A paper presented at the School of Economic Science Justice and Equity Conference 2010
John Deval, London, UK.
This paper will examine the proposition that “the alleviation of need and poverty in the world is more likely to be achieved by encouraging local self-sufficiency than by the universal application of free trade principles and practices.”
The arguments for and against free trade stretch back over many years and the first stage in the examination will review the ‘classical’ case for and against free trade. The second stage will be to review more recent arguments on the issue. Finally, the case for greater local self-sufficiency will be discussed – is it a realistic alternative, and, if so, how can it be encouraged?
One of the actions urged in the Waterperry Declaration was based on the proposition that the alleviation of need and poverty in the world is more likely to be achieved by encouraging local self-sufficiency than by the application of free trade principles and practices. This paper examines this proposition in the light of the various arguments for and against free trade. These arguments stretch back over many years and the first stage in the examination will be to review the ‘classical’ case for free trade. Next, more recent arguments on the issue will be considered and this will be followed by an examination of the case for self-sufficiency. Finally, some recent ideas that might achieve a balance between the two approaches will be explored.
- The ‘classical’ case for free trade.
This was made most succinctly by Adam Smith in ‘Wealth of Nations’.
‘It is a maxim of every prudent master of a family never to attempt to make at home what it will cost him more to make than to buy. What is prudent in the conduct of every private family can scarce be folly in that of a great kingdom. If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some of the produce of our own industry employed in a way in which we have some advantage.’
Henry George was also a strong advocate of free trade. His advocacy had three main strands:
- ‘In no one place will nature yield to labour all that man finds useful. Trade, by permitting us to obtain each of the things we need from the locality best fitted for its production, enables us to utilise the highest powers of nature in the production of them all, and thus to increase enormously the sum of various things which a given quantity of labour expended in any locality can secure.’
- Trade also utilises the highest powers of the human factor in production. All men cannot do all things equally well…………..By devoting himself to one branch of production a man can acquire skills which enables him, with the same labour to produce enormously more than one who has not made that branch his speciality. As with individual men so also with communities.’
- ‘It is a characteristic of all inventions and discoveries that are so rapidly increasing our power over nature that they require the greater division of labour, and extend trade. Thus every step or advance destroys the independence of men. The appointed condition of human progress is evidently that men shall come into closer relations and become more and more dependent on each other.’
Notwithstanding the simplicity and power of the arguments summarised above, there has been no shortage of counter arguments. Many of these are longstanding and usually put forward as reasons why free trade was not a sensible policy for individual countries. They can be summarised in the following statements:
- Employment and wages would be undercut by cheap labour from abroad.
- So-called ‘infant’ industries require protection.
- Protection, in the form of tariffs on imports, produce revenue for governments.
- National security requires a degree of self-subsistence.
- Protection is required against the ‘dumping’ of cheap products from abroad.
- The existence of protectionist measures provides a good bargaining counter in trade negotiations.
The following sections explore these arguments in more detail and the ‘free-trade riposte’.
The loss of jobs in the home economy.
The argument, which is still prevalent today, that a country of high wages needs a protective tariff, runs like this: ‘Wages are higher here than elsewhere. Therefore, if the produce of cheaper foreign labour was freely admitted, it would drive the produce of our dearer domestic labour out of the market.’
According to Henry George, the attraction of the argument is based on three misconceptions;
- Low wages mean low cost of production.
George argued the reverse – ‘the universal and obvious truth is, that the country where wages are highest can produce with the greatest economy, because workmen there have the most intelligence, spirit and ability. The notion that low wages give a country an advantage in production is a careless inference from the everyday fact that it is an advantage to an individual producer to obtain labour at low wages. It is doubtful whether this argument stands up today as American labour bemoans the loss of jobs to China.
2. Production is determined solely by absolute costs.
This can be put another way: everything will be produced where it can be produced at least cost. George points out that the interchange of labour does not depend upon differences of absolute cost but to differences of comparative cost. This was first spelt out by Ricardo, the essence of the theory being that goods may be profitably sent from places where the labour cost is higher to places where the labour cost is less, provided that a still greater difference in labour cost exists with respect to other things which the first country desires to obtain.
