Written by Andrew Jackson
Monday, 03 December 2007
The following is the October 5, 1994 testimony of Sir James Goldsmith before the Senate Commerce Committee on the subject of the Uruguay Round of GATT:
"We have forgotten that the economy is a tool to serve the needs of society, and not the reverse. The ultimate purpose of the economy is to create prosperity with stability."
THE NEW UTOPIA: GATT AND GLOBAL FREE TRADE by SIR JAMES GOLDSMITH
Federal Document Clearing House Congressional Testimony
SENATE COMMERCE GATT IMPLEMENTATION
October 5, 1994
Global free trade has become a sacred principle of modern economic theory, a sort of generally accepted moral dogma. That is why it is so difficult to persuade politicians and economists to reassess its effects on a world economy which is changing radically.
The ultimate objective of global free trade is to create a worldwide market in products, services, capital and labour. Its instrument to achieve this is GATT, the General Agreement on Tariffs and Trade.
I believe that GATT and the theories on which it is based are flawed. If it is implemented, it will impoverish and destabilize the industrialized world while at the same time cruelly ravaging the third world.
If it is implemented, it will impoverish and destabilize the industrialized world while at the same time cruelly ravaging the third world.
Q: Remind us of the economic theory on which GATT is based. the Vietnamese enterprise can employ forty-seven people where the French enterprise can employ only one One of the big, mistakes that we make is that when we talk about balancing trade we think exclusively in monetary terms.......our trade might be in balance in monetary terms, but if we look beyond the monetary figures we find that there is a terrible imbalance in terms of employment.....That is how we export jobs and import unemployment. ..the nation in which the product is cheaper is the nation that has the comparative advantage. But this calculation can be brutally and suddenly transformed by a devaluation or a revaluation of one of the currencies If 4 billion people enter the same world market for Labour and offer their work at a fraction of the price paid to people in the developed world, it is obvious that such a massive increase in supply will reduce the value of labour. Global free trade will shatter the way in which value-added is shared between capital and labor. Value-added is the increase of value obtained when you convert raw materials into a manufactured product. In mature societies, we have been able to develop a general agreement as to how it should be shared. That agreement has been reached through generations of political debate, elections, strikes, lockouts and other conflicts. Overnight that agreement will be destroyed by the arrival of huge populations willing to undercut radically the salaries earned by our workforces. The social divisions that this will cause will be deeper than anything ever envisaged by Marx. The winners will be those who can benefit from an almost inexhaustible supply of very cheap labor. They will be the companies who move their production offshore to low-cost areas, the companies who can pay lower salaries at home; and those who have capital to invest where labour is cheapest, and who as a result will receive larger dividends. But they will be like the winners of a poker game on the Titanic. The wounds inflicted on their societies will be too deep, and brutal consequences could follow. The largest 100 multinational corporations control about one-third of all foreign direct investment. The globalization of the market is vital to them, both to produce cheaply and to sell universally. Because they do not necessarily owe allegiance to the countries where they operate, there is a divorce between the interests of the transnational corporations and those of society. it is the poor in the rich countries who will subsidize the rich in the poor countries. This will have a serious impact on the social cohesion of nations. When you intensify the methods of agriculture and substantially reduce the number of people employed on the land, those who become redundant are forced into the cities. Everywhere you travel in the world you see those terrible slums made up of people who have been uprooted from the land. But, of course, the hurt is deeper, Throughout the third world, families are broken, the countryside is deserted, and social stability is destroyed. GATT, if it " succeeds", will create mass migrations of refugees on a scale a thousand times greater. We will have profoundly and tragically destabilized the world's population. GATT destroys the cultural diversity and social stability of our nation ... GATT, for us, implies recolonization. you must remember the example of France, where, over the past twenty years, spectacular growth in GNP has been surpassed by an even more spectacular rise in unemployment. This has taken place while Europe has progressively opened its market to international free trade. How can we accept a system which increases unemployment from 420,000 to 5.1 million during a period in which the economy has grown by 80 percent? The West has been hemorrhaging jobs and capital so as to help make them rich. We must start by rejecting the concept of global free trade and we must replace it by regional free trade. If a Japanese or a European company wishes to sell its products in North America, it should invest in America. It should bring its capital and its technology, build factories in America, employ American people and become a corporate citizen of America. A healthy economy must be built like a pyramid. At the peak are the large corporations. At the base is the diversity of small enterprises. .....Only a diversified economy is able to supply the jobs which can allow people to participate fully in society. We seem to have forgotten the purpose of the economy....In the great days of the USA, Henry Ford stated that he wanted to pay high wages to his employees so that they could become his customers and buy his cars. Today we are proud of the fact that we pay low wages. We have forgotten that the economy is a tool to serve the needs of society, and not the reverse. The ultimate purpose of the economy is to create prosperity with stability.
