Neoliberalism's Myth on Benefits of Free Trade

When Wall Street bankers and hedge fund managers and the corporate media use the term "free trade",
what they are really talking about is labor arbitrage and selective protectionism

Neoliberalism's Myth on Benefits of Free Trade

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Neoliberalism: Myths and Reality by Martin Hart-Landsberg

Agreements like the North American Free Trade Agreement (NAFTA) and the World Trade Organization (WTO) have enhanced transnational capitalist power and profits at the cost of growing economic instability and deteriorating working and living conditions. Despite this reality, neoliberal claims that liberalization, deregulation, and privatization produce unrivaled benefits have been repeated so often that many working people accept them as unchallengeable truths. Thus, business and political leaders in the

United States and other developed capitalist countries routinely defend their efforts to expand the WTO and secure new agreements like the Free Trade Area of the

Americas (FTAA) as necessary to ensure a brighter future for the world’s people, especially those living in poverty.

For example, Renato Ruggiero, the first Director-General of the WTO, declared that WTO liberalization efforts have “the potential for eradicating global poverty in the early part of the next [twenty-first] century—a utopian notion even a few decades ago, but a real possibility today.”¹ Similarly, writing shortly before the December 2005 WTO ministerial meeting in Hong Kong, William Cline, a senior fellow for the Institute for International Economics, claimed that “if all global trade barriers were eliminated, approximately 500 million people could be lifted out of poverty over 15 years....The current Doha Round of multilateral trade negotiations in the World Trade Organization provides the best single chance for the international community to achieve these gains.”²

Therefore, if we are going to mount an effective challenge to the neoliberal globalization project, we must redouble our efforts to win the “battle of ideas.” Winning this battle requires, among other things, demonstrating that neoliberalism functions as an ideological cover for the promotion of capitalist interests, not as a scientific framework for illuminating the economic and social consequences of capitalist dynamics. It also requires showing the processes by which capitalism, as an international system, undermines rather than promotes working class interests in both third world and developed capitalist countries.

The Myth of the Superiority of ‘Free Trade’: Theoretical Arguments

According to supporters of the WTO and agreements such as the FTAA, these institutions/agreements seek to promote free trade in order to enhance efficiency and maximize economic well being. This focus on trade hides what is in fact a much broader political-economic agenda: the expansion and enhancement of corporate profit making opportunities. In the case of the WTO, this agenda has been pursued through a variety of agreements that are explicitly designed to limit or actually block public regulation of economic activity in contexts that have little to do with trade as normally understood.

For example, the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) limits the ability of states to deny patents on certain products (including over living organisms) or control the use of products patented in their respective nations (including the use of compulsory licensing to ensure affordability of critical medicines). It also forces states to accept a significant increase in the length of time during which patents remain in force. The Agreement on Trade Related Investment Measures (TRIMS) restricts the ability of states to put performance requirements on foreign direct investment (FDI), encompassing those that would require the use of local inputs (including labor) or technology transfer. A proposed expansion of the General Agreement on Trade in Services (GATS) would force states to open their national service markets (which include everything from health care and education to public utilities and retail trade) to foreign providers as well as limit public regulation of their activity. Similarly, a proposed Government Procurement Agreement would deny states the ability to use non-economic criteria, such as labor and environmental practices, in awarding contracts.

These agreements are rarely discussed in the mainstream media precisely because they directly raise issues of private versus public power and are not easily defended. This is one of the most important reasons why those who support the capitalist globalization project prefer to describe the institutional arrangements that help underpin it as trade agreements and defend them on the basis of the alleged virtues of free trade. This is a defense that unfortunately and undeservedly holds enormous sway among working people, especially in the developed capitalist countries. And, using it as a theoretical foundation, capitalist globalization advocates find it relatively easy to encourage popular acceptance of the broader proposition that market determined outcomes are superior to socially determined ones in all spheres of activity. Therefore, it is critical that we develop an effective and accessible critique of this myth of the superiority of free trade. In fact, this is an easier task than generally assumed.

