Are Free Trade Agreements Free? Are They Development Strategies?

Central America is awaiting approval of a Free Trade Agreement with the United States, and the Andean countries are on the same path. The fierce economic competition between the United States and its rivals has sown free trade agreements all over the world. Are they really free or do they straightjacket the countries of the South? And what do they contribute to the South’s development?

George Gelber

Is the liberalization of international trade a desirable goal in principle? Opinions abound and are contradictory, but it would unquestionably be desirable for international trade liberalization to contribute to the comprehensive development of the countries involved and their people and to the elimination of poverty on our planet. Have the numerous trade agreements experienced so far done that?

To make a fair judgment, both trade liberalization and globalization as a whole must be analyzed in the real world, the world we live in. In this real world, 1.2 billion people are trying to live on less than a dollar a day and a full half of the planet’s population, 3 billion people, have an income similar to that of a European cow. Our world is radically unequal. According to the United Nations Development Program’s Human Development Report, the wealthiest 1% of the world population enjoys a combined income similar to that of the poorest 57%.

Globalization is a process of changes that provide continuity to another earlier process of major economic and cultural changes: industrialization, which itself had winners and losers. The millions of human beings who lost out with industrialization suffered greatly. Seeing their means of life destroyed, they emigrated or adapted as well as they could to the new situation, going hungry and even dying. Despite that, nobody today wants to return to the post-industrial age. Globalization will similarly have—in fact is already having—its winners and losers. Thrown into this as yet inconclusive process, our ethical challenge is to try to influence it, not only by compensating those who will be most affected, but also by promoting their participation in its design and benefits.

Rapid changes in a seamless world

What is globalization? According to Held and McGrew, it is a process—or a set of processes—involving a transformation of the arena of relations and transactions that manifests itself in transcontinental or inter-regional flows and networks of activities and power interrelations.

According to these authors, four kinds of change can be identified in globalization. One is in the physical space, with social, political and economic activities extending beyond borders, regions and continents. A second change is the intensification and expansion of interconnections and flows of trade, investment, finances, migrations, culture, etc. This triggers a third, which is the increased velocity of global interactions and processes, as the development of world transport and communication systems increase the speed at which ideas, goods, information, capital and people are disseminated. The fourth change is that all the others are having an increasingly profound impact, that the consequences of distant events are having increasingly significant repercussions elsewhere, in other words that local events are having global consequences.

The line between the national and the global is becoming increasingly fluid. Globalization is expanding, accelerating, intensifying and augmenting the impact of everything that occurs between these two lines: capital, investment, migration, information, technology, cultural products...

Who’s in charge?

The forces propelling and directing globalization are mainly economic, and the process is being controlled by large capital in its search for new markets in new places and new ways of producing in an ever more profitable and efficient way. Globalization couldn’t have its current forms without important technological advances, above all in the fields of information, communications and transport.

According to UNCTAD, there are currently some 64,000 transnational corporations (TNCs) with international production networks based on 866,000 affiliated companies in a sizable number of countries. The developed countries—especially those of the European Union—still have the greatest number of TNC headquarters. Less than a quarter of them are located in developing countries, although the latter host over half of all the affiliated companies. The majority of these affiliates are in Asia, followed by Latin America and the Caribbean. The trade among these transnationals represents almost a third of all global trade.

Trade agreements = straightjackets

Trade agreements are an essential piece in globalization’s social and economic technology, because they reduce barriers to the free circulation of goods and capital, regulating the exchanges. Like any technology, trade agreements are designed to last, to make it difficult to renegotiate or ignore them.

One historical example: many problems are still caused by the Treaty of Utrecht, a political agreement signed in 1713. This treaty’s first clause says: “The Catholic King through himself, his heirs and successors, cedes by this Treaty to the Crown of Great Britain the full and entire ownership of the city and castle of Gibraltar, together with the port, defenses and fort that belong to it, giving it the said property absolutely to have and enjoy with full right and forever, without any exception or impediment.” Although neither the controversy nor the diplomatic skirmishes have died down over the centuries, Gibraltar, which is geographically part of Spain, continues to belong politically to the British Crown.

