Global Policy Forum

By Larry Elliott

George Bush did us all a favour when he slapped tariffs on imported steel. Unintentionally perhaps, he shed light on the west's dirty little secret: free trade is a myth, a confidence trick, a grand illusion. The duties were evidence that the United States, like the European Union, Japan and Canada, are avid supporters of the ideas of Adam Smith and David Ricardo, but only when it means liberalising the markets of smaller and weaker countries, not their own.

Bush's kow-towing to the lobbying power of the steel-producing states has led to the strangest alliance since Hitler and Stalin hopped into bed together in 1939, with the anti-globalisation movement hailing the president as a born-again protectionist. As with the Nazi-Soviet pact, this marriage is unlikely to last long. The idea that America will stop trying to prise open foreign markets for US goods is absurd. There is no more chance of that happening now than there was of Britain recanting in the first age of globalisation at the end of the 19th century.

Frozen out

Why? Because the way the world's trading system works has little to do with ideology and everything to do with power. The strong are only interested in free trade when it suits themselves. No question, Europe has a strong case over steel. European producers have accepted the pain of restructuring, but will now be frozen out of the US market by the decision to subsidise inefficient plants. But hang on: isn't this the same EU that operates the grand-pappy of all protectionism, the common agricultural policy, which uses colossal subsidies to keep lower-cost producers out of the European market? And, just in case you are tempted to think that the extra £15 a week we pay on our food bills is worth it to keep those Greek olive groves tended and to ensure that the goats cheese appears on those market stalls in Gascony, think again. The bulk of the subsidies are swallowed up not by small farmers but by Europe's giant agri-businesses. Moreover, it was these special interest groups - every bit as powerful as the US steel lobby - which ensured that even when Europe's trade commissioner, Pascal Lamy, took the step of proposing duty free access to the EU for all goods except arms from the world's poorest nations, full and immediate implementation was blocked by the rice, sugar and banana barons.

For all that, Lamy's initiative was at least a step in the right direction. It recognised that trade is a vital tool in spreading prosperity to poor countries, but will only be effective in doing so if the rules are changed. At the moment, the rich countries act just like the patriarchs of Victorian London, demanding the highest moral standards of their servants but slipping out after dark to debauch themselves in brothels.

The prime example of this was the Uruguay round of liberalisation, which took seven painful years to negotiate from 1986 to 1993. Those badgering poor countries to open up their markets conjured up all sorts of imaginary numbers for the benefits the global economy could expect. At first it was $200bn, then $300bn, then $500bn. Had the Uruguay round gone on for a couple more years, the numbers would surely have escalated to those children use in playground games.

"Sign up to the Uruguay round and the world will be a zillion dollars better off." Whatever the real benefits have been, one thing is for sure: few of them have been seen in Zambia or Haiti.

It was ever thus. When Britain was top dog in the 19th century, free-trade rhetoric was exploited for national advantage, only with an even greater disregard for the human consequences. The self-serving and complacent view in Britain that globalisation in the glory days of empire was benign and tolerant is exposed as a self-serving sham by Mike Davis in his masterly exposé of the famines that killed 50m people in India, China and Africa during the last quarter of the 19th century (Late Victorian Holocausts; Verso).

There was no satellite TV to capture the consequences of Lord Lytton's famine-relief scheme designed to cope with an earlier incidence of severe El Niño climatic shocks, which involved herding peasants into labour camps and working them to death on rations even more meagre than provided by the Nazis in Buchenwald.

Davis's book provides a terrible warning of what can happen if rich and powerful countries use an adulterated form of free-market ideology to suit their own ends. What then is to be done? Western governments would argue that they have benefited from trade, and they are right. Countries that have been integrated into the global economy over the past 50 years have performed considerably better than those that have followed an autarkic route.

The alternative to an economic system that involves trade is not bucolic simplicity and hardy self-sufficiency, but extreme poverty. South Korea has plenty of problems, but not nearly so many as its neighbour to the north.

Where the west is wrong is in its insistence that poor countries open themselves up immediately to the full blast of global competition. The World Bank and the IMF have made opening up markets in poor countries a condition for loans, confident in the belief that this will lead to greater efficiency, higher growth and less poverty. They say that those countries which have given up on protectionism and become more export-driven have grown much faster than those nations that have maintained barriers to trade. But this argument needs to be stood on its head.

Tariff barriers

Successful countries develop industrial strength before they fully open up their markets. This is what America did. As Oxfam noted in its report last week*, if the founding fathers had listened to Adam Smith they would still be tilling the fields, leaving manufacturing to Britain. Instead, the US industrialised in the 19th century behind hefty tariff barriers. "I don't know much about the tariff," said Abraham Lincoln, "but I do know if I buy a coat in America, I have a coat and America has the money."

America's route was followed by Germany, Japan and the Asian tigers. "Most economies in east Asia did not start to liberalise imports until export growth was well established," Oxfam says. "In China, domestic marketing reforms generated the initial wave of economic growth, which exports helped to accelerate. Earlier, Taiwan and Korea developed behind import barriers. 'Free trade' was not a major feature of east Asia's success, but exports played a critical role in sustaining economic growth."

The Oxfam report has been condemned as an unconditional surrender to neo-liberalism. It is no such thing. Rather, it is an attempt, squarely in the Keynesian tradition, to show that trade can be made to work for the poor.

Not on its own, of course. East Asia's economic miracle was also based on high levels of saving and crash programmes of mass education. In many cases, poor countries need to purge themselves of corruption, and recognise the difference between helpful and unhelpful protectionism. It makes little sense, as Oxfam notes, for countries suffering from epidemics of malaria to put tariffs on imported mosquito nets.

That said, western protectionism is a bigger problem. At the moment, when developing countries try to export into the world's richest markets, they face tariff barriers four times as high as those encountered by other rich countries.

Trade restrictions cost poor nations $100bn a year - twice as much as they receive in aid. A 1% increase in export share for each developing region would reduce poverty by 12%, with the biggest reductions in sub-Saharan Africa. Oxfam says that as a global community, "we sink or swim together".

We ignore the scandalous unfairness of world trade at our peril.

* Rigged Rules and Double Standards; Oxfam

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