"Free trade" vs. "protecionism"?
Trade is not a goal in and of itself. The term free trade is subsequently a misnomer. Equally, protection is not a goal in and of itself. That is why "protectionism" is also a misnomer. Trade is valuable and protection makes sense, but none of them should be taken to the extreme. It would be blind and destructive to carry international division of labor to its logical end: Everything that is produced anywhere is exported and everything that is consumed, is imported from somewhere else. Export ratios would be 100%. Likewise, it would be blind and harmful to close down borders and stop trade completely.
In the public debate, nobody is calling for either of these extremes. Nevertheless, the terms "free trade" and "protectionism" refer to exactly these extremes. A reasonable trade policy regards trade as a means and enhances it where it helps to achieve the diverse goals of economic, social and ecological policy. It also limits and regulates trade when it conflicts with these diverse and legitimate policy goals, which should be protected.
Trade is a tool, a means, which can be utilized in a destructive or in a constructive fashion. Depending on how trade policy is implemented, either the positive or negative effects will come to fruition. Trade in slaves, children, organs or poisonous waste is forbidden and few would argue to the contrary. Trade policy must abide by the fundamental values guiding society from human dignity to sustainable development to the common good. We therefore call for an ethical trade policy.
7 Cornerstones for Ethical International Trade
1. An international trade regime that turns all participants into winners and that serves the "universal good of the whole" (David Ricardo-footnote 1-) can be regarded a global public good.
Its rules have to be democratic, transparent, fair, and susatainable. The best place for such a public good to be anchored is the United Nations Organization. The UNO is the core of the international law and it provides all necessary frameworks for an efficient and just trade regime: human rights, labour norms, environmental agreements, climate protection, sustainable development goals. The WTO treaties that were concluded outside the UNO to avoid these existing global standards and policies, should fade out in the same way as bilateral and regional treaties with an trade-is-an-end-in-itself approach. Particularly the US and the EU should not aim at an agreement outside the UN system (TTIP, TTP), but should work to strengthen it, and serve as role models in this endeavour.
2. Trade should serve universal goals and values, starting with human rights
The goals for which trade is a means are: the full implementation of all human rights, Sustainable Development Goals, Rights of Nature, cultural diversity, as well as frequent constitutional values such as justice, solidarity and human dignity. Those countries that ratify and comply with UN conventions and agreements - on human rights, labour norms, tax cooperation, environmental and climate protection, cultural diversity, and others - and who agree on a „UN Ethical Trade Agreement" (with at least 30 countries initially) should protect their higher commitments and standards both against non-ratifiers and non-compliers. They could, for example, place a 20% custom on imports from countries that have not ratified a particular human rights agreement, a 10% tariff for countries that have not ratified climate agreements and 3% for each core labor standard set by the International Labor Organization (ILO). This ethical tariff system creates an incentive to ratify and comply with the existing UN agreements. The consequence would be a „level playing field" concerning human rights, labor norms, social security and environmental protection and sufficiently high walls o protection against dumpers, freeriders and true "opponents of globalization". Finally, "soft" UN regulations in the area of human rights, worker's rights and climate justice will become "hard" international law.
3. Non-reciprocity between unequal trade partners
Historically, all industrial countries have used protectionist measures. This has served them very well. Protectionism made economic development possible in the first place. According to historian Paul Bairoch, the US is the "mother country and bastion of protectionism". Up until 1945, the US imposed duties on imports of up to 45% -footnote 2-. The USA learned this lesson from England, which could be considered the "grandmother of protectionism". Today, wealthy countries, in the WTO and in bilateral and regional trade agreements, are calling for "free trade" between countries with a lower degree of industrial and technological development. This is obviously unfair. Poorer countries should be able to sufficiently protect their markets until they have "caught up" to the industrialized countries. They should be able to use the same "ladder" to get over the wall of development that the industrial countries (including the seven Asian tigers) previously took advantage of -footnote 3-. This rationale for trade protectionism is referred to as the "infant industry argument" - an idea born in the USA.
4. Democratic freedom and "dancer's dress" instead of a "straightjacket" and "one size fits all" dogma
Development strategies framed around self-determination and individual design are important and often more efficient than one-size-fits-all strategies. In his book "The Lexus and the Olive Tree", Thomas Friedman introduced the term "golden straightjacket" for the current predominant economic policy scheme that includes a long series of restrictions and prohibitions to domestic policy makers, including the prohibition to use protective measures or to regulate investment -footnote 4-. We propose a "dancer's dress" to replace the straightjacket. This concept would include that: trade partners cannot take legal actions against democratically-legitimized regulations, neither on the basis of WTO or bilateral treaties; that investors cannot challenge "indirect expropriation" nor "unfair treatment"; or that sovereign countries are not limited in regulating investment according to their needs and political priorities. One recent example: Legal action has been taken in the WTO against European Union subsidies for Airbus and US subsidies for Boeing. These subsidies make sense for both sides and should not be subject to lawsuits as a result of "free" trade agreements. As for a principle, no country should be forced to open its markets more than it wants to and in ways that could be detrimental to its own economic policy goals. Dani Rodrik coined the slogan: "We need smart globalization, not maximum globalization -footnote 5-."