Treaties create obligations not only for the government that signs them, but for all governments that follow in the footsteps of the signing government. They bind the governments, and obviously their peoples, in genuine straightjackets. This explains, for example, why there is still strong resentment over the Uruguay Round of negotiations that concluded in 1992 and created the World Trade Organization (WTO). In crude terms, the poorest countries were had by the wealth countries, mainly the United States, Europe, Japan and Canada, which achieved two objectives: to continue supporting their farmers with over US$300 billion in subsidies annually and limit their garment and textile imports for ten years. At the same time, the poor countries acquired the obligation to begin opening up their national markets. Everyone, poor or rich, knew that agricultural products and the production of textiles and clothing are precisely the categories that give most of the developing countries their “comparative advantage” in international trade. Despite this, the Uruguay Round closed the wealthy countries’ markets to the poor while at the same time obliging them to compete with the subsidized agricultural production of their developed counterparts.

These are two examples separated by nearly three centuries. Both demonstrate how important it is for countries to defend themselves from pressure to sign agreements that are not in their interests.

Bilateral agreements: Playing it safe

The WTO’s recent ministerial meetings—Seattle 1999, Doha 2001, Cancún 2003, even the WTO General Council meeting in Geneva in August 2004—have witnessed constant arm-twisting of the poor countries by the wealthy ones, as well as resistance by many countries and by alliances of developing countries.

At the close of Cancún 2003, US chief negotiator Robert Zoellick declared in his last press conference that from then on his country would prioritize bilateral and regional negotiations. He explained that the US strategy had been to push forward the global liberalization of trade through the WTO on the assumption that others would have the same goal. “The message we have received in Cancún,” he acknowledged, “is ‘Not now.’” But despite that opposition, the US trade strategy predicted progress on numerous fronts: “Right now we have free trade agreements with six countries and are negotiating free trade agreements with another fourteen.”

Many participants perceived that declaration as a threat. It was a reaction to the situation the United States was facing in the international negotiations, in which its power was being reduced by alliances of the small countries—as had happened in Cancún—and by the giants of the developing world: China, India, Brazil and, to some degree, South Africa. In contrast, as Zoellick announced, the United States would play it safe, sure of victory in bilateral and regional negotiations.

An example of the influence of these countries in multilateral negotiations is the text on agriculture agreed to in early August 2004 in the WTO General Council, which addressed the controversial issue of the developed world’s subsidies, proposing that they be progressively cut back until they disappeared altogether. That proposal, which had already been rejected by the wealthy countries in Cancún, reflects the impact of what is called the Group of 20—all of them countries of the south—which also got two of its members—Brazil and India—included in the group of 5, together with the United States, the European Union and Australia. The G5 emerged as the main informal negotiating group during the Geneva meeting.

In an ideal world...

It is important to point out that such relevant issues as investment, competition and public contracting, currently excluded from negotiations in the WTO, are routinely included in the bilateral and regional negotiations carried out by the United States and the European Union. They are also present in the texts on the Free Trade Area of the Americas (FTAA) and Cotonou, the negotiation underway between the European Union and the ACP group countries (Africa, Caribbean, Pacific). And, of course, they form part of the North American Free Trade Agreement (NAFTA) among the United States, Canada and Mexico. The Central American Free Trade Agreement (CAFTA), later joined by the Dominican Republic, includes investment and public contracting, but does not have a chapter on competition.

It is impossible to discuss international trade or free trade agreements without considering other aspects of the economy. In an ideal world, each country should already have its own development strategy and a national strategy to eradicate it’s population’s poverty before embarking on negotiations to free up its trade. This would naturally include a trade strategy for both imports and exports. Key elements when it comes to drawing up such strategies include the quality of national leadership and the population’s participation in consultations about how to assume them and put them into practice.

