The global economy seems to be coming under attack from a variety of directions. On one side, there are the reborn “democratic socialists” and other “progressives” who insist that the international capitalist system exploits workers and minority groups. On the other side, there are nationalists and other nativists who fear the loss not just of jobs but the cultural character of their societies from foreign investors and immigrants looking for new homes. The fact is, for almost everyone, everywhere, things are getting better all the time due to the greater openness of the entire globe to trade, investment, and a peaceful movement of people.
Let’s start with some thought-provoking numbers. Worldwide, over the last 50 years, life expectancy, on average, has increased from 56 years to 72 years at time of death; this represents a nearly 30 percent increase in the time many of us are likely to live on this earth. In 1966, 113 infants died out of every 1,000 newborns, around the world; today, that is less than 32 deaths among the 1,000 newborns, for a reduction of 72 percent in the number of those dying before they really had any chance to live.
Amazing Improvements in the Human Condition
Global per capita income has increased from a little less than $4,000 a year in 1966 to almost $17,500, in inflation-adjusted dollars at the present time. That represents a 372 percent increase in the average income of everyone on this planet in only 50 years.
In 1820, the estimated world population was 1 billion people, out of which around 90 percent lived in serious material poverty. In 2018, just 200 years later, the world population has increased to about 7.7 billion people, but out of which less than 10 percent live in poverty anymore.
According to the World Bank, in 1990 the number of people living in poverty, worldwide, was about 1.9 billion people; but by 2018, that number had decreased to 650 million. That is, serious material poverty around the world decreased by 66 percent just in the last 30 years; and it will continue to decline as long as the domestic and international trade of nations around the world remains relatively free, open, and competitive.
A Shrinking World in Travel and Communication
The world increasingly becomes a smaller place as measured by the time it takes to get from one place to another. When the famous Italian merchant and traveler Marco Polo (1254-1324) left Italy with his father and uncle in the year 1271 to journey to China, they reached the capital of the emperor, Kublai Khan, four years later, in 1275. A trip from New York to Shanghai by plane nowadays takes only about 15 hours.
Two hundred years ago, in 1820, traveling across the Atlantic from, say, Great Britain or France to anywhere in North America normally took between four and six weeks by sailing ship, depending upon the winds and ocean currents. Today, passenger air flight enables any of us to travel between New York and London in less than eight hours.
The most important military engagement won by the United States against Great Britain during the War of 1812 was the Battle of New Orleans, fought on January 8, 1815. This was two weeks after the Treaty of Ghent, which was signed in Holland by representatives of the two warring governments on December 24, 1814, ended the conflict. It would still be weeks before people in America found out that the victory at the Battle of New Orleans under General Andrew Jackson was achieved when the two nations were already once more formally at peace with each other.
Today, news events of every type, virtually anywhere on the planet, can be almost instantly known and shared with most of the people around the globe thanks to the modern revolution in communications in the forms of satellite and cable television, the internet with “live” audio and video streaming, and the global associations that we have with friends and strangers through social media.
Two hundred years ago, most of the food that people ate and the clothes they wore came from crops grown and out of materials worked up in manufacturing that were accessed from within, maybe, a few hundred miles of where they lived. Today, we draw upon the agricultural foodstuffs and manufactured goods, as well as many everyday human services, from people producing and working around the world. Climate and local growing seasons no longer determine and limit what fruits and vegetables, for instance, we are able to place on our dining tables. All four seasons, and what nature can provide us with from them, are at our disposal all 12 months of the year.
We have become so used to such things that we have little or no appreciation of how relatively new all of this is in terms of the sweep of human history on planet Earth. In terms of the meaning of the “modern world” and all these changes in the human condition, modern really only means the last 200 or 300 years, out of many thousands of years of our recorded history.
Division of Labor and Expanding Trade Have Brought Prosperity
What has made all of this possible, slowly but surely, for more and more of us, everywhere, has been the emergence of the division of labor and the development from, first, local to then regional, to now finally global trade. Let us remember why people trade. If we had to rely upon our own mental and physical abilities and the small number of resources that accident of geological circumstances placed at our disposal where the equal accident of birth had placed us, our standards of living would be the most primitive imaginable, with life expectancy being based on disease, injury, lack of a few meals, or being killed by animals or other humans competing for the scanty material means of staying alive.
