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Free Trade or Fair Trade?
Address to the Marlborough Federated Farmers, 19 May 2000
Thank you for the opportunity to speak to you today about the issue of trade. As you will see, I will be speaking about more than trade, because as soon as you start looking at trade issues, it becomes clear that the all the issues of international economic relationships - trade, investment, currency, human, animal and plant health, conservation, and more - are thoroughly entangled. Because of this, the issue is one that is important not only to farmers, but is the big issue of our times, around the world. It is about human as well as economic development and the well-being of our environment.
If you look "free trade" up in a dictionary, it will say something like "Trade between nations without protective customs tariffs" . That is what the World Trade Organisation is trying to achieve, though broadening that to other government-controlled barriers such as import quotas and so-called non-tariff barriers such as requirements to meet health standards. Free trade advocates like recent New Zealand governments and Federated Farmers appear to believe that if we manage to remove those barriers, then trade will flow freely across borders and the best producer will win.
But this is not what most people think of intuitively when they hear the phrase "free trade". They probably think of it in a much broader sense - trade unfettered by any kinds of restrictions: the fabled level playing field. That is important, because we must consider whether if government-controlled barriers were ever removed, we would indeed be left with a level playing field. I will be considering that today.
First, I will look at whether the free trade advocates' nirvana has much relationship to reality. Then I'll look at what the WTO (and similar trade arrangements) is trying to do in that light. I'll consider the effect of free trade on farming, and then on New Zealand's and the world's wider community, and then conclude by coming back to the question we're here to discuss: free trade or fair trade?
New Zealand agriculture's devotion to free trade is a relatively recent development. Through most of New Zealand's international trading history, our agricultural trade has been anything but free: it was tied to the U.K. markets. Not only did it depend on privileged access to the U.K., but much of it was controlled trade. Either it was controlled through farmer-controlled marketing boards with full control of exports - such as the Dairy Board - or U.K.-owned meat companies bought live animals here and then controlled their processing (or lack of it) often right through to sale to consumers in the U.K. Wool was less controlled, but intervention in the market to buy and stockpile wool was frequent.
Why did farmers try to gain control of the trade in their produce to avoid the free market? Because they had had devastating experiences of large fluctuations in prices and export volumes, and were trying to control their trading environment. They were also well aware that there was strength in numbers in negotiating prices and markets. The boards were set up in the 1920's partly because of concerns that prices were manipulated to the disadvantage of farmers by the "middlemen" such as meat companies and buyers in London . Producer control of exports also helped compensate for the small volume of our production in world terms, to gain enough size to have influence on prices and buyers.
In many ways, though we have lost the guaranteed U.K. market, things have not changed: markets still are not free. The United Nations estimates that two-thirds of world trade is between transnational corporations. Half of that - one third of world trade - is not free in any real sense: it is trade within a single corporation. It is so-called "intra-firm" trade where one branch of, say Heinz (perhaps Watties in New Zealand) sells to another of its branches in another country. There is no reason that it will be at market prices, and indeed transnationals frequently use such transactions to manipulate prices to minimise their tax (called transfer pricing). In 1996-97, over half - 56% - of Australian trade was such "related party transactions" .
In agriculture, in the early 1990's, 77% of the world trade in cereals was controlled by five transnational corporations, 80% of the banana trade was controlled by three corporations, 87% of the tobacco trade by four corporations, and so on . It is not only agricultural produce that is tightly controlled: so are inputs such as fuels, chemicals and seeds, and downstream we see just four supermarket groups (three of which are overseas owned) controlling most of food retailing in New Zealand. In 1998, the top three seed companies controlled about 20% of global seed trade, and the top ten agrochemical companies controlled 91% of the world market, including the top five pesticide companies controlling 60% of the market . Things are actually even worse than that: many of those companies have products which, because of patents, have a virtual monopoly of the market. On top of that, in recent months there has been a sequence a further mergers of these already huge companies.
In the U.S., two grain companies control 50% of U.S. grain exports and those two are among the three that slaughter nearly 80% of U.S. beef and the four that mill nearly 60% of U.S. flour . In New Zealand, there are only two main companies (Goodman Fielder and Weston, both overseas owned) in the market for milling and biscuit wheat, and one (Tegel) dominates that for feed wheat.