5. Localization, "economic subsidiarity", resilience, and cultural diversity
It is preferable that countries are economically independent in as many industries as possible and import specialized goods and services primarily through the global market. Division of labour and the use of comparative advantage - distributing the production of certain goods between different countries aiming for efficiency gains - is a possible option for specific cases, but is not a goal in and of itself. Globalization should be the salt in the local economic soup, instead of being the other way around (when trade is an end in itself = free trade). Whoever bakes their bread themselves and also grows the grain themselves is independent of fluctuations and crises on the global market. This applies to virtually all industries. Division of labour should be the well-reasoned exception, not the efficiency- and profit-driven rule. Economic dependencies should be kept to a minimum. John Maynard Keynes once wrote, "I sympathize, therefore, with those who would minimize, rather than with those who would maximize, economic entanglement among nations. Ideas, knowledge, science, hospitality, travel - these are the things which should of their nature be international. But let goods be homespun whenever it is reasonably and conveniently possible, and, above all, let finance be primarily national" -footnote 6-.
6. Commitment to even trade balances
Principles 4 and 5 could invite countries to implement mercantilistic strategies: to limit importations or promote exportations at the cost of others, creating trade imbalances and global injustice. Lord Keynes, recognizing that trade imbalances lead to global instability and even wars, provided a clear tool for an international trade equilibrium, which could be properly implemented within the UN. The so-called "Clearing Union", which he proposed, would calculate all internationally traded goods and services in a new currency, called "Bancor" (today, we could call it "Globo" or "Terra"). This global reserve or trade currency would not replace, but complement national currencies for the international economic exchange. The goal of this new trade and currency union would be to ensure that all participating countries have equal trade balances. Keynes proposed that both countries with a trade deficit and a surplus would either re/devalue their currency or pay a fine according to the deviation. Keynes wrote: "We need a system possessed of an international stabilising mechanism, by which pressure is exercised on any country whose balance of payments with the rest of the world is departing from equilibrium in either direction, so as to prevent movements which must create for its neighbours an equal but opposite want of balance" -footnote 7-. This would bring an end to trade deficits in some countries and trade surpluses in others. An agreement on even trade balances would be the core of a fair global trade agreement. If this goal prevails, protective measures cannot be realized at the cost of others. Again, every country is free to be as open/closed as it wishes, it just cannot enhance exportations or limit importations at the cost of others. Keynes tool turns global trade competition into economic cooperation.
7. Limiting the power and size of transnational corporations
Transnational corporations have become too large and too powerful today and present a danger to freedom and democracy. This has not always been so in history. As late as 1800, only 200 corporations in the U.S. had received a license to operate by their corresponding state. In the 19th century, step by step, limited liability was introduced, the prohibition to own property in other corporations was suspended and, finally, in 1886, corporations became natural persons by the US constitution. Only after this progressive legal empowerment of corporations did they become as powerful as they are today. This was a mistake. Corporations should, therefore, be required to live up to their responsibilities towards society by:
a) growing only to a certain size (e. g. maximum turnover / total assets of 50 billion USD);
b) obtaining only a certain percentage of the world market (e. g. 0,5%);
c) democratizing internal structures when they become larger (progressive atomization of property and voting rights);
d) be required to complete a Common Good Balance Sheet. The result of this ethical balance sheet will provide companies with legal incentives by reducing their taxes, customs and by helping them in the areas of public procurement, grants and loan conditions.
Companies that fail to meet these standards would lose access to the "ethical trade zone" within the United Nations. They would only be able to operate in countries without limits on the size of corporations, on market shares and on concentration of power. Once these standards become commonplace, the concentration of power and the proliferation of corruption will decrease. Furthermore, the common good balance sheet will invert the current race to the bottom on global markets into a race to the top. The better its result, the freer companies can trade and invest or get market access. The poorer the result, the higher the difficulties they encounter - from tariffs to denial of market access. The „license to trade" depends on a company's contribution to the common good. As a consequence, ethical companies will win over less ethical ones, creating an ethical market economy - an economy for the common good.
1- David RICARDO: "On the Principles of Political Economy and Taxation", Batoche Books, Kitchener, 2001, p. 90.
2- Paul BAIROCH (1993): "Economics & World History. Myths and Paradoxes", The University of Chicago Press.
3-Ha-Joon CHANG (2003): „Kicking Away the Ladder. Development Strategy in Historical Perspective", Anthem Press, London/New York.
4- Thomas FRIEDMAN L. (2000): „The Golden Straitjacket", p. 101 - 111 in „The Lexus and the Olive Tree", NY Anchor Books, New York.
5- Dani RODRIK (2012): "The Globalization Paradox", Oxford University Press.
6- John Maynard KEYNES: "National Self-Sufficiency", The Yale Review, Vol. 22, no. 4 (June 1933), p. 755-769.
7- John Maynard KEYNES: "Proposal for an international Clearing Union", April 1943.
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