The development of free markets

Immediately after the Second World War, the main political powers began negotiations to reduce tariffs and duties worldwide, giving birth to GATT (the General Agreement on Tariffs and Trade). With the participation of 23 countries, this agreement was concluded in Geneva, Switzerland, in 1947, and took effect in 1948.

At that time, the objective was to approve an interim agreement until an international agency could assume responsibility for coordination and management of international trade relations. However, such an agency was never formed and GATT remains the principal tool for liberalizing world trade. Since its inception, GATT has expanded to include more than 100 countries by the early 1990s.

An attempt to liberalize regional trade took place in western Europe after 1958 when the European Common Market was formed by Belgium, France, Germany, Italy, Luxembourg, and the Netherlands. This trading bloc, now know as the European Community (EC), grew further to include Denmark, Ireland, and the United Kingdom (1973), Greece (1981), and Spain and Portugal (1986). By 1993, other European countries were negotiating entry and, before the end of the century, it is likely that the remaining Scandinavian countries (Finland, Norway, and Sweden) and Austria will join. The Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, and Slovenia are also interested, although their incorporation will probably not occur before the year 2000.

The EC countries trade mainly with their economic partners (78% of the Netherlands’ exports remain in the EC; Belgium and Luxembourg, 75%; Ireland, 75%; Portugal, 74%; Spain, 71%; France, 62%; Italy, 59%; United Kingdom, 55%; Germany, 53%). Most of the remaining commerce is directed to North America and the Far East. The role of Third World countries in European commerce is less important.

Starting in 1988, a second major commercial bloc was formed in North America when the United States and Canada negotiated a free trade agreement. In 1993, an agreement was reached between these two countries and Mexico to ensure its integration into the process through the North American Free Trade Agreement (NAFTA). The formalization of this treaty has generated strong opposition from some sectors of both the Canadian and the American public who believe that opening the borders will release a flood of companies moving south to Mexico in search of a less-expensive environment, while posing the risk of increased immigration to the United States and Canada.

A recent article (Economist 1993b) expressed the view of many who think that there may be exactly the opposite effect. It cites the case of a General Motors plant planning to move a large portion of the production of Cavalier vehicles from Ramos Arizpe, Mexico, to Lansing, Michigan. According to the article, Mexican labour costs are only 35% lower than those in the United States and 40% lower than Canada’s, when average wages are adjusted for benefits and lower productivity. The effect of NAFTA may thus be less pronounced than feared by those who oppose it.

Following a proposal of then President of the United States, George Bush (the 1990 “Initiative for the Americas”), other Latin American countries are also making progress toward similar agreements. The most important regional block is the MERCOSUR, comprising Argentina, Brazil, Paraguay, and Uruguay, complemented by the Central American Free Market (Costa Rica, Guatemala, Honduras, Nicaragua, and El Salvador) and the Andean Group (Bolivia, Colombia, Ecuador, and Venezuela). Chile and Peru have not joined any of these liberalization initiatives.

Since the 1960s, attempts have been made to create a Latin American free market - after the formation of the Asociacion Latino-Americana de Libre Comercio, which became Asociacion Latino-Americana de Integration (ALADI) after the treaty of Montevideo. ALADI’s role has been mainly to provide an institutional framework for regional agreements dealing with integration processes, including trade liberalization.

Recent GATT negotiations took place in this environment of globalization. Many difficulties were encountered during the “Uruguay round,” particularly because of the insistence of some EC countries on maintaining certain farming subsidies. The document resulting from the Uruguay round of GATT was approved and signed by the 117 member countries on 15 December 1993 in Geneva, Switzerland. Although the final agreement was not as wide ranging as expected, tariffs will decrease by an average 40%. The relatively successful conclusion of this agreement shows that the world continues to move toward globalization and that, although international commerce is complex, the barriers that used to prevent the development of open trade relations are gradually being dismantled.

Complexities of international commerce and their effects on globalization

Evidence from recent history shows that globalization processes are unstoppable because they tend to feed on each other. Current globalization trends are based on a framework of unidirectional openings (liberal approaches in developing countries, continued protectionism in developed economies). It is an internationalization controlled from the financial decision-making centres in the North.

Farming systems in the United States and the EC remain supported by direct and indirect subsidies. In Europe, this is viewed by some as overt protectionism; in the United States, the subsidies are more indirect - for example, subsidized water for irrigated agriculture in California and other western states.