Arguments promoting free trade generally rest on the theory of comparative advantage. David Ricardo introduced this theory in 1821 in his Principles of Political Economy and Taxation. It is commonly misunderstood to assert the obvious, that countries have or can create different comparative advantages or that trade can be helpful. In fact, it supports a very specific policy conclusion: a country’s best economic policy is to allow unregulated international market activity to determine its comparative advantage and national patterns of production.³   {The logic behind Ricardo’s argument was that when ever government intervened in trade it was for the benefit of a special interest, and the increased prices of the good effected was a harsh burden upon the downtrodden masses.  The masses would be better off without such intervention—jk}.

Ricardo “proved” his theory of comparative advantage using a two country, static model of the world, in which Portugal is assumed to be a more efficient producer of both wine and cloth than England, but with greatest superiority in wine production. Ricardo demonstrated that, in his created world, both Portugal and England would gain by an international division of labor in which each produced the good in which it had the greatest relative or comparative advantage. Thus, even though England’s production efficiency was inferior to that of Portugal in both goods, the logic of free trade would lead Portugal to concentrate on wine production and England on cloth production, with the resulting trade between them generating maximum benefits for both countries.

Mainstream economists, while continuing to accept the basic outlines of Ricardo’s theory, have developed refinements to it. The most important are the Hecksher-Olin theory which argues that since a country’s comparative advantage is shaped by its resource base, capital-poor third world countries should specialize in labor intensive products; the factor-price equalization theory which argues that free trade will raise the price of the intensively used factor (which will be unskilled labor in the third world) until all factor prices are equalized worldwide; and the Stopler-Samuleson theory which argues that the incomes of the scarce factor (labor in rich countries; capital in poor countries) will suffer the most from free trade. None of these refinements challenge the basic conclusion of Ricardo’s theory of comparative advantage. In fact they offer additional support for the argument that workers in the third world will be the greatest beneficiaries of free trade.

Like all theories, the theory of comparative advantage (and its conclusion) is based on a number of assumptions. Among the most important are:

• There is perfect competition between firms.
• There is full employment of all factors of production.
• Labor and capital are perfectly mobile within a country and do not move across national borders.
• A country’s gains from trade are captured by those living in the country and spent locally.
• A country’s external trade is always in balance.
• Market prices accurately reflect the real (or social) costs of the products produced.

Even a quick consideration of these assumptions reveals that they are extensive and unrealistic. Moreover, if they are not satisfied, there is no basis for accepting the theory’s conclusion that free-market policies will promote international well being. For example, the assumption of full employment of all factors of production, including labor, is obviously false. Equally problematic is the theory’s implied restructuring process, which assumes that (but never explains how) workers who lose their jobs as a result of free-trade generated imports will quickly find new employment in the expanding export sector of the economy. In reality, workers (and other factors of production) may not be equally productive in alternative uses. Even if we ignore this problem, if their reallocation is not sufficiently fast, the newly liberalized economy will likely suffer an increase in unemployment, leading to a reduction in aggregate demand and perhaps recession. Thus, even if all factors of production eventually become fully employed, it is quite possible that the cost of adjustment would outweigh the alleged efficiency gains from the trade induced restructuring.

The assumption that prices reflect social costs is also problematic. Many product markets are dominated by monopolies, many firms receive substantial government subsidies that influence their production and pricing decisions, and many production activities generate significant negative externalities (especially environmental ones). Therefore, trade specialization based on existing market prices could easily produce a structure of international economic activity with lower overall efficiency, leading to a reduction in social well being.

There is also reason to challenge the assumption that external trade will remain in balance. This assumption depends on another, that exchange rate movements will automatically and quickly correct trade imbalances. However, exchange rates can easily be influenced by speculative financial activity, causing them to move in destabilizing rather than equilibrating directions. In addition, as trade increasingly takes place through transnational corporate controlled production networks, it is far less likely that exchange rate movements will generate the desired new production patterns. To the extent that exchange rate movements fail to produce the necessary trade adjustments in a reasonably short period, imports will have to be reduced (and the trade balance restored) through a forced reduction in aggregate demand, and perhaps recession.