But we know that this scenario only exists in an ideal world. In the opinion of the British economist Razeen Sally: “The fact that participation is so weak in the WTO’s international negotiations is a reflection and an extension of the lack of participation in national policy formulation.”

Prohibiting today what they did yesterday

Many economists seem to believe that the trade rules and other disciplines frequently imposed by the World Bank as part of its reform packages linked to foreign debt reduction or to conceding new loans are beneficial to developing countries because they keep the government from falling into the hands of private economic interests that are not in line with the common good. They also believe that the straightjacketing of the countries by the free trade agreements is positive because it prevents them from returning to the “bad habits” of the past.

Independent of the good or bad faith of these beliefs and many others that paint the free trade agreements in the best colors, the political objective of these agreements is clear. By remaining in effect even when the political circumstances change, they will prevent any governments that have different economic policies than the World Bank from implementing them, because their hands will already tied when they come to power.

We know that many countries achieved development in the recent past with economic measures now proscribed by the WTO and by the trade agreement straightjackets. Economic historians such as Ha-Joon Chang recall that now developed countries—the United States, United Kingdom, France, Germany, South Korea, Japan—employed those very measures. They protected their emerging industries, imposed stringent conditions on foreign investors, refused to protect the intellectual property of foreigners and subsidized their own national producers. But despite doing all that yesterday, those countries are today in the vanguard of promoting the worldwide liberalization of the markets.

Mexico: A case that must be studied

NAFTA, signed by Mexico, the United States and Canada in 1992, is the first free trade agreement reached between countries with unequal economies. It is important to study its effects, because they show what a relatively less developed country—Mexico—can expect from an agreement with such a powerful neighbor. To start with, it is worth noting that Mexico’s economy had already begun to open up in the first years of the eighties, thus moving away from the import substitution policy that characterized the previous economic model. In this regard, NAFTA was more a continuation of a process that had started years earlier than a new and radical change.

The attention of NAFTA critics focuses mainly on agriculture, the sector in which its most negative effects have been felt. And within agriculture it looks mainly at the production of maize—an essential food for Mexicans—because NAFTA opened the doors to the import of corn from the United States, where the farmers who grow it receive multi-million dollar subsidies and other government supports. According to OXFAM UK, after NAFTA went into effect, the price of maize in Mexico fell 70% between 1994 and 2001. The number of farm jobs dropped as well: from 8.1 million in 1993 to 6.8 million in 2002. Many of those who found themselves without work were small-scale maize growers.

Maize: The law of the funnel

If small-scale Mexican growers have suffered the consequences of NAFTA it wasn’t because the text of the treaty left them unprotected. In fact, President Carlos Salinas was able to get NAFTA approved because, among other things, his government negotiated a certain level of protection for Mexican maize growers. The treaty allowed Mexico to impose a duty on maize imports exceeding 2.5 million tons annually that would slowly be reduced to zero by 2008. Nonetheless, alleging problems of internal supply, the Mexican government granted import licenses every year that increasingly exceeded that limit. In 2003, for example, the quota of maize that could be imported duty free was 3.3 million tons, but the government granted licenses for 3.8 million additional tons, with a 1.2% duty for yellow maize and 2-3% for white.

Maize production increased in Mexico when NAFTA went into effect. The United States exported yellow maize to Mexico, which is used to feed cattle and chickens, and almost all the white maize, which is used for human consumption, was grown in Mexico. But recent reports indicate that US exports of white maize are growing to the point that 20% of US maize exports are now white maize. In addition, the division between white maize for human consumption and yellow maize for animal consumption is no longer so clear. In fact, a substantial proportion of yellow maize has been pulled aside to make maize flour for human consumption, sparking complaints by Mexicans about the poor quality of the maize flour in the market now.