Third World countries, on the other hand, pressured by the need to service large debts and conditioned by liberalizing programs imposed by the International Monetary Fund (IMF) and other lending agencies, have been drawn into export-promotion campaigns. These have forced them to accept unfavourable terms of exchange because of import quotas, used as instruments of political pressure, or in relation to refinancing the foreign debt.

The desperate need to export, coupled with the necessity of creating new sources of employment, has compelled many developing countries to be less selective in their acceptance of new industries transferred from developed countries, including the rapidly spreading maquiladoras, which generally use production systems that are not only highly exploitive of the work force, detrimental to health, and environmentally unfriendly, but also teach workers almost nothing that can be applied elsewhere (see Chapter 1 for a detailed description).

Economic globalization and environmental degradation

Economic globalization and liberalization of trade are having a strong impact on the environment at local, regional, and global levels. Whenever trade barriers are lowered or eliminated, many economic activities that had previously been carried out under their protection also tend to disappear, often to relocate in other areas where economic survival is easier.

Generally, the dominant factor in competitive production is cost. Developed countries must compensate for their high labour, tax, and environmental costs through more productive technologies, higher production levels, and more efficient management strategies. Despite the high costs, there are clear advantages to producing certain goods in developed countries: well-organized and efficient infrastructures, high capacity of existing human resources, better quality control, and proximity to markets. However, a number of productive activities in developed countries would not be able to survive for long without the shields of protectionist trade barriers and subsidies.

Because globalization processes tend to remove these barriers, many productive activities traditionally associated with developed economies are gradually being transferred to developing countries. In some cases, this happens through partial transfer of some operations in the productive chain, such as assembly or production of parts for industrial use. Such transferred operations can be carried out at a lower cost at the receiving site because of lower labour and environmental costs.

Normally, this transfer involves agreements between the countries to allow productive complementarily. In most cases, the transferring country charges duty only on the value added in the host country, and the host country opens “free zones” to allow entry and exit of raw materials and merchandise with minimal or no import-export duty. These industries are called maquiladoras and are common in Costa Rica, the Dominican Republic, Guatemala, Mexico, and, with slight modifications, in some countries of East Asia and North Africa.

Often, when the whole economic activity becomes uneconomical in the developed country, the entire productive process can be transferred to the partner country. Many metallurgical, textile, and electronics industries, among others, have been transferred in this way. Similar arrangements are being made in relation to agricultural activities (some Californian crops have been transferred to Brazil, Chile, and Mexico), forestry (the Canadian forest industry is having trouble competing with counterparts in Brazil and Chile), and aquaculture (shrimp farms have been established in Ecuador and the Philippines).

This global restructuring of production is having a profound effect on the environment. Most of the industries or activities moving to developing countries have some potential for environmental degradation. A considerable number of them produce toxic wastes or emissions that can introduce negative elements into water, air, or soils. When these industries or activities are located in developed countries, a long social learning process has contributed to the development of a set of environmental laws to address, more or less efficiently, their potentially hazardous effects. Developed countries have preventive and reactive systems, including technical solutions to environmental degradation, policies and rules for that purpose, definitions of responsibility and accountability, and appropriate institutions, to deal with environmental problems. Many developing countries lack these systems. Some laws may exist, but they are poorly applied (if at all). Recently, progress has been made in several countries, but it is insufficient to prevent serious environmental degradation.

Thus, the restructuring of production appears to be threatening the environment at local, national, regional, and global levels. For example, acid rain, which was once common only in northeastern North America and western Europe, has become a serious issue in several Third World countries, including Brazil, China, and India. Industrial procedures to check environmental degradation are often bypassed as industries relocate to Third World countries where such requirements do not apply or can be circumvented. New irrigated-farming projects in developing countries are using water at a rate well above the renewability potential of aquifers or surface water bodies. Farming and neoforestry activities are being carried out on land from which rich and diverse native forests have been eliminated.

The balance is systematically negative: less care is exercised or responsibility taken; fewer resources are applied to environmental protection; soil is eroded) aquifers, streams, lakes, and coastal waters are contaminated; forests are disappearing; exotic species are introduced without consideration of their ecological effects; and the atmosphere is polluted. Any long-term approach to environmentally sustainable development must consider these effects of globalization. The problems must be addressed before they become impossible or too expensive to reverse.