After Protection or Free Trade:
Do We Need a Reality Check?

by Lindy Davies

After we've finished reading George's book, things seem to have fallen neatly into place. We feel like we can go forward with clear recommendations for public policy. George has taught us that free trade tends to increase production, and protection decreases it. He has shown the error in the old notion of a "favorable balance of trade." He's shown that international trade per se does not create the chronic problems of poverty and environmental destruction — and therefore those problems can't be addressed by changes in trade policy.

Yet when we turn back to reports from the "real world," everything seems topsy-turvy once more. In every round of international trade negotiation, nation after nation maneuvers as hard as it can to gain more exports, exports, exports! How else will workers find jobs? This becomes an intricate balancing act, for nations want to keep their own tariffs, while cajoling (or bullying) others into removing theirs. These interests — market access abroad and protection at home — are fundamentally at odds. This creates a constant ebb and flow of trade negotiations in round upon round of talks. These negotiations, unavoidably slanted in favor of the big national and corporate players, yield results that erode national sovereignty! They make countries less able to protect their workers from exploitation — protect their natural heritage from privatization — protect their very way of life from Americanization! Pretty soon we're on the barricades, screaming "Down with free trade!"

Henry George's rhetoric is stirring, and in 1886, no doubt, he'd made his case — but what about today? George claims to present theories that are grounded in natural law, true in every place and time — and he urges us to follow truth wherever it leads. We're free to offer corrections where needed. Can free trade be trusted in the 21st century?

Balance of Trade: In Whose Favor?

People trade because they want to; trading makes it possible for them satisfy their desires with less exertion. When a nation imports more than it exports during a given period, its consumers are better off — or at least they can be: much depends on who controls the increased amount of wealth. In fact, there is no reason why it couldn’t be the general rule for all nations to import greater values of goods than they export. After all, that is the essential nature of trade: to exploit advantages of local productivity, distinctive heritage and natural endowment.

Yet that's not what happens in "the real world," where nations want a "trade surplus." If they have one, they want a bigger one. Why is that?

As so often happens in discussions of political economy, the answer lies in carefully examining the meaning of our terms. We said above that a nation's consumers tend to benefit when they import more goods than they export. That's true — but who are the consumers? Demand is not mere desire; it is desire backed up with the ability to pay. A nation's consumption patterns depend on how its wealth is distributed. Most workers produce far more than they consume. We know that, among other reasons, because many low-wage countries regularly run trade surpluses! The ownership of land and wealth in such places is drastically skewed toward a small elite, whose lavish incomes allow them to be their countries' major consumers. Why would they want a trade surplus? Because growth in export industries means increased land values and a better return on their investments! Also, foreign exchange enables endebted nations to meet their debt-service payments, avoiding default and keeping the current regime ensconced.

Meanwhile, the United States has run a trade deficit for over three decades. Many people wring their hands about this — its effect on manufacturing and union jobs, its load on the national finances — yet for various reasons the US has not summoned the gumption to change it. One important reason for this is that although real wages in the United States have been steadily falling during this period, the US nevertheless retains a large middle class. A significant number of producers in the US are also consumers. The availability of attractively-priced import goods allows them to stretch their shrinking paychecks. But, because workers in the US make relatively high wages compared to those in other nations, manufacturers increasingly take advantage of opportunities to relocate to other countries.

The trade relationship between the United States and China illustrates this dichotomy. China's economy has been growing by leaps and bounds — its GDP growth rate has been over 9% per year for two decades. China has a massive and growing trade surplus with the US. It has pursued an explicit policy of buying up a tremendous volume of US-dollar- denominated assets — mostly US Treasury Bonds — and holding them in reserve, to be used if needed to hold the value of the Yuan at the level that the Chinese government wants. This policy leads to a sizable undervaluation of the Yuan; if allowed to trade freely on currency markets, its value would be much higher. This means that Chinese goods are very inexpensive, especially in the United States, whose currency, though currently declining, remains strong compared with China’s, which started at the extremely low level to which it had sunk after decades of communist isolation.