Trade enables us to obtain — peacefully — various desired goods and services that we otherwise could not produce for ourselves, due to our lack of either the necessary knowledge and skills or the needed resources and raw materials out of which to manufacture the wanted items. It is still our own labor and effort that makes possible having what we want, but we acquire it not directly, but indirectly by using our skills and resources in ways that our potential trading partner may not be able to, and offering him something in trade that he otherwise could not get in exchange for what he has or can produce that we want from him.
Someone, say, in Sweden or Germany or Canada would like to vacation where there are warm seas and soft sand during the wintertime, something that is not naturally available in their own places in the world. Those living in the Bahamas would like to enjoy a wide variety of manufactured goods, from automobiles, to television sets, to cell phones, to types of meats and vegetables for which there are neither the raw materials nor manufacturing facilities to easily and inexpensively produce them on the islands.
But any potential winter vacationer in Sweden, Germany, or Canada can specialize and apply their knowledge, skills, and abilities to producing and selling some good or service that they find willing buyers for in other places around the world that enables them to earn the financial resources to fund that winter vacation trip to sunny and warm Nassau in the Bahamas. In turn, by specializing in hotel, restaurant, and water-sporting activities, Bahamians are able to earn the financial means that comes from serving the vacation desires of those Swedes or Canadians to purchase the manufactured goods and foodstuffs that could never be produced in the Bahamas, or if attempted only at a cost far, far more exorbitant than importing them from many other places in the world.
Indeed, the production possibilities of the entire world are at the disposal of the people of the Bahamas in exchange for the vacationing and other services that Bahamians can supply to everyone else around this planet. Indeed, according to the World Bank, about 85 percent of the Bahamas’ exports to the rest of the world are in the form of banking and financial services or tourism.
Trade Brings Opportunities and Higher Standards of Living
If not for the network of global banking, and if not for a world wealthy enough and accessible enough through relatively inexpensive international vacation travel, the current standards of living — no matter how humble or high — enjoyed by the people of the Bahamas would be otherwise impossible. Without the global economy, the population of the Bahamas would no doubt be significantly less, and their living standards would be a fraction of their current levels.
Because of the degree of global prosperity that the Bahamas is able to participate in, students attending the University of the Bahamas, for instance, have the family standards of living that enable them to spend years not working, full time or part time, so they may acquire the education that will make them more marketable and provide valuable skills in the local and worldwide labor market. The Bahamian society and economy are wealthy enough for those university students not to have to fully produce all that they personally consume during their years of obtaining a higher education. This would be impossible if not for the global division of labor and the rising standards of living and quality of life and quality of living that all of us increasingly enjoy due to all the buying and selling in the international marketplace.
WTO Has Lowered Global Tariffs but Also Regulates Trade
And this now gets us to the World Trade Organization (WTO) and the global economy. The WTO is an outgrowth of the post-World War II General Agreement on Tariffs and Trade (GATT), which was created by a network of governments in 1947. Its task was to serve as an association for the lowering of trade barriers between the nations of the world. It was reorganized as the WTO in 1995, headquartered in Geneva, Switzerland. If you visit the WTO’s website, it makes clear that it is not an organization dedicated to or proselytizing for free trade. It reflects and serves the shared goals and purposes of its member governments, many of whom have differing views on the nature and desirable degree of freedom of trade versus protectionism of various sorts.
But it is nonetheless the case that over the, now, 70 years of its existence as either the GATT or the WTO, it has in general worked for and in the direction of greater freedom of trade, and most certainly compared to the hyper-trade protectionism that existed in the 1920s and 1930s, between the two world wars.
On average, even with the recent threats or implementation of higher tariffs by the Trump administration, especially against China, tariffs around the world are in the single-digit range for a significant number of goods and various services. For instance, India has an average weighted tariff on the importation of foreign goods of around 6.3 percent, while China’s weighted tariff average on imported goods is only 3.5 percent. The United States’ average tariff rate on imported manufactured goods is about 2 percent.