The principal theoretician of free trade was David Ricardo, a British economist of the early nineteenth century. He believed in two interrelated concepts; specialization and comparative advantage. According to Ricardo, each nation should specialize in those activities in which it excels, so that it can have the greatest advantage relative to other countries. Thus, a nation should narrow its focus of activity, abandoning certain industries and developing those in which it has the largest comparative ad vantage. As a result, international trade would grow as nations export their surpluses and import the products that they no longer manufacture, efficiency and productivity would increase in line w ith economies of scale and prosperity would be enhanced. But these ideas are not valid in today's world.
Q: Why?
During the past few years, 4 billion people have suddenly entered the world economy, include the populations of China, India, Vietnam, Bangladesh, and the countries that were part of the Soviet empire, among others. Then populations are growing fast; in thirty-five years, that 4 billion is forecast to expand to over 6.5 billion.
These nations have very high levels of unemployment and those people who do find jobs offer their labour for a tiny fraction of the pay earned by workers in the developed world. For example, forty-seven Vietnamese or forty-seven Filipinos can be employed for the cost of one person in the developed world, such as France.
Until recently, these 4 billion people separated from our economy by their political systems, primarily communist or socialist, and because of a lack of technology and of capital. Today all that has changed. Their political systems have been transformed, technology can be transferred instantaneously anywhere in the world on a microchip, and capital is free to be invested wherever the anticipated yields are highest.
The principle of global free trade is that anything can be manufactured anywhere in the world to be sold anywhere else. That means that these new entrants into the world economy are in direct competition which the workforces of developed countries. They have become part of the same global labour market. Our economies, therefore, will be subjected to a completely new type of competition. For example, take two enterprises, one in the developed world and one in Vietnam. Both make an identical product destined to be sold in the same market, say the USA, Great Britain or France; both can use identical technology; both have access to the same pool of international capital, The only difference is that the Vietnamese enterprise can employ forty-seven people where the French enterprise can employ only one. You don't have to be a genius to understand who will be the winner in such a contest.
In most developed nations, the cost to an average manufacturing company of paying its workforce is an amount equal to between 25 percent and 30 per cent of sales. If such a company decides to maintain in its home country only its head office and sales force, while transferring its production to a low-cost area, it will save about 20 percent of sales volume. Thus, a company with sales of 500 million dollars will increase its pre-tax profits by up to 100 million dollars every year. If, on the other hand, it decides to maintain its production at home, the enterprise will be unable to compete with low- cost imports and will perish. It must surely be a mistake to adopt an economic policy which makes you rich if you eliminate your national workforce and transfer production abroad, and which bankrupts you if you continue to employ your own people.
Q: But the companies that move offshore are those which employ large labour forces. Surely the new jobs that will be created by the high- tech industries of the future will compensate.
High-tech industries can, indeed, survive and prosper under these circumstances, for the very reason that they are highly automated and therefore employ few people. Labour is no more than a minor item in the overall cost of the products they make. But obviously they cannot compensate for the lost manufacturing jobs: the fact that they employ few people means that they are incapable of employing very many. As soon as they need to employ a reasonable number, they will be forced to move offshore. For example, IBM is moving its disk-drive business from America and Western Europe to low labour-cost countries. According to the Wall Street Journal, IBM plans to establish this new site as a joint venture with an undetermined Asian partner and use non-lBM employees so that it will be easier ... to move to an even lower-cost region when warranted ... Moving from higher cost region, to Asia cuts in half the cost of assembling a disk drive. Mr. Zschau of IBM admitted that the moves will put IBM on only even footing with its competitors.
