A New Model for Managing International Trade and Development , Part IV

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In Development…
…only one road leads to Rome, Part 4

By Sid Eschenbach / The Rag Blog / November 15, 2008

A Proposal for a New Trade and Development Paradigm

The WTO GATT Doha round of trade talks is dead, marking the failure of the current system to create a regulatory structure seen as fair by the nations of the world. Additionally, major industrial economies are in trouble, major and minor democracies are increasingly politically unstable, inequality is growing globally, poor countries are not sharing the benefits of globalization, workers of nearly all countries find their jobs are insecure and threatened, and the continued surplus of labor will continue to place a downward force on income and prosperity levels.

The simple act of facilitating industrial development and requiring all international traded goods to be made by unionized labor will … create a transparent, simple and fair system that will move us day by day closer to that goal, not further away.

In fundamental historical and practical dissonance with these truths is the equally true statement that the road to development and prosperity is known. It is the road discussed above in this essay. It is the road that starts in poverty and ends in industrialized prosperity, historically through the process of protectionism, industrialization, and the organization of labor.

The traditional tools, protection of domestic industry and cheap labor, both currently employed successfully by both China and India, are still available. However, we should be able to do the same, but in an organized, global manner, as the use of those tools are not available to others due to many factors, from pressures applied by the international lending and development community to simple corruption. In synthesis, then, let’s review where ‘there’ is before we set out.

A new model must:

  • Create national economies that grow at rates higher than that of population, and create new, middle class jobs.
  • Guarantee the rights of industrial workers to organize and share in the benefits of higher productivity.
  • Not cost any government in creation or operation more than it is worth.
  • Be easy and simple to negotiate and implement.
  • Be clearly beneficial to the mass of the people in order to increase national socio-political stability.
  • Allow for unilateral implementation if desired.
  • Encourage poor nations to develop a protected sector of increasing returns and innovation.
  • Maintain the existing sectors of increasing returns and innovation in developed nations.
  • Help rich and poor nations alike.
  • Be simple, fair and internationally uniform.

In my opinion, all of these goals can be met by adopting two very simple guidelines, either unilaterally, regionally, or globally:

One: That all nations be encouraged to produce locally the manufactured items that they import, each to the degree that they are able.
Two: That all manufactured goods traded between nations be made by organized labor.

I’d be surprised if you are not now thinking something like…”that’s it?” “These two points are going to take the place of the 10,000 pages of the GATT and resolve problems that very intelligent and highly trained people have been wrestling with for the past 20 years?” Well, let’s stack it up against our ‘new trade paradigm’ wish list and see what happens.

Will it:

  • Create national economies that grow at rates higher than that of population, and create new, middle class jobs?

Yes. By favoring manufacturing over importing, even at the lowest levels of manufacturing this is a win for the local economy. While higher prices may be paid by the consumer, an argument that places price above all other considerations is a policy that would logically bring back child labor or slavery in the name of low prices. As stated above, a development policy is not about cheap prices, but … DEVELOPMENT, and for that there is only one road to Rome.

The ways this might happen are only limited to the imaginations of the parties. The traditional methods of import duties to protect nascent producers should, of course, be available. Beyond that, the international manufacturers could consider other options, such as establishing locally owned and run factories along the lines of the franchised service industry, and receiving long term tax benefits in exchange for long term commitments, etc.

A component of these agreements could be that if the manufacturing was totally national and not being set up to export, local wages could be paid to offset the competitive price advantages of scale enjoyed by massive international players. If the manufacturing system and the good produced was able to find export markets, the original agreement must include the requirement that laborers in export oriented manufacturing facilities must be allowed to organize.

This not only raises the standard of living nationally, but it requires management to become more efficient in order to compete abroad if that is their goal. The counter-intuitive Fordist reality that, within reason, higher wages always produces higher productivity must be remembered. When all are playing by the same rules, this is a step towards being more competitive, not less, as it is a cost borne uniformly.

Again, any time any manufacturer pays higher wages, they MUST become more efficient in order to survive. If they are currently located in a low wage country and it is precisely the low wage that makes them internationally competitive, they will have to become more efficient to keep their markets … which means that they will have achieved the state of increasing returns that must be created in order to begin to build a middle class.

Management should be rewarded for efficiency and innovation, not abuse and exploitation. If they are unable to become more efficient, they will simply go out of business… not a bad idea if the success of your business is built upon worker abuse and underpayment.