Also worthy of challenge is the assumption that capital is not highly mobile across national borders. This assumption helps to underpin others, including the assumptions of full employment and balanced trade. If capital is highly mobile, then free-market/free-trade policies could produce capital flight leading to deindustrialization, unbalanced trade, unemployment, and economic crisis. In short, the free-trade supporting policy recommendations that flow from the theory of comparative advantage rest on a series of very dubious assumptions.⁴

The Myth of the Superiority of ‘Free Trade’: Empirical Arguments

Proponents of neoliberal policies often cite the results of highly sophisticated simulation studies to buttress their arguments. However, these studies are themselves seriously flawed, in large part because they rely on many of the same assumptions as the theory of comparative advantage. The following examination of two prominent studies reveals how reliance on these assumptions undermines the credibility of their results.

In 2001, Drusilla Brown, Alan Deardoff, and Robert Stern published a study that claimed that a WTO-sponsored elimination of all trade barriers would add $1.9 trillion to the world’s gross economic product by 2005.⁵ Their study was widely showcased in media stories that appeared before the November 2001 start of WTO negotiations in Doha, Qatar.

The World Bank has also attempted to calculate, as part of its Global Economic Prospects series, the expected benefits from trade liberalization. In Global Economic Prospects 2002, it concluded that “faster integration through lowering barriers to merchandise trade would increase growth and provide some $1.5 trillion of additional cumulative income to developing countries over the period 2005–2015. Liberalization of services in developing countries could provide even greater gains—perhaps as much as four times larger than this amount. [The results also] show that labor’s share of national income would rise throughout the developing world.”⁶

The studies by Brown, Deardoff, and Stern, and the World Bank are based on computable general equilibrium models, in which economies are defined by a set of interconnected markets. When prices change—in this case because of a change in tariffs—national product markets are assumed to adjust to restore equilibrium. Since economies are themselves connected through trade, price changes are also assumed to generate more complex global adjustments before a new equilibrium outcome is achieved. It is on the basis of such modeling that the authors of these studies try to determine the economic consequences of trade liberalization.

This type of modeling is very challenging. Specific assumptions must be made about consumer and producer behavior in different markets and in different nations, including their speed of adjustment. Detailed national input-output tables are also required. But even more is required. For example, in order to ensure that their model will be solvable, Brown, Deardoff, and Stern assume that there is only one unique equilibrium outcome for each trade liberalization scenario. They also assume there are just two inputs, capital and labor, which are perfectly mobile across sectors in each country, but bound by national borders. In addition, they assume total aggregate expenditure in each economy is sufficient, and will automatically adjust, to ensure full employment of all resources. Finally, they also assume that flexible exchange rates will prevent tariff changes from causing changes in trade balances.

Said differently, the authors created a model in which liberalization cannot, by assumption, cause or worsen unemployment, capital flight, or trade imbalances. Thanks to these assumptions, if a country drops its trade restrictions, market forces will quickly and effortlessly encourage capital and labor to shift into new, more productive uses. And, since trade always remains in balance, this restructuring will, by definition, generate a dollar’s worth of new exports for every dollar’s worth of new imports. As Peter Dorman notes in his critique of this study: “Of course, workers and governments would have little to worry about in such a world—provided they could shift readily between expanding and contracting sectors of the economy.”⁷

World Bank economists also use computable general equilibrium modeling in their work. In Global Economic Prospects 2002, they begin their simulation study with “a baseline view about the likely evolution of developing countries, based upon best guesses about generally stable parameters—savings, investment, population growth, trade and productivity growth.”⁸ This baseline view incorporates only those changes in the “global trading regime” that occurred up through 1997 and uses these best guesses to estimate economic outcomes for the years 2005 to 2015. Next, they assume the removal of all trade restrictions in the period 2005 to 2010, with the restrictions reduced by one-sixth in each year.⁹ Finally, they compare the estimated economic outcomes from this liberalization scenario with those from the initial baseline scenario to determine the gains from liberalization.

This modeling effort also depends on several critical and unrealistic assumptions. One is that tariff reductions will have no effect on government deficits; they will remain unchanged from what they were in the baseline projection. This assumption claims that governments will automatically be able to replace lost tariff revenue with new revenue from other sources. Another assumption is that tariff reductions will have no effect on trade balances; they will remain the same as in the baseline projection. The final one is the existence of full employment. Once again, a powerful free-trade bias is built into the heart of the model by assumption, thereby ensuring a pro-liberalization outcome.

