Free Trade and the Widening Gap Between Rich and Poor Countries

POLICY PERSPECTIVES

By Kelli Ketover

Abstract: The gap between the world's poorest nations and The traditional view of free trade, which involves the world's wealthiest nations continues to grow despite the prom ises made by the proponents of globalization. Increasingly only non-restrictive quotas and tariffs, is presently a however/new intel'11ationalists" argue that free trade policy should small part of the constantly evolving global economy. be reconstituted as fair trade policy. Current policies have only served to strengthen the influence multinational corporations have over Free trade increasingly encompasses pro-market re- the policy debate. The trade off has often been at the expense of qualities Hot easily measured in economic terms such as human forms, diversification of exports, and participation in rights, depletion of natural resources, and inequitable distribution the multilateral trading system in addition to liberal- of wealth. Future trade policy will have to contend with competing forces issuing from those fearing loss of national soveriengty on the ized trade policies and lowered barriers to interna- right and others concerned with social and environmental well be ing On the left. tional trade. Even with significant economic growth in many countries and industries, debate continues Free trade has increased 17-fold during the past 50 over whether free trade has been a source of income years, yet the gap between rich and poor countries divergence or income convergence between rich and has widened (Moore, 2001). Free trade has proven to poor countries. "This debate over winners and los- be a determining factor in many nations' economic ers is one of the most important empirical policy is- growth. According to Federal Reserve Chairman Alan sues of our time. Clearly, the argument here is that Greenspan, "it has taken a half-century to roll back the number of losers is substantial and that the gap those barriers that were erected after World War I as between the winners and losers is growing II country after country responded to economic down- (Cavanagh, 2000,7). Dani Rodrik, Professor of Inter- turns by erecting protectionist barriers that made eco- national Political Economy at Harvard University's nomic conditions worse ... international trade ben- John F. Kennedy School of Government, claims that efits all nations ... those benefits are shared by people when developing countries concentrate their efforts spread across quite different income brackets II on international integration, resources, such as human (Crutsinger, 2000, 1). and political capital, are redirected away from more Despite Mr. Greenspan's prognosis, after decades important development issues, including education, of trade liberalization the question remains: which na- public health, industrial capacity, and social cohesion tions' economic growth does free trade positively af- (Rodrick,2001). fect and what are the real and negative effects that Extreme poverty is an enormous problem world- accompany this trade liberalization? wide. According to the World Trade Organization Kelli Ketover is currently completing her Master of Public Ad (WTO), 1.2 billion people survive on less than one ministration degree at The George Washington University with a concentration in Managing Public Organizations. She eamed a dollar a' day and an additional 1.6 billion, more than bachelor degree in Business Administration from Seattle Pacific Uni one quarter of the world's population, survive on less versity in Washington in 1994. She served as a PeaceCorps volun teer in Guyana from 1995 to 1997. than two dollars a day (Ben-David et. al., 1999). A 24 FREE TRADE AND THE WIDENING GAP BETWEEN RICH AND POOR COUNTRIES growing number of "new internationalists" believe The U. S. economy has grown remarkably. In 1998, that free trade should be reshaped as fair trade "be- businessman and publisher Mortimer Zuckerman pro- cause the overarching goal is not to favor workers or claimed, "the American economy is in the eighth year communities in one country over another but rather of sustained growth which transcends the 'German to strengthen the role of all governments in protect- miracle' and the 'Japanese miracle of earlier decades ... ing worker, community, and environmental improve- everything that should be up is up -GDP, capital spend- ment over narrow corporate interests" (Cavanagh, ing, incomes, the stock market, exports, consumer and 2000,11). business confidence. Everything that should be down is down - unemployment, inflation, and interest rates" Current U.S. Foreign Policy (1998,2). However, Zuckerman did not address the in- Globally, the U.S. economy remains the strongest and come inequality between the richest and the poorest has proven to be quite stable in the face of financial cri- nations. This disparity has been rising for well over a ses that have deflated many other economies. Yet cur- century. Growth, as measured on an economic scale, rent U.S. foreign policy does not embrace the ideas of has been one-sided. Former Vice President Al Gore "new internationalism." U. S. Presidents since Franklin (1992) explained what is missing from the current U.S. Roosevelt have consistenly promoted free markets, de- approach: regulation, privatization, and democracy, each hoping The hard truth is that our economic sys- that global prosperity would follow. More prosperous tem is partially blind .... It carefully mea- times have come for