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Free Trade Agenda in 2009

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The export of the globalization psychology with its promise to improve the living standards of millions of people in the developing world during the 1990s and 2000s was a precursor to the global crisis we are experiencing now, in 2009.

Globalization psychology can be defined as an approach to global market integration that uses free trade and regulatory harmonization as a basis and is coupled with financial sector deregulation across national boundaries. It encompasses both the globalization of sources of supply with cross-boundary supply chains and the globalization of consumer markets.

Although the positive effects of free trade have been demonstrated, there have also been some unintended consequences. High worldwide inflation, off-the-charts prices for oil, and food shortages and riots in many developing countries are just a few of the maladies affecting modern global society. Security from threats stemming from political unrest and illegal migration are themes that are dominating most developed country public policy agendas. At the same time, the real effects of global warming are being felt across the planet through increased tornado activity, more frequent and more powerful cyclones and hurricanes, floods, and erratic weather patterns. The extent to which human activity contributes to global climate change is still under debate; but it cannot be contested that the rapid globalization of the 1990s/2000s led to greater and greater levels of petroleum product and natural resource use. This has exacerbated the already fragile balance between the human socio/political systems and the environmental and energy systems.

The convergence of disruptions in these social/political and environmental systems has been called by Thomas Friedman the beginning of the “Great Disruption” in a March 8, 2009 New York Times editorial.

It is evident that we are moving towards a period of greater conflict between the ‘haves’ and the ‘have-nots’ of the world. Globally, it has been shown that, despite all the promising rhetoric of the globalization advocates, and despite the actual, verifiable improvements in the living standards of millions, there has been a negative change in income distribution across the world population since the onset of globalization. Here are some startling facts from the 2007 Human Development Report of the United Nations:

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  • About 0.13% of the world’s population controlled 25% of the world’s resources in 2004
  • About 20% of the world’s population consumes 86% of the world’s goods while 80% of humanity consumes the remaining 14%.
  • About 50% of the population of the world lives on less than $2 a day as measured by purchasing power parity (PPP).

Indeed, as some have claimed, the unregulated, free-wheeling nature of global companies operating in the 1990s/2000s has contributed to what can be called the AIG-effect. That is where the norms and expectations of financial reward by top management appear to have no basis in reality or any cognizance of the impact of their actions on their subordinates or broader populace around them. If we extend this analogy to the global context we can say that the top 20% of the world population that consumes 86% of the world’s resources has little understanding of the impact of their actions on the other people around the world.

This is not to say that globalization is not a noble and laudable goal; indeed it is through this world-wide business/technology and economic transformation that the most important improvements to the quality of life and health and welfare have been made. What is globalization anyway but improved transportation and communications networks and reduced restrictions of the flow of capital and goods? And, it works for spreading the wealth of nations, as was so eloquently pointed out by Martin Wolf in his 2005 book Why Globalization Works. Wolf argues that a market economy is the only arrangement capable of generating “sustained increases in prosperity, providing the underpinnings of stable liberal democracies, and giving individual human beings the opportunity to seek what they desire in life.” Furthermore, he concludes that individual nations should remain the locus of political debate and legitimacy and those multilateral institutions, like the World Trade Organization (WTO), should draw their authority from the consensus of the nation-states.

But, even so, when the technological advances that led us to globalization are coupled with the growth rates in many developing countries, and the effects of the increased demand for petrochemical products are factored in, it becomes obvious to thinking people that there are now many unintended consequences of this global movement. Jonathon Porritt argues very effectively in his 2007 book Capitalism as if the World Matters that this is due to our failure to see that the human, social and economic systems that have led to the massive technology and wealth transfer known as globalization are simply subsystems of a larger thermodynamic earth system that has limits to growth. And, the unintended consequences of these human derived subsystems seem to be catching up with us at about the same time as the physical processes that regulate our planet’s weather patterns. He points out that a Five Capitals Framework that accounts for natural, human, social, manufacturing and financial factors should form the basis of our path forward.

With this, there is hope. That is, if our governments have the wherewithal to expand beyond the current rhetoric and status quo conditions to incorporate this broader vision. And, with conscious action on the part of the voters, citizens and consumers of the world, we may achieve it. There are economic possibilities that can help to ameliorate some of the suffering that is increasing at an accelerating rate. These economic possibilities are beautifully set forth by Jeffrey Sachs in his 2005 book The End of Poverty: Economic Possibilities for Our Time. In this book Sachs lays out guidelines for ending global poverty and sees this as the great opportunity of our time to advance the Enlightenment objectives of democracy, global security, and the advance of science. And, in addition to the individual and collective actions advocated by Sachs to improve the living conditions of millions of people around the world, there are public policy changes that can be implemented to further accelerate the effects.