Although this bias is sufficient to dismiss the study’s usefulness as a guide to policy, its results are still worth examining for two reasons: First, the projected benefits are smaller than one might imagine given the World Bank’s unqualified support for liberalization. Second, later World Bank studies have revealed significantly smaller benefits. In its 2002 study, the World Bank concluded that “measured in static terms, world income in 2015 would be $355 billion more with [merchandise] trade liberalization than in the baseline.”¹⁰ Third world countries as a group would receive $184 billion, or approximately 52 percent of these total benefits. Significantly, $142 billion of this third world gain is projected to come from the liberalization of trade in agricultural goods. Even more noteworthy, $114 billion is estimated to come from third world liberalization of its own agricultural sector.¹¹ Liberalization of trade in manufactures turns out to be a minor affair. Total estimated third world gains from a complete liberalization of world trade in manufactures amount to only $44 billion.

If we were to take these numbers seriously, they certainly suggest that the third world has little to gain from an actual WTO agreement. As Mark Weisbrot and Dean Baker note in their critique of this study, “the removal of all of the rich countries’ barriers to the merchandise exports of developing countries—including agriculture, textiles, and other manufactured goods—would...when such changes were fully implemented by 2015...add 0.6 percent to the GDP of low and middle-income countries. This means that a country in Sub-Saharan Africa that would, under present trade arrangements have a per capita income of $500 per year in 2015, would instead have a per capita income of $503.”¹² Moreover, as they also point out, these meager gains would be far outweighed by losses incurred from compliance with other associated WTO agreements.

More recent World Bank estimates show even smaller gains from liberalization. In Global Economic Prospects 2005, the World Bank incorporated new data sets, which allowed it to “capture the considerable reform between 1997 and 2001 (e.g., continued implementation of the Uruguay Round and China’s progress toward WTO accession), and an improved treatment of preferential trade agreements.”¹³ As a result, total projected static gains from merchandise trade liberalization fell to $260 billion (in 2015 relative to the baseline scenario), with only 41 percent of the gains accruing to the third world.

Although working people have been ill-served by capitalist globalization, many are reluctant to challenge it because they have been intimidated by the “scholarly” arguments of those who support it. However, as we have seen, these arguments are based on theories and highly artificial simulations that deliberately misrepresent the workings of capitalism. They can and should be challenged and rejected.

Neoliberalism: The Reality

The post-1980 neoliberal era has been marked by slower growth, greater trade imbalances, and deteriorating social conditions. The United Nations Conference on Trade and Development (UNCTAD) reports that, “for developing countries as a whole (excluding China), the average trade deficit in the 1990s is higher than in the 1970s by almost 3 percentage points of GDP, while the average growth rate is lower by 2 percent per annum.”¹⁴ Moreover,

The pattern is broadly similar in all developing regions. In Latin America the average growth rate is lower by 3 percent per annum in the 1990s than in the 1970s, while trade deficits as a proportion of GDP are much the same. In sub-Saharan Africa growth fell, but deficits rose. The Asian countries managed to grow faster in the 1980s, while reducing their payments deficits, but in the 1990s they have run greater deficits without achieving faster growth.¹⁵

A study by Mark Weisbrot, Dean Baker, and David Rosnick on the consequences of neoliberal policies on third world development comes to similar conclusions. The authors note that “contrary to popular belief, the past 25 years (1980–2005) have seen a sharply slower rate of economic growth and reduced progress on social indicators for the vast majority of low- and middle-income countries [compared with the prior two decades].”¹⁶

For those that reject the major assumptions underlying mainstream arguments for the “freeing” of international economic activity, this outcome is not surprising. In broad brush, trade liberalization contributed to the deindustrialization of many third world countries, thereby increasing their import dependence. By making them cheaper and easier to obtain, it also encouraged an increase in the importation of luxury goods. And finally, by attracting transnational corporate production to the third world, it also increased the import intensity of most third world exports. Export earnings could not keep pace largely because growing third world export activity and competition (prompted by the need to offset the rise in imports) tended to drive down export earnings. Exports were also limited by slower growth and protectionism in most developed capitalist countries.