3. Work is desirable in itself.
How does this assertion come about? George puts it this way: ‘All men in health have the power of labour, but under the conditions which prevail in modern civilisation, only a comparatively few have the means of employing labour, and there are always, even in the best of times, some men who find it difficult to sell this labour and who are thus exposed to privation and anxiety. Hence arises the feeling that a man who employs another to work is a benefactor to him. The habit of looking on the giving of employment as a benefaction and on work as a boon lends easy currency to teachings which assume that work is desirable in itself – something which each nation ought to try to get the most of – and makes a system i.e. Protectionism, which professes to prevent other countries from doing for us work we might do for ourselves. This seems like a system for enrichment of our own country and the benefit of its working classes but protection makes more work only in the sense that the rain wetting the hay makes more work for farmers
Infant industries require protection.
Supporters of this view argue that a particular industry may be well-suited to a particular country, but under free trade it may be hard to introduce there in competition with other countries where it is already established on a large scale. Exposed in its early days to the full strength of competition with established industry elsewhere, the infant industry may never grow up, though if it could grow up, it would in time be able to do as well as its rivals or even better.
This argument is really for temporary protection, yet the protection secured by it is seldom willingly renounced by the industries concerned, and in many cases becomes permanent. The infant industries never feel themselves grown up; if they grow up at all they tend to devote their ‘manly’ strength to fighting for bigger and longer protection.
Why should this be? During the protective period, the industry will be profitable beyond its natural scope, that is, as defined by the scope that would exist when it was open to competition from other countries, and will come to be established on an excessive scale, that is, on a scale and in places where it cannot be maintained without protection. At the end of the protective period, those industries (or firms) that cannot carry on without protection will fight for its continuation.
Protection produces revenue
The revenue produced by import tariffs can be a useful source of income for governments, particularly those in developing countries where other taxes can be difficult to collect. But the cost of collecting this revenue is high. Land frontiers must be guarded and sea-coasts watched, imports must be forbidden except at certain places and under regulations which frequently entail wasteful delays and expenses. All these costs finally fall on the consumer.
A more important objection is that, as with other indirect taxes, when imposed on articles of general use (and it is only from such articles that large revenues can be had) it bears with greater weight on the poor rather than the rich. While indirect taxation causes no loss to those who first pay it, it is collected in such insidious ways that those who finally pay it do not realise it.
National security requires a greater degree of self-subsistence in regard to food supplies.
The issue here is whether it might be prudent to forgo wealth in the short term in order to guard against military insecurity in the longer term.
If a government is to plan industrial life on the assumption that the danger of war is a permanently given fact, if it is to ‘sacrifice opulence to defence’, and if the population is alive to the nature of the sacrifice that is being made, there is nothing in economic analysis which would condemn such a choice as a foolish one.
However, if it is thought to be desirable to make provision of this sort, it is questionable whether a protective tariff is the best means of doing it.
Protection is required against the ‘dumping’ of cheap products from abroad.
Dumping is the selling of products abroad more cheaply than at home. There are different types of dumping. Details of these activities can be found at Appendix A plus the reasons why, generally speaking, tariffs are not an effective response to these activities.
The existence of protectionist measures provides a good bargaining counter in trade negotiations
This is not a question of economics. Suffice to say that experience has shown that once tariffs have been imposed, there is great resistance to them being removed. Bargaining with tariffs means that there must be some realistic chance of them being reduced or removed.
These mainly relate to issues of equity, sustainability and exploitation. They include the following:
- Not everyone gains from free trade and income differences are exacerbated.
- Free trade will lead to economic growth rates which are not sustainable.
- It leads to the industrialisation of agriculture which is undesirable.
- It leads to a growth in uniformity and the loss of indigenous cultures.
- It destroys the sense of community and weakens sovereignty.
- Industries in the developing countries will not be able to compete with the established industries of the developed world.
Gains from free trade are not universally enjoyed
Wage levels vary enormously between countries and are largely determined by the supply of labour, which in turn depends upon population size and growth rates. Over-populated countries are naturally low wage countries, and if population growth is rapid, they will remain low-wage countries. Cheap labour means low prices and a competitive advantage in trade. However, advocates of free trade do not worry about that because they believe that trade between high wage and low wage countries can be mutually advantageous thanks to comparative advantage.
