The Case Against GATT

An interview with James Goldsmith

Sir James Goldsmith's claim to fame in the 1980s was as a corporate raider; he cemented his reputation as an extraordinarily shrewd businessperson when he sold his stocks in the days before the 1987 stock market crash. He is now a Member of the European Parliament, President of the Parliamentary group L'Europe des Nations and a member of the Parliamentary Committee concerned with global trade, the Committee on External Economic Relations. He is also the Chief Executive Officer of the Goldsmith Foundation, Europe's largest privately-funded charity specializing in supporting environmental causes.

 This interview was reprinted with permission from the French bestseller, Le Piege (The Trap), by James Goldsmith.

Multinational Monitor: Why are you opposed to so-called global free trade and GATT?

 James Goldsmith: Global free trade has become a sacred principle of modern economic theory, a sort of moral dogma. That is why it is so difficult to persuade our politicians and economists to reassess its effects on a world economy which has changed radically. I believe that GATT and the theories on which it is based are flawed and that, if they are implemented, they will impoverish and destabilize the industrialized world whilst at the same time cruelly ravaging the Third World.

MM: What is the economic theory on which GATT is based?

 Goldsmith: A leading theoretician of free trade was David Ricardo, the early-19th century British economist. He developed two interrelated concepts: specialization and comparative advantage. According to Ricardo, each nation should specialize in those activities in which it can have a comparative advantage relative to other countries. Thus, a nation should narrow its focus of activity, abandoning certain industries and developing those in which it has a comparative advantage. The results would be that international trade would grow as nations export their surpluses and import those products that they no longer manufacture, efficiency and productivity would increase and prosperity would be enhanced. But these ideas are not valid in today's world.

MM: Why not?

 Goldsmith: During the past few years, four billion people have suddenly entered the world economy. They include the populations of nations such as China, India, Vietnam, Bangladesh, and the countries that were part of the former Soviet empire, among others. These populations are growing fast. Barring catastrophes, they are forecast to reach over 6.5 billion in 35 years. They have very high levels of unemployment and those who do find jobs offer their labor for a tiny fraction of the pay earned by workers in the developed world. For example, 47 Vietnamese or 47 Filipinos can be employed for the cost of one Frenchman. Until recently, these four billion people were separated from our economy by their political systems, usually communist or socialist, and because of a lack of technology and of capital. Today all of that has changed. Their political systems have been transformed, technology can be transferred instantaneously anywhere in the world [via] microchip, and capital is free to be invested worldwide, wherever the anticipated yields are highest.

 The principle of global free trade is that anything can be manufactured anywhere in the world to be sold anywhere else. That means that these new entrants into the world economy are in direct competition with the work forces of the developed countries. They have become part of the same global labor market. Our economies, therefore, will be subjected to a completely new type of competition. For example, take two enterprises, one in the developed world and one in Vietnam. Both make the identical product destined to be sold in the same market, say France or the USA; both can use identical technology; both have access to the same pool of international capital. The only difference between the two is that the Vietnamese enterprise can employ 47 people for the cost of only one Frenchman. You do not have to be a genius to understand who will be the winner in such a contest. In France, as in most developed nations, an average manufacturing company pays its employees, including social costs, an amount equal to about 30 percent of volume. If such a company decides to maintain in France only its head office and sales force, and to transfer its production to a low-cost area, then it will save about 20 percent of volume. Thus, a company with a volume of $500 million will increase its pre-tax profits by $100 million per year. If, on the other hand, it decides to maintain its production in France, the enterprise will be unable to compete with low-cost imports and will perish. It must surely be a mistake to adopt an economic policy which makes you rich if you eliminate your national work force and transfer your production abroad, and which bankrupts you if you continue to employ your own people.

MM: Won't high tech jobs replace those that move offshore?

 Goldsmith: High tech industries can, indeed, survive and prosper under these circumstances. That is because they are highly automated and therefore employ only a few people. So labor is a minor item in the overall cost of the products that they make. But obviously the fact that they employ very few people means that they are incapable of employing very many. As soon as they need to employ many, they will be forced to move offshore. For example, IBM is moving its disk drive business from America and Western Europe to low labor cost countries. Boeing has also announced that it will transfer to China production of parts of certain of its planes to China.