China & the WTO

China’s Minister of Commerce Bo Xilai says critics need to understand China’s unique challenges. “China is a big trading country in terms of quantity, but it is far from being a strong trading country. Take China’s exports for example. In fact, half of China’s exports are from foreign-funded companies,” he said. “So, China’s trading structure is very different from developed countries. As for trading volume per capita, it is even lower.” (from Voice of America, December, 2005)
Who benefits from this policy? US consumers do, clearly. But who benefits in China? Not the industrial workers — they are sending away far more of what they make than they are enjoying themselves. There are, of course, new jobs to be had. However, with 1.3 billion people, China will have a buyer's market for labor for a long time to come. These factors make it super-profitable to invest in China's export industries. Foreign investors are getting on the bandwagon, bringing capital and know-how. Many new factories are being built, and every single one of them has to go on a piece of land. Although land in China nominally still belongs to the state, the transfer of use rights and long-term leases has been legalized, and foreign investment in China is increasing rapidly. The returns on these investments to owners in the United States don't show up in the balance-of-trade statistics, but they are, nevertheless, a transfer of wealth from China to the US, and the "trade gap" would be much narrower if they were included.

Trade Agreements and National Sovereignty

In the past, the debate about international trade was about tariffs. It had gone on for quite a long time, in Great Britain and the United States and every other industrial nation. The United States has been a high-tariff nation through most of its history. (The dispute over trade issues between the free-trade South, which wanted to export its cotton crop to England, and the protectionist North, which wanted to encourage its textile industry, was a major cause of the sectional tension that led to the Civil War.) In the 1930s the US Congress yielded to political pressure and passed the Hawley-Smoot Tariff Act, which drastically increased tariffs and exacerbated the Great Depression. Other countries retaliated with tariff increases of their own. The need to address these extraordinarily high barriers to trade led to the convening, by 23 countries, of the General Agreement on Tariffs and Trade (GATT) in 1947. In three large "rounds" of multilateral negotiations (called the Kennedy, Tokyo and Uruguay Rounds), the GATT process succeeded in negotiating lowered tariffs, and many more countries joined. GATT, which had no governing body or permanent staff, evolved into the World Trade Organization (WTO), which does. The WTO has 150 member nations, and China has recently become one of them.

With the advent of transnational corporations, and increasingly complex issues regarding regulations and property rights, the matters addressed by multilateral trade negotiations have spread into other controversial areas. The current main issues are:

  1. Tariff Reductions — the only part of modern "trade negotiations" that has anything to do with the issue of free trade.
  2. Nontariff Barriers — regulations enacted at the national level (or lower) that make international trade less profitable. Examples include laws providing for a minimum wage, worker safety or environmental protection. These can be designated as "nontariff barriers" which will subject the country to retaliatory tariffs by WTO members.
  3. Intellectual Property — nations must comply (for the most part) with patent, copyright and trademark laws of the countries where products originate; the WTO is empowered to arbitrate disputes, and infractions are punishable by trade sanctions.
  4. Investments — The goal is all for nations to apply the same rules to foreign and domestic investors. The Multilateral Agreement on Investment (MAI), which has been set aside for the time being, sought to codify this in WTO policy. Under the North American Free Trade Agreement (NAFTA, which has recently been extended to the Free Trade Area of the Americas, or FTAA) the investor can sue for damages against the government that imposed the regulation. This could open things up to cases in which any regulation, such as zoning that decreases the value of land, could be nullified in a secret proceeding by a NAFTA tribunal.

    When nations agree to treaties, such as NAFTA, they essentially adopt the trade-arbitration rules as laws — which means that, in so doing, they cede their own power to enact certain laws and regulations. These agreements are bitterly condemned by advocates for the environment, labor, indigenous peoples, etc., because they seem to represent the handing over of nations' responsibilities, for fairness, compassion and stewardship, to heartless transnational interests — who need not answer to any constituency but their profit-hungry shareholders.

    Of course, there is another side to the argument; advocates of trade liberalization argue that opening of national economies leads to development and growth, while isolationism creates stagnation. How are we to sort out these complex counter-claims?

