Free traders face home guard uprising: Just as the world's leaders seek to build on last week's breakthrough at the Gatt talks, the protectionists are staging a comeback. David Bowen reports

NO SOONER had news of a breakthrough in the Gatt trade talks arrived from Tokyo last week than politicians were falling over each other to stress its significance. 'The biggest round of tariff cuts ever' would create 2 million jobs worldwide, of which, said John Major, up to 300,000 would be in Britain.

Officials capped this with a figure of 400,000, and higher bids would probably have emerged had the cynics not spoilt the fun. Stuart Thomson, economist for Nikko Europe, said the figures were 'plucked from the air'. This would not be a surprise to Jagdish Bhagwati, economic adviser to the Gatt secretary-general, who said last November that 'it's almost astrological to try and forecast specific numbers'.

Despite the political flummery, there was a genuine buzz of excitement among the weary officials in Gatt's lakeside fortress in Geneva. 'This is more than cosmetic,' one said. 'It will put a lot of steam behind the Uruguay Round.'

Tomorrow, the chief EC and US negotiators, Sir Leon Brittan and Mickey Kantor, will brief them on the deal agreed last week. Then the hard work of getting other countries to agree begins - followed by a series of negotiations to sort out the outstanding problems of the Uruguay Round. It will be a miracle if there are no more serious attacks on the round before it finally comes into effect.

Behind these hurdles lie an increasingly vocal group of sceptics who question whether Gatt is not simply a passing fashion among politicians. Indeed, they go further. These are people who question the benefits of free trade itself.

In recent years, free traders have been on a roll, able to indict protectionists as primitive heretics. Yet the near-universal intellectual acceptance of free trade is a relatively new thing.

Two hundred years ago, Adam Smith said that free trade was good because it allowed countries to specialise in the products they were best at. But his arguments were attacked by those who said it was dangerous for countries to be so reliant on each other.

Free traders and protectionists battled it out through the last century and well into this. The intellectual boot was not always on the free trade foot. George Bernard Shaw called it 'heart-breaking nonsense', while Keynes, usually a free trader, wobbled: 'I sympathise with those who would minimise, rather than those who would maximise economic entanglement between nations. Let goods be homespun whenever it is reasonably and conveniently possible.'

Following the Depression of the Thirties, which was indisputably deepened by protectionism, and the long period of growth after the Second World War, coinciding with the steady reduction of tariffs on manufactured goods from 40 to 5 per cent, the protectionist arguments withered. The proportion of income generated by exports increased (see chart, opposite). Output grew, and trade grew even faster. Choice expanded. Falling tariffs and more competitionreduced prices. Consumers gained.

In the Seventies and Eighties, the argument was strengthened as Asian free-trading countries, such as South Korea and Hong Kong, shot ahead of countries in Latin America that were attempting to achieve self- sufficiency behind towering tariff walls, that achieved inefficiency instead.

The new backlash against free trade comes from two angles. First, there are those who argue that the liberalisation of the Eighties, combined with freer trade, has led to the undermining of living standards in the West, with no great benefit to developing countries. Second, the increasingly powerful environmental lobby argues that trade leads to unsustainable growth.

William Pfaff, a columnist for the Los Angeles Times, wrote last month that 'the theoretical counter-offensive is gathering force'. In the Eighties, he said, average wages in the US fell in real terms, and social protection was sharply reduced. While, in theory, wealthier countries should have been upgrading to ever higher technology as the developing world took over labour-intensive industries, the free movement of capital meant this simply did not happen. Instead, companies transferred production to low labour cost countries, in turn forcing US workers to accept lower wages and benefits.

The free traders' response is that experience shows that industrialised countries do not suffer when low-paid jobs are transferred abroad. Almost without exception, developing countries are in trade deficit with the developed world, implying that they spend much of their increased income on imports.

'The more industrialised countries buy from foreigners, the more foreigners can afford to buy from them,' Gatt says. It is ludicrous to blame Third World factories for forcing wages down, free traders add, because the Third World's share of the Western manufactured product market is well below 5 per cent. Prosperity is not a zero sum game: both rich and poor countries can grow.