If a company cannot compete unless it enjoys a labor cost advantage and thus finds that it is no longer able to compete internationally, it can still manufacture for the unregulated domestic market, as it will enjoy the usual labor cost advantages versus the union made imported products it will be competing against there. Smaller, weaker, or not as efficient companies that do not export would not be affected, and they could continue to provide non-union entry level jobs for under-educated or unskilled workers that are unfortunately plentiful in underdeveloped countries.

Both of these latter labor and economic realities are at the heart of nascent industrial states and the establishment of the vital increasing returns sector, the start of the path that we have revealed as the only route that will lead to economic progress and well-being.

For high income nations, the impact is also positive. As a result of the current neo-liberal trade/development model, the industrial sectors of all of the major industrial powers are being hollowed out as manufacturing is being exported and foreign made goods imported… but again, wages are at the heart of this reality.

Most industrialized nations already have unionized labor in their major industrial enterprises… so this will create no new burden for them. What it will do is make the poor nations raise their wages, thereby lowering the natural tendency of business to move to non-union cheap labor countries in order to survive.

The recent and well-documented ‘hollowing out’ of industry in major nations is not a positive harbinger of things to come, as the loss of industrial capacity is always ultimately negative for the same reasons that the gain of industrial capacity is always ultimately positive.

A developed, unionized nation that adopted the union made import and export trade regime would strengthen its own labor force and manufacturing sector at no additional cost to its export trade…while simultaneously reducing the labor cost differential currently enjoyed by underdeveloped and large labor pool countries. The result of this would be to reduce the cost demands placed by the market on all competitive international business to lower prices in order to gain market share, and thus eliminate the need to get into the endless tariff wars or ‘off-shore’ in order to survive. It would thus protect the companies in both poor and rich nations… as both are under attack.

Will it:

  • Guarantee the rights of industrial workers to organize and share in the benefits of higher productivity?

Yes. This is the core of the proposition, so obviously the new model would do this. However, it must be noted that organized labor, in exchange for a full partnership with capital, would have to make many concessions too. As examples, the right of management to hire and fire without cause and without undue grievance procedures, and management’s ability to demote or promote according to any individual’s ability, capacity and achievement would have to be part of a ‘new union’ mentality. The right to organize cannot become a right to control the entire workers’ agenda, leaving management, as is the case in many instances today, without the necessary flexibility to meet challenges over time.”

Will it:

  • Not cost any government in creation or operation more than it is worth?

Yes. Obviously, the only infrastructure would be some sort of very minor bureaucracy whose job it would be to validate the labor bona fides of any company who wanted to import or export. There would clearly be exceptions due to scale and cottage industry type crafts that would be exempt. Compared to the budget of the World Trade Organization ($164 million in 2007), this would be insignificant and should actually represent a significant savings to current national commercial operating overhead.

Will it:

  • Be easy and simple to negotiate and implement?

Yes. Nothing could be simpler. If you want to export from your country, you simply need to unionize your workforce and demonstrate that fact to the responsible authorities. If you want to import goods from another country, you simply need to verify that their workforce is unionized. These would be certified by an international organization, and the validity of their bona fides easily established.

This is obviously not aimed at a company of 5 workers that manufactures some particular bit that a particular buyer abroad might need. Rather, it is aimed at large scale manufactures that export and import large quantities of manufactured goods, and through their economies of scale combined with cheap labor, suck the air out of national development.

That’s it. No tariff wars, special import or export restrictions, cronyism, back-room legislative deals, special taxes… nothing. The people who talk about ‘free trade’ and then produced the GATT would be shocked at what free trade actually looks like.

Will it:

  • Be clearly beneficial to the mass of the people in order to increase national socio-political stability?

Yes. The current trade and development structure is complex and incomprehensible not just to experts, but most importantly to the man on the street. In country after country, the GATT based trade deals are popularly felt to be done in the interests of the more powerful of the two nations… or is it the poorer… or the richer?

The truth is that it is rare that the man in the street feels its being made in his interests. Where does that resentment go? The feelings of powerlessness, frustration and alienation are major factors that contribute to cultures of violence, crime, substance abuse… and can end with the ultimate loss of governability of entire societies.

