Something’s got to give

Donald Trump, the US President, has put global trade in goods on a hot burner. It is impossible to predict the outcome of this reset in the world trade order, which is extremely complex in its interrelationships and has established itself as the only game in town for any country’s economic growth and prosperity. But it is important to take a step back and understand why it came about; what it has done to our world; and what can possibly be the way ahead.

First, let’s take a peek into the past. This idea took shape in the early 1990s, when the world (largely the industrialised part) decided to replace the General Agreement on Tariffs and Trade (GATT) with a formal global institution, the World Trade Organization (WTO). The idea was that this would bring world trade to a free zone—trade rules would be applied to all with assured compliance. The world would be one.

There was another objective, which has come to bite the industrialised world today. It was well understood that the cost of manufacturing was high in this world; labour was expensive and the cost of environmental regulations was prohibitive. This was the time when the already industrialised countries were feeling the pain of local air and water pollution—from acid rain to toxins in rivers. They were facing huge public outrages and so, the classic “not-in-my-backyard” (NIMBY) principle came to be applied in the name of global trade.

Renowned US economist Larry Summers, who in 1992 was with World Bank and went on to become the president of Harvard University, wrote in an internal memo “there is an economic logic to dump toxic waste in the lowest wage country”. The Economist report put it bluntly—“‘let them eat pollution’ says Summers”. The argument was brilliant; it would be cheaper to do business in the lowest-wage countries, with minimal regulations. The richer you are, wrote Summers, the more you want your environment to be clean and so the costs are higher. Public concern about toxic agents that have a one-in-a-million chance to cause prostate cancer would be high in countries where people survive to get prostate cancer, as compared to countries where under five mortality is 200 per 1,000 people. Harsh words, that Summers tried to squirm out of, but what he said was the absolute driver for economic and trade globalisation.

WTO was born in 1995, and in 2001, China joined this body. There has been no looking back since. The fact is, global manufacturing moved lock, stock, and barrel from the industrial world to countries like China and then to Vietnam, Bangladesh and Cambodia. It has been a game of finding the bottom; as costs of regulation and labour increase, so does the flight of industry in search of new greener pastures. We see this in India as well—as soon as the pollution regulator cracks the whip, industry moves out to “dark” unauthorised settlement areas. In this free-market world, the cost of labour and environment has to be discounted to stay competitive. Let’s not beat around any moral talk about the need to protect labour rights (including rights of child labourers) or environment. It does not wash.

In the 25-odd years of this global trade order, there are now new losers and new winners. In the early 1990s, when Arthur Dunkel’s draft proposal for WTO was being pushed, developing world was up in arms. There were protests in India, for instance, against the idea of unfettered global trade as it would destroy livelihoods of the poorest, particularly farmers who faced the prospect of cheap food being dumped from the industrialised mega farms of the West. By 1999, when the ministers met at Seattle to celebrate the new world order, there was widespread and growing anger against “untamed globalisation”. Protesters also came from the richer world, which was seeing the flight of manufacturing and pain of unemployment. Climate change has been the other big casualty. The fact is, emissions in the West never really reduced; they just moved to new production sites.

But all this was covered up; the winners made sure of this. Western companies moved to lower income countries and made profits; consumers (all of us) were happy because of cheaper goods. In all this, the service and technology sector boomed; banks and financial markets made money and with poor income distribution policies, disparities sharpened. The bubble burst when Brexit happened—it was about jobs and as I wrote then, the revenge of the rich. Trump, in his first term, made the same protectionist and tariff noise of today. But, it was buried under the disruption of COVID-19. Now, it is back with a bang. Of course, the global trading system has us all hooked. The low-wage countries have economically benefitted from global trade. In this interconnected world of trade, service and finance, disengagement will come at huge costs. But it is clear that something’s got to give. How this new trading system is designed would make or break much of our world. Let’s continue to examine this. DTE

The writer is Director General of CSE and Editor of Down To Earth, an environmentalist who pushes for changes in policies, practices and mindsets. Views expressed are personal