Interview with Ha-Joon Chang, Professor of Economics at Cambridge University, on Free Trade and the U.S.-Korea FTA.

Interview with Ha-Joon Chang, Professor of Economics at Cambridge University, on Free Trade and the U.S.-Korea FTA.

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Ha-Joon Chang has taught in the Faculty of Economics, University of Cambridge, since 1990. He has consulted for numerous international organizations, including the United Nations, the World Bank, and the Asian Development Bank. He has published eleven books, including Kicking Away the Ladder, winner of the 2003 Myrdal Prize. In 2005, Chang was awarded the Leontief Prize for Advancing the Frontiers of Economic Thought, whose previous recipients include Amartya Sen and John Kenneth Galbraith.

Chang’s book, Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism, is among a number of prominent books that have been targeted by the South Korean military in a systematic effort at censorship.


Thank you, Professor Chang, for agreeing to have an interview with the Korea Policy Institute. Your new book, Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism, is the most thorough and critical review of the myth of free trade and international development infusing both history and digestible economic analysis. Thank you for this important piece of scholarship.

Thank you.

Since Chalmers Johnson already provided a brilliant review of your book, we’d like to use this opportunity to take your analysis on free trade and get your perspective on the Korea-U.S. free trade agreement, which is now being considered in the National Assembly in South Korea and it’s soon to be in the United States Congress.

Yes.

My first question is, in your book, you argue that the neoliberal structural adjustment program pushed onto the Korea economy by the IMF actually worsened the economic situation of South Korea. After the financial crisis of 1997, South Korea is now pushing for a neoliberal trade agreement with various governments, including the United States. What is the relationship between the push for these trade agreements and IMF imposing a neoliberal policy?

Yes, the IMF mainly works—although not exclusively—on things like macroeconomic management, monetary and fiscal policy, and the financial sector, but it is basically based on the same intellectual foundation as the free trade agreement. [The South Korean Government] basically wants to institutionalize all these policies that have been used in Korea since the 1990s. It’s one thing to say that we have conservative macroeconomic policies and we welcome foreign investment, and another to sign this treaty, which will mean that when you step outside this boundary, you will actually get punished. So this [Free Trade Agreement] is a political project to consolidate this neoliberal regime in Korea.

Your book makes clear that free trade agreements between wealthier developed countries and poorer developing countries cause great poverty and institutionalize global inequality. But what about free trade agreements between the most powerful countries, like the United States, and relatively developed nations like South Korea, are they any better?

Yes, my view is that the free trade agreements between countries at similar levels of development tend to be beneficial because it provides bigger markets, greater competition, and so on. When you have free trade agreements between rich countries and poor countries, you have bad effects. But [free trade agreement] is completely wrong dominated by the fact that it basically stops economic development in its tracks. Once you open up to competition from the United States, Switzerland and so on, there’s no way you can develop better industries that will bring you higher income. Now then the practical question in Korea’s case is whether Korea is at a similar level of development with the United States. If that is the case, it might actually be beneficial, but what the people often don’t recognize is Koreans are, in this sense, full of themselves. They think “We are almost, not quite, but almost as rich as the United States and other rich countries,” but forget that their income levels are basically 1/3 of the U.S. level. Recently the dollar has been falling and so Koreans think they have become richer than they actually are in dollar terms, but if you look at all the indicators—the level of income, productivity and manufacturing—basically, Koreans are at about the 1/3 level of the countries like the U.S. and Switzerland. Given that gap, I very much doubt that this will be beneficial for Korea because although there might be some stimulation in terms of greater competition except in areas like automobiles, electronics, ship building where Korea already has international competitiveness, most industries would be wiped out.

Advocates for the U.S.-Korea FTA argue that this agreement will improve competition between the farmers of both countries. This is also supported by the claim that South Korean farmers receive too much from government subsidies that unfairly protects them from competition from American farmers. Would this FTA lead to fair economic exchanges in the agricultural sector?

The question is what do you mean by fair exchange, fair competition? Because when the players are unequal, equal treatment is unfair. My philosophy isn’t that good but I think it was Aristotle who said the most unequal treatment is the equal treatment of unequal people. And in the case of agricultural competition between Korean and U.S. farmers, this is definitely the case because the two countries have very different agricultural conditions. In one country, you have vast tracts of land, highly mechanized, intensive chemicals, while in the other country you don’t have those kinds of conditions. However hard the Korean farmers try, they’ll never be able to compete with American farmers. And in that case, is it really fair to let them have free competition when they have fundamentally different conditions?