Nonetheless, the WTO has been and is an intergovernmental organization that not only has worked to reduce a wide variety of tariffs and other forms of trade restrictions, but also imposes rules and regulations on member countries concerning how they may go about their international business and relationships with others around the world that oftentimes have nothing to with greater freedom of trade, per se. In fact, it enforces and facilitates agreements among the member countries that oftentimes hinder or prevent freer trade among the members.
Any country that is not already a member of the WTO, or that is a member but chooses to withdraw from the organization, could have all the benefits of freedom of trade without the other layers of restraining rules and regulations simply by following a unilateral policy of free trade. That is, abolish all its own existing tariff and other trade-prohibiting barriers within its political jurisdiction.
It is worth recalling that Great Britain followed such a policy in the middle decades of the 19th century. In 1846, it unilaterally abolished virtually all the protectionist restrictions on the importing of foodstuffs, and shortly after did the same with almost all manufactured goods. As the, then, British prime minister, Sir Robert Peel, said in an address before Parliament before stepping down from that role, if other nations choose to misguidedly buy high and sell lower in their commercial dealings with the rest of the world, there was no reason why the people of Great Britain should follow such an irrational course, as well.
What country has some of the highest average weighted import taxes on foreign goods? According to the WTO, it is the Bahamas, with an 18 percent tariff rate, on average, on imported goods. On agricultural imports, the average is about 17 percent, but on some foreign manufactured goods that goes as high as 35 percent, and on some imported automobiles even higher.
It Is the Consumer Who Ultimately Pays the Import Tax
The import tax on foreign goods is not paid by the foreign producer. It is ultimately paid by the consumers in the country purchasing and using those foreign-made goods. The import tax is merely, from the seller’s point of view, another cost of doing business.
Suppose that some product is being imported from the United States. There have been the basic costs of production — the labor, resource, and capital expenses — in manufacturing the finished, saleable good. Then there are the transportation costs of shipping the good by land and by sea or air to the Bahamas. At the point of entry, the Bahamian wholesaler must pay the import duty before he can move this American-made good off the shipping dock or the airport tarmac. From the wholesaler’s point of view, the price that he must include in the price charged to the retail seller in the Bahamas includes manufacturing charges from the U.S. producer, the transportation expenses to bring it to the islands, and the tax that the Bahamian government has levied before he could bring it into the country.
Thus, the price that the wholesaler must charge to the retailer, who then offers the product to consumers, includes the import tax along with all the other expenses of doing his business. This gets reflected, therefore, in the price at which the retailer offers the product to consumers in Nassau. Thus, the Bahamian consumer must pay a price for the American good that incorporates the import-tax cost of doing business through the supply chain of production.
Tariffs Reduce Consumer Standards of Living
This import duty, therefore, tends to raise the price that the Bahamian consumer must pay for the foreign good. This reduces the amount that he may be willing or financially able to buy, compared to the price and quantities demanded, if not for the import duty on the good. Using the WTO tariff data, suppose a consumer in Nassau were to purchase a basket of imported agricultural goods that cannot be grown in the Bahamas. Now, without the tariff those foodstuffs would cost, say, $100; but with the tariffs in place, the same basket will cost that consumer $117 to buy. On the other hand, some non-agricultural, manufactured good that otherwise, without the tariff, would cost him, say, $1,000 to buy, with the tariff in place might cost you as much as $1,350 to purchase.
The Bahamian income earner and consumer is poorer by these amounts. By which I mean, without the tariffs, a Bahamian consumer might have purchased that basket of food items and the manufactured product for a total of $1,100. But with the tariffs in place, the total cost of buying these things might now come to a total of $1,467. That is, an additional $367 that the Bahamian consumer will have $367 less in his pocket to use to buy other things also desired and wanted by him and other family members that he will not be able to purchase. It might have included a couple of pairs of shoes for his children, or a new suit of clothing for himself or his wife, or merely an extra sum of money to put aside in savings for some valued future use. This will not be possible, at least not for right now.