The enormous impact of NAFTA on Mexican maize producers is not a consequence of free trade, as understood by economists. It is the consequence of a distortion of free trade: millions in subsidies and genuinely free access for some and nothing at all for others. Hence the law of the funnel: the wide cup for some and the narrow stem for others. According to calculations presented in Cancún, the price in Mexico of maize imported from the United States in 1999 and 2000 was 30% below Mexico’s production costs, which is explained less by first-world efficiency than by the subsidies.

Realities, risks and dangers

Mexico is not an exception. Jamaica’s milk producers have been eliminated from any competition by the subsidies that the European Union grants to its powdered milk exporters. In Benin, Chad, Burkina Faso and Mali, four of the world’s poorest countries, the means of existence for 10 million cotton growers are threatened by the privileges granted to 25,000 US cotton growers who receive US$4-6 million each year in government subsidies.

The relationship between development and agricultural commerce is one of the most complex economic problems. To deal with it, we must not forget this reality: the majority of the world’s poor still live in the countryside and earn their living from agriculture, sometimes barely surviving. And although globalization and the relatively free trade have created jobs for many of these poor, most of them women, in the maquiladoras and other urban jobs, it is difficult to see these solutions as a viable alternative for the dozens of millions of peasants threatened today by the consequences of “free” trade. The only alternative for small-scale Mexican growers is to risk their lives by migrating as undocumented workers to the United States or to go to the city to seek work in the informal sector and live in some rickety shack in an impoverished suburb.

Other problems just add to these human tragedies. Industrial agriculture oriented to the demand from markets with a greater capacity is displacing the peasants, but over time this is not environmentally sustainable. The massive use of fertilizers and pesticides and the huge concentrations of cattle feeding on imported grains are creating serious contamination in rivers and water sources.

The destruction of peasant agriculture could also destroy our planet’s biodiversity. The crisis that NAFTA has caused in maize and in Mexico is a warning to us all: the few varieties of maize that are commercially profitable for industrial agriculture are pushing out the hundreds of varieties cultivated for millennia in Mexico, one of the cradles of our planet’s biodiversity.

Coffee and cacao: The error of generalizing

Those who defend free trade argue that we have not yet experienced it in all its glory and have only had partially free trade and incomplete trade agreements. Is that true?

Free trade has existed for some time for a number of primary products such as coffee and cacao. But this freedom is not benefiting the majority of countries that produce these two products. An increasing number of countries are being tempted or encouraged to use their “comparative advantages”—suitable climate and cheap labor force—to cultivate these two primary crops. The world production of coffee doubled in the past thirty years, from 3.5 million tons in 1970 to 7 million in 2000. The production of coffee in Vietnam alone grew from 5,000 tons in 1981 to 600,000 in 2001. As a result, the price of coffee today is 25% lower than in 1960.

Coffee, like other basic products, does not have elasticity of demand with respect to its price. Coffee drinkers do not increase their consumption when the price drops or their personal income increases. In this situation, what could be a good strategy for one country becomes a bad one when adopted by many. It is what is known as the “error of generalizing,” or the “fallacy of composition.” Excluding petroleum, cacao, coffee, tea, cotton and tobacco represented 42% of the primary products exported from the less developed countries in 1997-99. All the countries that exported these products suffered the consequences of the “error of generalizing.”

A study done in Nicaragua by the World Bank demonstrated that, while the poverty level of diversified agricultural producers fell 6% between 1998 and 2001, it increased 2% among those who continued growing coffee. In those same years, while the primary school enrollment rate rose 10% on average among rural families, it dropped 5% among coffee-growing families.

Equitable competition in a
world dominated by a handful?

The situation is no better in the textile and electronics assembly plants that employ massive numbers of workers in poor countries. Although these products have not seen their prices drop as drastically as agricultural products and are not so exposed to low elasticity of demand, competition is currently so intense that the income margins left to the countries where maquiladoras from both sectors have set up is shrinking significantly.