some countries, especially in the sures and keeps track of the value of those last few decades, but not for others. Economies in things most important to buyers and sellers, Singapore, Taiwan, South Korea, and Japan have done such as food, clothing, manufactured goods, extremely well in the past fifty years, while most Afri- work, and, indeed, money itself. But its in- can and Caribbean nations' economies have faltered tricate calculations often completely ignore (Moore, 2001). the value of other things that are harder to More recently, the U. S. Congress supported the Clin- buy and sell: fresh water, clean air, the rich ton administration's aggressive trade agenda which, diversity of life in the forest, [freedom] ... among other things, granted the Peoples' Republic of (183). China (PRC) permanent access to U.S. markets. Addi- Paradoxically, the policies of the Clinton Administra- tionally, President Clinton signed a trade agreement tion were a continuation of previous Republican ideals with the Republic of Vietnam in November 2000, and of advancing free trade. In the three major areas of glo- Congress is considering granting Normal Trade Rela- bal economic policymaking, including trade, investment, tions status to Vietnam (Saigon Times Daily, 2000). In and finance, the policies of the Clinton Administration many countries, such as the PRC, Nigeria, and Mexico, accelerated corporate globalization. For example, trade efforts to enhance governmental respect for human policies broadened with the passage of the North Ameri- rights seems to have been traded for the pursuit of eco- can Free Trade Agreement (NAFTA) in 1993 and the nomic liberalization. The trade may be free, but the WTO in 1994i investment negotiations produced a Mul- rights of the people are not. tilateral Agreement on Investment (MAl) as well as re- 25 POLICY PERSPECTIVES gional investment agreements. In finance, the multilat- Mexico and the gradual phasing out of other tariffs over eral agencies, along with the U.S. Treasury, have advo- a period of approximately 14 years. Restrictions were cated financial liberalization in South Korea, Thailand, removed from many categories, including motor ve- the Philippines, Mexico, Brazil, and Russia (Cavanagh, hicles and automotive parts, computers, textiles, and ag- 2000). riculture goods. The globalization movement appears to be one of the After eight years, NAFTAhas produced mixed results. factors that has caused a disproportionate amount of On the positive side, the agreement has resulted in in- political power to be concentrated in corporations. Ac- creased sales and jobs, increased multinational business cording to Cavanagh, by "utilizing their trade associa- alliances, and a new mentality towards international tions, pressure groups, and thousands of well-paid lob- business. Olaf Carrera (1999) notes that trade between byists, corporations have been able to shape U.S. policy all three countries has grown exponentially, surging so they are the prime beneficiaries" (2000, 2). Fifty-one more than 70 percent since 1993, from US $300 billion to of the world's largest economies are not countries but US $515 billion. The United States is Mexico's largest corporations. Richard Kaplan refers to corporations as trading partner with a 71 percent rise in two-way trade. the "feudal domains that evolved into nation-statesi they However, others argue that NAFTAhas caused prob- are nothing less than the vanguard of a new Darwinian lems, including increased trade disputes, the dislocation organization of politics" (1997, 15). of U. S. businesses to Mexico, environmental degrada- International corporations wield a significant level of tion, and has widened the gap between rich and poor power in the global arena. Corporations pursue global- within North America. According to Pilar Franco (2000), ization, arguably sometimes to the detriment of an indi- the benefits of NAFTA have not been distributed evenly vidual country's culture and environment. The destruc- across Mexico. The northern states, those closest to the tion of old growth rain forests by logging companies in U.S. border, have absorbed most of the benefits. Franco the Amazon Basin and the dislocation of the indigenous points out that almost $9 of every $10 in foreign invest- people who relied on the forest and clean rivers for their ment that went into Mexico from 1994 to 1999 went to existence are often cited examples. the northern states and Mexico City, in which 54 percent of the Gross Domestic Product is produced. On the Two Illustrations of U.S. Foreign Policy other hand, the southern regions gained barely 70 cents and Trade of every $10 invested by foreign firms. Ricardo North American Free Trade Agreement (NAFTA) Grinspun, argues that social groups that have the least NAFTA calls for the gradual removal of tariffs and protection, such as unskilled labor, will be most affected other trade barriers on most goods produced and sold (Simmons, 2000). in North America. Effective January I, 1994, NAFTA formed the world's second largest free-trade zone (after Trade in Endangered Species the European Common Market), bringing together 365 The Convention on International Trade in Endangered million consumers in Canada, Mexico, and the United Species of Wild Fauna and Flora (CITES) is a United States in an open market. It called for immediate elimi- Nations convention that came into force in 1975. The nation of duties on half of all U.s. goods shipped to United States has had mixed results when attempting