 In France, proponents of global free trade constantly say that the exporting of such high tech products as very fast trains, airplanes and satellites will create jobs on a large scale. Alas, this is not true. The recent $2.1 billion contract selling very fast French trains to Korea has resulted in the maintenance for four years of only 800 jobs in France: 535 for the main supplier and 265 for the subcontractors. Much of the work is carried out in Korea by Asian companies using Asian labor. What is more, following the transfer of technology to South Korea, in a few years time Asia will be able to buy very fast trains directly from South Korea and bypass France. As for planes and satellites, the numbers employed in this industry in France have fallen consistently. Over the 5 years from 1987 to 1992, they have fallen from 123,000 employees to 111,000 and are forecast to fall to 102,000 in the short term.

MM: Won't the growth of the service sector compensate for the jobs lost in manufacturing?

 Goldsmith: I am afraid that even service industries will be subjected to substantial transfers of employment to low-cost areas. Today through satellites you can remain in constant contact with offices in distant lands. That means that companies employing large back offices can close them and shift employment to low-cost areas. SWISSAIR has recently transferred a significant part of its accounts department to India, for example.

MM: But certain services such as health and education, cannot be transferred overseas, can they?

 Goldsmith: A nation's economy is split into two broad segments, one which produces wealth and the other which dispenses it. That in no way means that the latter is inferior. It includes such vital activities as health and education. But one cannot reduce that part of our economy which produces wealth and expect to be able to maintain the other part which dispenses it. You must earn what you spend.

MM: Proponents of GATT claim it will spur growth, citing, for example, the joint study published by the OECD and the World Bank which states that the application of the GATT proposals would increase world income by $213 billion a year. How can we turn down such growth?

 Goldsmith: If you study the facts, you will find that the increase is forecast to come about in 10 years time. Two hundred and thirteen billion dollars is a large sum of money, but to assess its significance you must compare it to the world's GNP as it is forecast to be in 10 years time. Two hundred and thirteen billion dollars is no more than 0.7 percent of the world's anticipated GNP. What is more, the General Secretary of the OECD described the report as being "highly theoretical."

MM: How do you respond to GATT proponents' claims that free trade will enable consumers to benefit from being able to buy cheaper imported products manufactured with low-cost labor?

 Goldsmith: Consumers are not just people who buy products, they are also the same people who earn a living by working, and who pay taxes. As consumers they may be able to buy certain products cheaper, although when Nike moved its manufacturing from the United States to Asia, shoe prices did not drop. Profit margins rose. But the real cost of apparently cheaper goods will be that people will lose their jobs, get paid less for their work and have to face higher taxes to cover the social cost of increased unemployment. Consumers are also citizens, many of whom live in towns. As unemployment rises and poverty increases, the towns will grow even more unstable. So the benefits of cheap imported products will be heavily outweighed by the consequent social and economic costs.

MM: Why will GATT reduce earnings?

 Goldsmith: According to figures published by the U.S. Department of Labor, since 1973, in inflation-adjusted dollars, real hourly and weekly earnings in the United States have already dropped by an average of 16.4 percent, and that was before the most recent GATT negotiations known as the Uruguay Round. If populations of 4 billion people enter the workforce and are willing to offer their labor at a fraction of the price paid to workers in the developed world, it is obvious that such a massive increase in supply will reduce the value of labor. Also, it will take away practically all negotiating power from organized labor. When trade unions ask for concessions, the answer will be: "If you put too much pressure on us, we will move offshore where we can get much cheaper labor, which does not seek protection, long holidays, and all the other items that you want to negotiate."

 You must understand that global free trade will brutally shatter the way in which value-added is shared between capital and labor. Value-added is the increase of value obtained when you convert raw materials into a manufactured product. In a mature society such as our own, we have been able to develop a general agreement as to how it should be shared between labor and capital. That agreement has been reached through generations of political debate, elections, strikes, lockouts and other conflicts. Overnight that agreement will be destroyed by the arrival of huge populations willing to deeply undercut the salaries earned by our workforces. The social division that this will engender will be deeper than anything envisaged by Marx in the nineteenth century.

MM: Who will be the winners and losers under a system of global free trade?

