An alternative vision of trade in the 21st century
A guest blog by RICHARD SMITH
Richard is an independent commentator on the textile, leather and footwear industries.
The topic ‘International Trade – New Challenges’ was of one of the panels at the World Leather Congress recently held in Rio de Janeiro on November 9th 2011. What was interesting was that the subject of “trade” had come up during the World Footwear Congress held at the same venue two days earlier. In a nutshell there was no agreement on trade – free or fair – between presenters representing developed and developing nations.
Speakers from Italy, for example, defended “free trade” as they wanted to export footwear to the growing Brazilian market but are being charged the 35% import duty on their products as permitted by the World Trade Organization and this tends to make them uncompetitive.
Cleto Sagripanti, President of the Italian Footwear Association (ANCI), said that he “wanted zero tariffs”. The Brazilians, on the other hand, had little faith in how free trade is currently being practiced. Milton Cardoso, President of the Brazilian Footwear Association (Abicalcados) said that “societies should be asked if it wanted free trade”. The director of JBS Group, Marcus Vincius Pratini, stated clearly in his presentation; “The idea of free trade only works in the academic world”.
If you are from Europe the mantra of “free trade” is everywhere since, according to Sagrpanti, the EU is the most liberal trade regime in the world. This is true from the point of view of trade in itself but what about the huge subsidies funding the EU’s Common Agricultural Policy to benefit European farmers? Such subsidies are an affront and gross contradiction to the idea of free trade but are ignored by European politicians, entrepreneurs and economists who want free movements of goods and services worldwide.
The point is that you cannot have it both ways. In the big picture of world trade it is impossible to extract say, leather and footwear out of the mix, and have zero tariffs on them when other products and commodities are being subsidized or have import duty imposed on them. Emerging countries are frowned upon for having a similar policy by the developed world. Argentina was criticized during the World Leather Congress for applying export duties to hides being exported to Europe. (What about EU tariffs on Brazilian agricultural products entering Europe?)
Alongside the “squeaky clean” mantra of free trade, which is not really free at all but a convenient verbal deception, goes the unpardonable sin of being “protectionist” by imposing duties on products from other countries or imposing export duties on raw materials which your local industry might actually need – the classic case being Argentine hides for Argentine tanneries. In fact, if you think about it, until the current deception surrounding the western definition and practice of free trade is clarified then subsidies render it the same as being protectionist.
To prove this point it is worth quoting former President of the World Bank, James Wolfensohn, who stated on March 3rd 2004 that the developed countries fund their agriculture – directly and indirectly – to the tune of US$300 billion per year – that is, almost US$1 billion per day and do not want their trading partners to do the same and then want to sign free trade agreements with them.
In the current scenario “all countries are equal, but some are more equal than others”, to paraphrase George Orwell, with economically powerful countries holding the whip hand in many trade related matters.
Even the President of the Guanajuato Footwear Chamber (CICEG) in Mexico, Armando Martín Dueñas, is concerned about his country being opened up to zero tariffs on imports of Chinese footwear from December 11th 2011. He is concerned that there are still hidden subsidies on such production in China which will render his members’ footwear uncompetitive in Mexico itself and could destroy the industry.
In a short conversation with Martin Dueñas, who is a convinced advocate of honest free trade, it was abundantly clear that Mexico had suffered a similar fate in the recent past. Mexico was self-sufficient in corn until the North American Free Trade Agreement (NAFTA) came into force with Mexico itself, the US and Canada on January 1st 1994. Over the years Mexico has imported more and more corn from the US since it is cheaper due to USDA subsidies for farmers. Now Mexico is almost 100% dependent on US corn imports for its staple diet of tortillas and has little or no corn production of its own, even though corn is a cultural mainstay of traditional Mexican life and cuisine. Now, will the same happen to Mexico’s footwear industry in the context of “free trade” – which is apparently neither “free” nor “fair” in many cases? And what will the government do about the resulting unemployment and the probable demise of a traditional Mexican industry?
The aim of free trade is to build wealth between nations so that everyone can benefit. The theory is fine but what about subsidies – normally hidden subsidies which make products cheaper and therefore more competitive? These can range from local tax breaks; property tax rebates; cheap electricity; discounted payroll tax; no import taxes on imported raw materials and components; little or no environmental care; no collective wage agreements; no trade unions; no social security payments for workers, currency manipulation…..and so on. If some of these elements that contribute to reducing the unit cost of a product are out of balance within a bilateral trading partner, then this cannot be classified as free or fair trade. Someone somewhere has an unfair advantage.
What do we do about subsidies? Independent audits would have to be carried out if unfair or illegal subsidies were suspected much in the same way as nuclear power plants are inspected in the context of the Nuclear Non-Proliferation Treaty. If you really want honest and fair free trade this is a vital requisite to enable it – otherwise it is at best semi-protectionist. By expanding and redefining the constitutional global mission of the World Trade Organization (WTO) to include the environment, this organization could undertake the auditing task.
Look at the number of disputes that take place every year before the WTO. Currently there are 14 cases open against China leveled against its footwear exports for unfair trading practices. If trade is free and fair then manufacturers should benefit from their profits and not from obscure subsidies which violate the spirit and even the mantra of free trade. The problem is that people pretend that such subsides are “normal” which somehow makes them legitimate. Nothing could be further from the truth.
So what is the solution to this conundrum of facts, opinions and contradictions?
Replacing the current system with “Sustainable Trade”
International Trade has to be taken out of its traditional vacuum and linked directly to manufacturing procedures – and by this I mean that trade has to be linked to sustainable or environmental manufacturing.