The theory of comparative advantage is supposed to work as follows: when countries are engaged in international competition, relatively inefficient activities lose out and jobs are eliminated but, at the same time, relatively efficient industries i.e. those with comparative advantage, expand, absorbing both the labour and the capital that were ‘disemployed’ in activities with a comparative disadvantage. Capital and labour are therefore re-allocated within the country, specialising according to that country’s comparative advantage.
However, one of the underlying assumptions of the theory is that capital is internationally immobile – a realistic assumption at the time the theory was expounded by Ricardo. Today both capital and goods are internationally mobile and capital will follow absolute advantage to the low-wage country, rather than reallocate itself according to comparative advantage within its home country. It will follow the highest absolute profit, which is often determined by the lowest absolute wage.
The standard neoclassical adjustment view argues that wages will eventually be equalised worldwide at high levels, thanks to the enormous increase in production made possible by free trade. However this ignores the issue of scale. For all the people presently alive to consume resources and the capacity to absorb waste at the same per capita rate as America and Europe is ecologically impossible. Much less is it possible to extend that level of consumption to future generations.
Free trade will lead to economic growth rates which are not sustainable.
Sustainable development means living within environmental constraints of absorptive and regenerative capacities; these constraints are both global and local.
Trade between nations or regions offers a way to loosen local constraints by importing environmental services (including waste absorption) from elsewhere. Within limits this can be quite reasonable and justifiable but when carried to extremes in the name of free trade, it can become destructive. It leads to a situation in which each country is trying to live beyond its own absorptive and regenerative capacities by importing those capacities from elsewhere.
The apparent escape from scale constraints enjoyed by some countries via trade depends on other countries’ willingness and ability to adopt the very discipline of limiting scale that the importing country is seeking to avoid. Which nations have actually made this complementary choice? All countries now aim to grow in scale, and it is merely the fact that some have not yet reached their limits that allows other nations to import carrying capacity. Free trade does not remove the carrying capacity constraints, it just guarantees that nations will hit that constraint more or less simultaneously rather than sequentially. It converts differing local constraints into an aggregated global constraint.
The drive to grow beyond carrying capacity has roots other than in the belief in free trade; but free trade makes it very difficult to deal with these root causes at a national level, which is the only level at which effective social controls over the economy exist.
Free trade advocates will argue that it is just a natural extension of price adjustment across international boundaries, and that right prices must reflect global scarcities and preferences. But if the unit of community is the nation; the unit in which there are institutions and traditions of collective action, responsibility and mutual help and the unit in which governments try to carry out policy for the good of their citizens, then right prices should not reflect the preferences and scarcities of other nations. Prices should differ between national communities.
Free trade leads to the industrialisation of agriculture which is undesirable
One of the advantages claimed for free trade is that by increasing the size of the potential markets available to the industries of a country, it enables those industries to enjoy economies of scale which bring the costs of production down and makes them more competitive. The extension of this logic to agriculture raises serious concerns. Agriculture in most western countries is now treated as merely another industry. Supporters of this state of affairs point to the huge amount of food that is required in order to solve the problems of hunger and malnutrition in the world and claim that only the methods of industry, extended as far as possible, can provide what is and will be needed.
Critics of this approach argue that industrialized, globalized agribusiness is not designed primarily to provide plentiful, safe, nutritious food to high standards, or to provide employment when employment is at a premium, or to protect landscapes and other species; and what it is not designed to do, it is not likely to do. Industrialized agriculture is also increasingly dependent on the oil and gas industry for its inputs and in the longer term thus becomes increasingly vulnerable – in short this method of agriculture is unlikely to be sustainable.
Also of concern is the impact of industrialized agriculture on the land on which we all directly depend for life. Apart from concerns about soil fertility the fact that increasingly fewer people work directly with the land is a disturbing trend. There is a danger that, as the connection with the land gets weaker, centuries of accumulated wisdom will gradually become diluted and disappear.
Free trade destroys the sense of community and weakens sovereignty
Free trade and capital mobility increase the separation of ownership and control and the forced mobility of labour which are inimical to community. Community economic life can be disrupted not only by your fellow citizens who, though living in another part of your country, might at least share some tenuous bonds of community with you, but also someone on the other side of the world with whom you have no community of language, history, culture or law.
