The Divide

by Jason Hickel

  Benin, Burkina Faso, Mali and Chad are all major African cotton producers. A total of 8 million workers are employed in their cotton industry – making it the largest private employer in these countries – and 13 million people rely directly on their incomes. But they find themselves up against a wall. Because of subsidies that the US government hands out to its own cotton producers, the global price of cotton is around 10 per cent lower than it otherwise might be. And that is a 10 per cent loss that these countries – which are some of the poorest in the world – can ill afford. If they are to have any chance at development, they need a fair price for their cotton exports, not one purposefully distorted by the United States. The ‘Cotton Four’, as they are known, have taken their case to the WTO, pointing out that the US subsidies are illegal under WTO rules. But the US has refused to back down.

  Under the WTO, the Cotton Four have the option of taking the US to court (the Disputes Settlement Body) – and the court will probably rule in their favour. But the WTO cannot force the US to change course. Enforcement is left up to the plaintiffs; should they win the case, the Cotton Four would be entitled to place sanctions on the US. But what use are sanctions from a little group of poor countries against the richest and most powerful economy in the world? It is like a fly punishing an elephant: the US wouldn’t even notice. Because the power of enforcement is distributed asymmetrically according to market size, there is little reason for rich countries to play by the WTO’s rules. They can do whatever they want. But poor countries have no choice. If they decide to break trade rules that harm them, rich countries can impose sanctions that could very well ruin them altogether.

  One might imagine that sanctions are too disproportionate to be applied to trade disputes; after all, sanctions are normally used as an act of direct aggression – an instrument of economic war. Perhaps demanding compensation might be a more reasonable approach. And indeed, developing countries have articulated this argument many times, calling for a fairer enforcement mechanism. But rich countries have refused to relinquish their power. Indeed, their insistence on using sanctions gives us a clue as to what is really at stake at the WTO. As long-time WTO negotiator Yash Tandon likes to point out, ‘trade is war’ – and the war is being waged by the North against the South.

  For many poor countries, though, the real pain of trade liberalisation is even more concrete and immediate than all of this – and one doesn’t need to ponder free-trade theory to get the point. Simply put, cutting trade tariffs means losing customs revenue. And customs revenue is generally an important source of income for poor countries – sometimes accounting for over 50 per cent of their budget. Poor countries rely on customs revenue because it is easy to collect; personal incomes are often too low to tax and governments often lack the capability to collect other kinds of taxes, such as capital gains taxes, inheritance taxes and so on. Indeed, a study conducted by the IMF itself shows that of all the tax revenue that countries have lost due to trade liberalisation over the past twenty-five years, more than 70 per cent has never been recovered through other forms of taxation. In other words, trade liberalisation directly denies poor countries the very resources they so desperately need to spend on social services and reducing poverty.

  The ‘Efficiency’ of Involuntary Sex Work

  I first became aware of the negative effects of trade liberalisation on developing countries when I returned to Swaziland in 2004. During the first few weeks of January 2005, something extraordinary happened. Textile factories began to close up one after the other, and more than 25,000 workers were sacked – most with no prior notice, and many without having received pay for the previous month. For a country as small as Swaziland, where formal sector jobs are almost impossible to come by, this was a devastating blow. How could it have happened? Where did all the factories go? Swazis found themselves at a loss as to how to answer this question. There had been no natural disaster. There had been no economic crisis. There had been no change in government policy. The jobs just vanished, and the industrial parks – once bustling with activity – were left eerily empty.

  I, too, was confused. I spent days struggling to figure out what was going on, scouring the newspapers and staying up late to read online by dial-up modem in a run-down Internet café. Eventually the story became clear.

