Free Trade Doesn't Work

by Ian Fletcher

  Eccentric billionaire and 1992 presidential candidate H. Ross Perot was roundly mocked for predicting a “giant sucking sound” of jobs going to Mexico if NAFTA passed. But he has been vindicated. The Department of Labor has estimated that NAFTA cost America 525,000 jobs between 1994 and 2002.550 According to the more aggressive Economic Policy Institute:

  NAFTA has eliminated some 766,000 job opportunities—primarily for non-college-educated workers in manufacturing. Contrary to what the American promoters of NAFTA promised U.S. workers, the agreement did not result in an increased trade surplus with Mexico, but the reverse. As manufacturing jobs disappeared, workers were down-scaled to lower-paying, less-secure services jobs. Within manufacturing, the threat of employers to move production to Mexico proved a powerful weapon for undercutting workers’ bargaining power.551

  The idea of Mexico as a vast export market for American products is a sad joke; Mexicans are simply too poor. In the 1997 words of Business Mexico, a pro-NAFTA publication of the American Chamber of Commerce of Mexico:

  The reality is that only between 10 and 20 percent of the population are really considered consumers. The extreme unequal distribution of wealth has created a distorted market, the economy is hamstrung by a work force with a poor level of education, and a sizable chunk of the gross domestic product in devoted to exports rather than production for home consumption. Furthermore, workers’ purchasing power, already low, was devastated by the December 1994 peso crash and the severe recession that followed. Even optimists do not expect wages in real terms to recover until the next century.552

  According to official figures at the time, fewer than 18 million Mexicans made more than 5,000 pesos a month.553 That was only about $625: roughly half the U.S. poverty line for a family of four. This has not improved much since, so, as Paul Krugman has pointed out, “Mexico’s economy is so small—its GDP is less than four percent that of the United States—that for the foreseeable future it will be neither a major supplier nor a major market.”554

  But if NAFTA wasn’t a plausible economic bonanza for the U.S. and America’s establishment knew it, then what was going on? Krugman again supplies an answer, writing in Foreign Affairs that, “For the United States, NAFTA is essentially a foreign policy rather than an economic issue.”555 The real agenda was to keep people like President Carlos Salinas, friendly with powerful interests in the U.S., in power in Mexico City. Free trade was pushed not because of any sincerely anticipated economic benefits, but to serve an extraneous foreign policy agenda. To his credit, Krugman later admitted the utter chicanery of it all, writing in The New Democrat in 1996 that:

  The agreement was sold under false pretences. Over the protests of most economists, the Clinton Administration chose to promote NAFTA as a jobs-creation program. Based on little more than guesswork, a few economists argued that NAFTA would boost our trade surplus with Mexico, and thus produce a net gain in jobs. With utterly spurious precision, the administration settled on a figure of 200,000 jobs created—and this became the core of the NAFTA sales pitch.556

  NAFTA was sold in Mexico as Mexico’s ticket to the big time. Mexicans were told they were choosing between gradually converging with America’s advanced economy and regressing to the status of a backwater like neighboring Guatemala. But the income gap between the United States and Mexico actually grew (by over 10 percent) in the first decade of the agreement.557 (This doesn’t mean America boomed; we didn’t. But Mexico slumped terribly.) In NAFTA’s first decade, the Mexican economy averaged 1.8 percent real growth per capita.558 By contrast, under the protectionist economic policies of 1948-73, Mexico had averaged 3.2 percent growth.559

  Because Mexico’s labor force grows by a million people a year, job creation must get ahead of this curve in order to raise wages; this is simply not happening. Mexican workers can often be hired for less than the taxes on American workers; the average maquiladora wage is $1.82/hr.560 The maquiladora sector is deliberately isolated from the rest of the Mexican economy and contributes little to it. Workers’ rights, wages, and benefits are deliberately suppressed. Environmental laws are frequently just ignored.

