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October 31, 2013


How and why did we leave the comfortable environs of Bretton Woods economic governance for the WTO and our current wild west “system” (if one may charitably call it a system)? Why would we give up a sub-system where the world’s money was pegged to the American dollar in favor of a floating currency value system and simultaneously remove controls of capital across borders? Couldn’t anyone see that that would be a recipe for disaster? The answer is yes, but John Maynard Keynes is dead and his 1944 advice is widely discredited these days (notably by those who profit off chaos in the international marketplace, including currency speculators and Wall Street crapshooters).

Wall Street and its assorted traders are responsible for the birth of WTO and its negotiated rules, regulations and protocols, though the newly proposed trade treaty was thinly veiled as “policy” by those whose election(s) were financed by (guess who?) Wall Street and its assorted traders. What is more painful to relate than this now standard exchange of “campaign contributions” for political favors (formerly known as bribes) is how trusted cheerleaders were attracted to support the WTO concept and the wonders of its adoption and how this exercise in “free trade” would bring nirvana to the universe.

Tom Friedman, a smart and likeable commentator, became a cheerleader for WTO. His two books (The Lexus and the Olive Tree, 1999, and The World Is Flat, a 2005 bestseller) per Madrick “sang the praises of free trade and deregulation as the ideal path toward global growth and social progress for poor and rich alike.” Tom is a nice guy, but he was out of his element. His Alice in Wonderland description in this brave new world of international trade proceeded from the crudest interpretation of Adam Smith’s “invisible hand,” itself a mystical concoction – an economic apparition without substance.

Here is some of what Tom and other cheerleaders predicted (per Madrick) that would usher a waiting world into some sort of trade heaven: the dismantling of tariffs, the deregulation of finance, and the reduction of government interference, all of which in combination would work free market magic. Trade would soar for emerging nations and rich nations alike, with each one making what it manufactured best. Capital would flow wherever it was needed, information would spread with equal ease, and wages would rise everywhere.

That’s not what happened. What happened is that Tom’s “Flat World” turned out to be mountainous. Per Madrick: “Trade among nations became highly imbalanced. China and Germany ran huge surpluses, while the United States and much of Europe ran corresponding deficits, undermining local manufacturing and overall financial stability. Such inequalities, in which a few countries suck the jobs and the potential for economic growth from others, cannot be sustained.”

Wealthy nations such as ours have suffered greatly from such inequalities, notably with chronic unemployment, not only in manufacturing but also middle-income jobs in finance, insurance and sales. All the usual suspects are present in this story of the economic decline of America: We have enormous trade deficits, our dollar is over-valued, leading to an inability to compete in export markets, we are tied to WTO rules and protocols which prevent us from competing on a level playing field with our trading partners, we have at best tepid aggregate demand in our own marketplace caused by chronic and massive unemployment, and perhaps worst of all, a government that has decided to practice austerity economics – the worst possible choice it could make to lift us out of this ongoing near-recession, a policy choice that throws gasoline on the fires of recession and guaranteed further decline.

The WTO goes far beyond the less restrictive GATT. WTO mandates includes policy area decisions that used to be matters of sovereign decision, not decisions some board composed of foreigners who dictate policy to us under the guise of WTO rules. The WTO, as economist Dani Rodrik noted in his book, The Globalization Paradox, became “an instrument for attacking the full range of transaction costs that impeded international commerce, INCLUDING NATIONAL REGULATIONS AND STANDARDS. GATT never presumed to take us so far.

Thus subsidies to domestic industries of goods for export would now be treated as a violation of trade rules. So are many other such activities that would not have been illegal under GATT rules. Under WTO rules, environmental regulations can be challenged, state and local ordinances and statutes overridden, and there is even a current proposal on the WTO table which would mandate the reduction of subsidies to agriculture in wealthy countries in order to encourage food production in poor and emerging economies. When, for example, the European Union banned hormone-treated-meat imports from the United States, the WTO deemed such a ban illegal. The WTO has thus pitted nation against nation in its subversion of the sovereign rights of its trade members. It has become a supra-agency dictator with power to override members’ attributes of sovereignty under the legal mantle of trade agreements.

I think that is a bridge too far. We clearly need to redo WTO with a view toward limiting its voracious forays into its members’ sovereign rights to govern themselves. We did not give up our democracy and rights to govern ourselves just because we signed a trade agreement, but if we did, then we certainly need to reform the agreement, and put our economy on a level playing field with those of our trade partners while in the process. We must attack our chronic unemployment problem on every front.

Among other free trade advocates, Larry Summers (Mr. WTO himself) has expressed doubts about globalization, as well he should. The 2008 financial crisis made many aficionados of free trade and globalization rethink their positions. What we were told would happen didn’t happen, and at least temporarily, we in this country are worse off for the experience in terms of unemployment, inability to compete in export markets, Chinese currency manipulation, weak domestic aggregate demand etc. etc.

Wall Street chose to ignore Keynes’s advice in 1944 on how to regulate cross-border movement of capital when it put the WTO together because their actors wanted the unregulated right to involve themselves in “hot money” transactions and a freedom to locate and do business around the world. They won; we lost, and are continuing to lose. That section of the WTO agreement needs amendment.
Given slow global economic growth these days, a trade war could break out at any moment (if it hasn’t already), signaling the end of WTO. It may surprise readers of these essays to know that I hope this does not happen. I do think there is a place for governance of international trade agreements and their enforcement mechanisms; it’s just that the WTO as presently written  and interpreted is overreaching and its design is such that only a few of its members are prospering. This compact can be changed; we have now had experience (the best teacher) in living within its terms, and it hasn’t worked out for most members, especially for us. Our task? Call a Bretton Woods type meeting to amend its terms.  GERALD  E


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