26 FREE TRADE AND THE WIDENING GAP BETWEEN RICH AND POOR COUNTRIES to enforce it unilaterally. CITES states that international to ensure conservation of tigers (Public Papers of the cooperation is essential for the protection of certain spe- President, 1994). cies of wild fauna and flora against over-exploitation Taiwan, conversely, did not heed the rhino and tiger through international trade (CITES Preamble). conservation recommendations. The Taiwanese Gov- Trade control is seen as one of the instruments for ernment failed to pass national laws mandating protec- protecting endangered species. President Clinton re- tion and was unable to pass adequate amendments to ferred to the international standards established by the country's Wildlife Conservation Law. As a result, CITES in his speech on November 8, 1993, regarding President Clinton suspended the import of wildlife violations of endangered species regulation (specifically specimens and products into the United States from Tai- rhinos and tigers) by the PRC and Taiwan. He stated, wan (Public Papers of the President, 1994). The presi- "Neither the PRC nor Taiwan has fully implemented the dent noted that when Taiwan adopted appropriate leg- international standards established by CITES for con- islative actions along with enforcement measures to re- trolling the trade in these species, and the poaching of duce the illegal trade of rhino and tiger parts, the U. S. rhinoceros and tigers continues in their native ranges Government would conisder lifting the ban. fueled in part by the market demand in the PRC and Taiwan" ("Message from the President," 1993, 1). Presi- U.S. Policy and Public Opinion dent Clinton asserted that the United States must work The U.S. approach to free trade is under attack from to diminish the trade of these species in order to pre- those advocating an increased focus on social justice and vent their extinction. A commission was established to environmental protection on the left and those fearing assist Taiwan and the PRC in evaluating their progress the loss of national sovereignty on the right. Social ac- towards protecting rhinos and tigers as recommended tivists and environmentalists have questioned the im- by a CITES resolution. Additionally, Clinton announced partiality of the people behind the spread of globalism .. that "import prohibitions will be necessary, as recom- Three separate stances arise from general public opin- mended by the CITES Committee" if Taiwan and the ion, those for or against free trade as it is, and those for PRC did not progress in their enforcement on illegal reshaping free trade to encompass social and environ- trade of rhino and tiger parts by March 1994 (1993, 2). mental issues. For example, 58 percent of Americans On April 11, 1994, President Clinton sent a letter to polled in a December, 1998 NBC News Public Opinion Congressional leaders regarding the actions taken by the Survey said that they believed free trade was not im- PRC and Taiwan in rhino and tiger conservation. The proving the U.S. economy (Wall Street Journal). Yet, letter stated that the PRC had taken explicit steps to- Michel Mandel and Paul Magnusson (1999) point out wards restraining illicit trade by consolidating stockpiles that expanding trade and overseas investment has in- of rhino horns and tiger bones, by attempting to edu- creased the output of industrialized countriesby 20 per- cate the people through media, and by improving en- cent, one quarter of the total global economic activity forcement in seizing illegal stockpiles. As a result, the over the past two decades. They report that tariffs on president did not impose import restrictions on the PRe. goods entering industrialized countries are down 90 He did warn, however, that the steps were insufficient percent due to previous trade pacts such as NAFTA. and that further action needed to be taken by the PRC

