Trade and globalisation

Inge Røpke

The idea that free trade is good can be seen as one of the ideas that support the growth engine. However, the idea is challenged when adopting an ecological economics perspective. This section gives an example of how a different picture emerges when looking through biophysical glasses than when wearing more traditional economy glasses.

It is widely accepted that free trade is good. The most important argument is that trade provides greater potential for the division of labour and specialisation, which means that overall production will increase because resources are used in the most efficient manner. Each country can specialise in the industries for which they are best equipped and through trade gain access to a greater amount of goods than the country could have produced in isolation. The obstruction of access to larger markets by barriers may be problematic, especially in small countries because the national market may be too small to exploit economies of scale. Furthermore, an argument for free trade is that everyone is exposed to competition, which means they are forced to increase productivity.

The idea of free trade as being good for everyone has been thoroughly criticised, also from other perspectives than the biophysical. For example, the idea can be criticised for adopting a static perspective by emphasising the benefits that are connected to the division of labour and specialisation at a given point in time. In contrast, a dynamic perspective would emphasise the importance of trade for the development of a country over time. In order to complete the transition from an agricultural to industrial society, it is obviously essential to build industry. However, this may be difficult if the process is not protected from competition from more advanced countries. If predominantly raw material-producing countries are forced into free trade, they run the risk of ending up in a specialisation trap, which may be difficult to escape. Therefore, it is no surprise that the vast majority of countries that have successfully undergone industrialisation have managed to do so through protection against foreign competition. As industry becomes stronger, the country can gradually be exposed to competition, thereby increasing the pressure for efficiency. What may also be crucial for a successful industrialisation process is the regulation of the composition of imports by the state so that, for example, machines for industry receive higher priority than consumer goods, which is what Denmark did after World War II.

The process can be made difficult in many ways. For example, the industrialised countries have used a form of asymmetric trade liberalisation by refraining from imposing duties on imports of raw materials, such as cotton from developing countries, while imposing high duties or quantitative restrictions on imports of finished goods such as cotton clothing from the same countries, which therefore found it more difficult to industrialise. As another example, the EU’s state aid for its agricultural production and exports has made it difficult for some developing countries to develop their agricultural sector. At the same time, local elites in some developing countries have prioritised making themselves rich through raw material exports instead of investing in economic development.

In recent decades, some developing countries have managed to industrialise and use trade as a tool in the process. One often hears the argument that trade and globalisation have contributed to lifting 300 million Chinese people out of poverty. It is true that regulated trade (not free trade) has been an important part of industrialisation, not least in China, which needed to import advanced technology from other countries and obtained the necessary funds for the imports through the export of labour-intensive industrial goods (textiles, assembly of electronics, household utensils, tools, toys). However, from a biophysical perspective, the fact that the development process involved the population of the rich countries increasing their material consumption is problematic. Due to the very low wages in the newly-industrialised countries, many products became very cheap, which helped to promote the throw-away culture in the rich countries and that a given amount of money could mobilise a larger amount of material resources. Furthermore, in the case of many products, this meant that production resulted in more pollution because Chinese energy production was based on coal from less efficient power plants. The point of this perspective is not to argue that China and other countries should not industrialise and lift their population out of poverty, but to illustrate the absurdity that the present system only allows the process by making the rich richer and by undermining the environment. A more environmentally rational and more ethically defensible system would lift people out of poverty without increasing the consumption of those who already have so much.

The biophysical perspective includes other criticisms. For example, it is obvious to focus on the environmental aspects of transport. The strong growth in global trade is based, amongst others, on low and declining transport costs because of major efficiency improvements, especially in the form of labour-saving technology. Even though the energy consumption per transported unit has also fallen, energy consumption and pollution that result from freight transport are significant – costs which are not paid for. If the environmental costs of transportation had to be paid for, it would not be worth engaging in trade to the same extent as now. Global trade flows also hamper the circular economy for biomass. For example, exporting soy from Latin America to feed pigs in Denmark, which results in nutrients ending up in Danish watercourses, is not very rational.

Ecological economics also highlights the problematic fact that trade helps to conceal biophysical limits. On the one hand, that countries complement each other in a biophysical sense may be seen as a great advantage. When economic growth in a country encounters biophysical limits, such as a lack of soil, water, forest, minerals, energy – trade makes it possible to overcome the barriers and continue growth. On the other hand, this process means that all resources are exploited to the utmost, and that humanity approaches many biophysical limits at once. The potential to bypass the limits means that we are oblivious to the danger signals that could have served as a feedback mechanism making us change course.

So far, the discussion on trade has implied that it takes place between countries, but most trade actually occurs between companies. Nation states can regulate the framework, but today many companies are so large that they have significant influence on the framework and can play states against each other. The theory that trade is beneficial to all the countries involved is based on the assumption that production factors, such as work and capital, are tied to particular countries in the same way as raw materials. However, the increasing liberalisation of, in particular, international capital flows since the 1980s has meant that this assumption is being met less and less frequently. The large multi-national companies organise supply chains throughout the world and exploit the benefits that are associated with specific locations, and organise capital transfers in order to minimise their tax payments. Globalisation, to a great extent, challenges states’ ability to regulate product standards and environmental conditions, while undermining unions’ ability to defend labour and working conditions. In addition, companies are trying to privatise an ever- increasing number of areas, so money can be made from, for example, water supply, education and health services, which are or have been organised collectively in many countries. Current discussions on trade agreements only concern the reduction of tariffs and the elimination of quantitative restrictions to a limited extent. They are more concerned with expanding the scope of the transnational corporations, making more areas subject to privatisation, preventing states from tightening product and environmental regulation and securing earnings on intellectual property rights.

Even though the old free trade argument has been undermined by the mobility of capital, liberalists still assert that free trade is beneficial to everyone because it results in goods being as cheap as possible: they are produced where the costs are lowest, while competition constantly ensures that productivity increases by as much as possible. Whether this is actually the case in practice may be questioned, but what is more important is that high costs are excluded from the calculation: the environment suffers damage, working conditions are undermined, and the welfare states can not be financed. For the individual, that it is possible to fly cheaply with low-cost airlines may seem like a gain, but the collective costs include climate destruction, deteriorating working conditions and the dismantling of the welfare state.

The effects on distribution are complex. On the one hand, that income has risen for large groups in poor countries may be considered progress, but on the other hand, globalisation has increased inequality in many industrialised countries, especially in the United States and the UK, where the wealthiest have become richer, while the middle-class have lost ground. The fact that there have not been many protests for a long time is probably due to the combination of low prices for many product groups and the significant growth in credit, which has made it possible to maintain living standards – until the financial crisis put an end to that.

In the longer term, an ecological economics approach would suggest that the economies be more self-sustaining in the biophysical sense, so that the cycles can be more easily closed, transport reduced and the constraints made more visible. In many areas, demographic and technological development has made trade unavoidable – in some areas, enough food can only be obtained in this way, while in Denmark, for example, it is hard to imagine an economy without electronic equipment, for which we do not have the resources to manufacture. However, regulation of the environment, working conditions, capital flows and much more is necessary to ensure that trade occurs on reasonable terms and that we do not get the goods too cheaply.

Next: Distribution of use values in a society