A book* to be published later this month puts an opposing view. Subtitled 'Protecting the future against free trade', authors Tim Lang and Colin Hines argue strongly for less trade, not more. 'Overall, the main beneficiaries of the Gatt reforms will be transnational corporations, and the main losers will be the environment and the world's poor,' they declare.

They say the Uruguay Round will do Third World countries little good. Liberalisation of agricultural trade will 'threaten their food security and open the possibility of increased dependency on the USA and EC'. The proposed intellectual property rules are also criticised: developing countries that make 'bootleg' drugs would be hard hit by stricter patents, for example.

The changes to the textile rules are also unfair. Although the quota protection of the Multi-Fibre Arrangement is being phased out, the process will be spread over 10 years. 'Gatt has not removed old-style protectionism,' the authors claim.

In riposte, Gatt says that the main supporters of the Uruguay Round are now in the developing world. Many formerly protectionist countries have been converted to free trade, and one of them - Argentina - was behind a letter sent to US and EC negotiators in an effort to restart the stalling talks. The 37 signatories included poverty- stricken countries such as Bangladesh and Tanzania.

However, the authors of the book also believe the free trade system damages the environment. The word 'environment' does not appear in the draft Uruguay Round treaty, they note, while the principles of Gatt mean it is almost impossible for a country to restrict an import on environmental grounds.

The most celebrated evidence of this is the case of the yellowfin tuna, which often swim below schools of dolphins; unless special nets are used, the dolphins are caught at the same time. The US introduced a law saying only 'dolphin-safe' tuna could be imported. Mexico complained to a Gatt disputes panel, which ruled that the US was acting illegally because it was imposing its own rules on another country. Environmentalists were alarmed, along with others who saw the ruling as a mechanism by which standards could be forcibly reduced in the name of free trade.

Gatt has said the environment will be on the agenda of the next round. Officials say that to have introduced it late into the most complex international negotiations ever undertaken would have been foolhardy. Free traders also say that the real solution to environmental problems is to increase incomes: London is cleaner than Sao Paolo because it is richer, and if it was not, that would be a failure of domestic policy rather than anything to do with trade.

Messrs Lang and Hines argue for a 'new protectionism'. In contrast to the old protectionism, which is 'used by big and powerful interests to pursue their goals', this new form 'seeks to protect public interests, like health, the environment, safety standards and to reduce poverty'. Under it, tariffs would be used to break the world up into regions that are as self-sufficient as possible, and where trade is minimised.

Utopian as this may seem, it appears to have at least one powerful backer. Sir James Goldsmith, the billionaire financier turned environmentalist, recently wrote in Le Figaro that Europe was essentially self- sufficient economically, and that there was no point in it trying to expand its trading links.

'Let us recognise, once and for all, that economic growth is valuable only to the extent that it reinforces the stability of our society and augments the well- being of the people.' The effect of unrestrained free trade is, he said, 'to impoverish and destabilise the industrial world at the same time that it cruelly ravages the Third World'.

All this is unlikely to cut much ice with the politicians or the economic consensus. Free traders argue that competition is the spur to efficiency and new ideas, as much in services and the new information and knowledge-based industries as in the traditional trade in goods. A society, they say, which blocks out its rivals is doomed to wither.

There is also a bottom line. According to Gatt, 23 million jobs in the G7 countries are dependent on merchandise exports, of which 2.5 million are in the UK. The figures may be wild guesses, like Mr Major's, but it would be a brave politician indeed who ignored them.

*The New Protectionism, by Tim Lang and Colin Hines. Published by Earthscan on 19 July at pounds 10.95.

----------------------------------------------------------------- G7 FULL-TIME JOBS SUPPORTED BY MERCHANDISE EXPORTS ----------------------------------------------------------------- Country Jobs (millions) United States . . . . . . . . .7.2 Canada . . . . . . . . . . . . 2.75 Germany (W) . . . . . . . . . .3.6 Britain . . . . . . . . . . . .2.5 France . . . . . . . . . . . . 1.55 Italy . . . . . . . . . . . . .1.5 Japan . . . . . . . . . . . . .6.0 ----------------------------------------------------------------- Jobs related to trade within EC not included -----------------------------------------------------------------

(Photographs and graph omitted)