27 POLICY PERSPECTIVES

Interna tional trade has blossomed and touches (Cypher and Dietz). This raises the question of valid- nearly all of the world's consumers. Many economists, ity in applying free trade to help alleviate poverty policymakers, and executives have concluded that within poor countries. countries cannot prosper unless they are part of the Economic growth is not the only indicator for pov- global economy. Indeed, the Clinton Administration erty alleviation. An emphasis on global trade integra- was an active promoter of free trade and the WTO and tion "undermines nascent democratic institutions by provided much of the impetus for free trade's momen- removing the choice of development strategy from tum. Ironically, supporting the WTO wholeheartedly public debate" (Rodrik, 2001, 1). Free trade can be was at odds with U.s. policy on free trade and U.S. exclusionary when human rights, environmental, and public opinion. Despite the hesitancy voiced in opin- societal issues are not considered as factors for gaug- ion polls, U.S. trade policy will most likely continue ing a country's development. its course as the public becomes more aware of the Advocates acknowledge problems associated with long-term benefits of free trade. free trade. Globalization intensifies dislocation in pOOl' and rich countries alike because economies un- Current Policy Winners and Losers dergo a nearly constant transformation. Creative so- Supporters of globalization take the position that lutions are needed to address the problems caused by consumers and workers alike benefit from trade lib- free trade. eralization. They argue that globalization provides The World Bank, which is made up of 180 member the promise of economic advancement for poor coun- countries, recognized that economic growth alone may tries because it allows the production of goods to be not solve the poverty problem for poor countries. In dispersed geographically. Thus, they believe that free a report on its worldwide antipoverty programs, the trade follows the theory of "comparative advantage." World Bank concluded that because political and eco- The theory of comparative advantage holds that nomic systems favor rich countries over poor ones, "unrestricted exchange between countries will in- economic growth alone would not alleviate poverty. crease the total amount of world output if each coun- The report stated, "in a world where political power try tends to specialize in those goods that it can pro- is unequally distributed and often mimics the distri- duce at a relatively lower cost compared to potential bution of economic power, the way state institutions trading partners" (Cypher & Dietz, 1998,305). Those operate may be particularly unfavorable to poor products and services will then be traded with other people" (Phillips, 2000, A2). nations for their goods that can be produced at a lower As mentioned above, opponents of free trade ar- cost than at home. Thus, imports are balanced with gue that it leads to loss of jobs, environmental degra- exports and no country incurs a trade deficit (Cypher dation, child labor, exploitation of resources, pollu- & Dietz). A shortcoming with this theory, when ap- tion, and societal problems. They claim that the ben- plied to globalization, is that it can work only when efits of free trade have not been evenly distributed perfect competition exists and all resources are fully among and within countries. Some workers in the used. Many question the ability of the comparative United States feel victimized when corporations move advantage theory to conform to economic reality to developing countries for cheap labor. 28 FREE TRADE AND THE WIDENING GAP BETWEEN RICH AND POOR COUNTRIES