Specialization and integration of local community into the world economy does offer a quick fix to problems of local unemployment, and one must admit that carrying community self-sufficiency to extremes can certainly be impoverishing. But short supply lines and relatively local control over the livelihood of the community remain obvious prudent measures which require some restraint on free trade if they are to be effective. To regard community as a disposable aggregate of individuals in temporary proximity only so far as it serves the interest of mobile capital is bad enough when capital stays within the nation. But when capital moves internationally it is much worse.
The undercutting of local and national communities, which are real, in the name of a cosmopolitan world community, which does not exist, is a poor trade, even if we call it free trade. The true road to international community is that of a federation of communitie, not the destruction of local and national communities in the service of what Herman Daly calls ‘a single cosmopolitan world of footloose money managers who constitute not a community, but merely an interdependent, mutually vulnerable, unstable coalition of short-term interests’.
Industries in developing countries will be unable to compete.
It is not entirely clear how developing countries will flourish in a free trade world, even when subsidies and protective tariffs in the developed world and other hurdles to trade have been removed. It is all very well having a level playing field but if one side is much stronger than another, the flatness of the playing field is going to be a very minor factor affecting the outcome.
In its report, The Commission on Africa, which supports the view that developing countries need to engage fully in the global economy, there is an instructive summary of what might be in store for a developing country as it makes this engagement. ‘Short-run adjustment costs will vary for different countries in Africa, but they include short term losses; balance-of-payments problems, including impacts on debt payments; loss of tariff revenue (where for some countries this is up to a quarter of government revenue); preference erosion; impacts of changes in world prices, particularly for food importers; new investment costs to support diversification; coping with the social costs of adjustment, including gender impacts, in sectors employing poor people and the impact of reduced income for some. Reduced income can have knock-on effects, in that they prevent poor people from meeting health costs or school fees.’ The Commission concludes that ‘strong support is vital in order to help Africa make these necessary adjustments, and major aid investments will be necessary to ensure that Africa can build its capacity to trade and gain from a more open trading system.’
Given the extreme reluctance of developed countries to make any meaningful concessions in the current trade negotiations, this ‘strong support’ is unlikely to be forthcoming. From this point of view the invitation to developing countries to engage fully in the global economy seems at the current time to be a poisoned chalice.
The proposition that this paper is examining is that the alleviation of need and poverty in the world is more likely to be achieved by encouraging local self-sufficiency than by the universal application of free trade principles and practices. So far the arguments discussed in this paper seem to support the conclusion that the universal application of free trade principles and practices are not the answer to alleviating poverty in developing countries. Is greater self-sufficiency the answer and, if it is, by what avenue might it be achieved?
The case for countries to pursue an alternative route based around self-sufficiency is beautifully spelt out by Schumacher in his description of what he calls ‘Buddhist economics’.
‘Simplicity and non-violence are closely related. The optimal pattern of consumption, producing a high degree of human satisfaction by means of a relatively low rate of consumption, allows people to live without great pressure and strain and to fulfil the Buddhist injunction ‘Cease to do evil; try to do good.’ As physical resources are everywhere limited, people satisfying their needs by means of a modest use of resources are obviously less likely to be at each other’s throats than people depending upon a high rate of use. Equally people who live in highly self-sufficient local communities are less likely to get in large-scale violence than people whose existence depends on world-wide systems of trade.’
Michael Schuman of the Washington-based Institute for Policy Studies uses the term ‘localization’ for this process of achieving greater self-reliance or sufficiency. He describes the aims of the ‘localization’ process in his book Going Local:
‘(It) does not mean walling off the outside world. It means nurturing locally owned businesses which use local resources sustainably, employing local workers at decent wages and primarily serving local consumers. It means becoming more self-sufficient, and less dependent on imports. Control moves from the boardrooms of distant corporations and back to the community where it belongs.’
What kind of policies will encourage such a situation to emerge? Another champion of ‘localization’, Colin Hines, depressed after attending yet another conference at which the iniquities of globalization had been enthusiastically and lovingly exposed without any coherent alternative solution being proposed, tried to set down the nuts and bolts of what a global economy refocused around local markets might look like. In his book Localization: A Global Manifesto he identifies a set of policies that could bring about localization. These would involve:
- Safeguarding national and regional economies against imports of goods and services that can be produced locally
- Site-here-to-sell-here rules for industry
- Localizing money flows to rebuild the economies of communities
- Local competition policies to ensure high quality goods and services
- The introduction of additional resources and other taxes to help pay for ‘such a fundamental and expensive transition’, and to guide it in such a way that adequately protects the environment
- Fostering democratic involvement in both the local economic and political systems
- Redirection of trade and aid, such that it is geared to help the rebuilding of local economies, rather than international competitiveness.
