Let goods be homespun

Something serious seems to be happening. Respected thinkers think so. "Globally and nationally, we shall sooner or later have to choose between the free market and the free society," says David Marquand in this issue of Prospect. Jacques Attali recently wrote in Le Monde: "If the debate is not quickly joined, unemployment will remain to haunt us in the 21st century. And it is democracy itself which will come to an end, boarded and wrecked by pirates flying either a black or a red flag. Or a black and red flag."

Why-and when-will we have to make this momentous choice between freedoms? What is this great debate whose delay threatens us with totalitarianism? It appears to boil down to "globalisation": boiled down further, to trade and protection. We in the developed world in the north are being threatened by the cheap labour of the developing world in the south and east.

An intellectual and political network is forming around this idea. It may become influential in our politics; the more so if European levels of unemployment remain high and monetary union fails. So far, the debate has been led by the political right (even if it attracts growing curiosity from the liberal left, as Marquand and Attali testify). This explains why it has been muted in Britain: the British right is too committed to free markets and free trade, and against the supposed protectionism of the EU, to rally to this flag.



But James Goldsmith, whose Referendum party is being readied to deprive marginal Tories of their seats, lurks in the background of the British debate; Goldsmith has been the most indefatigable presenter in this country of the case against free trade. He argues that the 18th century theory of free trade and comparative advantage was only meant to apply to societies at roughly the same level of development. His view is not original; it has been attacked by most of the economic establishment, but it has the virtue of simplicity and may acquire the sheen of relevance.

"The same technology is available but labour in one country costs more than 40 times less than in another... To benefit from these conditions, capital is transferred by trans-national corporations to cheap-labour countries to finance modern factories and to equip them with state of the art technology. These factories will produce goods to be sold in the markets of the developed nations, thus destroying jobs at home." In the same passage-from The Response, a reply to the numerous critics of his protectionist theories-Goldsmith quotes Keynes (from the essay National Self-Sufficiency) to the effect that "I sympathise... with those who would minimise, rather than maximise, economic entanglement between nations... let goods be homespun whenever it is reasonably and conveniently possible, and above all, let finance be primarily national." With this, Goldsmith has placed himself in the line of a great tradition.

He has also positioned himself on the side of labour in the developed world. The "cheap and docile labour" of the developing world, coupled with "banished trade unions" (in the words of Lane Kirkland, the former president of the US trade union federation AFL-CIO) is seen by workers' representatives everywhere in the developed world, especially in the US, as destroyers of secure jobs and high pay levels. Yet the unions are no longer protectionist-at least, not overtly. Rather, they push (largely unavailingly) for the observation of minimum labour standards to prevent the worst aspects of "social dumping"-a line echoed by the Labour MP Denis MacShane, who has called for a "21st century social plimsoll line" in a recent Fabian pamphlet. The International Labour Organisation, an agency which has struggled in the past decade to give prominence to its agenda of workers' protection and rights, is now proposing-according to Michel Hansenne, its director general-a kind of "grand bargain" between the north and the south: the former's markets will remain open if the latter's labour markets are regulated to take out the worst aspects of exploitation.

If this bargain is shunned, a different kind of bargain may come to seem feasible in the developed world: one between left and right to hold what we have. The western politician who most vividly made the issue his own in the past year is Pat Buchanan, a man of far right credentials whose failed run for the Republican nomination was built on a platform designed to appeal to skilled workers under threat from free trade (as well as social conservatives and even anti-Semites). Buchanan called for high tariffs in order to increase the demand and price for US labour, allowing US goods to be substituted for the low-priced imported goods many Americans prefer. He also called for an end to immigration, in order to stop immigrants undercutting US wage rates.

Buchanan has had surprising support from Edward Luttwak, the director of geo-economics in the Centre for Strategic and International Studies in Washington-certainly not a man of the right in economic matters. Luttwak wrote in the London Review of Books (9th May) that the mainstream parties have reached an economic consensus on free trade (as on other economic essentials) which will devastate their working classes.

