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The idea of free trade only works in the academic world (Part1)
FNA | 03 January 2012

An alternative vision of trade in the 21st century



Should Justice be replaced by Sustainbability

The topic ‘International Trade – New Challenges’ was of one of the panels at the World Leather Congress recently held in Rio de Janeiro on November 9th 2011. What was interesting was that the subject of “trade” had come up during the World Footwear Congress held at the same venue two days earlier. In a nutshell there was no agreement on trade – free or fair - between presenters representing developed and developing nations.

Speakers from Italy, for example, defended “free trade” as they wanted to export footwear to the growing Brazilian market but are being charged the 35% import duty on their products as permitted by the World Trade Organization and this tends to make them uncompetitive.

Cleto Sagripanti, President of the Italian Footwear Association (ANCI), said that he “wanted zero tariffs”. The Brazilians, on the other hand, had little faith in how free trade is currently being practiced. Milton Cardoso, President of the Brazilian Footwear Association (Abicalcados) said that “societies should be asked if it wanted free trade”. The director of JBS Group, Marcus Vincius Pratini, stated clearly in his presentation; “The idea of free trade only works in the academic world”.

If you are from Europe the mantra of “free trade” is everywhere since, according to Sagrpanti, the EU is the most liberal trade regime in the world. This is true from the point of view of trade in itself but what about the huge subsidies funding the EU’s Common Agricultural Policy to benefit European farmers? Such subsidies are an affront and gross contradiction to the idea of free trade but are ignored by European politicians, entrepreneurs and economists who want free movements of goods and services worldwide.

Symbol of Illegal Subsidies

The point is that you cannot have it both ways. In the big picture of world trade it is impossible to extract say, leather and footwear out of the mix, and have zero tariffs on them when other products and commodities are being subsidized or have import duty imposed on them. Emerging countries are frowned upon for having a similar policy by the developed world. Argentina was criticized during the World Leather Congress for applying export duties to hides being exported to Europe. (What about EU tariffs on Brazilian agricultural products entering Europe?)

Alongside the “squeaky clean” mantra of free trade, which is not really free at all but a convenient verbal deception, goes the unpardonable sin of being “protectionist” by imposing duties on products from other countries or imposing export duties on raw materials which your local industry might actually need – the classic case being Argentine hides for Argentine tanneries. In fact, if you think about it, until the current deception surrounding the western definition and practice of free trade is clarified then subsidies render it the same as being protectionist.

To prove this point it is worth quoting former President of the World Bank, James Wolfensohn, who stated on March 3rd 2004 that the developed countries fund their agriculture – directly and indirectly - to the tune of US$300 billion per year – that is, almost US$1 billion per day and do not want their trading partners to do the same and then want to sign free trade agreements with them.

In the current scenario “all countries are equal, but some are more equal than others”, to paraphrase George Orwell, with economically powerful countries holding the whip hand in many trade related matters.

Even the President of the Guanajuato Footwear Chamber (CICEG) in Mexico, Armando Martín Dueñas, is concerned about his country being opened up to zero tariffs on imports of Chinese footwear from December 11th 2011. He is concerned that there are still hidden subsidies on such production in China which will render his members’ footwear uncompetitive in Mexico itself and could destroy the industry.

In a short conversation with Martin Dueñas, who is a convinced advocate of honest free trade, it was abundantly clear that Mexico had suffered a similar fate in the recent past. Mexico was self-sufficient in corn until the North American Free Trade Agreement (NAFTA) came into force with Mexico itself, the US and Canada on January 1st 1994. Over the years Mexico has imported more and more corn from the US since it is cheaper due to USDA subsidies for farmers. Now Mexico is almost 100% dependent on US corn imports for its staple diet of tortillas and has little or no corn production of its own, even though corn is a cultural mainstay of traditional Mexican life and cuisine. Now, will the same happen to Mexico’s footwear industry in the context of “free trade” – which is apparently neither “free” nor “fair” in many cases? And what will the government do about the resulting unemployment and the probable demise of a traditional Mexican industry?

The aim of free trade is to build wealth between nations so that everyone can benefit. The theory is fine but what about subsidies – normally hidden subsidies which make products cheaper and therefore more competitive? These can range from local tax breaks; property tax rebates; cheap electricity; discounted payroll tax; no import taxes on imported raw materials and components; little or no environmental care; no collective wage agreements; no trade unions; no social security payments for workers, currency manipulation…..and so on. If some of these elements that contribute to reducing the unit cost of a product are out of balance within a bilateral trading partner, then this cannot be classified as free or fair trade. Someone somewhere has an unfair advantage.

What do we do about subsidies? Independent audits would have to be carried out if unfair or illegal subsidies were suspected much in the same way as nuclear power plants are inspected in the context of the Nuclear Non-Proliferation Treaty. If you really want honest and fair free trade this is a vital requisite to enable it – otherwise it is at best semi-protectionist. By expanding and redefining the constitutional global mission of the World Trade Organization (WTO) to include the environment, this organization could undertake the auditing task.

Look at the number of disputes that take place every year before the WTO. Currently there are 14 cases open against China leveled against its footwear exports for unfair trading practices. If trade is free and fair then manufacturers should benefit from their profits and not from obscure subsidies which violate the spirit and even the mantra of free trade. The problem is that people pretend that such subsides are “normal” which somehow makes them legitimate. Nothing could be further from the truth.

So what is the solution to this conundrum of facts, opinions and contradictions?

Click here to read Part 2