Protection Networks and Commodity Chains in the Capitalist World-Economy*

by Immanuel Wallerstein(immanuel.wallerstein@yale.edu) The primary feature of almost every commodity chain is that it crosses national frontiers. Indeed, when Terence Hopkins and I launched the concept in the 1970s, our original primary purpose was to show that most production within the capitalist worldeconomy that placed items for consumption on the market was the result of a long chain that did in fact cross frontiers, and that this had been so throughout the entire history of the capitalist world-economy from the long sixteenth century to today. This was as opposed to the idea that most such chains were entirely encapsulated within national boundaries.1 There is one inevitable consequence of this simple fact. All chains are, as a result, subject to interference by state authorities because states have the sovereign right within the interstate system to establish rules about what crosses their frontiers. They may permit or forbid crossing of persons, merchandise, or capital in general. They may distinguish between the crossings that come from or go to particular countries. They may set limits to amounts that may cross frontiers. They may charge fees on goods (usually called tariffs) that cross frontiers. They may pressure other governments to make conditions that are in the interests of the state placing the pressure, or in the interests of particular producers in the country of the state placing the pressure. If a state makes no conditions whatsoever on the crossing of its frontiers, we say that it is observing laissez-faire or permitting free trade. If they do make conditions, we say that they are engaged in protectionism. There is probably no state that has ever been entirely open and made no conditions whatsoever. And there have been only a few states who have ever closed their frontiers almost entirely, and then only for limited periods. So the actual practice of states lies somewhere in-between these two hypothetical positions. We can talk of frontiers that are relatively open and frontiers that are relatively closed or protected. We also know that there are ideologies of free trade and of protectionism, that is, that there are intellectuals who preach the virtues of each, and there are states who formally accept some of these ideological statements and act on them, and also assert that their foreign policy is to encourage other states in one direction or the other. This

matter is today the major subject of the debates within the World Trade Organization (WTO). What I would like to explore with you is who has been most likely to take one ideological position or the other, and what is the consequence for producers of states acting on one ideological position or the other. It is clear that, in a perfectly free market one in which no state ever makes rules about the rights of producers to sell products as they wish, and where they wish those producers of any given product who can, for whatever reason, produce it at the lowest total cost at the locus of proposed sale will be able to propose a lower price than their competitors, and thus presumably be more likely to attract buyers. So, in a perfectly free market, there are, at any given moment, winners and losers among the producers. And those who would lose consistently would eventually be forced out of business. However, it is crucial to remember that no producer is, or ever has been, primarily interested in being more competitive than others producing the same item, that is, producing the item at lower total cost than all others. Producers are interested rather in maximizing profit, which depends on the differential between the price at which they can sell the item and the total cost of its production. Producers who are not competitive in terms of the cost of production can still be, and quite often are, those who garner the most profit. This depends on their being able to obtain relative monopolies, either in the world market or in particular local markets. And these relative monopolies are dependent on state actions of various kinds. Capital accumulation is not about free enterprise but about monopolies.

Furthermore, we know that buyers do not always purchase the item that is priced lowest, even if we hold quality constant. A buyer may prefer his customary seller, for what are often erroneously defined as economically irrational reasons. Actually, buyers may be subordinating short-term advantage to middle-term advantages for example, greater reliability of a particular seller, or unwillingness to be at the long-run mercy of the particular seller who offers the lowest price. But if the price differential is significant, most buyers will give way over time to short-term economic self-interest, and the efficient seller of the moment will win out. This is indeed the main ideological argument for laissez-faire, that it benefits the buyer. In general, the so-called efficient producers obviously favor open frontiers and put their political weight within countries to get governments to do what they can to achieve this. Indeed, whole countries may find that, overall, open frontiers favor the interests of at least the majority of their producers, and hence decide to push for free trade. We see this, at the present time, in the general policy of the U.S. government which argues in favor of free trade in multiple arenas in the WTO, in regional trade pacts like NAFTA, and bilaterally with individual states.