This is quite a revolutionary agenda aimed primarily at developed, highly industrialized countries. However, a changeover to technologies and lifestyles that are smaller, more decentralized, more humane and less demanding on non-renewable resources represents a major departure from orthodox thinking and conventional practice and is unlikely to happen quickly in those countries, unless in response to some severe economic shock acting as a ‘wake-up call’.
But, ironically, the developing countries still have many of their options open. However it is extremely doubtful whether such an ambitious model as that described above would prove to be a useful template. Where then do they look for inspiration?
- Revisiting the ‘Infant Industry’ Argument
Critics of the expansion of free trade often point to the fact that since 1945, the developing countries that have most successfully expanded their economies are those that have been prepared to put in place measures to protect industries while they gain strength and give communities the time to diversify into new areas.
This is not intervention for the sake of it or to prop up failing enterprises, but part of a transitional phase to create new business that can compete on equal terms in the global market place without the need for continued protection – essentially the infant industry argument for protection. The most successful countries, initially Taiwan and South Korea and more recently China, India and Vietnam, have succeeded in reducing levels of poverty by increasing economic growth largely on the basis of high levels of government intervention aimed at strengthening domestic sectors.
In his book Kicking Away the Ladder, Ha-Joon Chang, looks at the development strategies followed by the advanced countries over a period extending back over the last 150 years. The picture that emerges from this historical survey seems clear. These countries used interventionist industrial, trade and technology policies in order to promote their infant industries. The forms and emphases of these policies may have varied according to the different countries, but there is no denying that they actively used such policies.
The policies that they used in order to get where they are now are precisely those policies that these countries now say the developing countries should not use because of their negative effects on economic development.
It is appropriate therefore to reconsider the infant industry argument or protection as Joseph Stiglitz does in his book Making Globalization Work. Countries often need time to develop in order to compete with foreign companies; to get this time, they may have to protect their nascent industries temporarily. The standard argument for free trade is based on efficiency. More goods can be produced with given resources if each country focuses on its own comparative advantage. Stiglitz asserts that even more important in determining the pace of growth in developing countries is how fast they acquire the knowledge and technology of the advanced industrial countries. Developing countries not only lag in resources but also in technology; for achieving sustained growth, closing the knowledge gap is more vital than improving efficiency or increasing available capital.
How best to learn? Stiglitz argues that the best way – probably the only way – to learn how to produce, for example, steel is to produce steel, as Korea did when it started the steel industry. At the time its comparative advantage was growing rice. But even if Korean farmers became the most efficient rice producers in the world, their incomes would still have been limited. The Korean government calculated that if it was to succeed in being developed, it had to transform its economy from agriculture to industry.
If developing countries are to enter into such industries, those industries have to be protected until they are strong enough to compete with established international giants. Tariffs result in higher prices – high enough that the new industries can cover costs, invest in research, and make the other investments that they need in order eventually to be able to stand on their own feet.
Advocates of free trade respond with two main criticisms of this ‘infant industry’ argument. First, they say, the appropriate response is not protection; if in the long run the firm will be profitable, it can obtain a loan to tide it over the hard times. In the real world, however, new firms have a difficult time getting capital.
Second, as Henry George observed, protected infants too often never grow up, and demand to be permanently insulated from outside competition. More generally, special interests grab hold of any argument, including the infant industry argument, to push protectionist measures in pursuit of higher profits – which impose significant costs on the rest of the economy. This undoubtedly does happen but it is not inevitable. The politics of different countries differ. East Asia did manage to wean its infant industries; the question is whether others have political systems capable of doing the same.
To overcome this, Stiglitz focuses on broad-based protection. For example, a uniform tariff on manufactured goods as a response to this last criticism of the infant industry argument:
‘This is the approach of the infant economy (as opposed to the infant industry) argument for protection. Without protection, a country whose static comparative advantage lies in, say, agriculture, risks stagnation; its comparative advantage will remain in agriculture, with limited growth prospects. Broad-based industrial protection can lead to an increase in the size of the industrial sector, which is almost everywhere the source of innovation; many of these advances spill over into the rest of the economy, as do the benefits from the development of institutions, like the financial markets, that accompany the growth of an industrial sector. Moreover, a large and growing industrial sector (and the tariff on manufactured goods) provides revenues with which the government can fund education, infrastructure, and other ingredients necessary for broad-based growth.’
