Free Trade's Weak Spot
By Anna Bernasek

(FORTUNE Magazine) – Globalization has brought far-flung communities across the world closer together. It has brought Internet access to Rwanda, CNN to Azerbaijan, Japanese investors to the U.S. It has also brought unprecedented wealth and economic activity--the world is richer than ever, and increased global trade is one of the main reasons.

So why has there been so much Sturm und Drang surrounding the World Trade Organization's meeting in Seattle in early December? The five-year-old WTO is the formal, legal manifestation of globalization--the body ostensibly devoted to tearing down trade barriers around the world. But instead of a celebration, the 134-country get-together (which took place after this magazine went to press) was shaping up to be a bitter grievance session.

Here's why. Two epochal forces are sweeping the world today: the spread of new technology and the spread of free markets. Their combined effect has been to let capital, labor, and production move more freely across borders. This freedom of movement has allowed for a more efficient allocation of resources--which has made for a more productive, wealthy world.

The problem is that not all capital, labor, and production are free to move. So while those who can transcend national boundaries--multinational corporations, financiers, software developers, David Hasselhoff--have been big winners in the new global order, others who are pretty much stuck in one place--unskilled workers, primary industries--have been big losers.

As a result, the gap between the world's rich and poor is growing quickly. According to an extensive United Nations Human Development report covering the current decade, the income gap between the wealthiest 20% of the world and the poorest 20% has jumped from 60 to one to 74 to one in just seven years. At the same time, the gulf between rich and poor within countries is, with few exceptions, growing as well. Among the worst cases are China, Russia, and the U.S. Even more unsettling is that crime, diseases such as AIDS, discontent, and national conflict are on the rise. So much for one happy global village.

Still, if there's anything economists agree on, it is that free trade makes countries better off. But keeping trade free may require a broader policy focus--one that equates human development with more than just economic development. "You can't have things going along on two different tracks," says John Gray, author of several books on globalization and a professor at the London School of Economics. "Market development and social development have to be linked, and now at least in some quarters, like the World Bank, you're starting to see that." Those aren't the pleadings of some "We Are the World" sentimentalist; Gray is a hard-nosed former Thatcherite. Another believer in global capitalism, author and New York Times columnist Thomas Friedman, offers a similar cautionary note: "We have to widen the winner's circle in our global system. Otherwise there will be instability."

Political leaders have a tendency to respond to the problems posed by an integrated economy by putting up trade barriers. The challenge facing those who see globalization as a positive force is to come up with alternatives that address inequality without stifling trade and economic growth. Of course, "social development" is an endeavor fraught with political difficulty, ideological dispute, and logistical nightmares. But as those shortchanged by global capitalism converge on Seattle to make the case against trade, it may be high time for the capitalists of the world to start showing off their bleeding hearts.

--Anna Bernasek