The aircraft manufacturer Boeing has announced that it will transfer some of its production to China. The sort of companies that created Silicon Valley, like Hewlett- Packard and AdvancedMicro Devices, are also shipping employment to low-wage countries. Proponents of global free trade constantly say that exporting such high-tech products as very fast trains, airplanes and satellites will create jobs on a large scale. Alas, this is not true. The recent 2.1 billion dollar contract selling very fast French trains to South Korea has resulted in the maintenance, for four years, of only 800 jobs in France: 525 for the main supplier and 275 for the subcontractors. Much of the work is carried out in Korea by Asian companies using Asian labour, What is more, following the transfer of technology to South Korea, in a few years' time Asia will be able to buy very fast trains directly from South Korea and bypass France.
As for planes and satellites, the numbers employed in this industry in France have fallen steadily. Over the five years from 1987 to 1992, they have declined from 123,000 to 111,000 and are forecast to fail to 102,000 in the short term.
One of the big, mistakes that we make is that when we talk about balancing trade we think exclusively in monetary terms. If we export one billion dollars' worth of goods and import products of the same value, we conclude that our overseas trade is in balance. The value of our exports is equal to that of our imports, But this is a superficial analysis and leads to wrong conclusions. The products that we export must necessarily be those which use only a small amount of labour. If not, they would be unable to compete with products manufactured in low labour-cost countries and so would be unexportable. The number of people employed annually to produce one billion dollars' worth of high-tech products in the developed nations could be under a thousand. But the number of people employed in the low-cost areas to manufacture the goods that we import would be in the tens of thousands, because these are not high-tech products but ones produced with traditional levels of employment. So, our trade might be in balance in monetary terms, but if we look beyond the monetary figures we find that there is a terrible imbalance in terms of employment.
That is how we export jobs and import unemployment. But many economist believe that the growth in service industries will compensate for lost jobs in manufacturing. Even service industries will be subjected to substantial transfers of employment to low-cost areas. Today, through satellites, you can remain in constant contact with offices in distant lands. This means that companies employing large back offices can close them and shift employment to any other part of the world. Swissair has recently transferred a significant part of its accounts department to India.
Q: Still, certain services cannot be transferred overseas, such its health and education.
Indeed, but let's think that through to its practical conclusion. A nation's economy is split into two broad segments, one which produces wealth and the other which dispenses it. That in no way means that the latter is inferior, it includes such vital activities as health and education. Despite the fact that both kinds of activities are measured by GNP, one cannot reduce that part of our economy which produces wealth and expect to be able to maintain the other part which dispenses it. You must earn what you spend.
The exchange rates between various currencies also have a substantial impact on the power to compete. When Ricardo calculated comparative advantage, he did so in money terms. If a product costs X French francs in France and Y US dollars in America, all you need to do is to convert dollars into francs at the going rate of exchange and it will be clear where the advantage lies. In other words, the nation in which the product is cheaper is the nation that has the comparative advantage.
But this calculation can be brutally and suddenly transformed by a devaluation or a revaluation of one of the currencies. In 1916, one dollar was worth 4.25 French francs, by 1985, the dollar had risen sharply and was worth 10 French francs; by 1992, it had fallen again and was worth only 4.80 French francs. So take a product which in 1981 had the same cost whether manufactured in America or in France. Four years later, in 1985, it became more than twice as expensive in America as in France. This was no more than a reflection of the changing value of the dollar relative to the franc. Yet, according to Ricardo, each nation is supposed to specialize in those products in which it has a comparative advantage. If you followed this reasoning, industries on which you might have concentrated in America in 1981 would have had to be abandoned in 1985. And the reason would have been that the comparative advantage would have disappeared purely for monetary reasons. Then as the dollar fell again in 1992, the theory would have required that you recreate the industry in the United States. This is obvious nonsense. No one should sacrifice and recreate industries merely to be in rhythm with fluctuations in exchange rates.
Q: Of course, those who believe in global free trade reject your arguments. Firstly, they cite the joint study published by the OECD and the World Bank which states that the application of the GATT proposals would increase world income by 213 billion dollars a year. How can we turn down such growth?