    One thing to remember is that rules of justice don't change just because something crosses a national boundary. As we consider these "assaults on national sovereignty," we must be clear, as always, about the meaning of terms. What is the basis of national sovereignty? Among many others, Henry George agreed with Thomas Jefferson that governments are instituted in order to secure people's inalienable rights. Jefferson called them "life, liberty and the pursuit of happiness." George reminded everyone that no one can live without land. Therefore, the right to life is not secured, unless everyone's equal right to the land is guaranteed. In its task of securing basic rights, the national government must exercise its sovereign power over the nation's land; that is the first, most basic and essential aspect of national sovereignty. Yet, nations all around the world today cast aside that fundamental responsibility, by allowing fee-simple private ownership of land.

    When a nation enacts an environmental regulation — say, should Cameroon disallow logging in virgin rainforests — the rent-collecting potential of a few investors is restricted, and they might go to their cronies in the WTO for redress. But in a case like that, they are really only going after the last few crumbs — for, as private individuals and corporations already own almost all the land in Cameroon, the entire pie has already, pretty much, been given away.

    Suppose, on the other hand, a nation followed Henry George's advice, collecting the full rent of its natural opportunities for public revenue. Would it then suffer any damage from offering the same rules to foreign and domestic investors? It would not — for it would not allow any investor to collect unearned profit at the community's expense. An environmental regulation that lowered the commercial value of land would not unfairly penalize any investor, for no investor would have had the right to collect the value of the land in the first place.

    However, if a nation were to try a radical stunt like that — public collection of land rent — this late in the game, would not the World Trade Organization squish it like a fly under its mighty thumb?

    The WTO's disciplinary power strikes fear into many hearts. What punishment can it impose on those who transgress its rulings? Nothing worse than trade sanctions. Of course, that's enough to persuade most of today's regimes, addicted as they are to "favorable" trade balances. But we might ask whether taking away "market access" for export products would necessarily be as bad as all that. Remember, in the world's poor, indebted nations, the vast majority of producers are nevertheless doing precious little consuming. Since the foreign exchange gleaned from all those exports scarcely benefitted them in the first place, poor people would hardly be hurt if they lost it.

    For example: suppose a developing country's leading export is rubber, which is grown on large plantations owned either by cronies of the ruling junta, or by foreign investors. Suppose this country decides to collect land rent for public revenue. Under WTO rules, this would degrade the value of investors' landed property. The WTO proclaims its doom, and our country's rubber exports are slapped with high tariffs worldwide. Rubber plantations have now become much more profitable in the neighboring country, where the land is cheap, and nearly as good. If our nation cannot export rubber anymore, and the rubber plantations are leaving, what will become of all those rubber-harvesting jobs?

    But — how much rubber do the people need? A whole lot of arable land now sits, abandoned by the rubber plantations, who are eagerly exploiting the workers in the country next door. Certainly there are other crops people can grow.

    Realists will hasten to remind us that if this newly-available land is useful for anything at all, opportunistic investors and well-informed cronies will snap it up so they can rack-rent it to the peasants. Won't we need some kind of "socialistic" land redistribution, if we are to make their lives any better?

    Enter Henry George, who insists that every nation has a sovereign responsibility to collect the rent of land for public revenue. And, if land values have declined — or even been lost entirely — because owners have abandoned their holdings, can the land not be made accessible to those who are willing to use it?

    If a nation respects its citizens' right to use its sovereign lands, it need not fear trade sanctions. In addition to stimulating efficient land use, Henry George's remedy would remove the burden of taxation on producers, and throw open large areas of land for use in production. Domestic production would be further stimulated by the removal of duties on imports. Domestic demand for goods would increase. Some exports would still be needed to purchase items that couldn't be produced domestically — but, goods offered at attractive prices have a tendency to find buyers. And, if one or two nations succeeded in establishing these reforms, others would soon follow suit — creating a "domino effect" that would make WTO membership much less advantageous.

    The reason why every nation in the world today yearns for a trade surplus (or says it does, anyway) is that every nation sets up its economic policy — some more boldly, some more subtly — to benefit small elites at the expense of the general welfare. A Georgist economy — even in a single nation — could safely abolish all tariffs and subsidies, and let its producers freely compete.



    | Protection or Free Trade | Back to Lessons | Site map |