He points out that advocates of strong intellectual property rights argue for exactly the same kind of trade-off; they claim that the short-run inefficiencies (in that case arising from monopoly; in this case arising from tariff protection) are more than offset by long run dynamic gains.
‘In each case, it is a question of getting the balance right; almost surely some intellectual property protection is desirable; and almost surely some trade protection is desirable. While the economic rationale behind the infant economy argument is similar to the infant industry argument, the political argument is far stronger; broad-based protection reduces the scope for special interest.’
In another recent book on the problems facing the poorest countries, The Bottom Billion, another ex-World Bank economist, Professor Paul Collier, argues that for poor countries where trade policy initiatives could be effective, the need is to diversify exports with labour-intensive manufactures and services, the sort of things that Asia is already doing. But this presents a problem – having broken into these markets, low-income Asia now has the huge advantage of established ‘agglomerations’ where costs are lower than for those just starting up elsewhere. When Asia broke into these markets it did not have to compete with established low-cost producers – it was ‘first on the block’. For the bottom billion to break into these markets they need temporary protection from Asia.
What this means is that goods and services exported from the bottom billion to the rich world markets would pay lower tariffs than the same goods coming from Asia. Without such a pump-priming strategy, the bottom billion is probably doomed to wait until Asia becomes rich and is at a substantial wage disadvantage against them. Even with high Asian growth, it will take several decades to open up a wage gap that is wide enough to spur firms to relocate.
How would this work? The Western world would not impose new tariffs on Asia. Rather, they should remove tariffs against the ‘bottom billion’ where they already have tariffs against Asia. There is some urgency in this as these tariffs are supposed to be on the way out. So such protection would only be temporary. Is such temporary protection politically feasible? The answer is that there are already schemes in existence designed to do this. The US and the EU both have schemes – but they are not working. They are not working because the devil is in the detail and the details are wrong; probably because the schemes were ‘not designed to be effective, but to appease lobbies’. The details that need to be reviewed relate to ‘rules of origin’ which are too restrictive, the timescales which are too short to encourage investment and the limited number of countries included in the schemes.
- Summing Up
In his book, ‘ A Walk With a White Bushman’, Laurens van der Post argued that:
‘…..when you take another man’s problem away from him, or another country’s problem from it, you rob them of all opportunity of redeeming themselves, of getting to know themselves. This is one of the evil consequences of living other people’s lives for them, telling people how to live a life of which you know nothing and of which you will not have to endure the consequences.’
Both Stiglitz’s and Collier’s analyses and prescriptions are based on the conventional economic wisdom, reflected in the policies of the IMF, World Bank and WTO, that no country aspiring to reasonable growth rates or living standards can any longer be self-sufficient. But it is unlikely that this conventional wisdom, however packaged, is going to bring universal well-being. A more productive alternative approach might be to provide developing countries with the ‘space’ and to develop solutions rooted in their own culture and traditions.
 Economic Monitor, Issue 77, Winter 2002; School of Economic Science.
 Adam Smith: Wealth of Nations
 Henry George: Protection or Free Trade; Henry George Foundation
 Henry George, ibid
 Sir William Beveridge (Committee of Economists under the Chairmanship of), Tariffs: The Case Examined, Longmans, Green and Co.
 Herman Daly: Beyond Growth, Beacon Press
 Colin Tudge: So Shall We Reap; Penguin Allen Lane
 Commission for Africa 2005, Our Common Interest
 E.F.Schumacher, Small Is Beautiful, Blond and Briggs
 Michael Schuman, Going Local, The Free Press
 Colin Hines, Localization; A Global Manifesto; Earthscan
 Ha-Joon Chang, Kicking Away The Ladder, Anthem Press
 Joseph Stiglitz, ‘Making Globalization Work’, Penguin Allen Lane
 Paul Collier, The Bottom Billion; Oxford University Press
 Laurens van der Post, A Walk With a White Bushman, Chatto & Windus