In an effort to keep growing trade and current account deficits manageable, third world states, often pressured by the IMF and World Bank, used austerity measures (especially draconian cuts in social programs) to slow economic growth (and imports). They also deregulated capital markets, privatized economic activity, and relaxed foreign investment regulatory regimes in an effort to attract the financing needed to offset the existing deficits. While devastating to working people and national development possibilities, these policies were, as intended, responsive to the interests of transnational capital in general and a small but influential sector of third world capital. This is the reality of neoliberalism.

The Dynamics of Contemporary Capitalism

While the term “neoliberalism” does, in many ways, capture the essence of contemporary capitalist practices and policies, it is also in some important respects a problematic term. In particular, it encourages the view that a wide range of policy options simultaneously exist under capitalism, with neoliberalism just one of the possibilities. States could reject neoliberalism, if they wanted, and implement more social democratic or interventionist policies, similar to those employed in the 1960s and 1970s. Unfortunately, things are not so simple. The “freeing” of economic activity that is generally identified with neoliberalism is not so much a bad policy choice as it is a forced structural response on the part of many third world states to capitalist generated tensions and contradictions. Said differently, it is capitalism (as a dynamic and exploitative system), rather than neoliberalism (as a set of policies), that must be challenged and overcome.

Mainstream theorists usually consider international trade, finance, and investment as separate processes. In fact, they are interrelated. And, as highlighted above, the capitalist drive for greater profitability has generally worked to pressure third world states into an overarching liberalization and deregulation. This dynamic has had important consequences, especially, but not exclusively, for the third world. In particular, it has encouraged transnational corporations to advance their aims through the establishment and extension of international production networks. This has led to new forms of dominance over third world industrial activity that involve its reshaping and integration across borders in ways that are ever more destructive of the social, economic, and political needs of working people.

During the 1960s and 1970s, most third world countries pursued state directed import-substitution industrialization strategies and financed their trade deficits with bank loans. This pattern ended suddenly in the early 1980s, when economic instabilities in the developed capitalist world, especially in the United States, led to rising interest rates and global recession. Third world borrowing costs soared and export earnings plummeted, triggering the third world “debt crisis.” With debt repayment in question, banks greatly reduced their lending, leading to ever deepening third world economic and social problems.

To overcome these problems, third world states sought new ways to boost exports and new sources of international funds. Increasingly, they came to see export-oriented foreign direct investment as the answer. The competition for this investment was fierce. Country after country made changes in their investment regimes, with the great majority designed to create a more liberalized, deregulated, and “business friendly” environment. Transnational corporations responded eagerly to these changes, many of which they and their governments helped promote. And, over the years 1991–98, FDI became the single greatest source of net capital inflow into the third world, accounting for 34 percent of the total.¹⁷

New technologies had made it possible for transnational corporations to cheapen production costs for many goods by segmenting and geographically dividing their production processes. They therefore used their investments to locate the labor intensive production segments of these goods—in particular the production or assembly of parts and components—in the third world. This was especially true for electronic and electrical goods, clothing and apparel, and certain technologically advanced goods such as optical instruments.

The result was the establishment or expansion of numerous vertically structured international production networks, many of which extended over several different countries. According to UNCTAD, “it has been estimated, on the basis of input-output tables from a number of OECD and emerging-market countries, that trade based on specialization within vertical production networks accounts for up to 30 percent of world exports, and that it has grown by as much as 40 percent in the last 25 years.”¹⁸

Despite the fierce third world competition to attract FDI, transnational corporations tended to concentrate their investments in only a few countries. In general, U.S. capital emphasized North America (NAFTA), while Japanese capital focused on East Asia, and European capital on Central Europe. The countries that “lost out” in the FDI competition were generally forced to manage their trade and finance problems with austerity. Those countries that “won” usually experienced a relatively fast industrial transformation. More specifically, they became major exporters of manufactures, especially of high-technology products such as transistors and semiconductors, computers, parts of computers and office machines, telecommunications equipment and parts, and electrical machinery.