If you study the report, you will find that the increase is forecast to come about in ten years' time. Yes, 213 billion dollars is a large sum of money, but to assess its significance you must compare it to the world's GNP as it is forecast to be in ten years' time. 213 billion dollars represents no more than 0.7 per cent. What is more, the General Secretary of the OECD described the figure in the report as being "highly theoretical". it is also claimed that global free trade means that consumers will benefit from being able to buy cheaper imported products manufactured with low-cost labour. Consumers are not just people who buy products, they are the same people who earn a living by working, and who pay taxes. As consumers they may be able to buy certain products more cheaply, although when Nike moved its manufacturing from the US to Asia, shoe prices did not drop. Instead profit margins rose. But the real cost to consumers of cheaper goods will be that they will lose their jobs, get paid less for their work and have to face higher taxes to cover the social cost of increased unemployment. Consumers are also citizens, many of whom live in towns. As unemployment rises and poverty increases, towns and cities will grow even more unstable. So the benefits of cheap imported product swill be heavily outweighed by the social and economic costs they bring with them.
Q: I understand your argument about increased unemployment, but why should earnings be reduced?
According to figures published by the US Department of Labor, since 1973 real hourly and weekly earnings, in inflation- adjusted dollars, have already dropped respectively by 13.4 per cent and 19.2 per cent, and that was before the most recent GATT negotiations known as the Uruguay Round. If 4 billion people enter the same world market for Labour and offer their work at a fraction of the price paid to people in the developed world, it is obvious that such a massive increase in supply will reduce the value of labour. Also, organized labour will lose practically all its negotiating power. When trade unions ask for concessions, the answer will be: If you put too much pressure on us, we will move offshore where we can get much cheaper labour, which does not seek job protection, long holidays, and all the other items that you want to negotiate.
Global free trade will shatter the way in which value-added is shared between capital and labor. Value-added is the increase of value obtained when you convert raw materials into a manufactured product. In mature societies, we have been able to develop a general agreement as to how it should be shared. That agreement has been reached through generations of political debate, elections, strikes, lockouts and other conflicts. Overnight that agreement will be destroyed by the arrival of huge populations willing to undercut radically the salaries earned by our workforces. The social divisions that this will cause will be deeper than anything ever envisaged by Marx.
It is interesting to note that many US economists believe that the inflation forces which normally follow a period of lax monetary policy will not occur in the same way on this occasion. They believe that the continued lowering of earnings resulting from global free trade, including the first effects of NAFTA will restrain inflation despite the fact that the Federal Reserve has maintained a loose monetary policy for one of the longest periods on record. In other words, the workforce will bear the brunt of the consequences of a prolonged policy of easy money by accepting reduced earnings to compensate for its inevitable inflationary effects.
Q: Who will be the losers and who will be the winners under a system of global free trade?
The losers will, of course, be those people who become unemployed as a result of production being moved to low-cost areas. There will also be those who lose their jobs because their employers do not move offshore and are not able to compete with cheap imported products. Finally, there will be those whose earning capacity is reduced following the shift in the sharing of value-added away from labor.
The winners will be those who can benefit from an almost inexhaustible supply of very cheap labor. They will be the companies who move their production offshore to low-cost areas, the companies who can pay lower salaries at home; and those who have capital to invest where labour is cheapest, and who as a result will receive larger dividends. But they will be like the winners of a poker game on the Titanic. The wounds inflicted on their societies will be too deep, and brutal consequences could follow.
The new phenomenon of our age is the emergence of transnational corporations, with the ability to move production at will anywhere in the world, in order to systematically benefit from lower wages wherever they are to be found. Trasnational corporations now account for one-third of global output; their global annual sales have reached 4.8 trillion dollars, which is greater than total international trade, The largest 100 multinational corporations control about one-third of all foreign direct investment. The globalization of the market is vital to them, both to produce cheaply and to sell universally. Because they do not necessarily owe allegiance to the countries where they operate, there is a divorce between the interests of the transnational corporations and those of society.
You must remember that one of the characteristics of developing countries is that a small handful of people controls the, overwhelming majority of the nation's resources. It is these people who own most of their nation's industrial, commercial and financial enterprises and who assemble the cheap labour which is used to manufacture products for the developed world. Thus, it is the poor in the rich countries who will subsidize the rich in the poor countries. This will have a serious impact on the social cohesion of nations.
Q: What are your thoughts about the World Trade Organization?
That is the organization which is supposed to replace GATT, regulate international trade, and lead us to global economic integration, it is yet another international bureaucracy whose functionaries will be largely autonomous. They report to over 120 nations and therefore, in practice, to nobody. Each nation will have one vote out of 120. Thus, America and every European nation will be handing over ultimate control of its economy to an unelected, uncontrolled, group of international bureaucrats.