  Mexican agriculture hasn’t benefitted either: NAFTA turned Mexico from a food exporter to a food importer overnight and over a million farm jobs were wiped out by cheap American food exports,561 massively subsidized by our various farm programs.562

  Promoters of NAFTA have tried to cover up its problems by using inappropriate yardsticks of success. For example, they have claimed that the expansion of total trade among the three nations vindicates the pact. But this expansion has just been due to a growing American deficit.563 Because a growing deficit means, by definition, that our imports have been growing faster than our exports, there is no way that economic growth per se will ever solve the problem. Congress was right to reject NAFTA initially, which never enjoyed sincere majority support in either the House or the Senate and was bought with sheer patronage by Bill Clinton.564

  To be fair, NAFTA is not the only thing that has been wrong with the Mexican economy in recent decades. But NAFTA was the capstone to a series of dubious free-market economic experiments carried out there since the early 1980s. Between 1990 and 1999, Mexican manufacturing wages fell 21 percent.565 Nevertheless, Mexico is now losing manufacturing jobs to China in such areas as computer parts, electrical components, toys, textiles, sporting goods, and shoes: 200,000 in the first two years of the millennium alone.566 Mexico’s trade deficit against the rest of the world has actually worsened since NAFTA was signed. In the words of commentator William Greider, “The Mexican maquiladora cities thought they were going to become the next South Korea, but instead they may be the next Detroit.”567

  NAFTA is not America’s only free trade agreement, of course. But our other agreements tell similar tales. We have signed 11 since 2000: with Australia, Bahrain, Chile, Colombia, Jordan, Korea, Oman, Morocco, Singapore, Panama, and Peru. (El Salvador, Nicaragua, Honduras, Guatemala, and the Dominican Republic were lumped together in the Central American Free Trade Agreement or CAFTA.) Every agreement but one has coincided with greater American deficits. The only exception is Singapore, where our existing surplus increased somewhat. But Singapore is tiny, a mere city-state.568 Nevertheless, our government pushes for more. As of 2010, country agreements with Colombia, South Korea, Oman and Panama were pending ratification, and the U.S. was in stalled negotiations with Malaysia, Thailand and the United Arab Emirates.569 Next on the list are reportedly Algeria, Egypt, Tunisia, Saudi Arabia and Qatar.570 In December 2009, the Obama administration announced its intention to eventually join the existing Trans-Pacific Partnership and elevate it into a full-blown free trade area comprising the U.S. plus Singapore, Chile, New Zealand, Brunei, Australia, Peru, and Vietnam.

  THE PHONY SUCCESSES OF FREE TRADE

  It is possible to explain away these problems with NAFTA and our other trade agreements by using cherry-picked data and other forms of statistical opportunism. Conversely, it is also possible to unjustly credit free trade for economic successes in foreign countries that it did not really cause. This is usually done by interpreting paper trade liberalizations (the legal forms of which were not reflected in facts on the ground) as substantive in order to claim that these liberalizations triggered economic takeoffs in nations that actually took off under earlier protectionist policies.

  China and India, for example, both opened up their economies to the world about a decade after their growth rates took off, so free trade cannot be the cause of their growth. Trade liberalization is, in fact, far more likely to be an effect than a cause of economic growth: once an economy is primed by protectionism and industrial policy and starts growing, it starts to have something to gain from somewhat freer trade (not free trade per se) and its political masters act upon this fact—with moderation and selectivity if they are wise.

  For example, from its first post-communist reforms in 1978 to 2001—a period of over two decades—China did not allow unconstrained imports. (It does no
t really do so even today.) If it had, it could easily have ended up like Mongolia or the African nations which unwisely opened up their markets too soon: its (meager at the time) domestic industries could have been wiped out by imports and it might never have become the economic powerhouse it is now. Instead, it only joined the WTO (and opened up its markets on paper) in 2001, after mastering the fine art of non-tariff barriers, largely with Japanese help. Thereafter, it has only opened its markets very selectively and under tight, often covert, controls. It has defied the spirit of WTO rules, and sometimes their letter, ever since.