  For most of modern history, Western countries protected their domestic textile industries against imports from countries where production costs are far lower. They placed special quotas on imports from East Asian countries such as Korea and Hong Kong, so that not too much cheap clothing would flow in. At the same time, Western countries granted special preferences to very poor countries like Swaziland – like unlimited quotas and duty-free access to Western markets – to help their national textile industries grow, and to encourage other producers to relocate there. The preferences were part of a carefully planned system that used trade rules to promote industrial development where it was needed most, creating jobs in regions of extreme poverty and unemployment. And it worked: Swaziland’s textile industry grew rapidly, and a number of Asian firms moved to Swaziland to take advantage of the country’s trade preferences. The industry soon became the largest formal employer in the country, with 35,000 workers on its direct payroll by 2004. For Swaziland, it was an economic miracle.

  But when the WTO was formed, it placed this system squarely in its sights. Multinational companies argued that the quotas and preferences ‘distorted’ the market, preventing them from operating in the places where labour was cheapest. And Asian countries argued that it gave unfair advantage to countries like Swaziland. The WTO upheld their argument and, on 1 January 2005, Western countries abolished their quotas on textile imports from East Asia. The landscape of the global textile trade changed literally overnight. It was great news for Asia: textile firms around the world frantically relocated there to take advantage of cheaper labour. But countries like Swaziland, where labour was slightly more expensive, were left in the lurch. Swaziland’s factories lost their comparative advantage, and either closed down for good or relocated to East Asia themselves. The textile industry collapsed in record time, and tens of thousands of workers lost their jobs.

  A humanitarian catastrophe soon followed. The vast majority of the retrenched workers were women, many of whom had no choice but to turn to sex work to keep afloat. A survey of sex workers in the city of Manzini in 2005 found that most of the women were newcomers who had been fired when the textile factories closed. ‘We are not happy with the work we are doing but we have to make a living,’ one was quoted as saying; ‘the number of people working here is increasing at a high rate, which is evidence that people are desperate for money and there are no jobs.’ As one might imagine, this only added to Swaziland’s already crippling HIV/AIDS crisis. Indeed, much of the disease burden that Swaziland bears today can be attributed to the spike in women’s unemployment after 2005.

  For me, this was a kind of epiphany – one of the most important realisations of my life. I was working with World Vision in the development sector at the time, doing home-based care with AIDS patients and setting up little income-generating schemes here and there, honestly trying to help assuage the suffering of my fellow Swazis in whatever ways I could. I was shocked to realise that the fate of Swaziland’s poor hinged on decisions made by technocrats in Geneva. With the flick of a pen, new rules – written in the name of free trade – crushed the already fragile lives of my country’s people. All of us at World Vision felt helpless against this remote and faceless force.

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  What do free-trade theorists have to say about such catastrophes? Well, they assume that the labour and capital ‘released’ from uncompetitive industries due to liberalisation will quickly be reallocated to other industries that align more closely with the country’s comparative advantage. This is the assumption of ‘perfect factor mobility’. But, as with many economic assumptions, reality almost never plays out according to theory. Workers who lose their jobs in one industry usually la
ck the skills necessary to quickly take up jobs elsewhere, and end up either languishing in unemployment or taking on very low-skilled, poorly paid work. The only way to ensure that some kind of productive transition takes place is to provide substantial unemployment benefits and training programmes – something that poor countries can rarely afford. Indeed, under structural adjustment programmes they are often denied the right to spend on this kind of social assistance.

  As for capital mobility: the theory states that the capital from one dying industry will shift automatically to other, more competitive ones. But if capital is fixed, in the form of a machine, for example, it is usually too specialised to be used in another industry, so it sits languishing until someone sells it off – like the shuttered factories that stand like empty giants on the outskirts of Manzini. And if the capital is liquid, there’s no guarantee that it will stay in the country when it could just as easily move abroad. Indeed, that’s what happened in Swaziland when textile investors packed up and moved to East Asia. The mobility of liquid capital is too perfect, while that of labour and fixed capital is not perfect enough.