Empowering the people is another of those counterintuitive concepts that in fact makes them more governable and less likely to join with the sectors found in all societies that are unproductive and destructive. The politics of a ‘national capitalism’ would be a very heady elixir for any leader to promote, and the real rising standards of living created by a new and growing industrial sector will be easy for all to see.

Will it:

  • Allow for unilateral implementation if desired?

Yes. The beauty of the fix is that it doesn’t depend upon general agreement for implementation. Indeed, because all nations control the terms for the entry and exit of goods across national borders, it is something that national leaders as well as political parties can recognize and relate to, and it is this very nationalistic essence that make it’s unilateral implementation simple to effect and effective in implementation. Politically, it will spur ‘buy national’ ‘support and improve workers’ sentiment, never a bad thing for a growing domestic manufacturing economy.

Will it:

  • Encourage poor nations to develop a protected sector of increasing returns and innovation?

Yes, and this is essential. As we have seen, the creation and growth of an industrial, increasing returns sector is the fundamental and essential first step to affluence. Any trade and development policy that does not resolve this problem in poor countries as a function of its operation fails the most important test.

Poor countries have the same basic needs as rich, and so there is always a market for manufactured goods. Because the people are poor, the products that they buy will be the cheapest expression of whatever necessary product they need, be it a hammer, a chair, a radio or a car. These cheapest products are generally made by multi-national corporations in the countries that have the lowest wages.

If a poor country adopts the policy that it will manufacture the goods it’s able to manufacture, and will not import products that are not union made, it will exclude the very products whose cost precludes the establishment of a local manufacturing business that would make the same item. When a small manufacturing business is established to sell the needed local product at a price the locals can afford, they will not be subject to the unionization requirement because they are a non-exporting entity, and so will be able to ‘abuse the poverty’ of its own people in order to establish the industry.

This is unfortunate, but is the only way it can be done. It is the way it was done in every single modern industrialized nation, and there is no way around it. The first step isn’t pretty, but without it, there is no second, third or fourth.

Will it:

  • Maintain the existing sectors of increasing returns and innovation in developed nations?

Yes. This is also an essential component of any successful trade and development policy, and also one where the WTO GATT model was failing miserably. Organizing labor in the poor nations would move towards an equalization of labor costs that would relieve much of the fundamental labor cost pressures placed upon multi-nationals as they struggle to survive.

It would also slow if not stop the hollowing out of the developed nations manufacturing sectors, a very delicate and sensitive political issue all developed nations are currently struggling with. The recent collapse of the global financial sector shows that there is, other than a few small and specific niche areas (Las Vegas, Lichtenstein, and Monte Carlo come to mind), no other nationally viable ‘new economy’ model based primarily upon service and financial sectors out there that allows large nations to maintain and continue to generate wealth while reducing or eliminating their manufacturing sectors.

As important as it is to raise the standard of living of the poor, it is just as important not to impoverish the relatively rich in the process. Another benefit of the new paradigm would be the general strengthening of the developed countries already unionized industrial labor pool, as any producer who exports would have to unionize.

While this idea of unionizing labor and protecting national markets sends modern economists and free-market theorists into a near epileptic state, we should remind ourselves of a simple historic fact: the greatest, broadest, wealthiest and most enduring economic success in the history of man was created in the U.S. during a period of high unionization of the labor force. At some point, this fact must be dealt with by those who theorize mightily against the beneficial impact of unions upon a society… while they watch the wealth of a nation diminish as the union roles shrink.

Will it:

  • Help rich and poor nations alike?

Yes, for all the reasons addressed above.

Will it:

  • Be simple, fair and internationally uniform?

Yes. Business is best understood as a tool, and like any tool it is only as ‘good’ or ‘bad’ as the ethics and abilities of its managers. Business will take advantage of any opportunity presented to it because it must… but it doesn’t need them to survive. For that reason, many confuse the use of cheap labor in undeveloped nations by multi-national companies with the assertion of necessity of the same… which is not only unfair, but a big mistake. While it will of course take advantage of any advantage available, it doesn’t require them.

What business does need is clarity. What business does need is a level playing field. To the degree that these two elements can be delivered in a simple and enforceable fashion, more is the virtue. Therefore, if all companies, big and small who import and export must pay more for labor and are excluded from the same markets for the same reasons, there will be no objection that cannot be overcome as long as it is uniform.