  Case in point: China did not open its financial markets to foreign players until very recently (this is an incremental process, so no single date can be given) and even then has kept them on a tight leash of regulations. This is wise, as an uncontrolled financial system is intrinsically liable to profound mischief (as Americans presumably realize by now). Interestingly, China was unscathed by either the 1997 Asian Crisis or the 2008 financial meltdown. Neither has China allowed true convertibility of its currency. It has not even allowed foreign investors genuine property rights: it allows them plenty of profits by producing for export, but no real ownership of corporations, land, or real estate.571 India has been similarly sluggish and cagey about opening completely to foreign goods and capital, albeit in different ways corresponding to its socialist rather than communist past, democratic government, and British-derived legal system.572

  Advocates of free trade trumpet a supposed correlation between a nation’s openness to the world economy and its observed growth rate. But a more careful review of the data reveals that it is actually growth in exports that correlates with economic growth, not openness as such.573 And even high exports do not in themselves bring growth: Sub-Saharan Africa has a higher ratio of exports to GDP than Latin America, but is still poorer and slower growing.574 Economic openness per se simply does not produce growth.575 (Cf. the quote from Wired magazine in Chapter 1 for contrast.) Empirically, a rational amount of closure, combined with good domestic industrial policies, does far better.

  Many nations trumpeted as evidence of the wonders of free trade have, in fact, succeeded for other reasons. Many of the star performers with respect to tariff reduction, such as Ukraine, Moldova, and Mongolia, have done badly, and some of the most tariff-protected nations, such as Lebanon and Lesotho, have actually done quite well.576 In fact, for the decade of the 1990s, one major study found that there was no clear statistical relationship at all between tariffs and growth rates; if anything, the data had an inconclusive drift towards the conclusion that higher tariffs actually correlate with more growth, not less.577 So a simplistic take on the data (to be fair, insufficient to settle the question) actually favors protectionism.578

  Some commentators argue that free trade isn’t what is hurting the Third World, but the lack of it. Ironically, this view tends to find its support among both right-wing free market types and left-wing antipoverty activists like the British-based charity Oxfam International.579 They point out that developed nations impose much higher tariffs on developing nations (by a factor of four, on average) than they do on other developed nations. Thus Angola pays as much in tariffs to the U.S. as Belgium, Guatemala as much as New Zealand,580 Bangladesh as much as France, and Cambodia more than Singapore.581 (This is not due to intentional discrimination, but to the fact that developed nations protect their agriculture.) Unfortunately, the implied gains of abolishing these discrepancies are very small: between three-tenths and six-tenths of one percent of the GDPs of the exporting nations.582 Furthermore, free trade in food and the end of First World agricultural subsidies could easily raise global food prices by 10 percent. (That’s what eliminating a subsidy does.)583 So Third World nations could easily slip down the path of the old Ireland: exporting food while their own people starve.

  Free trade would, however, give them somewhat more-efficient poverty.

  Chapter 8

  The Disingenuous Law and Diplomacy of Free Trade

  Free trade and free trade agreements are not the same thing. Nations certainly do not need free trade agreements to have free trade. They just need to drop their tariffs, quotas, and other overt and covert barriers to the flows of goods and services. So (contrary to what one might imagine from the media) NAFTA, our other country trade agreements, and the WTO treaties are not really free trade agreements at all. Although they contain free trade agreements, and their sponsors would certainly like the public to debate them as if they were nothing else, 90 percent of their legal substance concerns other things.

  Foremost among these is protection for foreign investors. The American oil industry, for example, is haunted by the memory of Mexico’s president Lázaro Cárdenas nationalizing its holdings there in 1938.584 So these agreements seek to tie governments into legal straitjackets that will prevent such expropriations in future. Unfortunately, these agreements go beyond securing honest foreign investors against theft by opportunistic politicians (which is perfectly reasonable) and embrace the dangerously elastic principle that any action which reduces the future profitability of foreign investments constitutes expropriation.585

  Taken to its logical conclusion, this ultimately amounts to the idea that the profitability of investments must be the supreme priority of state policy—overriding health, safety, human rights, labor law, fiscal policy, macroeconomic stability, industrial policy, national security, cultural autonomy, the environment, and everything else. While there is no justification for going to the opposite extreme and allowing governments to ride roughshod over legitimate property rights, these agreements thus mandate rigidly property-first solutions to questions where societies must strike a reasonable balance between public and private interests.

