Contribution No.8 to the debate on FREE TRADE:

Free Trade and Globalisation

Paper presented by Mike Curtis at the 23rd International Georgist Conference held in Edinburgh July 2001.

Mike Curtis is the Director of the 'Henry George School of Social Science', New York. www.henrygeorgeschool.org

Can you be a 'real Georgist', and be against the World Trade Organization Agreement?

The World Trade Organization is a Federation of about 130 countries. Some are big like the U.S. and some are small like Belgium. China is not yet one of them.

The W.T.O. is negotiating a reduction in trade barriers; It is also negotiating rules for foreign investment; financial services like banks and insurance companies with customers in other countries. And the enforcement of each other's patents and copy rights within the federation.

Does The W.T.O. represent the consumers of each nation? Is it about creating the opportunity for consumers to buy at the cheapest possible price? Or, is the W.T.O. an organization of corporations and governments that represent them --- in the process of negotiating the opening of each other's markets, and investment opportunities.

In order to be a member in good standing, no nation may restrict the sale of foreign products, unless there is scientific evidence that it poses a health or safety risk to the consumers or the environment, based on a standard negotiated by the representatives of 130 nations. And compliance is judged by a panel of arbitrators.

So, if the French government decides that English beef may be unsafe due to the possibility of Mad Cow Disease, it must appeal to the W.T.O. judges for a ruling, or be in violation of the agreement, with stiff penalties.

The United States can ban the use of certain pesticides, but it cannot unilaterally ban food that has been sprayed with those same pesticides in other countries.

In other words, no member nation has the right to decide for itself what products are safe for its own people.

The United States requires its fishermen to use special equipment which protects Sea Turtles and Dolphins when catching Tuna fish and Shrimp, but under the W.T.O. rules, it cannot prohibit the importation of Tuna fish and Shrimp which were caught along with Sea Turtles and Dolphins.

But the W.T.O. Representatives say it is broadening democracy. Its detractors say that the U.S. is not all that democratic, given the amount of money, and the outcome of the most recent election, but many of those 130 countries are oligarchies and modern day aristocracies which in no way represent their people.

Remember, in addition to imported products: The W.T.O. is also negotiating foreign investments and intellectual property rights, which makes it a multi faceted and enormously complex agreement with thousands of pages of rules already and many more to go.

Even if we focus just on trading products, we can see, clearly, there is a difference between negotiating access to foreign markets with universal standards of health, safety and the environment, and an independent country which allows its people the freedom to trade legal products with the people of other nations.

None the less, the W.T.O. has already increased the volume of International trade, and has the potential to increase it further.

Today, many Environmentalists, Humanitarians and Labor Unionists are against both the concept of Free Trade and the World Trade Organization Agreement.

The US President and Congress contend that Free Trade creates jobs, increases production and raises wages. The advocates of labor contend that Free Trade exports jobs, lowers wages and causes unemployment.

And we know that a large number of High Wage manufacturing jobs have been lost. Many of the workers have accepted far lower paying jobs, and many are still unemployed.

And during the last few years statistics show that the total number of Americans who are actually working has been greater, and the medium wage, or if you will, the average worker, has been earning slightly more.

And the critics say: jobs were lost, and those workers had to accept lower wages because of Free-Trade; because of cheaper Imports. And the high pay jobs that were created had nothing to do with Free Trade.

The U. S. imported nearly $300 bil. worth of products in excess of that which it exported this year.

Ironic as it may seem, one thing that all sides agree on, whether it's the US President and Congress or the advocates of labor, is that the more a nation exports above and beyond the amount it imports, the more it contributes to our prosperity. And this we call a" Favorable Balance of Trade."

So, in order to achieve the highest possible level of prosperity, a nation should export everything and import nothing.

I am here to convince you that restrictions of imports. (protection) do not and can not create jobs or raise wages, but neither can free trade.

Free Trade does increase production, but Free Trade does not and cannot increase wages.

Just to set the stage: In America, let's remember, tariffs were a major source of revenue for the national Gov. starting in 1789 with the inception of the U. S. constitution.