 Goldsmith: The losers will, of course, be those who become unemployed as a result of production being moved offshore. They would also be those who lose their jobs because their companies do not move offshore and are not able to compete with cheap imported products. Finally, they will be all those affected by the reduction in their earning capacity following the shift in the sharing of value- added.

 The winners will be those who can benefit from an almost inexhaustible supply of very cheap labor. They will be the companies who move their production offshore to low-cost areas; the companies who will benefit from paying lower salaries at home; and those who have capital to invest offshore, and who will receive larger dividends as a result of the very low-cost labor. But they would be like the winners of a poker game on the Titanic. The wounds inflicted on their societies would be too deep to be acceptable without brutal consequences.

 It should also be remembered that one of the characteristics of developing countries is that a small handful of people control the overwhelming majority of their nation's resources. It is these people who own the major part of their nation's industrial, commercial and financial enterprises and who assemble the cheap labor which is used to manufacture products for the developed world. Thus, it is the poor in the rich countries who will subsidize the rich in the poor countries. This will have a deep impact on the social cohesion of nations.

MM: Do the developed nations not have a moral responsibility to open their markets to the Third World?

 Goldsmith: Let me start my response by quoting an extract of a report by Herman Daly and Robert Goodland, published by the World Bank.

 "If by wise policy or blind luck, a country has managed to control its population growth, provide social insurance, high wages, reasonable working hours and other benefits to its working class (i.e. most of its citizens), should it allow these benefits to be competed down to the world average by unregulated trade? This levelling of wages will be overwhelmingly downward due to the vast number and rapid growth rate of under-employed populations in the Third World."

 But the application of GATT will also cause a great tragedy in the Third World. Modern economists believe that the definition of efficient agriculture is one that produces the maximum amount of food for the minimum cost, using the least number of people. That is bad economics even in purely mathematical terms. When you intensify the methods of agriculture and substantially reduce the number of people employed on the land, those who become redundant are forced into towns. Everywhere you travel in the world you see those terrible slums made up of people who have been uprooted from the land. Even in one-dimensional economic terms, you should add to the direct cost of producing food by intensive methods, the cost of building infrastructure and paying welfare to those who have as a consequence been uprooted. But, of course, the hurt is deeper. Families are broken, the countryside is deserted and social stability in the towns is destroyed. The slums in Brazil, known as favelas, did not exist before the Green Revolution was applied to agriculture in Brazil and chased people off the land. It is estimated that there are still 3.1 billion people in the world who live from the land. If GATT manages to impose worldwide the sort of productivity achieved by the intensive agriculture of nations such as Canada and Australia, then it is easy to calculate that about two billion of these people will become redundant. They will be uprooted and will move to urban slums. But a large part of the GATT refugees will be forced into mass migration.

There is much concern about the tragic events in Rwanda where 2 million refugees have been chased into neighboring countries, and about the boat people who left Haiti. But GATT, if it "succeeds," will create mass movements of refugees on a scale of about l,000 times greater. We will have profoundly and tragically destabilized the world's population.

MM: But why do Third World nations themselves support global free trade?

 Goldsmith: You must distinguish between the populations on the one hand and their ruling elites on the other. As I explained earlier, it is these elites which are in favor of global free trade. It is they who will be enriched. Visit India and you will find that there have been demonstrations of up to one million people opposing the destruction of their rural communities, their culture and their traditions. In the Philippines, several hundred thousand farmers protested against GATT because it would destroy their agriculture.

MM: Some would say that Europe's, and more particularly France's, employment problem is not GATT, but just the result of the old-fashioned diseases that one finds in uncompetitive, inflexible and spoiled societies. The welfare state is out of control; social costs borne by employers discourage the creation of new jobs; high government expenditure and taxation stifle the economy; state intervention is paralyzing corporatism.

