The Cost of Free Trade : The WTO Regime and The Indian Economy

Feb 20th 2000, Utsa Patnaik

(The First E M S NAMBOODIRIPAD MEMORIAL LECTURE delivered on February 16 2000 by UTSA PATNAIK Centre For Economic Studies and Planning, J N U Draft, not to be quoted until published)

It is indeed a privilege to have been asked to deliver the E M S Namboodiripad memorial lecture and I thank the organisers for it. Two years ago, after EMS (as he was referred to affectionately by everybody) passed away in March 1998, there was a memorial seminar held in June at Perintalamana in Malabar, the town which is within a short distance of EMS's ancestral home. I read a paper on this occasion, which was specifically on EMSs writings on the agrarian question - in particular how his famous Minute of Dissent to Commission  Malabar Tenancy Reforms, was informed by the Marxist theory of ground rent. This has been published in a recent issue of Social Scientist.[1] In that paper the concern was with the contradiction within the agrarian economy between those who monopolise landed property and those who derive a livelihood from the land.
In today's lecture I propose to talk about another very important contradiction which is fast maturing - that initiated by the liberalised trade and investment regime under the earlier loan-conditional structural adjustment programmes from the late 70's as applied to the developing nations, and strengthened further with the current WTO discipline imposed after the signing of GATT in 1994. All of this, I would proceed to argue, is part of a new onslaught by the advanced capitalist countries (following their own economic interests), on the third world countries' attempts to follow growth trajectories best serving their peoples' development and welfare. In talking of this emerging new contradiction I would like first to discuss briefly the historical experience of trade-liberalized regimes, and refer to the theoretical underpinnings of analysis relating to these trade liberalized systems. Then we will discuss, again briefly, at the costs paid by the other developing countries which in the last two decades have followed a liberal trade and investment regime and finally look at the specific results and future implications for the Indian economy of the current 'free trade' regime.
It is often accepted as an unquestioned truism by economists, including economists from developing ex-colonized countries, that the freest possible international trade, is necessarily a good thing for everyone participating in that trade. For over two centuries now the ideology of free trade has been so thoroughly dinned into the heads of students, via the textbooks and in today's world also via the conventional wisdom filtering through the print and electronic media, that any systematic alternative viewpoint which stresses the costs of 'free trade' is hardly  ever encountered. The ideology of free trade dates back to Adam Smith and David Ricardo, and it is no accident that both theorists should be from Britain and have written at a time when that country was in the process of  grasping the land and resources of other civilizations, and launching on the world's first Industrial  Revolution after creating a conducive economic environment for it by forbidding its colonies to manufacture anything and forcing them to specialize in producing the wage goods and raw materials its own industry needed. Neither theorist was English, for Smith was a Scotsman while Ricardo's forebears came originally from Spain. Yet both were the quintessential theorists of the emerging manufacturing bourgeoisie in Britain in the last quarter of the 18th century and the first quarter of the 19th century respectively. The free trade that  they advocated has been much misunderstood; it was the freeing of British trade from its own monopoly trading companies, but very much while retaining control of subjugated colonies; hence the freedom to Britain to continue to industrialize at the expense of other nations and peoples, and definitely not a general freedom for any potential rival to do likewise. Thus Adam Smith, in a passage in The Wealth of Nations which is never quoted, strongly opposed the idea of North America developing its own manufactures rather than relying on importing manufactures from Europe:
"It has been the principal cause of the rapid progress of our American colonies towards wealth and greatness that almost their whole capitals have been employed in agriculture. They have no manufactures, those household and coarser manufactures excepted which….are the work of the women and the children in every private family. The greater part both of the exportation and the coasting trade of
America is carried on by… merchants who reside in Great Britain
. Were the Americans, either by combination or by any other sort of violence, to stop the importation of European manufactures, and, by thus giving a monopoly to such of their own countrymen as could manufacture the like goods, divert any considerable part of their capital into this employment, they would retard instead of accelerating the further increase in the value of their annual produce, and would obstruct instead of promoting the progress of their country towards real wealth and  greatness." [2]
Here was the first clear articulation by a metropolitan economist, of the now familiar and self-serving argument that the colony's best interests lay in remaining an agricultural exporter, leaving the manufacturing and trade to be done by the metropolis.
These words, published in 1776 were famous last words, for after winning independence less than a decade later, from 1783 North America's European settlers went on precisely to do the opposite of Adam Smith's advice, namely they erected protective barriers against the inflow of manufactures from Britain and Europe and built up their own industry in a process of  import substitution. Because they did so the USA is today the world's leading capitalist country: had they listened to Adam Smith's version of 'free trade' it would have been at most an Argentina. As the leading capitalist and imperialist country in the world the USA follows today in turn policies to encourage its own growth at the expense of the third world's freedom to industrialize, a question I propose to discuss later.
Of course, the modern theory of international trade is associated above all with David Ricardo and is an elaboration and development of Ricardo's theory of comparative advantage[3]. The essence of the ideology of international free trade can be said to reside in this theory, for it says that specialization and trade is necessarily of mutual benefit to both parties entering into trade as long as relative cost differences in producing goods exist, even where one country may produce all goods at a lower absolute cost than does  the other. The theory has been immensely influential and has been used to explain not only the trade between countries of equal economic strength, e.g. intra-European trade, but also the pattern of international trade in which the colonies and subjugated areas came to specialize in agriculture while the European countries specialized in manufactures; and to argue that not only the colonizer but the colonized too benefited from this pattern of specialization and  trade. Comparative advantage is the reason given, for example, by Professor K N Chaudhuri in the Cambridge Economic History of India to explain why from being the world's largest exporter of cotton textiles in the pre-colonial era, India turned into an importer of cotton manufactures from Britain and an exporter of agricultural products like raw cotton, jute, opium, indigo  and so on.[4]
