The idea of global free trade is not bad. In theory, all nations should produce what they are best in, due to their resources, technological know-how and certain cost factors, and then trade their goods, to the benefit of consumers around the world. This in turn may motivate nations to specialise on the production of certain goods, thereby creating many jobs, as there is a continuous demand for these goods. The flow of capital will also be mutually beneficial. If, by means of trade, money is taken out of economy A and flows into economy B, this system could nevertheless be beneficial for economy A, as it will lead to building up purchasing power in the receiving economy. For if it does, economy B will be able to consume the products made in economy A. Thus, both economies will be provided with both capital and jobs. Therefore, the proponents of free trade argue, there should not be any barriers for products to entering markets.
But the world today is fundamentally different from what it was like two centuries ago, when the theory of free trade was established. The tasks of states have widened, while their control of the economy has decreased. The flow of capital is different. Technological know-how can be transferred and copied and resources can be shipped by anyone to any place. Hence, companies can basically set up shop in any country in the world. In doing so, they have a variety of options for establishing production facilities in low-wage countries, while selling the products in high-wage markets at the price level of such markets. As labour costs are considerably lower in many emerging and developing countries, for competitiveness reasons, companies that export to high-wage countries will not need to reinvest large amounts of their income in wages. The states they produce in endorse this system. Thus, in the current global free trade system large amounts of capital are being taken out of high-wage countries without being adequately re-distributed to citizens of low-wage countries. This considerably limits their ability to build the purchasing power needed to be able to purchase the goods from high-wage countries.
Therefore, it is highly questionable if free trade between low-wage and high-wage countries will really lead to establishing a sufficient and economically sustainable customer base for products of high-wage countries. But a sufficient customer base in emerging and developing markets is needed if export gains of Western markets are to balance the negative impact of increased imports on domestic producers.
When high-wage countries, such as many of the EU’s member states, engage in free trade, domestic producers are being exposed to increased competition from foreign products. They will face the challenge of selling goods at a higher price than foreign competitors, as local production requirements are higher in the EU than in other regions. They are higher because they provide for a higher standard of living. Thus, further opening the EU’s Single Market to foreign competition will inevitably require EU producers to lower their production costs or sell more in foreign markets.
Of course, one could argue that lowering production costs in the EU is beneficial for consumers, as it will lead to lower prices of goods and they can afford more products for the same amount of money. However, lowering production costs will naturally include lowering wages. Hence, EU citizens will have less money and they will not be able to buy more. Also, some of the costs of living will not change through global trade, in particular housing and health care costs. If consumers earn less but rents and contributions to the health care system stay high, they will have less money to spend than they have today. Perhaps, at some point in time the market will adjust rents to the income of consumers but this may take many years. During this time, consumers’ consumption ability is limited and will further decrease the sales potentials for their own employers.
Sufficient income of citizens is required to maintain education-, health insurance, pension- and social security systems. With their jobs, corporate taxes and non-wage related labour expenditures, companies contribute to these systems as well. But if export companies cannot generate sufficient income from foreign markets and, importantly, distribute it widely (through mass employment) among citizens, then their states will face even larger problems than they have today.
In effect, the current system of free trade destabilises the socio-economic base of Western high-wage nations, as it continuously decreases the capital flow in the real economy, which through the process of consumption and production is distributed to citizens and in turn should ensure their consumption ability.
Adding the ecological dimension, free trade between the EU and emerging and developing countries has an even more disturbing effect. The low cost production capacity of emerging and developing countries is being maintained by the unwillingness of such countries to introduce the same set of laws and monitoring systems that the EU has established to prevent further environmental degradation and climate change. With every product Europeans buy from such countries, they are endangering the potentials for keeping our natural environment as human-friendly as possible. They are also limiting the prospects for a greening of the European economy, as EU producers will not increase their domestic eco-social investments if foreign competitors are allowed to refrain from any such investments. If the EU allows for an unqualified further opening of the Single Market to non-EU products it will assist in deteriorating the ecological security of its citizens and the world.
There is, however, an option: if the EU were to establish the principle of qualified free trade in global trade it could prevent further eco-social degradation. Qualified free trade means that companies are entitled to sell their goods in the EU Single Market if they qualify for free trade by contributing, through living wages and adequate contributions to their national health care- and social security- and pension systems, to further building their own national economies into systems that are ecologically, socially and economically sustainable.