Goldsmith: All that is partially true. And those diseases must be treated forcefully. But even if the treatment is successful, it would not solve the problems that I have described. Imagine that the French were able to reduce at a stroke social charges and taxation so as to diminish the cost of labor by a full 33 percent. All that would mean is that instead of being able to employ 47 Vietnamese or 47 Filipinos for the price of one Frenchman, you could only employ 31. In any case, you must remember that France, over the past 20 years, has produced spectacular economic growth. During that period her GNP has grown by 80 percent. And yet during the same period, unemployment has grown from 420,000 people to 5.l million (the official figure is 3.3 million, but the government's own figures show that various categories consisting of 1.8 million people have been omitted and should be added). 5.1 million unemployed in France is equivalent to about 25 million in the USA. This growth in unemployment has taken place while France has progressively opened her market to international free trade. How can we accept a system which increases unemployment from 420,000 to 5.l million during a period in which the economy has grown by 8.0 percent?

MM: Why is it not possible to repeat our successes in enriching countries like Taiwan, Hong Kong, South Korea and Singapore?

 Goldsmith: The combined population of these countries is about 75 million people. So the scale of the problem is quite different. The United States might be able to achieve a similar success with Mexico and, progressively, Western Europe could accommodate Eastern Europe. But attempting to integrate four billion people at once is blind utopianism. In any case, each of the countries that you mention has been the beneficiary of the Cold War. During that period, one or other of the superpowers sought to bring every part of the world into its camp. If one failed to fill the void, the other succeeded. That is why very favorable economic treatment was granted by the West to South Korea after the Korean war, and to Taiwan, Singapore and Hong Kong while China was considered a major communist threat.

MM: So what do you recommend?

 Goldsmith: We must start by rejecting the concept of global free trade and replacing it by regional free trade. That does not mean closing off the regions from trading with the rest of the world. It means that each region is free to decide whether to enter into bilateral agreements with other regions when it is to their mutual economic benefit. We must not just open our markets to any and every product whether or not it benefits our economy, destroys our employment, and destabilizes our society.

MM: Does that not mean that we will cut ourselves off from innovation in other parts of the world?

 Goldsmith: No. Freedom of movement of capital should be maintained. If a Japanese or a European company wishes to sell its products in North America, it should invest in America. It should bring its capital, its technology, its products, build factories in America, employ American people, and become a corporate citizen of America. The same is true for American and Japanese firms wishing to sell their products in Europe. Think about the difference between the GATT proposals and those I have just described. GATT makes it almost imperative for enterprises in the developed world to close down their production, eliminate their employees and move their factories to low-cost labor areas. What I am suggesting is the reverse: that to gain access to our markets, foreign corporations would build factories, employ our people and contribute to our economy. It is the difference between life and death.

MM: But won't that reduce competition?

 Goldsmith: Competition is an economic tool which is necessary to promote efficiency, to apply downward pressure on prices, and to stimulate innovation, diversity and choice. Vigorous competition needs a free market that is large and in which cartels and other limitations on competitive forces are forbidden. The idea that Europe or NAFTA , the two largest free trade areas ever created in history, are not able to be thoroughly competitive is, of course, nonsense. They are vast and open and free and competitive and welcoming to innovations from anywhere in the world. Every significant corporation worldwide would have to come and compete, because no corporation could afford to bypass them. The markets are much too big and prosperous. But such competition would be constructive, not destructive.

MM: What other recommendations do you have?

 Goldsmith: I totally reject the concept of specialization. We need the contrary, a diversified economy. Only such an economy will allow our populations to participate productively in our society.

 Specialization inevitably leads to chronic unemployment and to lower wages. Growth in GNP has not solved the problem. Usually it creates part-time, lower-paid jobs. That has been the trend in the developed world during the past decades. In addition to the large corporations, we need a society based on a multitude of small- and medium-size businesses and craftsmen covering a wide range of activities, and we need a decentralized economy. We must encourage local activity rather than urban centralization. Everything must be done to return life and vigor to the small towns and villages throughout our nations. It is extraordinary to read economists commenting on the state of the nation. They believe that the profitability of large corporations and the level of the stock markets are the reliable guide in assessing the health of the society and the economy. A healthy economy does not exclude from active life a substantial proportion of its citizens.

In the great days of the U.S.A., Henry Ford stated that he wanted to pay high wages to his employees so that they could become his customers and buy his cars. Today we are proud of the fact that we pay low wages. We have forgotten that the economy is a tool to serve the needs of society and not the reverse. The ultimate purpose of the economy is to create prosperity with stability.