  So the theory just doesn’t square with reality. In fact, in order for this theory to make any sense at all, we would have to conclude that the involuntary movement of thousands of Swazi textile workers into the sex trade is an efficient and desirable outcome, on the basis of comparative advantage. Of course, while Swaziland suffers in this scenario, East Asia wins – and free-trade advocates in the WTO are always quick to point that out. Given the history of the South, this is a sad truth to swallow. The 1950s and 1960s saw valiant attempts by global South leaders to unite in solidarity and mutual assistance through the Non-Aligned Movement and the G77, but structural adjustment and the WTO have unravelled these efforts, pitting one poor country against another. It is a strategy as old as colonialism itself. Divide and conquer.

  How to Profit from a Plague

  Much of the pain that developing countries suffer under the global free-trade regime actually has nothing to do with free trade at all. One of the WTO’s agreements, the Trade-Related Aspects of Intellectual Property Rights (or TRIPS), focuses on copyright and patent rules. One might think that trade would be enhanced by lowering patent standards: making it easier for countries to share technology is surely a good way to spur technological development and make trade more efficient. It would increase productivity, innovation and exchange. But TRIPS is designed to do exactly the opposite. The point of TRIPS is to raise patent standards and enshrine them in international law – and this is being conducted, ironically, under the banner of liberalisation. It is a contradiction in terms.

  Towards the end of the 19th century, the global average length of a patent was about thirteen years. By 1975, before the period of liberalisation, it was around seventeen years. Under TRIPS, however, rich countries have succeeded in imposing a new twenty-year standard. This is great for individuals and companies that own patents, because it means that they get to sit back and extract rent from them for a much longer period. But it has a devastating effect on poor countries. Because patent licensing fees can be so expensive, many poor countries are unable to afford the knowledge and technologies that they need for basic development, like computer programs, agricultural implements and medicines. As a result of TRIPS, developing countries have to pay an additional $60 billion per year in licensing fees to multinational companies.

  This might sound like a technical problem, but it can have devastating consequences for human well-being. The most powerful example of this is, of course, the story of the AIDS crisis.

  *

  When I was still a small boy, my father diagnosed one of the first cases of HIV in Swaziland. It was 1988. Intrigued, he decided to start testing more widely. The following year, he discovered that 2 per cent of the women in his antenatal clinic were HIV positive – a surprisingly high number. One year later, it was double that, and the next year it doubled again. The virus spread so fast that by the end of the 1990s, nearly 25 per cent of the population was infected. He and my mother watched as the clinics and hospitals where they worked overflowed with emaciated bodies. ‘It was horrifying,’ my father recalled. ‘We quickly ran out of beds, and were forced to care for patients on the floor. It was a total crisis.’ I still remember my parents coming home from work late at night, exhausted. Yet for them the worst part about the epidemic was not just the suffering they encountered, but the fact that they were unable to treat it. Not because there were no medicines; there were. The first antiretroviral drugs were approved by the United States government in 1987, the year before my father diagnosed his first case. But they were priced at around $15,000 per yearly course – way out of reach for all but the very richest.

  The prices were so high because the drugs were locked under a powerful new patent system imposed by the TRIPS Agreement. In the past, pharmaceutical companies were only allowed to hold patents on the process of manufacturing drugs, not on the compounds themselves. This meant that developing countries could produce generic versions of important medicines – and sell them for a fraction of the cost – so long as they were able to find their own methods of manufacturing them. TRIPS put an end to this practice by extending corporate patents down to the level of the molecule itself. During the AIDS crisis, generic firms in India were capable of producing and exporting antiretrovirals for as low as $350 per year, which would have been affordable enough to save millions of dying patients, but the WTO – pressured by the pharmaceutical companies – actively prevented them from doing so. ‘It was criminal,’ my father tells me. ‘I was shocked that the drug companies were willing to let people die so needlessly.’

