Trade and the Great Recession

The Trade Deficit is among the rarely discussed causes of the Great Recession; yet, to this observer, it is the primary cause.  The Deficit plummeted further as deregulated banks peddled bad debt and allowed homeowners to use homes as ATM machines.  Everything was done to keep the consumer on a buying spree, buying more and more imports, while manufacturing shrank and exports dwindled. These imports, ironically enough, were products of American and Western multinationals now exporting goods from third world countries.

No wonder income inequality soared; the real winners of trade policy and the subsequent buying spree were the top echelons of the multinationals.  Those who insist that CEO billionaires share the wealth with American workers should understand that American workers often had little to do with making the products the multinationals were peddling.

A plummeting trade deficit revealed the profound flaws in a poorly conceived and foolishly implemented plan to globalize the world economy.  Globalization failed.   The proponents of globalization are now strangely silent, preferring to discuss other topics.

The question is: What went wrong with American Trade Policy?

Trade Data 1960-2012X


To understand what has happened, we should look at the structure and policies of the WTO. (The policies of the WTO were operative before the official creation of the WTO. The creation of the WTO merely cemented those policies into the structure of the WTO.) Curiously enough, we now have one body, designed primarily for capital and business, whose job is to oversee world trade. I would suggest that those policies led to the Great Depression and will insure a continued distortion in the growth of globalization.

The WTO is aware of the criticism now being directed its way. Below, the WTO itself clearly phrases the controversy.

Four broad questions have been raised inside and outside the WTO.

  • The analytical question: if a country has lower standards for labour rights, do its exports gain an unfair advantage? Would this force all countries to lower their standards (the “race to the bottom”)?
  • The response question: if there is a “race to the bottom”, should countries only trade with those that have similar labour standards?
  • The question of rules: Should WTO rules explicitly allow governments to take trade action as a means of putting pressure on other countries to comply?
  • The institutional question: is the WTO the proper place to discuss and set rules on labour — or to enforce them, including those of the ILO?

Of course, the WTO answers all these questions in terms favorable to capital, not labour–or the environment. The WTO was structured by capital and for capital, with the sanction of well-paid politicians, both Democratic and Republican.

While the WTO is against child labour and slavery, pretty much everything else is permissible. The WTO and its supporters leave it to the International Labour Organization to handle the other stuff: Right to bargain freely, for example, or prohibition on sweat shops. But the ILO is a toothless body, at the beck and call of local and national governments. Dictators serve the WTO well. And, of course, the WTO pays no attention to despoiling the environment. Again, dictators and this form of laissez-faire capitalism serves business well.

But let’s clearly spell out the answers to each of the points above.

The Analytic Question: Do lower labour standards provide an unfair advantage to exports? Of course they do. And what we see now are the slow attrition of labour rights in the U.S. We are witnessing the “race to the bottom.” Globalization as so structured treads a dangerous path.

The Response Question: Should countries trade only with countries sharing the same labour standards? This question should not be framed as either/or. It is a false choice. If globalization is to work properly and globalization is to avoid a growing inequality in wealth, then labour everywhere must enjoy meaningful rights: safe working conditions, right to organize and bargain…. Right now, the WTO ignores unequal labour standards. I do not belittle the complexity of trade beween countries that are at differing levels of development or at differing labour standards. Instead of simply ignoring those differences, we should recognize them and start to deal with them intelligently. Otherwise, we have structured globalization as a monster whose growth will endanger us all. Witness the Great Recession. And, I suspect, more is to come.

The Question of Rules Should countries allow governments to take trade action as a means of putting pressure on other countries to comply? Right now, because the WTO has placed labour in such a weak position, I would say, “Yes.” Until the WTO is either abolished or reframed, I think some countries have no other option. What to do about manipulation of currency, for example? In the long run, I do not think the world will have any other choice, as the Great Recession drags on and on and as income inequality becomes monstrously absurd.

The Institutional Question:Is the WTO the proper place to discuss and set rules on labour? Of course it is, silly boy. It ain’t happening anywhere else. Occasionally someone notices a sweat shop–and some multinational is shamed. Or economists complain that capital should share the pie. Get real. How are you going to make that happen?

The WTO does not address two other issues. These issues are rarely raised.

  1. The Question of Fairness:Can one country gives preferential treatment to foreign companies over its own indigenous firms? Countries do this in order to rapidly industrialize. For a number of years, China, for example, taxed foreign firms at half the rate of its own indigenous firms. As a result, companies left the states, for example, and set up shop in China. The race to the bottom had begun. In general, I would say that all companies–foreign or domestic–should share the same taxation as well as labour and environmental standards. China coupled this tax incentive with further reduced taxation on goods that were exported. We should add to this mix currency manipulation.  Mercantilism at its worse.
  2. The Question of Environmental StandardsIf a country has lower environmental standards, do its exports gain an unfair advantage? Of course they do–to say nothing of the environmental damage that is becoming of global, not merely local, concern. Pollution has a way of drifting from place to place.

Globalization has been a disaster. Few have address the root causes. Instead, band-aids are being applied: for the United States, government spending Keynesian style and Fed sequestration. And everywhere are voices demanded that debts be paid.  And who is to pay?  Not those responsible for trade policy or those who gamed the system.  No, workers must pay yet again for a failed system.  And ever-hungry wolves crowd around national carcasses, eager for basement bargain deals. Meanwhile, multinationals plead once again that their profits be repatrioted at zero costs.  Slowly but surely, we are beginning to understand just how little multinationals have actually paid in taxes.

We have not asked: What happens when the consumer dies of debt exhaustion? What happens when capital can easily seek a more profitable haven? Everytime the trade deficit closes slightly, we pop the champagne. Meanwhile, China has had to close thousands of factories. Capacity has outstripped demand. Additionaly, as price for its rapid industrialization, China has become an environmental disaster.

I do not raise these questions lightly. The answers are not easy ones. Nonetheless, events have a way of forcing answers. Unfortunately, I do not think the old system will die a painless death. It will protect itself, at almost any cost. Enormous profits are at stake–as well as economic reputations.

Regardless, we will be forced to find a more intelligent way to globalize. China and undeveloped countries cannot industrialize at lightning speed; capital cannot be allowed to move willy nilly across the globe; labour and the environment must have a place in all we do globally. We are becoming a global civilization. The pangs of that birth is not and will not be easy.

In future blogs, I will address a number of issues, all of which will aggravate the trade deficit and make globalization ever more difficult: depletion of natural resources, protection of old energy sources, the race for new ones, the growth of pollution and ecological suicide, the revolving door between government and business, and the appearance of Big Brother.  The old system will protect itself; corporate profits are not easily surrendered.  This game will play out whether we like it or not.  If you think we merely need to patch the system, take another look at the graph above.  Four years after the Great Depression and still the trade deficit is huge.  Now we argue about whether Walmart should pay higher wages.  This game has a long way to go.  Waking up is not easy. Time to step back and look at the forest, not get lost amongst the trees.

For those who wish to see Trade as a Percentage of GDP, I include the following:

trade percentage gdp 1960-2012