Farmers should therefore feel no guilt about the export monopolies of your producer boards. If your boards did not have the monopoly, one or two overseas owned transnationals certainly would. Their objectives would be the same as (say) the Dairy Board in one way: they would aim to control both the terms on which they buy from producers and sell to downstream markets. But what would be different is that their aim would be to maximise their own profits rather than your returns as producers. Control of your industry and the marketing of your produce has probably been at least as important to the success of New Zealand farming as the natural advantages the country has.
Given that corporations so dominate trade, it would be surprising if they did not dominate the policies of bodies like the WTO. It is not done by direct representation, but through their influence with the governments that dominate the WTO and the world economy: so-called "quad" - the U.S.A., the European Union, Japan and Canada, in descending order of clout. Little happens without their consent.
For example, the U.S. government's position in negotiations is formed through "trade advisory committees". A study in 1991 showed that 92 of the 111 members of the three main committees represented individual companies, and a further 16 represented trade industry associations - ten from the chemical industry. There were two trade union representatives and one unfilled position for an environmentalist . These advisory committees become integral parts of the negotiations: in the Uruguay Round negotiations, their words were instantly available to negotiators through a computer system, and they were kept in constant touch with every twist and turn of the negotiations. A former senior vice-president of Cargill - one of the world's largest agribusinesses which, with ConAgra, controls half of the U.S.A.'s grain exports - drafted the U.S. proposal on agriculture in the Uruguay Round . A Monsanto representative is particularly proud of the part thirteen large transnational corporations played in drawing up the main elements of the intellectual property agreement in the Uruguay Round, the TRIPs agreement .
It is the same principle as in New Zealand, where a government official told meetings of business representatives gathered to talk last year about the now faltering 2000 WTO trade round, that the "New Zealand's approach to the negotiations is dictated by the business sector's trading needs and priorities" . In our case, the farming sector has a strong influence, through Federated Farmers, the producer boards, and so on, but it is unusual in international terms for agricultural producers - let alone ordinary citizens - to have that kind of influence unless they favour the government line. That was part of the reason for the protests in Seattle in December last year, which included not only environmentalists and unionists but farmers and farm workers from both the industrial and developing world.
This is an explanation for the U.S. hypocrisy over free trade. Its huge corporations - whether they are agribusiness, manufacturing, services or financial corporations - want access to international markets and the ability to invest freely all over the world, because they have the ability to dominate those markets. But individual U.S. farmers are producing mainly for domestic consumption. Trade is largely seen as a threat to them rather than an opportunity, and like farmers everywhere they are wrestling with falling and unstable incomes. Government support or tariffs are obvious answers - though they frequently end up benefiting agribusiness more than the family farmer. Even the American Farm Bureau, which generally takes a free trade line, when it came to the crunch supported the lamb tariff.
It also explains why the WTO is about much more than trade. I cannot emphasise this enough. The WTO's influence is steadily expanding into almost every area that affects our economic lives - the control of our industries, our environment and health. There is not room here to go into this in detail, but let me give you some examples of how it affects you.
Incidentally, the previous government put considerable store by the prospect of a free trade agreement with the U.S.A. Given that our economy is already so open - we have given away so many bargaining chips - it is difficult to imagine what the U.S. is likely to want from such an arrangement other than to bring about the end of our producer boards. So you would be exchanging the possibility of increased access to the U.S. market for the loss of your ability to benefit from access to it and any other markets.
The WTO is sold here as the answer to all farmers' problems, if not all New Zealand's problems. Apparently by taking off all our clothes we will persuade even those who have no need to, to take off theirs. We have been remarkably unsuccessful in this strategy. In the Uruguay Round we bought meagre gains in access to markets at a high cost.
Even the Ministry of Foreign Affairs and Trade's upbeat analysis immediately following the Uruguay Round in 1994, forecast it would produce only a barely noticeable increase in agricultural output of 4% over six years - less than 1% a year - and revenue rise of 10 to 15% until this year - only 2 to 3% a year. These assumed competition would not increase from other suppliers being attracted to the new markets . It forecast the annual increase in GDP growth to New Zealand as a whole would be 0.2% to 0.3% a year - which is so tiny as to be probably not even measurable in reality.