"If a new political economy cannot emerge to tame the new force [of global job-destroying capitalism]," he writes, "populism in many different local forms may well come to dominate both American and European politics. In all cases, it would have to promise more personal economic security to the broad masses of office workers, shopkeepers, industrial workers and government employees now threatened by efficiency and unemployment. In some cases, it might acquire a fascist undertone by adding racist and authoritarian stances... anyone who believes that the humiliation and material impoverishment that unemployment has brought to one out of 15 (US, UK) or one out of ten (France, Germany) fellow citizens are worse than some loss of real GNP, and worse than inflation's inconveniences and irritations for all, should oppose central bankerism [that is, the prevailing liberal orthodoxy]."

Luttwak makes clear what others disguise-that protectionism does cause inefficiencies and distortions, but that while these are regarded as inadmis-sible by the liberal economic consensus which has seized most leading western parties, it is better than riot and authoritarianism. Jacques Attali, the former adviser to President Mitterrand who was the first head of the European Bank of Reconstruction and Development, uses similar, if less transparent, rhetoric and calls for the same remedies-in his case, a wall of tariffs around those European countries which adopt the Euro currency.

Thus Attali writes: "In this new world of industrial and technological turmoil there are only two possible long term strategies for Europe-one of the right and one of the left." The first is a de-regulated, free-trading Euro-liberalism. The second, which he prefers, is a social Europe regulated and protected "culturally, socially and industrially."

The left's argument for European protection is, so far, primarily a French affair. There is a great reluctance to consign world development to a capitalism which they call "Anglo-Saxon." Roger Boyer, director of research at the Centre Nationale de la Recherche Scientifique, described in a recent interview in Le Monde (4th June) the descent of the old, social democratic-capitalist model: "After 1983, the failure of French statism underlined the power of internationalisation and the free market. Then came the collapse of the regimes of the Soviet type, which was put down to the superiority of capitalism. And then, at the end of the 1980s, the Swedish model which had for so long reconciled economic dynamism, full employment and social justice, entered into a crisis... Even Japanese capitalism which had so much impressed-even terrorised-American managers in the mid-1980s, seemed to grind to a halt. By contrast, American capitalism experienced a rediscovery of dynamism and prestige to the point of focusing the attention of politicians and entrepreneurs on it as 'the' model to emulate."

But, added Boyer, the wrong, Anglo-Saxon, model, has won. "Gresham's Law, under which bad money drives out the good, applies globally: in the long term, bad capitalism-inegalitarian, inefficient but flexible, drives out the good-more egalitarian, more efficient but too slow in the short term." Faced with "bad" capitalism, the intensity of the drive to protect a space within which a "good" capitalism can thrive, increases. The language of its advocacy includes what Attali calls "social cohesion"-a rediscovery of the old social contract between labour and capital.

Implicitly at least, this contract no longer pretends to be friendly to the material aspirations of the developing countries, but stresses that in order to protect our social gains we must cease to assist theirs. If this route were followed, we in the north would find the south ranged against us, speaking in the name of a free trade which we-especially we British-once forced down southern throats in order to expand the possibilities of our manufacturing sector. The outlines of the coming struggle were already visible in early skirmishes: at the closing stages of the lengthy Uruguay round to establish a new Gatt (now WTO-World Trade Organisation) agreement two years ago. The Indian ambassador to Gatt, BK Zutshi, said that a strict observance of what MacShane calls the international social plimsoll line had "the potential for undoing the understanding we have built up on free trade."

in practice, in the world's sea ports and airports, and even in theory, free trade has never been stronger. The new embrace of free trade by much of the developing world-most ardently by the post-communist economies of central Europe and, to a more limited degree, Russia-appears from recent evidence to be well grounded in fact. It seems that "openness" is a crucial predictor of growth-to the point where openness nearly always and everywhere brings higher growth.