As a consequence of this development, the share of third world exports that were manufactures soared from 20 percent in the 1970s and early 1980s, to 70 percent by the late 1990s.¹⁹ The third world share of world manufacturing exports also jumped from 4.4 percent in 1965 to 30.1 percent in 2003.²⁰

Mainstream economists claim that this rise in manufactured exports demonstrates the benefits of liberalization, and thus the importance of WTO-style liberalization agreements for development. However, this argument falsely identifies FDI and exports of manufactures with development, thereby seriously misrepresenting the dynamics of transnational capital accumulation. The reality is that participation in transnational corporate controlled production networks has done little to support rising standards of living, economic stability, or national development prospects.

There are many reasons for this failure. First, those countries that have succeeded in attracting FDI have usually done so in the context of liberalizing and deregulating their economies. This has generally resulted in the destruction of their domestic import-competing industries, causing unemployment, a rapid rise in imports, and industrial hollowing out. Second, the activities located in the third world rarely transfer skills or technology, or encourage domestic industrial linkages. This means that these activities are seldom able to promote a dynamic or nationally integrated process of development. Furthermore the exports produced are highly import dependent, thereby greatly reducing their foreign exchange earning benefits.

Finally, the transnational accumulation process makes third world growth increasingly dependent on external demand. In most cases, the primary final market for these networks is the United States, which means that third world growth comes to depend ever more on the ability of the United States to sustain ever larger trade deficits—an increasingly dubious proposition.

Few countries have escaped these problems. For example, UNCTAD studied the economic performances of “seven of the more advanced developing countries” over the period 1981–96: Hong Kong (China), Malaysia, Mexico, Republic of Korea, Singapore, Taiwan Province of China, and Turkey. These are among the most successful third world exporters of manufactures. Yet, because much of their export activity is organized within transnational corporate controlled production networks, the gains to worker well being or national development have been limited.

For example, average manufacturing value added for the group as a whole remained consistently below the value of manufactured exports over the entire period, with the ratio declining from 76 percent in 1981 to 55 percent in 1996. And, although the group’s average ratio of manufactured exports to GDP rose sharply, its average ratio of manufacturing value added to GDP remained generally unchanged.²¹ Moreover, while the group as a whole generally maintained a rough balance in manufactured goods trade until the late 1980s, after that point imports grew much faster than exports. Mexico’s experience perhaps best symbolizes the bankruptcy of this growth strategy: “between 1980 and 1997 Mexico’s share in world manufactured exports rose tenfold, while its share in world manufacturing valued added fell by more than one third, and its share in world income (at current dollars) [fell] by about 13 percent.”²²

China: The Latest Neoliberal Success Story

Capitalism’s failure to deliver development is not due to its lack of dynamism; in fact quite the opposite is true. By intensifying the development and application of new production and exchange relationships within and between countries, this dynamism causes rapid shifts in the economic fortunes of nations, creating a constantly changing (and shrinking) group of “winners” and (an ever larger) group of “losers,” and masking the connection between the two. Even East Asia has been subject to the instabilities of capitalist dynamics, as the East Asian crisis of 1997–98 devastated such past “star performers” as South Korea, Indonesia, Thailand, and Malaysia. After quickly distancing themselves from these countries (and their past praise for their growth), most neoliberals have now eagerly embraced a new champion, China.²³

According to the conventional wisdom, China has become the third world’s biggest recipient of foreign direct investment, exporter of manufactures, and fastest growing economy, largely because its government adopted a growth strategy based on privileging private enterprise and international market forces. In response to this new strategy, net FDI in China grew from $3.5 billion in 1990 to $60.6 billion in 2004. Foreign manufacturing affiliates now account for approximately one-third of China’s total manufacturing sales. They also produce 55 percent of the country’s exports and a significantly higher percentage of its higher technology exports. As a consequence of these trends, the country’s ratio of exports to GDP has climbed steadily, from 16 percent in 1990 to 36 percent in 2003.²⁴ Thus, China’s growth has become increasingly dependent on transnational corporate organized export activity.