As Malcolm Bailey has said himself: "It is quite apparent that the Uruguay Round did not really threaten the status quo of many highly subsidised farming systems in the developed world" . A recent evaluation of the effect of the Uruguay Round by a senior Australian trade official concluded that "in practice, little additional market liberalisation has been delivered". This is mainly because of the games played by the countries with high tariffs: they promised to reduce tariffs from a base that was much higher than they had already achieved. So in practice they didn't have to reduce tariffs much at all. Tariff peaks of 100% are still common, reaching as high as 1,016% (for dairying in Switzerland!). Support for producers as a percentage of gross farm receipts actually increased between 1991 and 1998 in the Japan and the U.S.A., fell only slightly in the EU, while it reduced a very low level of support by a quarter in New Zealand. In the OECD in 1998 it still amounted to US$274 billion a year - about 50 times our agricultural exports .
The unemployment rate now is over 50% higher than in 1985. We lost 80,000 jobs in agriculture and manufacturing between 1987 and 1990 alone . For many, farming profitability has not recovered. Real interest rates are amongst the highest in the OECD. Poverty and inequality have increased substantially, while for all but about 30% of households, incomes have fallen . All this has led to massive social upheaval and dislocation. In return we have seen neither spectacularly increased labour productivity nor growth - on the contrary we have fallen behind Australia, the most similar economy in the world, and many other countries . The country's foreign debt and current account deficit have steadily worsened to threatening levels - in other words, our international competitiveness has declined rather than improved. Not all of this can be blamed on trade liberalisation, but given the extreme position New Zealand has taken in unilaterally opening its economy, if the claims for it were true, we would have expected clear benefits to have shown through.
At best, proponents could claim that it illustrates what prominent U.S. economist, Paul Krugman, calls "economics' dirty little secret": that the theoretical gains from free trade (let alone the real gains) are tiny. When optimistic theoretical studies can only come up with annual income gains of 1% or less - for example, APEC claims that if trade liberalisation and facilitation measures committed to by members to date were fully implemented, the region's GDP would grow by just 0.4% - then it is valid to ask whether the pain has been worth the actual gain. But even those meagre gains have never been rigorously demonstrated in practice for New Zealand.
The previous government tried to demonstrate some gain by commissioning a report which seems to show that as consumers we are better off because of tariff reductions on cars, household appliances, shoes and clothes. The study estimated that households were on average $1,140 per year - about 3% - better off as a result in 1998 compared with 1987 . This needs to be treated with care.
Firstly, it is looking only at consumers. It is selectively looking at benefits to them. At whose expense did the reduced prices come? Some came from New Zealanders losing jobs in those industries. Some of those people remain unemployed, some found jobs at lower incomes. Seventy percent of household incomes fell during the period 1986-1996 after such price reductions had been taken into account. For most of us then, lower prices are small consolation. Some of the saving came from government - it no longer had the income from the tariffs to maintain public services or pay off debt. It also had higher costs in unemployment benefits. Some came from importers or manufacturers. The study gives us no clue as to whether New Zealand was better off in net terms, which is the reason given for tariff cuts.
Secondly, the study assumes that manufacturers, wholesalers and retailers did not simply increase their margins to take some of the benefit of the tariff cuts. Tim Hazledine, Professor of Economics at the University of Auckland, has shown that this is crucial in determining whether there are net benefits to the whole economy. He has demonstrated that under quite plausible conditions, the country would suffer a net loss by removing tariffs.
Certainly, cheap tractors and other imports are a great selling point for reduced tariffs. I don't blame you for welcoming them, especially those that are essential for running the farm. I am less convinced about the "urban attack vehicles" - the four wheel drives which have never seen anything but tar seal under their tyres, and instead clutter our city streets. There has been a huge increase in vehicle imports, which brings me to the second problem connected with imports. Imports - of both goods and services - are rising more quickly than exports. We usually have a surplus on our trade in goods, but currently even that is running at a deficit. Our current account deficit is at danger levels - since mid 1996 it has been almost constantly over 6%, and up to 8% of GDP ($8.2 billion) . That feeds the enormous foreign debt - at over $100 billion, compared to $16 billion in 1984, now over 100% of GDP and growing further as the dollar falls. Paying interest on the debt and dividends to overseas companies is now taking almost a quarter of our export earnings and generally more than accounts for our current account deficit. On those measures we are in a worse situation than a number of the East Asian nations that crashed in 1997. It cannot continue: we simply cannot afford those imports, foreign investment and debt.