Trade is ubiquitous and for this reason it is already implicitly linked to environmental concerns. Toxic financial products have endangered the global financial system and we must not allow toxic consumer goods to do the same to the global environment. With the world population expected to reach 9.3 billion by 2050 sustainable practices will become even more important since, without a healthy environment living creatures, including man, will not be able to survive longer term.
During the World Leather Congress, the lead speaker on the panel dealing with International Trade – New Challenges, Sergio Miranda da Cruz of The United Nations Industrial Development Organization (UNIDO) concentrated on trade and environmental concerns in the leather industry. “The sector will have to consider environmental management even more in terms of renewable energy. It is impossible for us to continue in this way since resources are limited,” stated Cruz.
This is certainly part of the solution for the environment but how do we link this to trade and take on “New Challenges” when the “old challenges” have still to be resolved?
Despite programs aimed at consumers to recycle waste in many countries this is simply not enough to decisively benefit the environment. It is papering over the cracks since it is industrial production which produces 70% of harmful environmental and air borne waste. Thus, industrial practices must be tackled and given our attention. They must be the Number 1 priority, rather than concentrating on consumer actions when disposing of household garbage, for example.
Manufacturing and trade have been regarded as separate activities but in reality must be inextricably linked together. Sustainable manufacturing should be rewarded, by products made in this way having lower tariffs imposed on them. Products manufactured or produced with harmful discharges for the environment or are not biodegradable should have punitive tariffs imposed on them. In other words manufacturers, farmers and tanners will be rewarded for promoting and implementing an environmental service to society by limiting harmful waste and discharges into the environment.
A major obstacle to be overcome is that it is developing economies that lack the skills and/or financial and other resources to produce the newest and latest techniques. They have the will but not the means but if developed consumer nations want “green products” then they will have to accommodate (i.e. help pay and at least finance) the technology and environment machinery necessary to preserve the environment.
This idea goes beyond Free Trade – or “free for all or unregulated trade” and even beyond Fair Trade, since it ensures that environmental protection and sustainable practices are at the forefront of industrial production even before a product enters the international commercialization chain.
In the case of the footwear industry, and as proposed by Mike Redwood, Visiting Professor in Business Development in Leather at the University of Northamptonat, during the IUTIC conference in Mexico in November 2010, the carbon footprint of footwear manufacturing would be reduced if some effort was made to promote time zone manufacturing. For example, shoes for the Americas would be produced in that continent, cutting back the transport times, component delivery times and the fuel consumption needed to deliver shoes to market from Asia – half way around the world. Shoes for Europe could be manufactured there and even in Africa.
In this context Peter Geisler, President of the Swedish safety and occupational footwear manufacturer, Arbesko AB, stated at the World Footwear Congress that he had calculated how far some shoe components had to travel on average before reaching the retail shelves. The distance is twice around the world or approximately 80,000 km! This cannot be good business or environmental practice no matter how it is spun and is perhaps one of the manifest absurdities of unbridled globalization.
Time zone manufacturing does not mean that factories would lose business since they could set up manufacturing facilities in the required time zone and operate there. For example, Chinese or Vietnamese factories could set up operations in Latin America (there are already examples of this in Colombia) or Central America, as is the case with Taiwanese apparel manufacturers. Sustainable manufacturing would be rewarded; transport times would be shorter; employment would be created locally and manufacturing leading to international trade would not be focused just on profit and cost per unit, but environmental concerns would be an integral part of the manufacturing process. Thus sustainability would play an important role in establishing a competitive selling price for the finished item or pair of shoes.
To enforce such practices it would be necessary to involve UNIDO and the WTO (which would have to focus on the environment as well as on trade) with national and regional governments participating and patrolling the industrial processes and environmental cost. The name for this could be termed “Sustainable Trade”. Longer term, this practice of Sustainable Trade will be more important than the traditional concepts of “Free Trade” or even “Fair Trade” since these two ways of doing business internationally do not encompass the greatest challenges mankind will face in the next 40 years in terms of planetary environmental protection.
Some may argue that a system of carbon credits which can be bought and sold will aid sustainable manufacturing but I disagree with this assertion. Carbon credits will favor countries and companies with large amounts of money behind them and will automatically place smaller manufacturers in developing countries at a competitive disadvantage.
The environmental impact of producing a piece of finished leather or a pair of shoes should not be offset by buying a carbon credit. To protect the environment production must have a lower impact and in the system of Sustainable Trade, the more competitive its price will be in the market place. This will encourage sustainable practices rather than using the loophole of buying carbon credits to continue to manufacture unsustainably.
Another objection could be that international and government regulations would interfere with investment and industrial production. This is an objection whose roots are embedded in a free trade ideology when the absolute priority must be to protecting the environment. Free Trade never has and never will subordinate profits to the environment. Voluntary restraints would simply not work. We are all dependent on the environment for survival and legal constraints and/or punitive fines would have to be applied and enforced by regulatory bodies.
Does it not make consummate sense – products fabricated unsustainably should be less competitive than products manufactured with the environment in mind. If you cannot sell a product due to a high environment tax levied on it, no one will manufacture it and in this way unsustainable or “toxic” products will be gradually excluded from the commercialization chain.
The whole trade paradigm needs to be rethought if industry is to act responsibly across the board and protect the environment. As Moacir Berger, President of AiCSul, said at the end of his presentation at the World Leather Congress, “Environmental policy is as important as commercial policy”. The phrase Sustainable Trade encompasses both of these policies and with a decisive combination of political and commercial will it could be applied for the benefit of the expected 9 billion plus inhabitants of the Earth in first half of this century.
Let the debate begin!
This topic will be the subject of a debate to be held at the Prime Source Forum which runs from March 28th – 30th 2012 in Hong Kong entitled “Localization vs. Globalization” and will address the many challenges pertaining to this issue. Don’t miss this debate if you are in Hong Kong. It is bound to be stimulating for all concerned!