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Part 2: "Free Trade" and the State

We are currently witnessing an attempt to globalize "free trade." But what is "free trade"? The theory behind "free trade" goes like this:

Countries should specialize. They should produce only the things that they are good at producing, and buy from other countries the things that they are not as good at producing. In this way the economy will operate at maximum efficiency. In order for this to happen, barriers to trade must be eliminated. Borders must be opened up, and governments must stop meddling in markets, so that competition will be free on the level playing field of international markets.

In order to understand this argument, we must take a broader look at the global economy. Today more than 1/2 of the world’s 100 largest economies are not countries, but corporations. Wal-Mart is bigger than 161 countries including Israel, Poland and Greece. Mitsubishi is larger than the fourth most populous nation on earth: Indonesia. General Motors is bigger than Denmark. Ford is bigger than South Africa. Toyota is bigger than Norway. The combined sales of the world’s top 200 corporations are greater than a quarter of the world’s economic activity, more than the combined economies of all the world’s countries minus the biggest 9. About 1/3 of all of what is called "trade" is simply moving of resources across borders between subsidiaries of the same corporation. It has nothing to do with free competition. It is a centrally-managed, economic activity, planned by the corporate elite.

Furthermore, the "opening up of borders" is only for the rich. It is the removal of restrictions on the flow of money across borders. In reality, it is getting harder and harder for most people to cross borders, especially if they want to get a job in another country. This is a key feature of "free trade": making capital mobile and labour immobile. Since people are immobile--they cannot easily cross borders--differences in wages and unionization rates can be maintained across borders. When controls on the movement of capital are removed, corporations can simply relocate their operations to the countries with the lowest cost of doing business. This will be the country with the lowest wages, the least active unions and the lowest environmental standards, since all these things cut into profits. This situation exerts an economic pressure on wages in all countries to drop and environmental standards in all countries to be loosened. This is the agenda behind the North American Free Trade Agreement (NAFTA) and the Free Trade Area of the Americas (FTAA). NAFTA is a treaty between Canada, the United States and Mexico, that removes restrictions on capital flow across their borders. Since it was implemented in 1994, it has had a devastating effect on all three countries. In the United States hundreds of thousands of jobs were lost, as corporations relocated their manufacturing to Mexico, to take advantage of cheap labour. The new jobs that were created were mostly part time, temporary and non-union. The average real disposable income in Canada decreased by 8% since NAFTA. In all three countries real wages and standard of living decreased. The FTAA is a proposed treaty that will extend NAFTA to all of North and South America. It is set to be implemented in 2005.

The expansion of "free trade" does not only remove tariffs and similar restriction on the easy flow of capital. It also seeks to remove "non-tariff barriers to trade". This is where the World Trade Organization (WTO) comes in. It is an international institution, created in 1994, that takes the place of, and vastly expands the GATT. One way that it does this is by encouraging the privatization of public services. Another is by settling international trade disputes. Any government, acting on behalf of a corporation, can challenge the acts of another government if they "interfere with trade". Complaints are taken to a WTO dispute resolution body--made up of trade lawyers and bureaucrats--which then makes a binding decision.

In one such case, the Venezuelan government, acting on behalf of its oil companies, brought a case against the United States. It claimed that the US Clean Air Act of 1990 was a non-tariff barrier to trade. The Act required that gas be produced that was cleaner and polluted less. Since the starting point for required improvements was based on pollution levels caused by gas produced at the time by US companies, and since Venezuelan oil companies tended to produce more-polluting gas, the Venezuelan government claimed that the Act was an interference with "free trade"--it was unfairly biased toward US companies. The WTO ruled in favor of the oil companies, and the Clean Air Act was modified to allow more pollution.

NAFTA too attempts to remove non-tariff barriers to trade. Chapter 11 of NAFTA requires that domestic corporations and foreign corporations from other NAFTA countries be treated equally. It also allows corporations to sue governments if they harm their profits through any unfair barriers to trade. In one case, Metalclad, a US-based waste disposal company, sued the Mexican government. The government of the Mexican state of San Luis Potosi had refused to allow Metalclad to build a waste disposal facility, after a geological survey showed that there was a risk that the waste would contaminate the local water supply. Metalclad claimed that this was an unfair expropriation of their profits. The NAFTA tribunal ruled in their favor, and the Mexican government was forced to pay Metalclad $16.7 million in compensation.

There are a number of other cases under both NAFTA and the WTO. In the vast majority of these cases, the tribunals have ruled in favor of the corporations. This means that the definition of "property" is being expanded to include, not only what is currently owned, but profits that could potentially be made. By providing corporations with a tool to override governmental decisions, NAFTA and the WTO (as well as the proposed FTAA) shift power even more into the hands of the elite.