  A similar ideological bias is evident in other aspects of these agreements, like their attempts to force the privatization of public services. Supposedly, this is to create a level playing field between foreign and domestic producers of these services. Reserving the provision of these services to the state, the reasoning goes, is a form of protectionism because the state is a domestic producer. But this reaches beyond free trade to the far more radical proposition that everything should be traded, which not even the strictest Ricardianism implies. So, in the words of the International Forum on Globalization, a left-leaning group:

  Those negotiations involve changes in many services that were until recently reserved for governments, like public broadcasting, public education, public health, water delivery and treatment, sewage and sanitation services, hospitals, welfare systems, police, fire, social security, railroads and prisons….We could end up with Mitsubishi running Social Security, Bechtel controlling the world’s water, Deutschebank running the jails (and maybe the parks), Disney running the British Broadcasting Corporation, Merck running the Canadian health care system.586

  But the privatization of natural monopolies just substitutes private monopolies for public ones, frequently shrugging off layers of democratic accountability in the process. And in the resulting absence of competition, profit seeking finds its natural outlet in higher prices, not higher efficiency. Private producers can often skim off the profitable parts of the market and saddle the taxpayer with the dregs. Privatization is frequently no more than a one-time sell-off of future profits by the current government—with a cut of the proceeds going, of course, to its friends. In fact, privatization of physical and social infrastructure usually lacks justification, unlike the privatization of industrial operating companies, which have often been successfully privatized around the world over the last 30 years.

  OVERRULING DEMOCRACY

  All these free trade agreements are profoundly antidemocratic. For a start, they take precedence over national, state, and local laws whenever a trade angle can be found. What kind of laws have been struck down? A laundry list. In the 1993 words of Lori Wallach of Global Trade Watch (referring to the WTO’s predecessor, the General Agreement on Tariffs and Trade or GATT):

  Successfully challenged under
GATT as trade barriers have been the U.S. Marine Mammal Protection Act of 1972, several laws conserving fish resources, and Thai cigarette limitations. Currently under challenge at GATT are the U.S. fuel economy standards, the U.S. gas guzzler tax, and the EU ban on the use of growth hormones in beef. Challenges have been threatened under GATT against restrictions on drift net fishing by the U.S., export bans on raw logs in Indonesia, the Philippines and the U.S., the U.S. 1990 Consumer Education and Nutrition Food Labeling Act, California’s Proposition 65, which requires labeling of carcinogens, German packaging recycling laws, and the recycling laws of several U.S. states, the Pelly Amendment, which enforces a ban on commercial whaling, state procurement laws requiring a certain content of recycled paper, and more. As a result of past pressure of such challenge threats, meat inspection along the U.S.-Canadian border was all but eliminated for a period of years and now remains very limited, a bill banning import of wild-caught birds into the U.S. was delayed and then watered down in Congress as contrary to GATT, Danish bottle recycling requirements were weakened, Canada is now required to accept U.S. food imports that contain 30 percent more pesticide residues than were allowed under their national laws before the 1988 U.S.-Canada Free Trade Agreement, a Canadian plan for provincial auto insurance was scrapped when attacked by U.S. insurers as a subsidy, as was a British Columbia reforestation program challenged as an unfair subsidy to the timber industry.587

  The U.S. was forced in 1996 to weaken Clean Air Act rules on gasoline contaminants in response to a challenge by Venezuela and Brazil. In 1998, we were forced to weaken Endangered Species Act protections for sea turtles thanks to a challenge by India, Malaysia, Pakistan and Thailand concerning the shrimp industry. The EU today endures trade sanctions by the U.S. for not relaxing its ban on hormone-treated beef.588 In 1996, the WTO ruled against the EU’s Lome Convention, a preferential trading scheme for 71 former European colonies in the Third World.589 In 2003, the Bush administration sued the EU over its moratorium on genetically modified foods.