This continued until 1913 when they began to shift in favor of the income tax. But, as a means of protecting American industries, the tariff remained a powerful force until 1933, in the depths of the great depression.

Tariffs were raised and lowered many times over the years, with a multitude of different rates for different products, but in 1933, following the Smoot-Hawley Tariff Act, the average tariff was all the way up to 54%. It was dramatically cut during the Roosevelt years, and by 1963 it was all the way down to 12%.

From the middle of the 1970s to the middle of the 1980s there were increases in protection, but they took the form of Quotas. Only a certain number of each foreign product was allowed in every year. (Cars and steel were among the big ones). Under the General Agreement on Tariffs and Trade (GATT), which was the W.T.O. predecessor, these quotas were substituted for tariffs, which are being phased out over several years.

By 1997 the average tariff, which included automobiles and steel, was less than 3%, and even the tariffs on clothing, which were previously between 25 and 30%, were well on the way to being phased out.

Most products from Mexico and Canada have no tariffs or quotas at all. There are some exceptions like sugar, oranges and grapefruit. Peanut butter has 150% tariff, but that's probably a small part of our total cost of living.

Today, many of the corporations that were in the past advocates of protection, have established facilities in other countries and are now sending goods to the United States. Tariffs diminish their profits, so, they've reversed their positions, and are now in favor of free trade.

And America is still loosing many smaller industries such as canned mushrooms and cut flowers.

Which brings us to the fundamental question: Why do we want to trade with the people of other nations?

For the same reason we trade with the people of the same nation --- to satisfy our desires with the least exertion.

The diversity of nature impels people to trade. Everything does not grow equally well in all parts of the world; minerals are not found in equal abundance everywhere in the world.

By trading, we enable each nation to produce that for which it is best equipped. We multiply the total body of knowledge and skill, increase the potential from economies of scale, and disperse the regional peculiarities of nature to everyone.

Tariffs are probably as old as any tax. Because trade is the most significant way that human beings increase the results of individual exertions, it must be an irresistible source of revenue. A Sales Tax is simply a Domestic Tariff

What is different about a protective tariff is the way it discriminates against foreign products and distorts the incentives. It rewards people who divert their labor and capital from producing the things they make most efficiently, to producing things in which people of other nations are more efficient. And in the process they diminish the total production of the country.

Or in the words of Henry George: With a protective tariff, we attempt to do to ourselves in time of peace what we do to our enemies with a blockade in time of war. Keep them from getting desirable products from other countries. Isn't that what was attempted in Iraq or with the Embargo on Cuba.

Here's how the protective tariff works, and who actually profits from it.

Let's say we levy a tariff on cars, and the price of cars goes up until the return on every dollar invested in the production of cars goes from the standard 10, to 15 percent.

What do other American investors do? Continue producing food, gasoline and office buildings, etc. or do they start making cars. They may buy stock in existing companies, or start their own. Investment always seeks the path of the highest

return.

When the supply of cars increases due to the fact that more people are building them, what will then happen to the price of cars?

The supply of cars will increase until the profits from making cars are no greater than the profits from making gasoline or office buildings, or anything else.

Of course the existing companies have the organization and know how and the patents, but others will make cars until their profits are no greater than they would be making other products.

Although the profits from producing a protected product may be no higher, protected products may still cost more if the domestic producers are less efficient, or the cost of their materials are higher, which is why we bought foreign products in the first place.

Now, by contrast, suppose a tariff is raised on foreign steel. What will happen to the price, and the demand for American steel? What then happens to the production of American land containing iron ore?

So, in this case, the price stays increased. As long as it doesn't diminish equally the demand for iron to be used in export products. No one can produce a natural resource. The same thing applies to any mineral --- or any monopoly.

Let's say that we put a tariff on German steel that's being exchanged for American wheat. As Americans make more steel, the rent of land that contains iron ore increases. But since they traded wheat for steel, they now grow less wheat and the rent of land that grows wheat decreases.

However, since Americans grew wheat more efficiently than they made steel, the total production of the country is diminished.

Let me reiterate:

The less a nation imports, the less it exports. What one group of landowners gains from reducing imports, another group of landowners looses from a corresponding reduction in the demand for exports. However, by impeding trade, both countries give up some portion of the natural, cultural and scientific advantages possessed by the other country. And: their total production falls.

