Even if free trade is ultimately broadly beneficial, the fact remains that as trade has become freer inequality has worsened, Jayati Ghosh argues

By Jayati Ghosh*

For most critics of globalisation, trade is the villain, responsible for deepening inequality and rising economic insecurity among workers.

This is the logic driving support for US President Donald Trump’s escalating tariffs. Why, then, does the message resonate far beyond the United States, and even the advanced economies, to include workers in many of the developing countries that are typically portrayed as globalisation’s main beneficiaries?

Free trade is hardly the only – or even primary – source of inequality and insecurity worldwide. Surprisingly, one enduring problem that provokes far less popular backlash is that finance continues to dominate the world economy, generating substantial instability and mounting risks like those that led to the 2008 global financial crisis.

Moreover, some countries continue to pursue fiscal austerity, instead of consolidating their budgets by, say, addressing large-scale tax avoidance and evasion by major companies and wealthy individuals. And labour-saving innovations continue to be developed and deployed, producing “technological unemployment” among some groups.

Some argue that free trade is being demonized simply because people do not understand what is in their own best interest. But that is both patronising and simplistic. Even if free trade is ultimately broadly beneficial, the fact remains that as trade has become freer, inequality has worsened.

One major reason for this is that current global rules have enabled a few large firms to capture an ever-larger share of the value-added from trade. Specifically, the proliferation of global value chains has enabled powerful multinational firms to control the design, production, and distribution of traded goods and services, even as various segments are outsourced to smaller firms far from final markets.

These firms often benefit from intellectual-property monopolies, reinforced by free-trade agreements designed to strengthen corporate power. These enable them to collect massive economic rents, especially at the pre-production (including design) and post-production (marketing and branding) stages, where the most value-added and profit is generated.

Meanwhile, increasingly intense competition in the production phase drives down prices, so that the actual producers, whether employers or workers, receive diminishing shares of the value pie. The upshot of this system is that many developing countries that should have benefited from the globalisation of value chains have remained confined to low-productivity activities that yield only limited economic value and do not even foster wider technological upgrading.

The forthcoming Trade and Development Report 2018 by the United Nations Conference on Trade and Development (UNCTAD) captures how top firms have steadily increased their share of total exports, and now dominate global trade. Ironically, this trend has intensified since the 2008 global financial crisis, which cast a spotlight on the disproportionate market power of the few and the outsize gains going to the top 1% of the income distribution.

UNCTAD’s research also shows that, for both developed and developing countries, integration into global value chains correlates with declining shares of domestic value-added in exports. The share of actual production in domestic value-added has also declined, as has the share of the remaining value-added accrued by labour. One potential driver of the latter trend is that, by drastically enlarging the global labour supply, the economic integration of countries with large populations like China and India has increased the bargaining power of capital relative to labour.

The only significant exception to these trends is China, which has designed industrial policies specifically to increase the share of domestic value-added and to improve workers’ conditions. Ironically, it is these measures, which have helped offset some of the negative effects of free trade, that Trump has condemned in his pursuit of policies that will do little to protect workers.

But the implications of allowing a few global corporations to wield such vast market power extend further. For one thing, such concentrated economic power makes it more difficult for countries to industrialise, because local companies cannot expect to compete with established multinationals. For another, it prevents developing countries from reaping the full benefits of rising commodity prices, though they gain no protection from price downturns. The ability of large corporations to underprice natural resources also encourages excessive extraction, pollution, and environmental degradation – outcomes that they disingenuously present as the “price of development.”

Consumers also suffer. Yes, major multinationals can offer low prices. But their massive market power leaves consumers at their mercy in every sphere, from manufacturing to financial services to digital technologies.

The more power these companies have, the more they can accrue, as they use their influence to shape regulatory systems, economic policies, and even tax regimes. The result is a weakened state that serves the interests of the few, rather than protecting the many. Those who claim that redistribution can adequately address this problem must address the fact that the “losers” of free trade have so far received little, if any, compensation.

Globalisation’s detractors are right that free trade has created serious imbalances. But a trade war completely misses the point. The problem is not that free trade has led to too much global competition, but rather that it has enabled a few companies to secure monopolies or near-monopolies. This has given rise to massive inequalities, blatant rent-seeking, and predatory behavior. Only by addressing these trends can the benefits of trade be increased and equitably shared.


Jayati Ghosh is Professor of Economics at Jawaharlal Nehru University in New Delhi and Member of the Independent Commission for the Reform of International Corporate Taxation. Copyright: Project Syndicate, 2018, and published here with permission.

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15 Comments

I've thought this for ages. Nice to hear someone who is an expert in this area saying this.

In the old days they used to call them monopolies. Monopolies entrench their positions by buying political favor, its nothing new and has been going on for thousands of years. The people of the world have been sold a lemon, free trade agreements are more about entrenching corporate interests. Its made worse now than in centuries gone by because of the tax haven system has allowed multi nations to become free of any effective taxation while using the extra profits to 'buy' the governments of the world.
While there is some pushback it would require a multinational movement to destroy the monopoly position they have built up and that does seem likely. They can easily divide and conquer because people in power are always open to some form of bribe.

Did we ever have free trade? I remember the EU, quotas restrictions on trade, tariffs, duty, they still have them on lots os stuff including aluminium and steel and Ag. The countries often pushing free trade via the world bank/IMF or whatever, were never really free themselves unless it suited them.