In a paper by Jeffrey Sachs and Andrew Warner for the Brookings Panel on Economic Activity last year, the two economists argued from an examination of over 100 countries of widely differing development status that trade was the most important of a mix of economic policies, including keeping a macroeconomic balance and relying on the private sector as the main engine of growth. "We suggest," they write, "that the most parsimonious reading of the evidence is that convergence can be achieved by all countries, even those with low initial levels of skills, as long as they are open and integrated in the world economy."

For Sachs, a missionary among economists, free and open trade is always a win-notwithstanding the adjustment problems of sectors and even whole countries. It is, for him, the most precious insight of classical economics as preached by Adam Smith and his followers-allowing (in Sachs' words) "efficient resource allocation according to comparative advantage, diffusion of international knowledge through trade and heightened domestic competition as a result of international competition."

Sachs, and others who preach openness, propose identical threats to those of the social cohesionists. For them, nationalism, authoritarianism and fascism reside not in the consequences of trade-induced unemployment, but in the very closure of the world economic system itself. The era conjured up in this version of the future is the period after the first world war, when a world trading system in some ways as "globalised" as the present one collapsed, to be replaced by financial instability, low commodity prices (which shattered the previously rapidly developing economies of Latin America) and the Great Depression, which in turn stimulated intense, beggar-my-neighbour protectionism everywhere.

Global capitalism under British hegemony came to an end. Britain could no longer supervise it, nor was any other power prepared to shoulder the gold standard's previous burden. The intellectual consensus, among most economists, too, was that capitalism had failed or at least had to be seriously modified. Communists had come to power in Russia, fascists came to power in Italy and Germany, there were right wing authoritarians in Spain and Portugal and in many of the Latin American states. State planning, which gained enormous prestige from the perceived successes of the Soviet Union in the 1930s in ending unemployment (we now know how), was regarded as the wave of the future.

It was in this context that Keynes wrote National Self-Sufficiency, whose best known passage is the one now quoted by James Goldsmith. Delivered as a lecture in Ireland in 1933, it came at the zenith of the period in which everyone who thought about the economy and society had to grapple with the evident fact that the 19th century capitalist model commanded neither success nor respect. Later in the same essay, Keynes makes clear what he is seeking:

The point is that there is no prospect for the next generation of a uniformity of economic systems throughout the world, such as existed, broadly speaking, during the 19th century; that we all need to be as free as possible of interference from economic changes elsewhere, in order to make our own favourite experiments towards the ideal social republic of the future; and that a deliberate movement towards greater national self-sufficiency and economic isolation will make our task easier, in so far as it can be accomplished without excessive economic costs.

In this passage, especially in the last clause of it, Keynes then, like Luttwak now, makes clear that he accepts there will be costs in creating "the ideal social republic"-but that these had to be borne because no possibility existed of a global agreement on trade, capital movements, or anything else.

Keynes went on-which Goldsmith does not say -to be one of the driving forces for the establishment of what came to be known as the Bretton Woods system: the creation of the International Monetary Fund and the World Bank (with its later agencies), at once the midwives and guardians of an embryonic but spreading world economic order based on precisely these principles which a decade before he had said were impossible to retain in the climate of the 1930s. Keynes cannot be quoted to endorse all subsequent actions of the IMF and the Bank in their 50 years of existence. Still, it is clear that he cannot in conscience be cited by protectionists to give beyond-the-grave endorsement of their project.

The opening of world trade under the Bretton Woods system has been remarkable-particularly after 1970 (though the opening of the western European economies largely occurred in the 1950s). With it (on the Sachs and Warner evidence) went convergence, as the poorer OECD economies pulled closer to the level-in some cases surpassed the levels-of richer ones. To the evidence that, for some of the poorest countries, the income gap between their population and inhabitants of the developed world has grown, the riposte is that they have not adopted the policies of openness and secure property rights which are fostering the growth of developing countries which have, especially in Asia.