The textile and electronics maquiladoras are also threatened by another error of generalizing. Some have seen the textile industry as a first rung on the ladder to industrialization, following the example of several Asian countries. But now, according to UNCTAD, the countries that have specialized in the garment industry are seeing this path blocked because more and more countries are lending themselves to the business of assembling clothes with their massive unskilled work force.

For genuinely free trade to function, equitable competition is needed, but many world markets are dominated by a handful of companies, and although regulations on competition may exist nationally, there is still no international framework to control market domination. The international coffee trade is controlled by four companies: Nestlé, Procter and Gamble, Sara Lee and Kraft, which among them buy 50% of the world’s coffee bean production. Meanwhile, just five companies—Cargill, Continental, Louis Dreyfus, André and Bunge—dominate the world food trade. It was estimated that these companies already controlled 85-90% of the world seed trade in 1986.

Corporations move the levers of power

In an article on pharmaceutical corporations, British newspaper The Guardian noted that while there was a time when they were equal in size in all countries, two years of mergers have left them gigantic and reaching beyond entire continents. The combined value of the world’s five largest pharmaceutical companies is double the GDP of all the countries in Sub-Saharan Africa. Such wealth gives them enormous influence on the rules of world trade; they directly move the levers of power of the wealthy countries.

In the eighties, for example, the pharmaceutical industry worked intensely on the GATT’s Uruguay Round to determine the rules on intellectual property. As a result, the WTO’s intellectual property rules grant 20 years of patent protection, which can be extended to 30 years or even more by making use of certain legal loopholes. A former president of the pharmaceutical giant Pfizer—the largest in the world—celebrated the influence of his company and others—including the pharmaceutical companies Merck, Johnson & Johnson and Bristol-Myers, together with IBM, Hewlett Packard, General Motors, General Electric, Rockwell International, Du Pont, Monsanto and Warner Communications—on the US patent negotiators in the Uruguay Round. In 2002, the combined sales of the 10 largest pharmaceutical companies in the world totaled more than US$183 billion, representing 45.8% of world medicine sales.

No international law is yet on the books to regulate competition. The United Nations Center for Transnational Corporations was dismantled in 1993 and the work it did on drawing up a code of conduct for transnationals was suspended. Although national norms of competition exist in some countries to prevent anyone from controlling an entire national market, there is no international rule to prevent a single company dominating the market in several countries, or even the entire world.

Information plus economic literacy

Given these realities, can globalization and free trade agreements work on behalf of the poor? If the answer is no, we will witness the increasing concentration of wealth and economic power in our world and the growing marginalization and exclusion of the poor from all countries and possibly even entire countries from the benefits of globalization. This is already happening in some African countries. To ensure that globalization benefits not only those with greater economic power, all sectors need to be able to participate and influence economic policy and the negotiation of free trade agreements. This is already being said, but it is not being done. What steps have to be taken to ensure that the words turn into reality?

It is essential that the population be well informed. Let’s look at the Bolivian example. In the eighties, Bolivia signed crucial free trade agreements with Chile, Peru, the Andean Community and Mercosur. The foreign relations minister who negotiated the agreement with Mercosur confirmed that the peasants in Bolivia weren’t even aware that the government was negotiating something. But the big soy producers in eastern Bolivia did know. And thanks to their pressures, longer adjustment periods were established for their soy products: beans, flour and oil. In a meeting I had with the minister in October 2000, he told me he hadn’t received a single representative from the peasant producers.

But information is not enough in itself. It has to be accompanied by the possibility and the capacity to receive and use it. Capacity building and “economic literacy training” are indispensable if those who will be affected by the free trade agreements are to understand what the probable impacts will be and propose their own alternatives.

Participating is no easy task

It is essential for those who are going to be affected by the agreements to be able to participate in the discussion of their content. Let’s look at the example of Uganda. In 1999, the Ugandan trade minister established the Inter-Institutional Commerce Committee, a forum in which interested groups could discuss the problems. Various civil society organizations began participating in the committee, together with representatives from governmental ministries and institutions and from the private sector.