If by wise policy or blind luck, a country has managed to control its population growth, provide social insurance, high wages, reasonable working hours and other benefits to its working class (i.e . most of its citizens), should it allow these benefits to be competed down to the world average by unregulated trade? This leveling of wages will be overwhelmingly downward due to the vast number and rapid growth rate of underemployed populations in the world. Northern laborers will get poorer, while Southern laborers will stay much the same. But the application of GATT will also cause a great tragedy in the third world. Modern economists believe that an efficient agriculture is one that produces the maximum amount of food for the minimum cost, using the least number of people. That is bad economics. When you intensify the methods of agriculture and substantially reduce the number of people employed on the land, those who become redundant are forced into the cities. Everywhere you travel in the world you see those terrible slums made up of people who have been uprooted from the land. But, of course, the hurt is deeper, Throughout the third world, families are broken, the countryside is deserted, and social stability is destroyed.
This is how the slums in Brazil, known as "favelas", came into existence. It is estimated that there are still 3.1 billion people in the world who live from the land. IF GATT manages to impose worldwide the sort of productivity achieved by the intensive agriculture of nations such as Australia, then it is easy to calculate that about 2 billion of these people will become redundant. Some of these GATT refugees will move to urban slums. But a large number of them will be forced into mass migration. Today, as we discuss these issues, there is great concern about the 2 million refugees who have been forced to flee the tragic events in Rwanda. GATT, if it " succeeds", will create mass migrations of refugees on a scale a thousand times greater. We will have profoundly and tragically destabilized the world's population.
Q: But why do third world nations themselves support global free trade?
We must distinguish between the populations on the one hand and their ruling elites on the other. It is the elites who are in favor of global free trade. it is they who will be enriched. In Indi a there have been demonstrations of up to one million people opposing the destruction of their rural communities, their culture and their traditions. In the Philippines several hundred thousand f armers protested against GATT because it would destroy their system of agriculture.
Vandana Shiva is an eminent Indian philosopher and physicist. She is Director of the Research Foundation for Science, Technology and National Resource Policy, and is the Science and Environment Advisor of the Third World Network. In India, she says, global free trade will mean a further destruction of our communities, uprooting of millions of small peasants from the land, and their migration into the slums of overcrowded cities. GATT destroys the cultural diversity and social stability of our nation ... GATT, for us, implies recolonization.
Q: Without global free trade, how could the developing nations emerge?
Those who wish to industrialize should form free trade areas, such as the trading regions currently being created in Latin America and South-East Asia. These areas should consist of nations with economics which are reasonably similar in terms of development and wage structures. Trading regions would enter into mutually beneficial bilateral agreements with other regions in the world. Freedom to transfer technology and capital would be maintained. Thus commercial organizations wishing to sell their products in any particular region would have to produce locally, importing capital and technology, and creating local employment and development. That is the way to create prosperity and stability in the developing world without destroying our own.
Q: Some would say that Europe's employment problem is not GATT, but just the result of the old-fashioned diseases that one finds in uncompetitive, inflexible and spoiled societies. The welfare state is out of control; social costs borne by employers discourage the creation of new jobs; high government expenditure and taxation stifle the economy; state intervention is paralyzing; corporatism blocks remedial action, etc. Is that not true?
It is partially true, and those diseases must be treated forcefully. But even if the treatment is successful, it will not solve the problems created by global free trade. Imagine that we were able to reduce at a stroke social charges and taxation so as to diminish the cost of labour by a full third. All it would mean is that instead of being able to employ forty-seven Vietnamese or forty-seven Filipinos for the price of one Frenchman, you could employ only thirty-one. In any case, as we have already discussed, you must remember the example of France, where, over the past twenty years, spectacular growth in GNP has been surpassed by an even more spectacular rise in unemployment. This has taken place while Europe has progressively opened its market to international free trade. How can we accept a system which increases unemployment from 420,000 to 5.1 million during a period in which the economy has grown by 80 percent?
You must understand that we are not talking about normal competition between nations. The 4 billion people who are joining the world economy have been part of a wholly different society, indeed, a different world. It is absurd to believe that suddenly we can create a global free trade area, a common market with, for example, China, without massive changes leading to consequences that we cannot anticipate.
Q: Why is it not possible to repeat our successes in enriching countries like Taiwan, Hong Kong, South Korea and Singapore?