No argument can be more fallacious than Ricardo's theory. Why it should have been necessary to use military force to induce countries like Portugal, China or India to trade, if it was so beneficial for them, is not explained. Even more important, the theory is internally logically fallacious. A fallacy in a theory can arise either because the premise is incorrect, or because the argument is incorrect. In the case of the comparative advantage theory applied to Northern trade with warmer lands, the premise itself is incorrect. The premise is that in the pre-trade situation (assuming the standard two-country two-commodity model) both countries can produce both goods. Given this premise, then it can be shown that both the countries gain by specializing in that good which it can produce at relatively lower cost compared to the other country, and trading that good for the other good: for compared to the pre-trade situation, for a given level of consumption of one good a higher level of consumption of the other good  results in each country. This mutual benefit arising from comparative advantage, is adduced as both the reason for and the actual outcome of specialization and trade.
The reality was that the tropical or sub-tropical regions with which Britain, Netherlands France etc. initiated forced trade using military power, were bio-diverse and could, and did, produce a much larger range of goods than the N. European countries could, including tropical crops which could never be produced under field conditions in the temperate regions. In tropical regions crops can be grown all the year round and multi-cropping of the same physical unit of land is possible. Not only is the output vector much larger but it is a qualitatively  different output vector, for it contains elements which are not present in cool temperate lands at all. Moreover since it is agriculture which provides not only food for subsistence but raw materials for manufacture, fibres for clothing and traditional materials for housing, the better resource base and lower costs of subsistence in a bio-diverse tropical region led to abundant supply and lower costs of all these elements vital for the standard of life.
While Portugal which is a warm temperate land could produce both cloth and grape-based wine on a large scale, Britain could produce only cloth but not grapes under field cultivation, for the latter requires land within a mean July isotherm of at least 19 degrees Celsius or 66 degrees Fahrenheit, which no part of Britain (except  perhaps Cornwall) possessed. Similarly while India, Burma or China could produce both cotton cloth as well as raw cotton/sugarcane/ indigo/tea/jute/ rubber etc., Britain, Netherlands, Germany and France could produce only cloth and none of the other crops, and so on. The cost of production of raw cotton, indigo, tea, coffee, jute, rubber etc thus cannot even be defined for cool temperate Britain, Germany, or Canada. If absolute cost is not definable, then ipso facto relative cost is not definable. The premise of the theory does not hold, namely that both countries can produce both goods, hence the conclusion does not hold, that specialization and trade is necessarily mutually beneficial. (Certainly the country with the poorer output vector benefits by acquiring goods it cannot produce; but the country with the superior output vector does not necessarily benefit : specialisation and enforced trade can lead to very adverse welfare outcomes such as falling mass nutrition levels, as we will show below). Yet economists have continued to make logically untenable hence nonsensical statements like the following: Britain exported cloth and imported tea/indigo/cotton  from India because it had a comparative advantage in cloth production while India had a comparative advantage in the crops specified. How does one at all talk of production, or cost of production of tea and indigo in Britain? This absurd fairy tale masquerading as serious theory continues to hold sway in trade theory to this day, modified only to say - the labour-abundant country produces labour intensive (primary or simple manufactured) goods while the capital abundant country produces capital intensive (advanced manufactured) goods.
The lack of satisfaction of the basic and crucial premise  - homogeneous productive capacities across countries - in  history, itself was the positive real reason for this important segment of trade: thus adopting the  premise, amounts to assuming away the real reason for this trade. The basic motive of forced trade was for the temperate lands to gain access to tropical bio-diversity and to inexpensive manufactures like textiles of mass appeal and mass consumption which were based on using the  unique and cheap resources of these regions. In the course of the three centuries since 1700 the consumption basket and standard of living of the Northern populations has altered beyond recognition. It is based on importing goods from all over the world, the major part being goods not producible at all in the temperate lands.
While Ricardo's explanation was superficially extremely clever, he did a signal disservice to the cause of objectivity and science, by pretending in effect that all trade including forced trade, was freely chosen trade determined by technologically determined, neutral cost factors. Trade patterns which had been in reality the outcome of trade wars, genocide and political subjugation, were discussed in such a way as to ignore this historical reality of 'capitalism's blustering violence' (to use a memorable phrase first employed by Rosa Luxemburg [5]); and by focusing only on value-neutral cost factors - necessarily in a fallacious manner - Ricardo provided an intellectual justification for, and hence an apologetic for forced  trade. 'Capitalism's blustering violence' was neatly sanitized into the theory of relative costs. All subsequent mainstream trade theory has been similarly tautological and apologetic in character, and has talked of mutual gains from trade as the necessary cause and result of all observed  patterns of specialization- not simply that between countries of similar economic strength.[6] 'Factor endowments' are talked of while completely ignoring the real differences in productive capacities in the same 'factor', land, in different countries. Many generations of third world economists have been fooled into believing that somehow being involved in a particular pattern of primary sector specialization, was unavoidable in terms of pure cost-of -production logic and was to the ultimate benefit of their countries.
But why blame Ricardo  alone ? It is more than that: we in the third world remain mentally and intellectually colonised even when we are politically independent: we do not dare to question the most nonsensical of theories as long as they come from the centres of academic hegemony and power, we do not dare to point out that the Emperor is naked. This is not accidental: as long it is not the search for objective truth which guides us, as long as it is professional publications and professional recognition in metropolitan centres which remain our implicit aim, in short as long as third world academics continue to suborn themselves, intellectually dishonest theorizing will continue to hold  sway.

