TPP and the fallacy of free trade

Tomorrow there will be nationwide protests around New Zealand against the TPP agreement. Most of the opposition quite rightly centers around the agreement being less a pure free trade agreement between equal partners but rather a Corporate Bill of Rights, challenging national sovereignty on a whole host of areas that potentially crimp corporate profit making potential.

The Investor State Provisions that allow multi national corporations to challenge local regulations and laws, from labour to the environment, adjudicated by secret non transparent tribunals may be a corporate wet dream but favour the wealthy and politically connected companies of large nations and leave small nations like New Zealand extremely vulnerable.

It is far from clear what sanctions will be imposed on “transgressors” if they resist these tribunal’s rulings. Even Forbes Magazine, hardly a bastion of anti corporate ideology, has given several good reasons why these provisions should be dropped.

It is also worth noting that the TPP has a northern hemisphere twin, the TTIP. George Monbiot in The Guardian gives a good summary of where that is at. As is often the case, the British public are far more activist and militant  in their opposition than their Antipodean cousins. He makes an excellent point when asking why the British Government:

…have failed to answer the howlingly obvious question: what’s wrong with the courts? If corporations want to sue governments, they already have a right to do so, through the courts, like anyone else. It’s not as if, with their vast budgets, they are disadvantaged in this arena. Why should they be allowed to use a separate legal system, to which the rest of us have no access? What happened to the principle of equality before the law?

But beyond this it is well worth reflecting on the fallacies underlying the entire “free trade” argument. The theory dates back to David Ricardo and his theory around comparative advantage, that nations should produce and export the things they are most efficient at and import the things other nations can do cheaper or better.

Like most economic theories it is initially appealing but hopelessly simplistic in real life, for like the efficient market hypothesis and the assumption of rational markets and individuals, it makes little allowance for the complexity of political, social, geographical and environmental interactions, let alone capricious human behaviour/psychology.

Even more than that, as Charles Hugh-Smith points out, the real comparative advantage isn’t with nations but with hyper-mobile global capital.

The mobility of capital radically alters the simplistic 18th century view of free trade. In today’s world, trade can not be coherently measured as goods moving between nations, because capital from the importing nation owns the productive assets in the exporting nation. If Apple owns a factory (or joint venture) in China and collects virtually all the profits from the iGadgets produced there, this reality cannot be captured by the models of simple trade described by Ricardo.

In today’s globalized version of “free trade,” mobile capital can arbitrage labor, currencies, interest rates, regulatory burdens and political favors by shifting between nations and assets. Trying to account for trade in the 18th century manner of goods shipped between nations is nonsensical when components come from a number of nations and profits flow not to the nation of origin but to the owners of capital.

In the New Zealand context this means that every share in an exporting company that is sold to foreign owner, usually a financial institution of some description, be it bank, sovereign or pension fund, the profits flow offshore, leaving less money to offset against imports. The difference is instead made up with debt and reflected in the Current Account Deficit. Indeed a few years ago Bill English admitted that as the economy improved, counter intuitively and contrary to economic theory, the Current Account Deficit would get worse not better because so much of New Zealand’s productive capacity was owned by foreigners.

It’s a no win situation for New Zealand as a nation as long as foreign investment here outweighs our investment elsewhere. As a young and small nation, this is a forgone conclusion in a non regulated, non interventionist “free market”, particularly “hot money” flows.

The reason why small nations like Norway and Singapore are wealthier than us is because, besides being more geographically advantaged, they have government initiated sovereign investment funds actively investing in local companies as well as overseas. They are not hands off. They are active players in the global capital Charles Hugh-Smith talks about. New Zealand has started to make small steps via the Superannuation Fund but the government cut off contributions post GFC and has not resumed them. It is currently succeeding despite the government.

Moreover the free and instantaneous ability of money to enter and leave an economy like New Zealand’s has made a mockery of the model that has the currency acting as a shock absorber and preventing big imbalances in the trade and current account ledgers.

According to the theory the “market” will adjust the currency downwards as trade and CA deficits increase and consumers will switch from relatively more expensive imports to local products, and exporters will have increased foreign demand from their more competitive prices, bringing everything back into balance.

The problem is, even though the currency may drop, there can be little import substitution needed to restore balance as vast swathes of, entire industries, have been off shored or shrunk and can no longer respond to price signals. It takes time to gear up again and train staff. The capacity is no longer there and consumers are forced either to pay more for imports which is inflationary or consume less. Exporters too may face increased costs from their imported factors of production that offset any increase in returns. In addition any profits from foreign owned New Zealand exporters are repatriated and have little offsetting effect.

A falling currency may not be a panacea as Japan is finding at the moment. The Reserve Bank may respond to higher imported inflation by increasing interest rates and suppressing local demand further but the higher interest rates may attract “carry trade” speculation driving the currency back up.

What many local businesses, importers and exporters, find difficult is not the exchange rate per se but its volatility which creates havoc with stable business planning. Financial corporations that can move speculative money in and out of a small open economy like NZ at will are the main beneficiaries of  “free trade”, not the local businesses who work on a much longer time frame. Currency hedging only goes so far. Nothing works as it is supposed to. There are no slow, smooth adjustments, but rather, rapid, volatile and sometimes violent lurches back and forth favouring financial speculation but destabilising the real economy.

So this Saturday there is a numerous reasons to get out and protest against the TPP. It IS undemocratic. It IS non-transparent. It IS designed to facilitate the free movement of capital not trade. It DOES favour corporations over elected governments and citizens. It is a doubling down on a flawed ideology that favours the world’s financial elite short term but always ends in crisis. To quote Hugh-Smith again;

As John Kenneth Galbraith observed: “People of privilege will always risk their complete destruction rather than surrender any material part of their advantage.” ….Unfortunately, everybody else gets destroyed along with the Elites when the system implodes.

Stopping the TPP is the crucial first step in the push back against global capital and reforming the financial system.

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