The combined population of those countries is about 75 million people, so the scale of the problem is quite different. The US might be able to achieve a similar success with Mexico and, progressively, Western Europe could accommodate Eastern Europe. But attempting to integrate 4 billion people at once is blind utopianism.
In any case each of those countries has been a beneficiary of the Cold War. During that period, one or other of the superpowers sought to bring every part of the world into its camp. If one failed to fill the void, the other succeeded. That is why very favorable economic treatment was granted by the West to South Korea after the Korean War, and to Taiwan, Singapore and Hong Kong while China was considered a major communist threat. Special economic concessions combined with their cheap and skilled labor made them successful. Over the past thirty years the balance of trade between these countries and the West has resulted in a transfer of tens of billions of dollars from us to them. The West has been hemorrhaging jobs and capital so as to help make them rich.
Q: What do you recommend?
We must start by rejecting the concept of global free trade and we must replace it by regional free trade. That does not mean closing off any region from trading with the rest of the world. It means that each region is free to decide whether or not to enter into bilateral agreements with other regions. We must not simply open our markets to any and every product regardless of whether it benefits our economy, destroys our employment or destabilizes our society.
Q: Does that not mean that we will cut ourselves off from innovations in other parts of the world?
No. Freedom of movement of capital should be maintained. If a Japanese or a European company wishes to sell its products in North America, it should invest in America. It should bring its capital and its technology, build factories in America, employ American people and become a corporate citizen of America. The same is true for American and Japanese firms wishing to sell their products in Europe. Think about the difference between the GATT proposals and those I have just outlined. GATT makes it almost imperative for enterprises in the developed world to close down their production, eliminate their employees and move their factories to low-cost labour areas. What I am suggesting is the reverse: that to gain access to our markets foreign corporations would have to build factories, employ our people and contribute to our economics. It is the difference between life and death.
Q: But won't that reduce competition?
Competition is an economic tool which is necessary to promote efficiency, to apply downward pressure on prices and to stimulate innovation, diversity and choice. Vigorous competition needs a free market that is large and in which cartels and other limitations on competitive forces are forbidden. Europe and NAFTA are economically the two largest free trade areas ever created in history. Both are more than big enough to ensure highly competitive internal inlets. They are vast and open and free and welcome to innovations from anywhere in the world. Every significant corporation worldwide would have to come and compete, because no corporation could afford to bypass them - their markets are much too big and prosperous. But such competition would be constructive, not destructive.
Q: Many will answer you by saying that you cannot export to other regions if you maintain a regional economy. There would be retaliation.
Take a look at Japan: the Japanese have certainly been able to export over the decades during which they protected their economy. In any case bilateral trade agreements would allow for the exchange of products in a way which suited all parties. And our corporations would be free to invest and compete throughout the world.
Q: What other recommendations do you have?
I totally reject the concept of specialization. Specializing in certain activities automatically means abandoning others. But one of the most valuable elements of our national patrimony is the existing complex of small and medium-sized businesses and craftsmen covering a wide range of activities. A healthy economy must be built like a pyramid. At the peak are the large corporations. At the base is the diversity of small enterprises. An economy founded on a few specialized corporations can produce large profits, but because the purpose of specialization is to streamline production, it cannot supply the employment which naturally results from a broadly diversified economy. Only a diversified economy is able to supply the jobs which can allow people to participate fully in society.
It is extraordinary to read economists commenting on the state of the nation. They believe that the profits of large corporations and the level of the stock market are a reliable guide to the health of society and the economy. A healthy economy does not exclude from active life a substantial proportion of its citizens.
Q: You face a difficult problem in converting the British to these ideas. Britain has a long tradition of almost unconditional belief in free trade.
The origin of Britain's belief in free trade goes back to the early nineteenth century. It was in Britain, at that time, that the Industrial Revolution was born. The new industrial barons, whose power was growing in step with the expansion of British industry, needed ample and low-cost labor to populate their factories. The idea was that by importing cheap food from the colonies, British farms would be unable to compete. This would result in an exodus of farm workers to the cities. At that time, 80 per cent of the British population lived outside urban areas. Once the farmers who had lost their livelihood reached the towns, they could be employed cheaply because cheap food was available from the colonies. What is more, the money that left Britain to buy the cheap food was recycled back to Britain to buy manufactured goods. At the time, Britain had a quasi-monopoly of manufacturing. Those were the dynamics which led to the repeal of the Corn Laws, which protected British agriculture, in 1846.