Energy concerns were foremost in minds then the arms race. I remember Mr Gorbachov and Yeltsin, they broke up the USSR and the wolves from the West moved in to scavenge the spoils of a failed empire.

Until you actually sit down and decide what wealth really is it's hard to go forward. Dividing what you have between more and more people was never a long term solution.

Mergers and acquisitions have destroyed competition, created global corporations who roam and pillage at will. Instead of benefiting the third world countries they set up in they only take, it's about shareholder return.
Nike may have the message for the USA, 'Just do it', is that also the corporate moto when it comes to getting it's shoes made in Indonesian sweat shops?

Big Biz has used it's size & muscle ever since (biz) time began. As is commented above, nothing is new here. Big biz wants the best for its shareholders as we've heard so often recently, but has very little respect for its customers. Think Australian banks. Think American & UK & EU banks a decade ago. Think Insuance. Think supermarkets. Think DIY. Big is Good they tell us. Still, nothing has, or will change. Big is power while small is powerless. One of my only 'agrees' with the Democrats embarrasing political behaviour over the last couple of years, is their fight against the 1%. Big Biz is the 1%.
Here in NZ Big Biz doesn't seem to have quite the same effect as they do offshore. The leaders of this country's big biz seem to hellbent on running their organisations into the ground for reasons I am unable to fathom. Perhaps some other readers might be able to enlighten me on this phenomenon.

There is a thing called human nature... and as long as a large majority of the world's population does not wake up to the reality of what is going around them, this will get worse, not better. But don't misunderstand me, I applaud the article and how well it is written. Just like a stone thrown into water creating ever wider circles...

Those corporations driven by human greed do not have the true power, only the power over propaganda (also known as mainstream media and advertising) and a few select bought politicians. The true power lies in raising the consciousness of oneself. All it takes is for each one of us to make changes in our own lives. Be happier for having made a change and not supporting those global corporations wherever possible. Other people will question what they do too, and may end up changing their behaviour when watching what other people around them do.

In the meantime, I am daily questioning within my own family what we buy, why we consume or how we waste things. Eventually, one by one, the majority will be reached and the pendulum will swing in the opposite direction to correct the excesses we see today.

While we continue to blame the failure of free trade on governments and big businesses, we cannot deny the fact that all this happened gradually under our own watch. We want the world to lament on our loss of jobs to offshore locations but proudly fill up our homes with stuff made in China, Japan or Germany.

Stop free trade and then what? Hand ourselves to the mercy of more homegrown corporations like Foodstuffs, Fonterra and Fletchers. Or our Aussie-owned banks? The NZ markets with the least participation from foreign companies are usually the ones where we suffer with the most from inefficiencies and predatory pricing.
Don't fool yourself into believing for a second that in the absence of free trade, wealth would be equitably distributed among individuals in our lovely country.

Sooner or later you find yourself having to protect yourself. While you can still identify what 'yourself' is. It's easy with NZ, sometimes easy by race.

To have global trade sans monopolies would require global Courts and penalties and policing. Great ideal but it doesn't look likely given:

https://www.cnbc.com/.../john-bolton-says-international-criminal-court-i.......

With immaturity like that.......

Link is broken.

Great article but pretty obvious stuff. This is why it's a total joke when NZ bans on oil and plastic bags or claims to care about human rights. We import 3 Billion tones of oil from the middle east. Meanwhile the plastic bags in the oceans are mostly coming from our #1 trading partner; China.

People want the illusion that they're doing good. It's all feel good vanity.

To improve your economic situation, you either need to be lucky (e.g. Oil rick Saudi Arabia) or work very very hard to catch up. Japan, Sout Korea and now China has worked very very hard to bridge the unimaginable gap between their technological capabilities 100 years ago and the developed western world at the time. There is absolutely no reason why the likes of Indonesia, Vietnam, Thailand, Sri Lanka, India etc cannot change their fortune from cheap labour countries to something more. But that requires hard work, focus and vision. Globalisation, like any other phenomena, offers opportunity and risk. A nation attitude will be fundamental to whether it benefits from it (long term) or lose.
South Korea and Iran started their car assembly industries in 1960s, simply assembling parts manufactured elsewhere. Iran is still exactly where they were 60 years ago buying parts from other countries and assembling them in Iran. South Korea is now a global force in car manufacturing.
You can always blame everyone else but yourselves. There is always something going on. However, even if all you say is true, you need to work very very hard to achieve anything. There are no shortcuts.
Developing countries have a huge gap to cross in terms of improving their capabilities. Expecting other to play it nice is a sure way to continue to lose.

South Korea, China and a few others at least had dictatorial governments (at the time) who pushed for industrialisation - in South Korea's case basically forcing some of the wealthy oligarchical families to develop industry or lose what they had. The likes of the Philippines were unlucky enough to have a worthless sack of the proverbial who only indebted the country to syphon money into their own and their friends' bank accounts without driving industrialisation.

Agree.. free trade is not necessarily fair trade, if there were tariffs based on say.. the median wage of a country we might start to raise all boats.. but until then its as you say, the big getting bigger and cheap labour.

Free trade simply means free of protection, so that captitalists can rape the resources of the planet unimpeeded, heaven help those in the way. This is not good and needs a change of direction.

Its interesting how America was the proponent of free trade and now that China has cheated its way into pole position , they are not so much in favour of free trade any more