[1] "E MS and the Agrarian Question: Ground Rent and its Implications"  Social Scientist Vol.29 No.9-10 Sep- Oct 1999
[2] Adam Smith The Wealth of Nations Books 1-111  (First published 1776,  quoted passage on p.466 of  Penguin Books 1986, Ed. Andrew Skinner)
[3] David Ricardo  Principles of Political Economy and Taxation  (Vol.1 of The Works and Correspondence of David Ricardo edited by Pierro Sraffa with the collaboration of M H Dobb , Cambridge: CUP 1951) Ch.VII 'On Foreign Trade'
[4] K N Chaudhuri  'Foreign Trade and the Balance of Payments' in The Cambridge Economic History of India Vol.11 edited by Dharma Kumar and Meghnad Desai (Orient Longman 1985)
Rosa Luxemburg  The Accumulation of Capital (London:1963) 
[6]  Joan Robinson  is an exception. In her "Reflections on the Theory of International Trade" (Collected Economic Papers Vol.V Oxford: 1975) she points out that "In Ricardo's example Portugal was to gain as much from exporting wine as England from exporting cloth, but in real life Portugal was dependent on British naval support, and it was for thid reason that she was obliged to accept conditions of trade which wiped out her production of textiles and inhibited industrial development, so as to make her more dependent than ever".


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