Government Tax Revenues and Political Corruption and Plunder
Now a not-unreasonable reply might be that, yes, the import tariff may be a form of a tax on the Bahamian population, but the tax revenue goes into the coffers of the Bahamian government to do things that are collectively needed or desired by the people of the Bahamas as a whole. It would be inappropriate for me, as a foreign guest, to delve too deeply into the internal political affairs of my host country.
But allow me to ask the following question. Do you think that these tariffs and many other tax dollars collected by the Bahamian government are always wisely and efficiently and effectively spent by those in political authority who determine how those taxed dollars are used? I know it may seem shocking to even suggest this, but in some places around the world, those in political power use the taxes they collect from the citizenry to line their own pockets or to benefit special interest groups and other well-connected cronies close to the halls of political decision making.
This is sometimes referred to as “corruption” or even political plunder. Far be it from me to even, in any way, suggest that such misuse and abuse of political position ever occurs in the Bahamas! But it has been known to happen, and tariffs easily serve as a useful source of tax revenue to buy the support of voting groups, both to redistribute to those close to the powers-that-be, and to use the import tax as an anti-competitive method to protect a domestic producer or seller from foreign rivals who also wish to serve the domestic consumers of the tariff-imposing country.
Smaller Government Reduces the Need for Taxes
There is also the question of whether some of the things that the government does might not be better supplied by the private market, so that by reducing or eliminating some of the services and activities currently performed by the government through privatization, a good amount of the taxes currently collected to undertake these services also could be reduced, including import taxes. Plus, the private suppliers of such goods and services would now have the usual competitive incentives to produce and market them at lower expense and with improved qualities over time.
Nor should it be forgotten that when decision making is removed from government hands and shifted into the marketplace, each of us has transferred to ourselves the ability to better decide how much and of what type of such services we consider worth buying and investing in, rather than those in political authority making these choices for us, whether we agree with their priorities or not.
This widens the scope of our personal choices and decisions concerning the purchase or sale of our goods and labor services in the domestic market or the international arena of trade and exchange. It enables each of us as producers and consumers to better fit in and find our personal niches in the social system of division of labor to better improve our own and our families’ well-being, and indirectly, that of all the other members of society, as the cumulative outcome and results of our individual free choices in the global marketplace that interconnects all of us in the wider community of humanity as a whole.
Politics Oppresses, Free Markets Liberate
Let me briefly turn to some of the criticisms made against the market-based global economy by those socialists and “progressives” on the one hand, and by nationalists and nativists, on the other hand. Free markets, both domestically and internationally, do not result in or cause the “exploitation” or oppression of workers or ethnic and racial groups. Very much to the contrary, global competitive markets serve as a force of liberation for those who may have faced political and cultural oppression at the hands of majorities or minorities within their own country.
International trade opens opportunities to people offering their labor services for hire or looking for customers to whom to sell their goods and services. It also frees customers from dependency upon what local producers are offering to the market, and at what prices.
Global trade undermines the ability of domestic special interest groups using their own national governments to restrict employment alternatives or diminish the outlets in which domestic producers may sell their goods. Private direct foreign investment creates job opportunities outside of the limited options of the domestic employers. It widens the labor market by increasing the number of businesses competing for the useful workers available among that country’s population.
The foreign capital investment and the resulting increased number of prospective employers puts upward pressure on wages due to the greater competition that foreign investors create on the domestic market. Racial or religious minorities who have faced social and economic prejudices and discriminations from among the majorities in their own country may more easily find outlets for jobs and better wages from foreign investors who do not necessarily come into that part of the world with the same biases.
Trade Raises Up the Poor, Can Reduce Bias Against Minorities
The poorer segments of that society, as well as minorities suffering from discrimination, find avenues of escape from poverty and biases, which over time helps to force discriminating majorities in those countries to rethink their prejudices as the foreign investors and producers take advantage of skills and talents among those minority groups that their own bigotry prevented them from taking advantage of in the domestic labor market.