"Economists," claims The Economist of 25th May, "argue about how much weight to attach to one factor or another, but most have come to agree with this broad proposition: the key to growth is granting producers and consumers the economic freedom to face and to respond to incentives." This consensus had conquered much of the north: it is now conquering the south for the usual reason that it is seen as being in their self-interest, in the long term and even in the short. Having discovered the comparative advantage of cheap labour, they do not wish to have it taken from them by any sort of regulation.

the question now is: Will the effects of their vast pools of "cheap and docile" un-unionised labour stimulate the reaction for which intellectual support-from ends of the spectrum traditionally described as both left and right-is now gathering, and render their conversion to the world trading system futile, even as it gets fully under way?

The ills of the rich world are familiar enough-expressed in the UK and the US in poverty level wages at the low end of employment, in high levels of unemployment in much of western Europe, and in growing inequality caused by both these. There is clearly no automatic link between political extremism and unemployment, especially unemployment supported by decent welfare. But equally clearly there is some link. In once-social democratic Sweden, for example, racist propaganda has soared: "Not since the war," says the 1996 edition of the Antisemitism World Report, "has Swedish neo-Nazism been as self-confident as it is now."

Do protectionists have a real means of keeping the social peace (assuming that it is threatened) or just a plausible populist message? That depends on whether trade is the primary cause of our ills. A case can certainly be made. The decline in living standards of unskilled workers in the US occurred during a period of unprecedented growth in developing country imports. These now account for roughly one third of US imports, compared with 14 per cent in 1970. In the EU the proportion has risen from 5 to 12 per cent. Manufactured goods now account for more than half of developing country exports to the industrial nations, up from less than 5 per cent 30 years ago.

The educated economic consensus still finds this unconvincing; the preferred culprit is a combination of labour-saving technology and free market politics (or the lack of it). The main doubt about the trade link concerns scale. In most industrial countries only a small fraction of workers (15 per cent in the US) are now employed making manufactured goods. It is hard to see how trade pressures in this sector could push down wages throughout the economy. Similarly, manufacturing trade with developing countries accounts for less than 2 per cent of the GDP of rich countries.

It is also easy enough to prick the hyperbole of the great "sucking sound" of capital being lured to cheap labour economies. The price of labour is only one factor among many in deciding business location. If it were decisive, the US would not be the most important location for UK overseas investment.

The wage gap which Goldsmith, Buchanan and others make so much of tends to reduce as the countries using that comparative advantage most aggressively become more successful. Japan was, after all, the cheap labour scare country in the 1950s and 1960s; South Korea in the 1980s. They remain successful-but no longer cheap: they both have labour movements which claim an increasing share of national income for their members; and Japan is showing the downside of strong growth in rather a "western" manner. We might expect that pay in, say, the Czech Republic would quickly rise towards west European wage levels in the next decade: though it is much harder to see how the Chinese workforce-much of which, as Samuel Brittan has noted, is surplus to agricultural production-could be so benignly accommodated.

but the above caveats do not answer, yet, the perceptions of impending turbulence. Two examples indicate why not. Russia (a week from the first round of presidential voting at the time of writing) has, in the programme of the communist-dominated opposition coalition whose presidential candidate is Gennady Zyuganov, a classic anti-free trade set of policies. The programme's diagnosis is that Yeltsin governments over the past five years have been following policies dictated by the Bretton Woods institutions: turning Russia into a raw materials producer while destroying its industrial base in order to provide an empty market for western goods. The perceived cure is a high tariff policy, behind whose walls modernisation of the Russian economy would take place. Russia would then issue forth again early in the next century to take on the world on equal terms. This programme, when questioned, is justified not by reference to socialism (of which there is little mention in the programme) but to parallels with western European states after the war and, more recently, to Japan and the east Asian tigers.

