Globalization and Free Trade - Boon or Bane

The US Presidential elections have brought the issue of Globalization and Free Trade to every home. There are numerous debates and discussions over the topic. Supporters cite benefits like enhancement of international trade by 14% of the world GDP during last 50 years, elimination of poverty for hundreds of millions of people in China, contribution of amount in excess of USD 20 billion to the national tax revenue by immigrants to UK etc. etc. They also do not agree that free trade and globalization has benefited only multinationals and the rich sections of the society, while conceding few drawbacks of free trade which is more to do with faulty government policies than an offshoot of globalization. The drawbacks cited are selective while the benefits are over-stated without much proof.

The benefits are well-known and well-documented over the years, especially the China-growth story. However, the plethora of ills brought about by free trade is still something about which not everyone may be aware of. One such drawback is about 6 million people having lost their jobs in the US alone between 1999 and 2011, some of them not finding replacement jobs and some multi-nationals following dubious tax policies.

The question is if free trade has really done so much good for the society as is claimed by its proponents, there would not be a backlash against it as we see today not in one country but globally. Naturally, the benefits of free trade have occurred to a miniscule section of the society, but a very powerful one, which has access to vast array of means to continue to perpetrate the suffering on the society due to existing unhindered free trade.

History has shown that whether countries follow free trade or protectionism, the winner is a miniscule section of the society. In a protectionist environment, lack of competition promotes bad quality products, lower productivity and higher prices i.e. ultimately the society as consumer suffers. However, this miniscule section of the society still prosper as it is able to find ways to keep their profits high.

Free trade as we see today is characterized by two main scenarios. One, shifting of the manufacturing from one market to another mainly to take advantage of cheap labour.  But this manufacturing is done without regard to the harm to the environment, water, soil and soul of the employees. These products are produced cheaply, but are sold in the consumer market at a price much higher than the cost of production. Leaving out few developed markets, all other markets have high inflation. This means for the majority of the consumers, the benefit of low cost production is not available. Therefore the markets which have lost their jobs do not get the benefit since there are no replacement jobs for those rendered unemployed; and for other markets the price remains high. So, who benefits? No one except the same miniscule section of the society. We should also not lose sight of the fact that the companies which stop production in one market, set up manufacturing in another market through foreign direct investment. Therefore the bulk of the benefits of free trade tend to occur to the same set of people.

The second scenario comprises the easier export of goods and services due to lowering of tariffs by the importing countries. We all know quality control measures are low in majority of the countries. This provides an opportunity to the exporters in the producing countries to drive higher profit margins than could be achieved in their current market. All of us know how these large exporters of agricultural and chemical products are trying to influence third world and developing countries governments to meet their objectives. Again, who is benefiting - not the large population but the miniscule section of the society.

Similarly, big retailers’ purchasing policies have ruined the American agriculture. The big retailers have driven out self-employed corner stores forcing everyone to become low paid employees. Further, recent fresh graduates and post- graduates are unable to find jobs or are forced to take up work which does not give justice to their education. And there are numerous such examples. This is the story of most of the developed markets and in particular of USA. Still the proponents of free trade say that only 6 million jobs have been lost.

On the other hand, the undeveloped markets where jobs are created suffer from other related issue of industrialization like environment, lack of infrastructure, exploitation, low salaries, profit maximization, high inflation, etc. Further, any decrease in global demand brings back the miseries. On top of this, the population of these regions is so huge that only a fraction of the employable resources tend to get absorbed in the available opportunities.

It is a fact that whenever a new treaty is signed the miniscule section of the society comprising multinationals, lawyers, accountants, etc. start thinking overtime how to generate benefit from the new treaty. The first thing is to find out ways to minimize tax outgo for the multinationals which will conduct the trade or manufacturing. Further, these treaties are mechanisms for protection of assets of the investors i.e. they do not want to take political and social risks of new markets. Why should their investments be protected if they adopt unethical business practices? In the whole game plan, the consumer, the so-called beneficiary, is always ignored.  

It is a myth to argue that loss of 6 million jobs has influenced 150 million Americans to  root for Trump’s agenda of localism. Because the only beneficiaries of free trade are the multinational companies and their employees. No one else. Not the consuming countries, not the new supplier countries.

In the words of President Barack Obama (The Economist October 8-14, 2016), " But some of the discontent is rooted in legitimate concerns about long-term economic forces. Decades of declining productivity growth and rising inequality have resulted in slower income growth for low- and middle-income families. Globalisation and automation have weakened the position of workers and their ability to secure a decent wage......".

What more can be said?