Trade negotiations that once focused on reducing country,and will often raise tariffs and quotas on im- quotas and tariffs now involve everything from regu- ports. Clearly, more creative ways need to be explored lating Internet sales to protecting endangered species to create and sustain wealth in poor countries. (Mandel & Magnusson, 1999). Free trade promotes A third group, including many nongovernmental globalization, the elements of which are inextricably organizations, international organizations, and local linked but which do not necessarily lead to social or groups, challenges the narrow view of protectionism political harmony. Alan B. Simmons, Editor of Inter by advocating a restructuring of free trade. This group national Migration, Refugee Flows and Human Rights in opposes trade deals that undermine healthy commu- North America (1996), suggests that these elements nities, clean environments, and human dignity. This taken together tend to create social, cultural, and eco- view is sometimes referred to as the "new internation- nomic tensions. He contends that this tension cre- alism," wherein U.S. policy would actually protect ates conflict in countries with new trade patterns and standards and regulations abroad while improving the results in loss of jobs and tax revenue for social pro- quality of life at home. Al Gore questioned the end grams in countries that rely on tariffs and quotas to result of a free market economy when he said, "the provide basic human needs. Countries in this situa- stunning victory of free market economics . . . has tion are usually poor and do not have a reliable tax brought with it a new obligation to change those fea- base by other means. tures of our economic philosophy that we know are Bernard Wysoki reports that the richest countries flawed in light of the ecological destruction they le- have averaged a three to five percent increase in an- gitimized, and even encouraged" (1992, 337). John nual Gross Domestic Product (GDP), while many of Cavanagh, Executive Director of the Institute for the poorest countries have actually regressed in terms Policy Studies, suggests that the aim of new interna- of GDP. While GDP is not the best measurement for tionalism is to "maintain and improve the quality of how well a country is succeeding in meeting basic hu- life in the United States while ensuring that the for- man needs, it does give a slight indication of a eign projection of U.S. economic and political power country's ability to begin meeting those needs. Un- also advances sustainable and equitable development derscoring what GDP omits, former Vice-President abroad" (2000,2). Gore said, "[it] completely excludes any measurement Policy makers should be guided by whether the ma- for depletion of natural resources .... everything in jority of people, both in the United States and abroad, nature is simply assumed to be limitless and free" benefit or lose from the market deregulation approach (1992,337). What is most disturbing is that civil war, to globalization. Supporting the status quo is sup- famine, natural disasters, corrupt political leadership , porting the continued expansion of the divide and the and the migration of highly educated citizens to more inequitable distribution of economic growth as it re- successful industrialized countries plague many of lates to globalization. Free trade will create a more these poor countries. These situations seriously hinder dynamic tension as cultural and political beliefs of rich a government's ability to raise revenue within its own and poor countries clash and corporate entities, even borders. Naturally, these governments will seek rev- in emerging economies recently "freed/' continue to enue-raising ability from sources outside their place greater importance on profit margin than sus-

29 POLICY PERSPECTIVES tainable development. Examples of corporate respon- Crutsinger, M. (2000, November 14). Greenspan speaks for free trade. The Associated Press. sibility including The Gates Foundation, Ted Turner's recent donations to the United Nations, and Chevron's Cypher, 1. (I 998, June). Static and dynamic advantage: A multi-period analysis with declining terms oftrade. successful partnership with the World Wide Fund for Journal ofEconomic Issues, 32(2), 305-314. Nature (WWF) in Papua New Guinea are encourag- Desai, M. (2000, April 17). The left is wrong about free ing. Nevertheless, the immediate future of free trade trade. New Statesman, 13(601), 23-24. continues to create a divide between the "haves" and Franco, P. (1999, Apri13). Mexico: NAFTA widens the gap the "have-nots." Even as nongovernmental organi- between rich and poor regions. Lexis Nexis zations struggle to reduce the discrepancies, the gap [Online database]. http://web.lexis-nexis.com. between the world's poorest nations and the world's Froning, D. (2000, August 25). The benefits offree trade: A wealthiest nations continues to widen. guide for policy makers. The Heritage Founda tion. Center for International Trade and Econom- ics, Washington D.C., 1-3. REFERENCES Gore, A. (1992). Earth in the balance. New York: Houghton Mifflin. Ben-David, B., Nordstrom, H. & Winters, L. (1999). Special studies: Trade, income disparity and Kaplan, R. (1997). "Was democracy just a moment?" The poverty. World Trade Organization. Atlantic Monthly. Online: www.theatlantic.com! issues97 dec.democ.html. Calmes, J. (December, 1999). Despite buoyant economic times, Americans don't buy free trade. Wall Street Kwa, A. (1999, January). "In focus: WTO and developing Journal. countries." Foreign Policy in Focus, 4 (35).

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