Unequal Exchange on an Ebbing Tide
/In 1963, to combat criticism against a dam project he was inaugurating, President John F. Kennedy argued that a ‘Rising Tide lifts all boats’.
More generally, the expression can be applied to David Ricardo’s promotion of comparative advantage, underpinned by his theory that free trade makes nations efficient. We can attribute the success of free trade in Great Britain to the repeal of the Corn Laws in 1846 and the concomitant boom in the Victorian economy, which set the tone for Britain’s trade for the rest of the century.
Following WW II, Bretton Woods envisioned a liberal international system with open markets and free trade, but within this system, individual nations were able to undertake the sorts of domestic policies, advocated by John Maynard Keynes, that would moderate inflation, control unemployment, and encourage economic growth. In a nutshell, the state had a fairly important macro-economic role within each nation, while free markets were intended to dominate relations between nations. The key to Bretton Woods was the notion of ‘embedded liberalism’, coined by John Ruggie, where nation states operated under a modicum of free trade, but with fixed exchange rates and capital controls. As a result, states could control their domestic markets through fiscal and monetary policy, but still manage to push the Ricardian ideal of free trade.
Once the key norms of the Bretton Woods regime changed under the Reagan and Thatcher administrations, state control over domestic monetary policy was sharply reduced, as capital controls fell away.
Has this change led to unequal trade or ‘unequal exchange’? And if so, what are the consequences for world trade? How will the international trading system cope with the general downturn in current commodity prices and trade in general? This is the issue I wish to unpack as we discuss the future of the World Trade Organization, the predisposition for states to negotiate bi-lateral agreements instead of retaining the principle of non-discrimination, and of more importance, understanding the nature of trade within supra-national regions like the European Union.
I’d like to think that Rosa Luxemburg’s The Accumulation of Capital introduces the spatial conditions of integrating peripheral economies into the global expansion of capitalism to a wider understanding on unequal exchange developed by Andre Gunder Frank, Immanuel Wallerstein, Samuel Valenzuela and later Samir Amin.
From a different perspective, the debate on the Singer-Prebisch thesis also provides an explanation for falling terms of trade for underdeveloped nation states. But by far the most interesting challenge to the idea of free trade stems from the arguments on the political economy of the nation state developed by Friedrich List.
To my mind, List has been unfairly equated with German authoritarianism, and therefore largely dismissed in recent scholarship. Nevertheless, a thorough analysis on List opens the question as to whether his ideas on a German customs union, which led directly to the formation of the Zollverien, were indeed the forerunners of the European Union. List succinctly linked human capital to classical economics and its distinction between wealth and the causes of wealth. By demonstrating that mental capital is a crucial addition to Smith’s understanding on the division of labour, List could argue the importance of human capital to economic development. List’s thinking, in fact paved the way for the state to build a mass system of education to educate and mobilise the masses to the desired outcome of national economic development. In effect, the nation-state, far from withering away as the liberal economists would have us believe, plays a crucial role in promoting, guiding and regulating the process of nation building.
Thus unequal exchange is not merely concerned with the export of manufactured goods from the core-industrialised states in exchange for primary products from peripheral states. Unequal exchange goes to the heart of the matter of uplifting and training, the mental capital if you will, of the underdeveloped nations’ populations. This ties in to the future economic and social progress of these underdeveloped states, which under free trade are largely kept away from social upliftment. National political institutions thus play a crucial part in structuring the national economy to promote the national interest and to overcome obstacles and constraints that are most beneficial to the national interest. The strength of any state lies in the accumulated human capital within these states and not just on the efficiency of the market and the division of labour.
This scenario is currently playing out within the European Union where Germany, for example, is powering ahead while the semi-peripheral states in the south, like Greece, Italy, Spain and Portugal, find themselves not only being marginalized, but in fact being de-industrialized as they lose competitive ground to the manufacturing powerhouses in the north. As wages stagnate and trade slows in these areas, will dissent in the peripheral states introduce a new virulent nationalism and a backlash based on protectionism? Moreover, will we see once more a move towards radical party structures that occurred during the interwar period, epitomised particularly by those states that were marginalised by unequal exchange?