Foreign investment has indeed transformed China into a fast growing export platform, with some significant domestic production capacity. At the same time, many of the limitations of this growth strategy, which were highlighted above, are also visible in China. For example, foreign dominated export activity has done little to support the development of nationally integrated production or technology supply networks.²⁵ Moreover, as the Chinese state continues to lose its planning and directing capability, and the country’s resources are increasingly incorporated into foreign networks largely for the purpose of satisfying external market demands, the country’s autonomous development potential is being lost.

China’s growth has enriched a relatively small but numerically significant upper income group of Chinese, who enjoy greatly expanded consumption opportunities. However, these gains have been largely underwritten by the exploitation of the great majority of Chinese working people. For example, as a consequence of Chinese state liberalization policies, state owned enterprises laid off 30 million workers over the period 1998 to 2004. With urban unemployment rates in double digits, few of these former state workers were able to find adequate re-employment. In fact, over 21.8 million of them currently depend on the government’s “average minimum living allowance” for their survival. As of June 2005, this allowance was equal to approximately $19 a month; by comparison, the average monthly income of an urban worker was approximately $165 dollars.²⁶

While the new foreign dominated export production has generated new employment opportunities, most of these jobs are extremely low paid. A consultant for the U.S. Bureau of Labor Statistics has estimated that Chinese factory workers earn an average of sixty-four cents an hour (including benefits).²⁷ In Guangdong, where approximately one-third of China’s exports are produced, base manufacturing wages have been frozen for the past decade. Moreover, few if any of these workers have access to affordable housing, health care, pensions, or education.²⁸

China’s economic transformation has not only come at high cost for Chinese working people, it has also intensified (as well as benefited from) the contradictions of capitalist development in other countries, including in East Asia. For example, China’s export successes in advanced capitalist markets, in particular that of the United States, have forced other East Asian producers out of those markets. Out of necessity, they have reoriented their export activity to the production of parts and components for use by export-oriented transnational corporations operating in China. Thus, all of East Asia is being knitted together into a regional accumulation regime that crosses many borders and in so doing restructures national activity and resources away from meeting domestic needs. Instead, activity and resources are being organized to serve export markets out of the region under the direction of transnational corporations whose interests are largely in cost reduction regardless of the social or environmental consequences.²⁹

The much slower post-crisis growth of East Asian countries, and the heightened competitiveness pressures that are squeezing living standards throughout the region, provide strong proof that this new arrangement of regional economic relations is incapable of promoting a stable process of long-term development. Meanwhile, China’s export explosion has also accelerated the industrial hollowing out of the Japanese and U.S. economies as well as the unsustainable U.S. trade deficit.

At some point the (economic and political) imbalances generated by this accumulation process will become too great, and corrections will have to take place. Insofar as the logic of capitalist competition goes unchallenged, governments can be expected to manage the adjustment process with policies that will likely worsen conditions for workers in both third world and developed capitalist countries. Neoliberal advocates can also be expected to embrace this process of adjustment as the means to “discover” their next success story, whose experience will then be cited as proof of the superiority of market forces.

Our Challenge

As we have seen, arguments purporting to demonstrate that free-trade/free-market policies will transform economic activities and relations in ways that universally benefit working people are based on theories and simulations that distort the actual workings of capitalism. The reality is that growing numbers of workers are being captured by an increasingly unified and transnational process of capital accumulation. Wealth is being generated but working people in all the countries involved are being pitted against each other and suffering similar consequences, including unemployment and worsening living and working conditions.

Working people and their communities are engaged in growing, although uneven, resistance to the situation. While increasingly effective, this resistance still remains largely defensive and politically unfocused. One reason is that neoliberal theory continues to provide a powerful ideological cover for capitalist globalization, despite the fact that it is both generated by and designed to advance capitalist class interests. Another is the dynamic nature of contemporary capitalism, which tends to mask its destructive nature. Therefore, as participants in the resistance, we must work to ensure that our many struggles are waged in ways that help working people better understand the nature of the accumulation processes that are reshaping our lives. In this way, we can illuminate the common capitalist roots of the problems we face and the importance of building movements committed to radical social transformation and (international) solidarity.