Leaping off that question, what about the claim that it’s natural that as South Korea industrializes and shifts to more of an information technology economy, that it’s inevitable for farmers to disappear.

I accept that over time Korea will need to reduce its agriculture but the question is whether you want to do it in a shock therapy way. If this agreement is signed then more or less 3 million Korean farmers will be on a retirement plan in the next couple years. Secondly, you cannot treat agriculture in the same way you treat the manufacturing of iPods and things like that because agriculture is closely integrated to the way our land is organized, it has deep implications for environmental protection and like it or not, the whole of our country. Yes, I mean, in theory, there’s no God-given reason why we shouldn’t shut down all the farms, lay the countryside to waste and bring everyone into the city and give the farmers a fat pension. It might even be at one level fair treatment that the farmers get fully compensated, but agriculture’s something more than that.

South Korean public health advocates argue that the Korea FTA will potentially wipe out South Korea’s universal health care system, because it will force the South Korean government to include new medicine produced by U.S. pharmaceuticals in their reimbursements. The pro-FTA pharmaceutical lobbyists argue that the passage of the FTA will enable Koreans to have access to cutting edge technology and encourage research that will save lives. Who is right?

Well, in abstract, both are right, because patents have this two-side effect, a double-edged sword. So yes, [FTAs] encourage innovation, but it also makes these life-saving drugs very expensive. Once again, you cannot treat life-saving drugs in the same way you treat potato chips or corn flakes. So there’s a big question as to the legitimacy of patents in the international debate about the role of HIV drugs. After all, the patent is a socially sanctioned monopoly. If the government wouldn’t protect patents, the pharmaceutical companies would not have much profit.

Now given that they have a social duty to deliver certain kinds of basic services to the society, the pharmaceutical industry’s argument is that they’re self-serving. They only highlight the good side. Of course, it can stimulate innovation as long as they require the fact that the huge profit that they’re making won’t simply be there without patents. So you need to give something back to society. I once read that in a newspaper interview a pharmaceutical executive complaining, “Why are you asking us to solve health crisis in Africa?” I think they have a lot more duty to the society than companies producing chocolate and breakfast cereal because these companies would not exist if we didn’t sanction artificially monopoly on patents. And in the case of the Korea-US FTA, we will basically have to accept the American medical system, which is laggard by international standards. This country spends the highest amount of its income on healthcare and it has one of the lowest health standards in the developed world. The Swedish spend only about ten percent of their income on healthcare and they’re much healthier and they live longer than the Americans. There’s something wrong with the system here and Americans are trying to import that.

There’s been speculation that what’s really driving the free trade agreement is the push to privatize South Korea’s financial services. Can you talk about this and how it will affect ordinary working people?

Well, I think that there are lots of different motivations behind this agreement. Some Korean manufacturing companies want reductions in two to three percent of U.S. tariffs so that they can sell a bit more, while there are others who are looking more into the financial sector. Yes, I think that there has been a push from the U.S. financial community and also some people in the Korean financial community. We have a number of financial institutions that have been nationalized after the Asian financial crisis because the government didn’t have to inject public money into them. Yes, these guys want these institutions to be privatized so that they can get a piece of action. Unfortunately, we have already seen the negative intentions of this market-driven, American-style financial system in Korea. Several banks have been basically bought up by foreign, mainly American, shareholders, and the way they run the banks has meant the reduction in the quality of services. In the old days, from one point of view, it’s over-manning, but when you went to the bank you immediately got service. Now you have to wait for so long because, like the American way, they under-man the place. The banks have also been lending mainly to households, both secure and un-secure, and not lending to enterprises. This may look good for ordinary people in the short term but in the long run, it hurts them because this means that there are less jobs created, less opportunities for them. So in the short run they may need temporary help with their finances but the whole system has been actually doing a great disservice to the ordinary people because it’s slowing down the economy and reducing economic opportunities.

In the United States, there’s a fierce debate going on about the merits of free trade for ordinary American workers. Who would be the principal America-based winners and losers should this free trade agreement be ratified?