Will this policy raise prices generally and globally? Of course. However, as I stated at the beginning of this essay, a trade and development policy that uses unit cost as its paramount goal is a failure by any standard but its own. There are many very expensive countries and entire regions where food, shelter and clothing all cost significantly more than other places… and contrary to those who kneel at the alter of cheap goods, these areas, the expensive areas where the consumer pays more for everything… are the BEST places to live, not the worst.

In terms of generalized higher prices, business used to pay $5 a barrel for oil and the consumer .45 cents a gallon. Today it pays over $100 and the consumer $4… but it doesn’t matter. As long as it is uniform, as long as they all pay roughly the same, the business landscape adapts to the changes, either by passing the increase through to the consumer if successful, or going out of business if not.

In any event, rising and falling prices are existential features of the modern capitalist world, and it is impossible to argue that a general rise in labor costs will not simply be integrated as any other price change would be.

Conclusion

The WTO GATT model of trade and development has failed, and in the shadow of this failure President-Elect Obama is struggling to find a way to prime the pump and restart the machinery that generated well-being… but so far there is no sign that either he or his economic advisors recognize the immutability of developmental history.

The traditional Keynesian policy of spending money created by fiat cannot begin to do the job of wealth creation that only middle class workers of industry can do, and for that reason Obama must address an entirely new industrial trade and labor policy… or fail. Keynesian spending can only hope to prime an economic pump… but that implies that there in fact IS a pump to prime, and that that pump is properly identified, nurtured and protected. If there is no economic pump to prime, then vehicles such as infrastructure spending or tax rebates will simply be good money after bad.

Free trade has created a world in which the citizens in both rich and poor countries see their jobs become less secure, their options going forward shrink, and the inequality of income expand. With those results, it should be no surprise that it failed.

No system can deliver what it is not designed to deliver, and the WTO GATT model failed to bring rising standards of living to the majority of the people on the planet quite simply because, in spite of the grandiose claims of its proponents, creating global well-being was not it’s goal.

Not unlike virtually any kind of undirected but well-represented legislation, what it became was the formalization of ten thousand deals made for ten thousand problems… trade-offs between your agriculture and mine, between my manufacturers and yours, tax breaks for one and quotas for another.

It was not designed to answer any questions about well-being, political stability, or social dignity and pride. Indeed, its goal was quite simply the opposite; to provide statutory protection for historical privileges, to provide a forum for the influential and powerful to attempt to maintain the status quo. As such, it was born of a concept of trade as commercial war, not as a vehicle to generate societal well-being. That became just an occasional and coincidental byproduct.

It evolved out of a time that saw growth as a zero sum game… the idea that ‘your gain is my loss’ … and as we’ve seen, in the modern industrial world, this is simply not the case. Repeatedly, the creation of new products through innovation has provided massive growth in sectors that compete with no existing technology and cause no ones loss.

For all of these reasons, the path that the recently developed nations have taken is different. They continued the historic practice of protecting their own markets and nascent industries, but at the same time let the multi-nationals into their countries on a cheap labor export only basis…. and as Malaysia, Singapore, Taiwan, Korea, and more recently China and India are proving, this is a much more successful plan than the neo-liberal ideas as represented by the ‘Washington Consensus’.

It would be a very simple project to expand this idea to the rest of the world, but in order for that to happen the ‘free-trade’ tide must be rolled back both ideologically and practically, a task greatly if tragically aided by its spectacular recent failures. If this strategy, the creation and protection of national industries feeding off the cutting edge technologies and finance of the multi-nationals could be combined with a progressive Fordist labor policy, the results would, in my opinion, be hugely beneficial to all three parties to this socio-economic-political problem: the people, the nations, and the businesses.

The past 200 years, and particularly the past 50, give us many regional examples of a simple principle: that we can, in fact, all live well at the same time. There is no fundamental political or economic rule which requires an oppressor and an oppressed, a rich and a poor. WE CAN ALL LIVE WELL SIMULTANEOUSLY. Therefore, a new trade and development model must be designed to deliver just that: well-being to all… and that is the great challenge of this new presidency.

The simple act of facilitating industrial development and requiring all international traded goods to be made by unionized labor will, in my opinion, create a transparent, simple and fair system that will move us day by day closer to that goal, not further away.

Sidney Eschenbach, 60, lives and works in Guatemala, Central America. His thoughts regarding developmental economics and trade are based on decades of development work in Latin America at various levels, community and corporate.

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