  Eventually, neighbouring South Africa, where the epidemic was just as bad, chose to disobey the WTO’s rules and began using generic antiretrovirals, pleading a public health emergency. They insisted no patent was so sacred that millions should have to die to respect it. The United States responded by threatening them with crushing sanctions through the WTO’s court – and the world watched in horror at this callous move. But then something happened in the United States that weakened their case. In 2001, a number of Americans died of exposure to anthrax. The US government feared that an epidemic might be on the horizon, possibly triggered by biological weapons. Just in case, they decided to stockpile Cipro, the antibiotic that treats anthrax. But Cipro was under patent by Bayer, making it very expensive to buy. So the US government stepped in and, citing a possible public health emergency, forced Bayer to suspend its patent so that generic versions could be produced.

  It quickly became clear to the world that patents were not inviolable after all, even for the United States. And if exceptions could be made after a few Americans fell ill, why couldn’t the same exceptions be invoked for the sake of millions of dying Africans?

  Still, the United States and the WTO refused to back down. It took two more years of grassroots community organising and strategic advocacy before they finally gave in. It was only in 2003 that developing countries gained the right to manufacture and import generic versions of life-saving drugs to defend against AIDS and other public health emergencies. Unfortunately, by the time this concession was made, the epidemic was already entrenched. Ten million Africans had died of AIDS by then – most of whom would have lived had they had access to affordable medicines.

  It’s not just AIDS drugs that are at stake. Medicines for malaria, tuberculosis and other drugs essential to saving lives in the global South are also in question. Eighteen million people die each year because of preventable diseases, in large part because they lack access to affordable medicine. How does the pharmaceutical industry justify the exorbitantly high prices of these drugs, if it has nothing to do with the costs of manufacture?

  Their main argument, which gets wheeled out whenever patents are in question, is that the income from patents provides an incentive to develop the products in the first place. Plus, the profits can be ploughed back into research and development (R & D) to make new and better drugs
. But we know that 84 per cent of research on pharmaceuticals is funded by governments and other public sources, while only 12 per cent comes from the pharmaceutical industry. Most of the scientists who develop these drugs are not industry technicians driven by profit, but academics. In fact, many of the key components of the AIDS drugs were developed in public universities, and then bought and patented by corporations. Pharmaceutical companies complained that the TRIPS exception for public health emergencies allowed privately produced products to be publicly appropriated. But the opposite is true. The products are, for the most part, publicly produced and then privately appropriated through the patent system. As for the argument about reinvesting in R & D: the pharmaceutical industry spends far more of its profits on marketing than on research, which suggests that their commitment to research is questionable at best.

  The successful battle for a public health exception to TRIPS marked a tremendous victory against the most draconian principles of free trade. But the victory is by no means secure. Once Big Pharma recognised the threat posed by the generics market in developing countries, they took the battle back to the WTO, where they are now developing what they call TRIPS+. The idea behind TRIPS+ is to extend US-style patent laws to the rest of the world, so that producers in all countries have to obey US patents just as if they were operating in the United States.

  The End of Democracy

  Those who defend the WTO like to point out that – unlike the IMF and the World Bank – the WTO does not impose its will unilaterally. All it does is provide a forum for collective decision-making and furnishes a mechanism for policing decisions that are made. Technically, this is true. Decisions at the WTO are theoretically made on a consensus basis. But it sounds better than it really is. In the consensus process, bargaining power is ultimately based on market size, so the largest and most powerful economies – like the US, UK, Germany and Japan – almost always get their way. This is why so many of the WTO’s trade rules end up being asymmetrical, like the subsidy rules that favour rich countries at the expense of poorer ones. But many key decisions are made before the consensus process ever even begins. G7 negotiators have a long history of convening special ‘Green Room’ meetings from which most developing countries are excluded – a tactic that allows them to agree on positions before they even enter negotiations. In the past, when representatives from poor countries have attempted to enter these exclusive meetings to demand their rightful place at the table, they have often been forcibly removed by security.