But suppose one country produced all things more efficiently than other country. Would it be mutually profitable for them to trade?

Suppose a first-class carpenter could do every job faster than a second class carpenter. He could saw boards, hammer nails and even sweep the floor one tenth faster. He could figure the pitch of the roof, frame the windows and hang the doors ten times faster.

By dividing the jobs --- The 1st class carpenter doing the most difficult, they could build two houses much more than twice as fast as either one of them could have built one. Even if the U.S. could produce every single product more efficiently than Mexico, we could still benefit from trading.

By exchanging Blue Jeans for computer programs, the Mexicans would get more computer programs than they could have produced with the same amount of labor and time, while the Americans, by trading computer programs for blue jeans, would get more blue jeans than they could have produced with an equal amount of labor and time.

And this is known as the law of comparative advantage.

Yes, we know that trade is a two way street, but, any fool can see that every year Americans are buying nearly $300 Billion dollars worth of cheap foreign products for which America isn't exporting anything in exchange.

How long before the American worker has to accept the same subsistence wage that the vast majority of other people are getting all over the world.

We know that they aren't giving those products away; and we know they only take money because it will buy valuable products in the future.

But what about the 300 Billion dollars worth of products that aren't made by, or exchanged for the products of American workers every year?

What about all the factory workers that are either unemployed or working for half of what they used to make, while Americans are buying products from other countries?

Well, for 30 of the last 50 years the U.S. exported more than it imported. For the last 20 years it imported more than it exported. Some countries always export more than they import and visa versa.

How do we explain it?

The first way is for people from other countries to make investments in the U.S.

Let's say that Japanese products go to the United States, but instead of buying American products and taking them back to Japan, they buy American assets and leave them here. It could be an automobile factory, or a cattle ranch or Urban Real Estate. It could be corporate stocks or Government bonds. Or, it could include money in American banks.

You sell a product in the U.S., and you simply put the money in an American bank. You could buy anything from anywhere, but only if the money buys an American product, and only if that product leaves the country, does it count as an Export.

It is rumoured that more American money is being used by people in other countries, than that which is used by people within the United States. And that could account for billions and billions of dollars worth of foreign products.

The second way for imports to exceed exports is for investors from the U.S. to take profits from previous investments. If Americans invested heavily in China during past years, many of the products which go to the U.S. will simply represent profits from those investments.

Nothing will be given in exchange. There will be no corresponding export.

You've heard: the British are still the number 1 foreign investors in the United States.

And guess what? The United States exports more to Britain than it imports from Britain --- which takes us all the way back to the colonies and the Rail Roads.

Of course the credits from one country are often used to buy products from another. There is no direct - quid pro quo. But look at a country like Guatemala. It has probably exported a lot more than it imported over the last 50 or 75 years.

To really understand what I'm saying, imagine we stopped imports entirely. There are some exports that would continue to leave the country anyway. They would include products bought with American money spent by Americans living in other countries --- like tourists and American military personal.

Or people in other countries who received American money as a gift or inheritance, and bought American products with it.

And I should mention foreign aid. I'll bet the Marshall Plan increased American exports --- in that case they did give the products away, and most importantly all the returns from bonds, stocks and real estate owned by people who live in other countries.

Now, some of those exports which result from previous investments, are compensation for an increase in productivity. They yield a net gain to the national economy --- and some of them represent a pure drain on our national wealth.

Productive investment vs. monopoly profit.

Suppose the interest on bonds which built part of the Interstate Highway system amounted to $200 billion a year, but the same part of the highway system increased the Gross Domestic Product of the United States by $400 billion a year. Would this drain the national wealth?

By contrast, suppose that foreigners owned our mineral land. They take the raw materials or the products they exchange for them, and they send nothing back to the United States. Can that be anything but a drain on the national wealth?

What if, instead of buying the land, it was taken with an army, what would we call the relationship? Imperialism, Colonialism; but in this case it's Foreign Capital Investment.

One group of people produce, and another group of people in another country consume --- and we call it an Export and a favorable balance of trade.