These changes are best pointed out by Joseph Stiglitz in his 2006 book Making Globalization Work. Importantly, Stiglitz argues that the key to successful global trade liberalization lies in the approaches that multilateral institutions and individual countries take to ground trade in principles of fairness. This point underscores my underlying premise that is based on international trade as the engine that is fueling globalization and with it, the increases in human welfare we have witnessed over the past few decades. But a second part of my premise lies in the simple fact that the economics of globalization must be grounded in the physical and thermodynamic truth of the limits to growth.

The above cited arguments of the reform globalization advocates, no matter how sound, were, nonetheless, made prior to the onset of the rapid rise in crude oil prices, the failure of the world credit and banking systems, and the global plunge in the stock markets that have so shocked today’s world economy. In fact, to some extent, they predicted this outcome.

Now, that the world is undergoing this transformation, it is of such significance that the entire fabric of modern human society is threatened. The delusion of unlimited growth is being questioned by millions of developed world citizens and consumers as they scramble to pay their mortgages, put gas in their cars, and, at the same time, keep food on their tables. In the emerging markets and developing countries, it is much more dire as the populations of internally displaced persons, emigrants and immigrants continue to grow from natural disasters, resource shortages, and political upheaval.

The capitalist consumer is either being transformed into a desperate survivor or a responsible citizen through the day-to-day struggles of this rapid economic transformation. This situation is, indeed, the natural outcome of the depletion of global oil reserves and was forecast as early as 1956 by geophysicist M. King Hubbert and presented so forcefully by Paul Roberts in his 2004 book End of Oil. Our societal failure has been our inability to mobilize the political will and resources needed to adequately plan for this natural outcome through energy diversification.

It is the actions of the responsible citizens of the world that will help us avoid such collective delusions in the future. But, as Mort Rosenblum argues in his 2007 book Escaping Plato’s Cave, it is in part, America’s blindness to the conditions in the rest of the world that is threatening our very survival. America’s citizens happen to make up a good part of that 20% consuming 86% of the world’s resources. His solution for Americans is to quit gazing at the shadows on the wall and turn around to cast our eyes on the reality of the moment. If we can do this, there is hope.

But, with the world in desperate straits, it seems unlikely that the U.S. should be launching new initiatives like some of the programs in the ‘stimulus’ package recently passed by the U.S. Congress and signed into law by President Obama. Indeed many European countries are refraining from using deficit spending as a tool for stimulating their own economies and they are questioning the wisdom of our approach to doing this.

Furthermore, with so many Americans out of work, there is little support for programs that are aimed at shifting resources from the developed world to the emerging markets. On the contrary, a strong protectionist mentality has, in some circles, taken hold of the American psyche and threatens to take us back to an 18th century mercantilist mentality. This tendency must be strongly countered by the rational arguments for free and fair trade and continued trade liberalization.

It is our leadership in advancing free trade that, in the past, led the U.S. to become the leader of the free world. It is our approach to establishing free markets which has, in turn, improved the welfare of millions of people around the world. And, at the end of the day, within the current geopolitical context, it could help us to counteract this short-sighted, protectionist reactionism. Herein lays the key to our path forward.

What I am alluding to when I refer to the ‘hope’ of our time is this: We have the opportunity to take an entirely different approach to our economic and trade agenda. Let us recognize that our underlying assumptions of unlimited growth were not comprehensive enough to take into account the thermodynamic and limits to growth realities of our natural systems. Let us recognize that free trade as defined by classical microeconomic theory (i.e., based on perfect markets, perfect information, unlimited resources, mobility of labor, etc.) does not exist in this idealized form. Therefore, it is unwise for us to base our public policy on a theoretical framework that is elegant, but not reflective of reality. Let us recognize that we need to substitute this outmoded model with an updated, more workable framework. But in this recognition, it is important that we refrain from casting back to a time when mercantilism was the norm and trade protectionism was the battle cry.

The guiding vision that should instruct our national commercial public policies in this day and age should be based on a more integrated model that reflects all of the Five Capitals outlined in Jonathan Porritt’s framework. To reiterate, these are:

  1. Natural Capital
  2. Human Capital
  3. Social Capital
  4. Manufacturing Capital
  5. Financial Capital

With this kind of a guidepost, our actions can once again help us to lead the free world toward positive outcomes, and a free trade agenda that truly works. That is: a free trade agenda that reflects the needs of our time, a free trade agenda that is fair, and a free trade agenda that recognizes the natural limits to growth.