The problem, as the U.S. government presently realizes, is that other countries may have comparative advantage (to use the Ricardian concept) in certain goods, and expect the United States, or any country to which they might open their frontiers, to reciprocate by opening its frontiers in turn for the goods of the other countries. To take the most obvious examples, many countries in the South can today produce many agricultural products and many varieties of textiles at lower cost than U.S., or for that matter west European, producers. Were the U.S. (and western Europe) to permit the import without conditions of these products, the result would be that agricultural and textile producers in the U.S. and western Europe would find it difficult, sometimes impossible, to compete in the home market, and would therefore go out of business or at least be forced to reduce production. And this would hurt not only the owners of these production units but those employed in them. As a consequence, there result considerable political pressure on the U.S. and western European governments not to open their frontiers in this way, or at least to limit seriously the degree to which they open them. But, in this case, we are faced with a situation in which the U.S. and western Europe (more generically, the countries of the North) would be asking the countries of the South to open their frontiers without adequate reciprocity. And, even given the disproportionate political power of the states of the North and those of the South, the latter tend to be very resistant to such a lopsided arrangement, which is quite understandable.

If there are barriers to crossing borders, there are ways to get around them for example, by transferring the location of a key part of the commodity chain within the frontiers of the target country of final sale. Another way is to launder parts of the chain (in the same way that one launders money) so that they appear to be products of one country when they are in fact products of another, and in that way circumvent laws that require that a certain percentage of the final product be produced in the country of final sale, or at least in a restricted list of countries. Because there are so many ways to play games with commodity chains, we have situations in which one set of producers in a country of final sale wants laws that are directly contrary to those preferred by another set of producers. The political pressures at this point go in opposite directions. In addition, to the extent that there are significant electoral contests in a given country, pressure from the workers within production units can play an important political role, and these pressures too of course can also go in opposite directions. In addition, as is obvious, wherever there is a commodity chain, it is possible for units of the chain to be linked to each other under the aegis of a single owner. This is

called vertical integration and has a number of advantages. In the first place, it guarantees supply between the lower (or earlier) unit and the higher unit in the chain. This may occasionally be crucial in situations of uncertain supply, whether because of scarcity or because of potential political constraints. In the second place, it may enable a given producer to obtain a quasi-monopoly at some point in the commodity chain and hence guarantee that the owner of this nexus can obtain a particularly large share of the overall surplus value generated within a chain.

In the third place, and perhaps most importantly, it may enable a producer to minimize tax transfers to particular states by playing games with the sales price of items going between two elements in the chain, both of which are owned by the same company, but located in different political jurisdictions. In the continual struggle between states and their need for tax revenues and producers and their desire to reduce their tax burden, the trans-national nature of the commodity chain is one of the best weapons at the disposal of the producers. I would go so far as to say that, without it, the likelihood of serious accumulation of capital would be radically reduced. In consequence, one cannot make sense of decisions by particular producers in a commodity chain without first taking into account the geopolitical situation, the worldwide struggles of social movements, and the fluctuations in the governing geocultural norms. Take, for example, one of the clichs of the 1980s which is still regularly reproduced: TINA there is no alternative, that is, no alternative in the face of a new phenomenon called globalization. This is, of course, on its face, utter nonsense. There are always alternatives. Indeed, this last statement there are always alternatives is one of the few sociological assertions that seems to me self-evident. Furthermore, as I have long argued, what is called globalization is in no way new, if by new one means something that is less than fifty years old (Wallerstein 2000).

Let us therefore analyze what we mean by TINA. It was a slogan launched by Mrs. Thatcher and reflecting an ideological push of certain countries and capitalist forces to persuade intellectuals, media, social movements, and ultimately governments to abandon their previous belief in developmentalism. Developmentalism, a doctrine propagated by almost everyone in the period 1950-1970, is the belief that all countries can develop and attain the standard of living of the presently richest countries by appropriate government action. This doctrine was as absurd as the neo-liberal slogan of TINA (Wallerstein 1988). I do not intend here to trace the history of the two successive rhetorical traps (see Wallerstein 2005). I merely wish to underscore the degree to which what is rhetoric has had a great impact on actual governmental decisions, and

this in turn has had a great impact on the practices and decisions of actual producers in actual commodity chains.