There are many and, I believe, decisive objections to this. High among them would be the venality of Russia's bureaucracy and the aversion of much of its political and industrial elite to competition: but the programme derives huge strength from the rapid drop in output, the fall in real living standards and the very large underemployment (and non-payment) of workers. If underemployment turns into open unemployment-it has long been forecast, but long delayed-then the programme, even if its candidate is defeated in the presidential elections, will re-emerge as a powerful option for any future government.

What holds true for Russia holds true to a greater or lesser degree for all the post-communist economies. Lesser-even much lesser-for the central European states, which were able to pass through a sharp drop in output relatively rapidly and which are now growing strongly-though often with high unemployment and, in the case of Hungary, sharp drops in real income. Greater-in some cases much greater-in the cases of Ukraine and other former Soviet republics, whose will to reform has been weak or whose economies have been ravaged by civil wars. Cheap labour, especially when it is not dramatically cheaper, is not enough to guarantee success-as the bankruptcy of the Gdansk shipyard in Poland, early in June, showed. More seriously, the lack of secure property rights, a reliable legal system, law and order and coherent tax policies can swamp the advantages of trading openness. Coupled with skimpy democratic institutions and the power of the industrial and agricultural lobby groups, protectionism could become less an option, more an inevitability. That in turn would encourage political revanchism.

The second example is the quite different case of the single European currency and the reaction of Britain and the weaker EU economies to its likely arrival. The Labour party, favourite to be in power in Britain when the moment arrives, probably wants to be able to join the single currency either at the starting date in less than two years' time, or soon after. At the same time, Labour has a range of policies for tackling unemployment and educational and training deficits which would require a much more interventionist and active treasury-as well as a commitment to steady growth substantially above recent levels. Yet once the main economic instrument-control over the currency-is renounced to a European central bank, Labour's economic strategy will be subject to currency levels on which, for the first time ever, a UK government has no influence.

What happens when and if unemployment starts to rise sharply? When the terms of trade worsen? When a resentment against foreign institutions destroying our economy becomes a potent political force? It would be unusual if some of these did not arise. When they do, the forces now represented by the protectionist Eurosceptic James Goldsmith and the anti-protectionist Eurosceptics John Redwood and Michael Portillo might-notwithstanding their differences-be linking arms and marching to Trafalgar Square.

Britain invented free trade and benefited from it more than most. There is no strong protectionist tradition on left or right, and it may be hard to build one. But the experience of the 1930s and, later, entry into the Common Market has shown that neither tariff barriers nor the severing of historic trading ties are completely strange to British politics.

None the less the decisive arguments for and against protection will take place elsewhere in Europe, notably in Germany. The fear of the free-traders is that Germany will be lured into a pact with the benign social democratic protectionists of France rather than with their more menacing populist cousins (with Jacques Attali and Lionel Jospin rather than James Goldsmith and Jean-Marie Le Pen).

In European arguments, Germany has so far remained resolutely allied with Britain in opposition to French protection. But who can say what five or ten years of high unemployment, a withering social wage and rising votes for extremist parties will do to the free-trading resolve of Germany's political class?

Paul Kennedy, the trend-spotting historian, asked recently in an anxious BBC Analysis lecture: "If the German nation finds itself having to choose between the continued relocation of industry to low wage countries; making severe cuts in the social wage so that it will be competitive in domestic markets; or returning to some form of protection-which way will the country go?" He clearly believes that protection is the most plausible answer.

Protection has many faces: benign as well as bellicose; rooted in the nation state or in the region (Europe versus "the rest" or even north versus south). But if circumstances were to bring a variation of any of these to power, this would change more than the international postwar consensus on economic openness. It would swamp the old divisions of left and right-already weakened, and waiting for a new configuration. It would draw the lines much more starkly between liberal internationalists and nationalists (or nationalists cum regionalists): the former depending on the ability of international capitalism to deliver generally higher living standards all round; the latter maintaining the impossibility of that position and counterposing protection as a way of holding on to the economic gains and social peace of the last half century. There is no guarantee that the political map will be drawn in that way, but powerful individuals are seeking to ensure that it is.