Today the circumstances are precisely reversed. Now only 1.1 percent of the British workforce is employed in agriculture; instead of a need for labour in the towns, there is chronic unemployment; and the money that leaves Britain to pay for imports no longer returns to buy British manufactured products. It goes to Japan or Korea or anywhere else in the world. The result is that Britain has a trade deficit in practically every major category of manufactured goods. And even though some of the large companies make good profits, 25 per cent of all households and nearly one child in three live in poverty.
One of the greatest fallacies in economic thinking is that the funds that flow away from a nation as a result of a negative balance of trade, or of capital outflows, will automatically be recycled. They believe that the money that goes out must return, usually in the form of inward capital investment or loans, but that is naive. When funds leave a nation, those who receive them are free to invest anywhere in the world. And they will invest wherever the anticipated returns are highest. They will not necessarily choose societies which are bleeding to death. When a system is valid in one set of circumstances, it is extremely unlikely to be valid in diametrically opposite circumstances. One would hope that this observation alone might prompt the British political elites to reassess their economic doctrine with an open mind. We seem to have forgotten the purpose of the economy. The present British government is proud of the fact that labour costs less in Britain than in other European countries. But it does not yet understand that in a system of global free trade its competitors will no longer be in Europe but in the low-cost countries. And compared to labour in those countries, Britain's labour will remain uncompetitive no matter how deeply the British government decides to impoverish its people. In the great days of the USA, Henry Ford stated that he wanted to pay high wages to his employees so that they could become his customers and buy his cars. Today we are proud of the fact that we pay low wages. We have forgotten that the economy is a tool to serve the needs of society, and not the reverse. The ultimate purpose of the economy is to create prosperity with stability.
Q: What do you mean by stability?
Stability does not mean ossification or standing still. A stable society can accommodate necessary change, without social breakdown. A stable society can benefit from responsible economic growth without destroying itself.
Q: How would you convince Germany of the merits of regional trade in view of the German elites' commitment to globalism?
The Germans should understand that by far their largest customers are their neighbors; about 70 per cent of Germany's exports are sold within Europe. Germany cannot want to see its principal customers impoverished as a result of hemorrhaging jobs and capital. German prosperity depends on the prosperity of the other nations of Europe; Germany's social stability will be deeply influenced by that of its neighbors, and, no matter how advanced its industrial skills, Germany will suffer from the transfer of production to low-cost areas, just like the rest of the developed world. What i s more, under GATT, Germany will have to share its residual markets with imports from Japan, Korea and others.
Q: How would you sum up the effects of regional free trade?
Let us imagine that Europe returns to the original concept of the Treaty of Rome, which was the basis for the creation of Europe. Economically, its purpose was to establish the largest free market in the world. Within Europe, there would be no tariffs, no barriers, and a free and competitive market. Trade with nations outside Europe would be subject to a single tariff. This concept was known as community preference. In other words, priority would be given to European jobs and industry. About twenty years ago, quietly, the technocrats who run Europe started to alter this fundam ental principle and move progressively towards international free trade. Ever since, unemployment in Europe has swollen despite growth in GNP. The Treaty of Maastricht enshrines this change and makes global free trade one of the fundamental principles on which the new Europe is to be built. If we were to return to the ideas of our founding fathers and reimpose community preference, overni ht all the enterprises which have moved their production to low-cost countries would have to return. They could no longer competitively import products manufactured outside Europe. Factories would be built, Europeans would be employed, the economy would prosper and social stability would return. What is more, international corporations wishing to sell their products within Europe would also have to build, employ and participate in the European economy. From being a community which, at the moment, reeks of death, it would all of a sudden become one of the most exciting places in which to invest and participate, and European corporations would go out to invest and contribute to the prosperity of regions throughout the world.
The same is true for North America. Insofar as free trade areas consisting of developing economics are concerned, they also would prosper. For example, currently free trade areas are being formed in Latin America and in South-East Asia. Most North American, European and Japanese corporations will wish to sell their products in these large markets. To do so, they will have to transfer capital and technology, build factories in Latin America and South-East Asia and employ Latin Americans and Asians. By participating in these economies, they would encourage development. GATT must be rejected. It is too profoundly flaw ed to be a stepping stone to a better system. The damage it will inflict on the communities of both the developed world and the third world will be intolerable.
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