Notes

1. Quoted in Ha-Joon Chang, Kicking Away the Ladder: Development Strategy in Historical Perspective (London: Anthem Press, 2002), 15.
2. William Cline, “Doha Can Achieve Much More than Skeptics Expect,” Finance and Development (March 2005), 22.
3. Significantly, most neoliberal theorists do not include the free movement of people in their argument.
4. Additional discussion of the theoretical weaknesses underlying free-trade theories can be found in Arthur MacEwan, Neo-Liberalism or Democracy: Economic Strategy, Markets, and Alternatives for the 21st Century (New York: Zed Press, 1999), chapter 2; Graham Dunkley, The Free Trade Adventure: The WTO, the Uruguay Round and Globalism—A Critique (New York: Zed Press, 2000), chapter 6; and Anwar Shaikh, “The Economic Mythology of Neoliberalism,” in Alfredo Saad-Filho, ed., Neoliberalism: A Critical Reader (London: Pluto Press, 2005).
5. Drusilla Brown, Alan Deardoff, & Robert Stern, CGE Modeling and Analysis of Multilateral and Regional Negotiating Options, Discussion Paper 468 (University of Michigan School of Public Policy Research Seminar in International Economics, 2001), http://www.fordschool.umich.edu/rsie/workingpapers/
   Papers451-475/r468.pdf.
6. The World Bank, Global Economic Prospects 2002 (Washington D.C.: World Bank, 2002), xiii.
7. Peter Dorman, The Free Trade Magic Act, Briefing Paper (Washington, D.C., Economic Policy Institute, 2001), 2.
8. World Bank, Global Economic Prospects 2002, (Washington, D.C.: World Bank Publications, 2001), 166.
9. The restrictions that are eliminated include import tariffs, export subsidies, and domestic production subsidies.
10. World Bank, Global Economic Prospects 2002, 167.
11. This result is largely a reflection of the assumptions of the World Bank model. Because the agricultural sector in the third world is protected by relatively high tariffs and assumed inefficient, its liberalization produces the biggest gains for the third world. This view of third world agricultural production ignores all cultural and ecological considerations.
12. Mark Weisbrot & Dean Baker, The Relative Impact of Trade Liberalization on Developing Countries, Briefing Paper (Washington, D.C., Center for Economic and Policy Research, 2002), 1.
13. World Bank, Global Economic Prospects 2005 (Washington D.C.: World Bank, 2005), 127.
14. UNCTAD, Trade and Development Report 1999 (New York: United Nations, 1999), vi.
15. UNCTAD, Trade and Development Report 1999, vi.
16. Mark Weisbrot, Dean Baker, & David Rosnick, The Scorecard on Development: 25 Years of Diminished Progress (Washington, D.C., Center for Economic and Policy Research, 2005), 1.
17. UNCTAD, Trade and Development Report 2002 (New York: United Nations, 2002), 103.
18. UNCTAD, Trade and Development Report 2002, 63.
19. UNCTAD, Trade and Development Report 2002, 51.
20. UNCTAD, Trade and Development Report 2005 (New York: United Nations, 2005), 131.
21. UNCTAD, Trade and Development Report 2002, 77.
22. UNCTAD, Trade and Development Report 2002, 80.
23. For a discussion of the rise of China as a neoliberal success story see Martin Hart-Landsberg & Paul Burkett, China and Socialism: Market Reform and Class Struggle (New York: Monthly Review, 2005), especially chapter 1.
24. Martin Hart-Landsberg & Paul Burkett, “China and the Dynamics of Transnational Accumulation: Causes and Consequences of Global Restructuring,” Historical Materialism (forthcoming 2006).
25. Hart-Landsberg & Burkett, “China and the Dynamics of Transnational Accumulation.”
26. China Labor Bulletin, “Subsistence Living for Millions of Former State Workers” (September 7, 2005).
27. Edward Cody, “Workers In China Shed Passivity, Spate of Walkouts Shakes Factories,” Washington Post, November 27, 2004.
28. For more discussion of the destructive social consequences of Chinese state policies on working people as well as their growing resistance to these policies see Hart-Landsberg & Burkett, China and Socialism, chapter 3.
29. This restructuring is examined in detail in Hart-Landsberg & Burkett, China and Socialism, chapter 4, and “China and the Dynamics of Transnational Accumulation.”

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