But if the other guy lives down the street in the same country, we don't count it at all. --- And none the less --- one man produces and another consumes, which is the real problem we ought to be trying to fix.

And neither protection or Free Trade can stop this.

Clearly, Protection can't create jobs, and it can't raise wages.

The number of jobs in any country is simply a matter of physics. You can't put two things in the same place at the same time The more land is accessible to labor and capital, the more jobs are created.

It is on the land we stand and live; and from the dirt and minerals of the land that we grow our food and make our products. You can't export a job, because you can't export the land.

However, with every advance in technology, every extension of the infra structure; and every increase in population, the value of the land tends to increase; people tend to hold on to it, the way they horde gold and silver when the price is going up.

As long as it is profitable to speculate in land, we will have some segment of our population unemployed. In fact, as freer trade increases production, it also increases the value of land. And this increase encourages some landowners not to sell.

As the population increases; as machines replace workers, more land has to come into production. So the degree to which the supply of land meets the need for land will determine the level of employment,

Freer trade can no more reduce unemployment than the steam engine and the railroad, the automobile or the computer. It simply increases production.

Are not wages determined by the legal Minimum Wage, and the supply and demand for superior --- better educated, higher skilled --- workers needed to maximize production.

So, in the long run, free trade cannot create jobs, nor can it raise wages

Well! Am I for it or against it?

In my opinion, we should be against all trade agreements, and the W. T. O. Agreement in particular. It will only remove the standards of health, safety, the environment, and all considerations of morality, that much further from the people.

Nor should we in any way restrict the opportunity of our citizens to trade with the people of other countries. For that would only impede cooperation and diminish production.

What we should do in the short run, is simply apply to products coming into the country the same rules that apply to products produced within the country.

We should unilaterally institute Free Trade and strengthen our Representative Government.

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All right, you say: How do we create a job for every worker, and raise their wages until they are equal to the full value that each worker has produced?

Only after there is free land, which can only result from an end to land speculation, can Free Trade, which does raise production, also raise wages and the return to labor applied indirectly, in the form of capital --- tools, machines, buildings, inventory, etc. But you've heard this part of the talk before.

When you look around at the 50% of the land in the U.S. that's designated for private use, it is all owned --- but there's an enormous amount that's unused or grossly underused.

It is held because its owners expect its value to increase. (Speculation). Check out the price of undeveloped land surrounding the any city, or in the case of our inner cities, miles and miles of land that's worthless, ostensibly, because of confiscatory taxes.

Start by thinking of land as a natural opportunity -- a common opportunity -- assigned to individuals and corporations for the purpose securing the product to the producer. Of course no one would plant a crop or build a house, much less a modern factory, if they couldn't lock the door or put up a fence.

But, if they paid to the community, the rental value of the land they held, they would be satisfying everyone else's equal right to the same piece of land.

To horde land that you are only renting, would be like getting a rental car from Hertz and parking it in your back yard for the weekend. There would be nothing to gain by holding the land idle, and every incentive to work and produce on it.

By collecting land rent, we could eliminate all confiscatory taxes like income and sales. We would redevelop our cities and the surrounding suburbs.

We would relieve the farmland from development pressure and the wilderness from being cleared for agriculture.

At this point, much of the land, though having a productive potential, would have no rental value at all. It would be in abundance!

All people would have free and equal access to the marginal land, while the superior land would be assigned to those who would pay its rental value to the community.

At present, most taxes are based on domestic trade. Labor is exchanged for money; it is taxed. Money is exchanged for a product of labor, the value of the product and/or the profit which results from the transaction is taxed. By supporting the government with the rental value of land, we could all enjoy what Henry George called:

True Free Trade.

From then on all trade would be free of taxation and restrictions. All increases in production would raise wages and interest, and on superior land, would increase rents, which is the social fund, out of which all people would share in social benefits or in cash dividends.

And this would clearly be a foundation for just and prosperous nations.

Michael Curtis

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The reader's comments are very welcome. Please send a letter to the International Georgist Union, 212 Piccadilly, W1J 9HG, United Kingdom, or e-mail to iu@interunion.org.uk

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