A significant element is that the civil society organizations not only debate the trade policy but also have representation in other arenas—the Agricultural Modernization Plan, the Poverty Eradication Plan, the Participatory Poverty Monitoring Project—and in the World Bank Consultative Group meetings. A representative of civil society has also participated in the government delegations to the WTO ministerial meetings. Those members of Ugandan civil society that have reached this level of participation recognize that their work is anything but easy: “Gaining credibility takes time, intense work and a lot of sacrifice. Our opinions must be backed by relevant research and good analysis.”

This level of participation requires government openness toward civil society, but even when formal arenas for it exist in a country, which is often the case, they don’t ensure anything because they don’t eliminate conflicts among different groups with contradictory interests. For all that, they are a first step. The voices of the poor are beginning to be heard, albeit mediated by NGOs and networks.. The dynamic of either the solution or the intensification of the conflicts among sectors or interests will be determined by the history of each national society and the strength or weakness of its institutions.

If international trade has to be part of a broader development strategy, civil society must participate in the institutions and forums that formulate development proposals. Nonetheless, the reality has been precisely the opposite: in many countries the development strategies have had to be adapted to the demands and rules of the free trade agreements.

Maneuvering room is indispensable

It is essential for developing countries to have arenas and room in which to formulate policies that ensure that their national priorities and options will not be conditioned by the trade agreement straightjackets.

In a meeting on these issues held in São Paulo in May 2004, UNCTAD addressed this sore point when it noted: “In carrying their development processes forward, the developed countries have historically enjoyed, and even enjoy today, ample room to formulate policies related to their own development strategies. This maneuvering room acquires importance over time in enabling them to achieve development and to safeguard public interest in many arenas: job creation; technology transfer; the development of national industries and businesses; facilitation of infrastructure services and basic services; protection of cultural diversity, patrimony, traditional knowledge and the environment; improved social conditions; equal opportunities; and the orientation of foreign investment to satisfy national priorities, eradicate poverty and foster gender equity.”

Strength in numbers

It is essential to forge alliances both among each country’s organizations and civil society groups and among different countries. If the civil society organizations can present a common platform of proposals when dialoguing with the government, they will have a greater possibility of asserting it. The same thing happens when small countries participate in international negotiations as a bloc and not separately.

They can’t achieve much if they go up against the United States, the European Union or Japan alone, but together they can get further. Alliances such as the Group of 20 or the Group of 90 within the WTO have made positive progress. It must be recognized that the countries that made most ground in the WTO negotiation in Geneva in August 2004 were the “heavyweights” among the developing countries—China, India, Brazil and South Africa—but their achievements also benefited the “flyweights.” The Geneva text contains changes that favor the positions of all developing countries compared to what was under discussion in the failed Cancún meeting.

Pending challenges

Civil society’s participation in the formulation of economic policies was officially recognized by the World Bank and the donor countries when they imposed consultations with civil society as a condition for writing off a country’s foreign debt in the Initiative for Highly Indebted Poor Countries (HIPC). The premise of these consultations—and that of so many other forums, round tables and participatory workshops—is that all participants have the common goal of eradicating poverty. But that is an erroneous if not disingenuous assumption, predicated on the misbelief that there is no conflict of interests among the diverse sectors that participate in the consultations and round tables. HIPC is a product “made in Washington, London and Paris” which at best is ignorant of the political realities of societies as divided as those in the South, such as those of Central America.

The challenges are many: ensuring that the voice of the poor is heard; that the origins, causes and consequences of the national conflicts between rich and poor are understood and that a real option can be provided for the poor. Are these utopian? They are simply pending.

George Gelber is the public policy director of the Catholic Agency for Overseas Development (CAFOD), the English and Welsh arm of Caritas International, a worldwide network of Catholic relief and development organizations.

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