Well, the losers would be mainly the auto producers and others like electronics and ships but frankly, there’s not much of those left in the U.S. anymore so the main losers will be the auto sector. And the main gainers will be the agribusiness and the financial industry as well as the main branches of the manufacturing of pharmaceuticals. There will be some people who would be very hard-hit by this agreement, and unfortunately this country doesn’t have adequate compensation mechanisms for this kind of thing. In Europe, free trade is less of an issue because they have a good welfare state. So even if you sign this agreement and autoworkers lose their jobs, they don’t have to worry about this healthcare. They don’t have to worry about their children’s schooling because that minimum standard of living is guaranteed and he will be able to get retrained through state subsidies. In those countries, even though there are some people who have been hit by these kinds of agreements, it’s not the end of the world for them. But in the U.S. for some people, this will be literally the end of the world for them, because they lose their income, they lose their healthcare plan, what are they going to do?

South Korean capital investment has had a significant impact in changing the landscape of the lives of people in U.S. cities such as Los Angeles and New York. I don’t know if you got a chance to see that while you’re in New York, you’ll see a lot of Korean shopping malls and definitely the presence of South Korean investment. Migration of labor from South Korea has been the same. You see quite an extensive working class in these cities. Should the FTA pass, how do you think it will influence the flow of capital investment and migrants from U.S. to South Korea?

Well, in the first place, in relation to labor, South Korea has the same tools to secure any kind of guarantee about migration in this agreement. So countries like Australia was able to guarantee somewhere between 4000, 5000 working visas issued every year. And South Korea seemed to secure that, so I doubt this will change the migration flow a lot. In terms for capital investment, the only reason why the Korea-US FTA might increase Korean investment into the U.S. is through the so-called investor protection clause like Chapter 11 in NAFTA, which gives enormous leverage for the investors of the host government. But the question is whether the lack of it has really been preventing Koreans to invest in the U.S. side. Before the start of this new agreement, I’ve never heard any complaints along that line.

Now, my final question is, if you had the chance to brief presidential candidate Obama’s trade ministers, what would you say, what would you tell them?

Well, I think externally, the U.S. should stop promoting free trade among poor developing countries. There’s enough evidence, which now even the World Bank indirectly admits, to show that these policies have not worked for these countries and externally, they should, first of all, stop pushing these ideas. And secondly, they should stop pushing for bi-lateral free trade agreement with other countries because we have, despite its problems, a functioning multi-lateral system called the WTO. And all these bilateral free trade agreements are disrupting this mechanism. Despite its name “free trade agreement,” when its bi-lateral, it’s not a free trade agreement because if you are giving free market access to, say, American cars or chemicals, you are implicitly discriminating against German cars and Japanese chemicals.

So actually, even if you believe in free trade, actually, if you are a true believer in free trade, you have to support this multilateral system. And this is why more intelligent free trade economists like Professor Bhagwati of Columbia are very critical of this bi-lateral free trade agreement because for them they are intelligent enough to know that this is not a free trade agreement.

Secondly, that the new incoming government should stop pushing this bi-lateral agreement. And thirdly, internally this leads back to the point I made earlier, the U.S. should try to build up its welfare state if it’s really intent on pursuing free trade for itself. As I explained earlier, why are some Americans so opposed to free trade? They may not have all the economics to understand everything but they are intelligent enough to know that this is going to be the end of the world for them. If I were in their position, I would take to the streets and protest. In Europe, in contrast, you don’t see that kind of protest that much, although you have the famous French farmers, because people say, “I don’t want to lose my current job, but it’s not the end of the world.” So if the U.S. is actually going to pursue the free trade, which I think it should among rich countries, then it should reform its welfare system so that people don’t have to worry about these risks that open us inevitably. I put it in the following way, that sometimes you can drive a car 18 miles only because you have brakes. If you don’t have brakes, then probably even the most skillful driver will be able to drive only 13 miles. In the same way, people can actually be even more forward looking in making choices, they can be more risk-taking, they can be more innovative when they know that failure doesn’t mean you are being throw into the scrap heap of the future. So for that reason, if you want to pursue free trade, please revamp the welfare mechanism.

Transcribed by Sarah D. Park

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