In the gamut of possibilities for governments to choose between the extremes of total protectionism and total openness of frontiers, developmentalism pushed governments towards the protectionist option and globalization towards the openness option. Of course, we have to distinguish among states, since states in the North and those in the South made, had to make, different choices within the framework of each of the rhetorics. Nor can we leave out the pressures exerted by the geopolitics of military confrontation. It is quite clear that the United States tolerated many protectionist decisions of western Europe, of Japan, South Korea, and Taiwan as part of its effort to strengthen its political and military position within the framework of something we call the Cold War. And of course, the Soviet Union did the same with its allies. The same remains true in the framework of what since 9/11 has been called the war on terror. In 2005, the United States government has placed much pressure on western Europe not to lift the arms ban on China, and not to sell certain items to Iran, to take the most obvious examples. Considerations of competitiveness in the relevant commodity chains were entirely ignored, as they were in the massive expenditures of the U.S. government in Iraq. In the global economy of 2005, such pressures account for a great deal more of the value added, and its distortions, than anything that has to do with TINA. Then there is the small question of currency rates of exchange. The price of U.S. goods in the world market are fundamentally affected by the state of the U.S. dollar, a function in turn of budgetary decisions of the U.S. government, both the executive and legislative branches. And these budgetary decisions are dictated by a whole series of considerations, one of the least of which is maximizing the competitiveness of U.S. producers. While in theory, the rates of exchange of any currency are determined by world market conditions, who believes in such a fairy tale? They are determined by political power, and the jostling that goes on constantly is decided by real power. No doubt the power is exercised in part in terms of creating favorable economic benefits in the middle run, but first of all only in part, and secondly with only middling prospects of success.

Remember also the small issue of environmentalism. There are first of all some strong aspects of the environment that constrain the market, in the short run, in the middle run, in the long run. Climate, for example. As a result, we have governments making decisions as to whether they should or should not increase costs to producers

(by taxation or, by requiring them to internalize certain costs). And different governments, as we know, are making different decisions. These decisions are affected by the pressures of producers but also by those of social movements, and even of consumers. This has absolutely nothing to do with competitiveness, in the simple sense that the ecological problems we are encountering are in part, probably in large part, the result of producers seeking to maximize their profits by ignoring the ecological damage they have been causing. The Kyoto Accords may have far more impact on the ability of given firms to succeed in the market than instituting the latest improvement in organizational management. But the producers do not directly decide on the measures incorporated in the Kyoto Accords.

There is much discussion these days of the fact that workers in the North are claiming unfair loss of jobs as a result of the poorer working conditions in the countries of the South, conditions that enable producers in the South to pay lower wages. They often call for worldwide labor standards or worldwide wage minimums. They assume that such measures would increase the costs to producers in the South, thus making them less competitive, and hence allowing producers in the North to continue to employ their present work forces. This is perhaps analytically correct. And it may even be morally or politically justified or wise or desirable. The point however is that it has nothing to do with TINA, or with competitiveness in some absolute sense. These are political positions, exercised via the states. And they are justly called protectionism. The alternative of protectionism is one that virtually every government in the world today is currently exercising. The only ones who exercise it minimally are those who are too weak politically to exercise it. Of course, there is protectionism and protectionism, as there is free trade and free trade. But we get nowhere in our political analyses by accepting the slogans. And we get nowhere in our analyses of the worldeconomy if we fail to include such central issues. The Federal Reserve Bank of the United States claims to make its crucial decisions on the basis of the real underlying trends of the economy. So do the OPEC oil ministers. But it is they, as much as anyone, who are creating many of the so-called real underlying trends. And they do so in terms of some narrow self-interest that constitute political options.

Studying commodity chains is for the political economist something like observing the operations of the human body by means of multiple tests for the physician or looking through the Hubble telescope for the cosmologist. We are measuring indirectly and imperfectly a total phenomenon that we cannot see directly no matter what we do. The point however is to figure out how this total phenomenon operates, what are its rules, what are its trends, what are its coming and inevitable

disequilibria and bifurcations. It requires imagination and audacity along with rigor and patience. The only thing we have to fear is looking too narrowly. Bibliography Hopkins, Terence.K. & Wallerstein, Immanuel (1977). Patterns of Development of the Modern World-System, Review, I, 2, 11-145. (1986). Commodity Chains in the World-Economy Prior to 1800, Review, X, 1, Summer 1986, 157-170. (1994). Commodity Chains: Construct and Research, in G. Gereffi & M. Korzeniewicz, ed., Commodity Chains and Global Capitalism, Westport, CT: Praeger, 1994, 17-20 Review (2000). Special issue on Commodity Chains in the World-Economy, 15901790, XXIII, 1. Wallerstein, Immanuel (1988). Development: Lodestar or Illusion? Economic and Political Weekly, XXIII, 39, Sept. 24, 1988, 2017-2023. (2000). Globalization or the Age of Transition? A Long-term View of the Trajectory of the World-System, International Sociology, XV, 2, June, 249-265, (2005). After Develeopmentalsim and Globalization, What?Social Forces, LXXXIII, 3, March.