as it was sold off at fire-sale prices, to the detriment of everyone else. While Russia ‘recovered’ thanks to oil and gas revenues, albeit as the most unequal society in the industrialised world, other countries, such as Georgia, still have a lower GDP then they did in 1989. 

Trade agreements have also had a severe effect on the availability of medicines. Across the world, tight copyright laws, which form part of the international trade system known as intellectual property, have prevented ill people from being able to afford patented medicines.   

None of this means that countries shouldn’t trade, or that protectionism is always the best policy. Indeed, when Brazil banned the import of computers in the 1980s, it is generally considered to have been a disaster, stopping local people gaining highly important skills. Trade can be beneficial . But countries shouldn’t be forced to trade by those, especially corporations, who seek to benefit. 

What’s more,  a certain model of neoliberal trade, which is dominated by very large global corporations, has allowed a small elite to capture more and more wealth. Far from being ‘free’ this form of trade is backed by a stringent system of international law which places corporate ‘rights’ to profit far ahead of human rights or environmental protection. 

For instance, under many trade and investment agreements, foreign companies are given special legal access to arbitration panels known as Investor-State Dispute Settlement (ISDS). This allows corporations to challenge laws which damage their profits – even if these laws protect people and planet. They are held secretly, with no right of the state being sued to appeal. This is a direct threat to governments that want to act in the best interests of their people. In fact, the inclusion of ISDS is one of the reasons there is considerable opposition to the proposed Transatlantic Trade and Investment Partnership (TTIP). 

Yet there is no similar international legal recourse for a person whose rights have been violated by a corporation.        

So what’s the answer? In Latin America, some countries are experimenting with an alternative trading system known as the Bolivarian Alliance for the Peoples of Our America – or ALBA in Spanish. This trade system is based on the idea of trading in a complementary, rather than competitive way. It believes in raising, not lowering, standards like wages and environmental protection. And it tries to raise standards of living in poorer areas by encouraging trade and investment.

The current system of trade makes life harder for small businesses by forcing them into competition with giant corporations under rigged rules. We need to turn trade rules on their head and make sure that trade rules only ever improve, rather than decrease, the wellbeing of the majority of people and the environment.

Under a different system of rules, trade can help small-scale farmers and small business – not giant corporations.