The new or increased skills and talents that are acquired by those hired by direct foreign investors not only raises their market value and therefore wages over time, but provides over the longer term the incomes and knowledge for some of these people to start their own businesses and move themselves and their children into financial middle class status or even higher.
An important question to ask in terms of direct foreign investment by private enterprises is: if foreign capital and employment opportunities are prevented or limited in these markets, what are the real world alternatives for those in conditions of severe poverty or discrimination from domestic majorities controlling and influencing government polices to their disadvantage and detriment?
In many cases, the answer is continued discrimination and abuse at the hands of their fellow citizens and prevented or delayed escape from even lower-paying forms of employment, or perhaps no jobs at all, in the domestic economic environment politically closed off from opportunities potentially coming from outside their country.
Foreign Influences Enrich, Not Destroy, a Culture
The other concern, most frequently heard nowadays from the new nationalists and nativists, is that the global economy threatens the cultural and social cohesiveness of a society being bombarded by the arrival of foreign goods, foreign music, foreign movies, foreign food, and foreign “ways of doing things.”
Except for the most isolated and reclusive remaining primitive tribes in still fairly inaccessible places in the world, we all have been and are influenced by a multitude of foreign cultures and ways of doing things done in other places in the world. When I’ve moved about in Nassau on my current and previous visits to the Bahamas, I’ve found a wide variety of restaurants and food shops offering the cuisine and the ingredients for the preparation of meals that have little or nothing to do with what, say, 200 years ago or even 50 years ago would have been considered traditional Bahamian eating fare.
Ours is a global society and community that shares what every country and culture have to offer to all the other peoples in the world. We are all richer and better off as a consequence. Would we really be better off without the influence of medicines, scientific achievements, and technological improvements that have originated in other places on the planet but of which all of us can be the fortunate users?
Nothing prevents the nationalist or nativist from choosing to not use what other cultures and societies have to offer. He can decide to only eat foods grown in his country, prepared in the ways of those of his countrymen from centuries before; to only manufacture and wear clothes of his own country’s older ways of doing things in the style of his ancestors; to live in a house following the architectural forms used in his native country 400 years ago out of the materials and methods of construction used during that earlier time. And he can decide to only listen to music and real books composed and written, respectively, by his fellow countrymen.
Nothing prevents him and others sharing his views and values from doing all of this and many other things reflecting his nation’s cultural past. But he often is not satisfied with this. What he wants is to impose his values and views on others through the intervening powers of government to restrict or prohibit the importations of whatever he considers a threat to his native culture as he defines it.
In other words, he wishes to prevent his fellow citizens from freely picking and choosing from the alternatives that other societies offer from which each can make his own decisions concerning how to live, and what contributions of other societies to integrate into his own life and his ways of interacting with his countrymen.
The nationalist, to one degree or another, wishes to command and control how others in his country live and work and enjoy the fruits of their own labor. They threaten to be social and cultural tyrants wishing to confine others in his country to what he views as his own nation’s cultural “good” compared to the foreign “bad.” He wants to confine others to his own preconceived notions of the past in which he wants others to live today with him.
Like too many other collectivists, he does not like some or many of the choices people want to peacefully and freely make; and wanting to stop them, he is ready to call on various political and economic weapons at his government’s disposal to lock up those others in a cultural prison designed by him in the form of bans and limits on how the “foreigner” may ply his ways in the nationalist’s country.
Global Trade Brings Worldwide Benefits to All
In spite of all the fears and criticisms of the global marketplace, the innovations and improvements that have come through worldwide competitive private enterprise have been raising mankind from abject poverty to, instead, increasing material and cultural prosperity. Are there necessary adjustments and adaptations along the way from the old or traditional ways we may have been doing things to new ones? And do these sometimes require us to learn new things in a world of change? No doubt.
But the cumulative effect for all of us now and over the generations is that the human condition has been and can continue to be radically and amazingly improved, if only personal freedom and free markets are allowed to work their wonders on our global community of free trade and networks of voluntary association.
This article, originally published at The American Institute for Economic Research, is based on a presentation titled “The WTO and the Global Economy,” delivered on November 7, 2019, at the University of the Bahamas, sponsored by the Nassau Institute.)