Neither has New Zealand much chance of developing new industry under the threat of cheap imports and overseas takeover. While agriculture and forestry provide about 60% of New Zealand's exports, they provide only about 15% of our GDP and 13% of employment . Only a third of sheep and beef farms are making a profit according to MAF. We must develop new industries to provide employment, increase export income and substitute for imports. In recent years we have seen not only large scale industry closures as a result of competition from imports. We have also seen a procession of innovative companies like Allflex being taken over by transnational competitors and the exit of more established companies like Aulsebrooks and Cedenco to greener fields in Australia. In the agricultural sector, pig farming has been declining rapidly under the pressure of imports, with many farmers going out of the business, according to MAF. What is interesting is that small pig-farmers in North America are complaining as loudly as our pig farmers: the industry is being transformed by the rapid growth of giant factory farms for pigs. Huge barns containing up to 1,000 pigs are putting family farms out of the business. Between 1993 and 1998, over 104,000, or half the farmers in the U.S. raising 500 hogs or fewer, gave up pigs or left farming altogether. Meanwhile, the number with more than 5,000 hogs nearly doubled to just under 2,000. By 1998 the five largest pork companies raised about 19 million hogs, nearly a third of the number produced that year.
It is likely that we are simply experiencing the wash from this. It is clear that our pig industry will not survive this competition unless it begins this poultry-like factory farming, controlled by large corporations, and/or it gains some support or tariff protection. If we go down the factory-farm route, then be ready for huge environmental problems. One corporate-owned Oklahoma farm which raises more than a million hogs annually, creates more sewerage than the city of Philadelphia. "Neighbours complain of intolerable stench, and everybody worries about water pollution". Issues of humane treatment of animals also arise. The farm was set up with the assistance of US$60 million in direct subsidies and tax breaks. Canadian pig and feed-grain production is also subsidised. Yet the previous government took no steps to assist our farmers.
This is a kind of parable for where New Zealand farming is heading, and is an international trend. Farming is being forced into an increasingly corporate approach. Average farm sizes are steadily growing, the price of farms, under pressure from new - sometimes speculative - uses and lifestyle properties stay up, yet profitability for many is falling. That means the gradual death of the family farm: it becomes simply unaffordable. Should companies like Dairy Brands (which plans to move away from sharemilkers) and Grocorp be the future of New Zealand farming? Because that is one trend in the U.S.A. and Canada. It leads to depopulation of rural communities, increased use of chemicals, and reduced employment opportunities. Another trend is increased contract growing, with chemicals and seeds all specified by the contractor, leaving the farmer little to do but prepare the land and water it. Being tied to the one corporation, farmers are vulnerable to reducing prices. It is the same position faced by many third-world farmers growing pineapples or bananas on contract to Dole or Del Monte, which control everything from chemicals to shipping, processing and wholesaling. The farmer just takes the part of the chain with the most risk .
To compete with corporatised agriculture in other countries under free trade, New Zealand agriculture will be forced down this track, as the pig industry is showing. It implies heightened specialisation - perhaps dairying and horticulture - with the environmental and financial risks that entails. You need to decide whether farming is just a business or whether it is more than that.
Some things seem apparent. First, I have no doubt that ownership and control of your producer boards, including processing and marketing, is absolutely essential. Otherwise you will end up as the low-paid risk-taker in the corporate-controlled chain of production.
Second, New Zealand cannot afford its current level of imports, debt and foreign investment. We must reduce imports by tariffs, substitution from local production, and perhaps other means, and control the capital - the debt and foreign investment - that enters the country.
Third, it is clear that waiting for trade agreements to open new markets is simply a cargo cult mentality. If it does happen, the pace will be glacial: if you prefer speed, sit outside and watch the trees grow. Farmers in other countries - particularly the third world, where falling incomes can mean the difference between life and death - are experiencing the same problems that you are, but even more intensely, and won't give up trying to protect their position, often with good reason.
The WTO negotiations should be regarded as a red herring as far as the future of New Zealand agriculture is concerned. It will be a key point of dispute between the U.S., the EU, Japan and a number of other major countries, and will be tied to service industry concessions that will increasingly undermine our social conditions, such as health, education, and services to rural areas. Most likely not much more will be achieved for agriculture than last time, in the Uruguay Round.
We need to take control of our own economy and society. Opening it up to free trade and investment and waiting for heaven to descend has not worked and will not work. Like other countries, we must make use of all the economic tools available to us. Trade is not an end in itself: it is there to be used as a means to a better standard of living and a more compassionate society for all who live in it. Our trade must be fair to the societies of our trading partners, and it must be fair to us. *** NOTICE: In accordance with Title 17 U.S.C. Section 107, this material is distributed without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. ***
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