Another important factor to take into account when looking at the global economy is speculation. Speculation is short-term investment. It has very little to do with actual goods or services being traded. Speculators make their money off tiny fluctuations in the relative prices of currencies. Recent deregulation of the movement of capital along with developments in computer technology have made it possible for huge amounts of money to be transferred half-way around the world in a matter of seconds. This has greatly increased the amount of speculation. Whereas world trade associated with actual goods and services is estimated at $7 trillion a year, speculation is estimated at $1.5 trillion a day! This means that if a country’s economy starts to slow, billions of dollars can be transferred out of it instantaneously, which can escalate the problem dramatically. This is what happened in 1997 to a number of countries in East Asia, with brutal consequences. In Indonesia, 1/2 of businesses declared bankruptcy. More than 20 million people lost their jobs within a 1-year period. 250,000 clinics were closed, infant mortality jumped 30% and now over 100 million people in Indonesia are living in poverty.

Perhaps one of the scariest things about speculation is that it exerts tremendous pressure on the internal politics of a country. If a country were to raise the minimum wage, nationalize some industry, enact too strict environmental laws or interfere in some other way with profits or the political atmosphere necessary to make profits, its economy could be ruined very quickly.

With the weight of speculative capital, the relative economic power of corporations, the ability of international organizations to overrule governmental decisions and all the rhetoric about "reducing the role of government", one might be lead to believe that states are becoming less and less important. This is not true. States have been and continue to be major actors in the economy.

Strong states do not step aside to allow "free trade" to go on. They manipulate trade agreements in order to ensure profitability. Governments, if they are strong and rich enough, insist on tariffs and protectionism in areas in which they are weak. Amidst all the rhetoric about "free trade" during the Reagan presidency, protection for US industry (in the form of restrictions on imports) was doubled. Only when a state has built up various strong industries do they try to get other governments to "open up their borders", so that their corporations can move in and out-compete all the domestic producers. Free trade opens up a poor country’s economy to competition with strong, developed, well-financed, multinational corporations. The result is that most of the local producers go out of business. This leaves a poor country’s economy entirely in the hands of the transnational elite. It is a form of colonization. Rich countries force poorer countries to open up their markets, and then take them over. It is no coincidence that the loudest voices for "free trade" come from the richest people in the richest countries.

States run the economy in other ways as well. Government funds are simply given to corporations, under the pretext of "attracting business". When corporations run into trouble, governments often give them huge amounts of money to keep them in business. 20 of the top 100 multinational corporations have been "bailed out" in this way, and almost all of the others have directly benefited from either government subsidies or protectionist trade policies.

Another important way in which governments prop up the economy is with the military. Governments, especially the United States, spend massive amounts of money on the military. This money goes to big corporations and subsidizes their other activities. The main reason that the United States is a leading manufacturer of civilian airplanes is because of all the money that the state gives to airplane manufacturers in the form of defence contracts. The subsidies to the industrial base of the military prop up a large part of the US economy, especially the high-tech sectors. This is why US defence spending barely declined at the end of the Cold War. It was needed to keep business running.

Of course this doesn’t mean that the military is unimportant. It is used against domestic dissidents, like a police force. It is also used to expand markets and keep international dissidents in line. Governments of poor countries that try to take control of their own resources and develop their own economies (instead of remaining areas of cheap labour and raw materials for rich countries) are declared enemies and attacked, officially or otherwise. This has been the case with many countries, from the Soviet Union to Nicaragua to Yugoslavia. In fact, the IMF, which had contributed to the economic chaos that led to the war in Yugoslavia, was already, in 1999, drawing up plans for the restructuring of the Yugoslav economy, while the United States and NATO forces were still bombing.

Government spending on the prison industry serves a similar function as military spending. In the United States, there are many private prisons--prisons owned and operated by corporations but paid for by the government. This means that the more people there are in prison and the longer their prison terms, the more money the government gives to the corporation. As “free markets” have expanded, so have prisons. The US government now spends $35 billion a year on prisons. Imprisonment rates in the United States are 4 times what they were in the 1960s. The United States now imprisons more of its population than any other country in the world, over 2 million (with another 4 million on parole).

States are not becoming less important, but they are changing. They are changing in a way that benefits the elite, and harms everyone else. States are making cutbacks in services that they were forced to provide by pressure from popular political movements: education, healthcare, welfare, food and housing subsidies, environmental spending, etc.... They are increasing spending on things that tend to protect the ruling classes and their profits. In most free trade agreements, intellectual property rights are strengthened, and along with the expansion of "free trade" comes more prisons, more military spending and more police. When a state is forced to give in to democratic pressure, new ways have been developed to overturn that. The WTO dispute resolution body and the NAFTA tribunals are made up of elite trade lawyers, judges and bureaucrats, who can override government decisions.

Why then, does anyone believe the rhetoric about "free markets"? Because the major media, as well as the education system are also run on "free market" principles. TV and radio stations, movies and newspapers all have to make a profit. They do this by selling advertisements. A newspaper that prints radical material will simply not get advertisers. It will be out-competed on the "free market". In order to get advertisers, critical content must be kept to a minimum and news must be sensationalized. In the US today, 10 corporations own almost all the media, and 2 corporations control half of all book-selling. In the United States media, critical discussion of capitalism is approximately as frequent as critical discussion of the activities of the Communist Party was in the Soviet media. Under these circumstances, the only interpretations of the world we hear in the mainstream media are from people like ABC correspondent John Stossel, who once said, "I have come to believe that markets are magical and the best protectors of the consumer. It is my job to explain the beauties of the free market."

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