From harelb@math.cornell.edu Fri Apr 24 01:58:10 1992 Date: Fri, 24 Apr 92 01:30:23 EDT From: harelb@math.cornell.edu (Harel Barzilai) To: schissel@math.cornell.edu Subject: re "free trade" (550 lines long) Topic 526 Rethinking the Economics of Free Tr rich misc.activism.progressive 3:16 pm Apr 16, 1992 (at pencil.cs.missouri.edu) (From News system) /** carnet.mexnews: 66.0 **/ ** Topic: Rethinking the Economics of Free T ** ** Written 12:01 pm Apr 14, 1992 by resourcectr in cdp:carnet.mexnews ** The Resource Center Bulletin The Resource Center Bulletin is published quarterly by the Resource Center. Most recently, the Bulletin has been focusing on U.S. influence in Mexico and Mexico's role in the proposed North American Free Trade Agreement, but in the past the Bulletin has explored topics in Central America and the Caribbean. The Bulletin has also focused on general labor issues. The Bulletin is posted in this conference in order to reach a concerned audience more readily. In the future, the Bulletin might be posted in its own conference. In any case, readers in this conference will be notified of any changes. The Bulletin is also available on a subscription basis. In the United States, subscriptions are $5 for one year, $10 for two years; foreign subscriptions are $7.50 and $15 respectively. Those interested in subscribing or in other Resource Center publications can contact us via PeaceNet: Mail: Box 4506, Albuquerque, NM 87196 Phone: (505) 842-8288 / Fax: (505) 246-1601 Spring 1992: Rethinking the Economics of Free Trade By Harry Browne As this Bulletin goes to press, the final details of a North American trade and investment agreement are being hammered out in secret negotiations among representatives of Canada, Mexico, and the United States. Reports indicate that disagreements persist in only a few economic sectors. At this time the most important influence on when an agreement might be signed is political. President Bush has been advised by many free trade supporters in Congress that he should delay signing an agreement so that the required Congressional vote can be put off until after November's elections. If a draft is not submitted to Congress by early April, no vote is likely to occur before November. The U.S. recession is largely responsible for Washington's fear of voting on a North American free trade agreement (NAFTA). But impressive efforts by labor, environmental, church and consumer groups to publicize the many negative aspects of NAFTA have also contributed to heightened public awareness. Without these groups the free trade debate would have remained limited to mainstream economic theory and the result would have been determined entirely by power politics. Opposition groups are learning from one another and from their counterparts in Mexico and Canada. They are forging a counterproposal based not on nationalist protectionism or narrow self-interest, but on a vision of continental cooperation and development in which trade is but one tool, not an end in itself. By pursuing a high-profile free trade agenda, President Bush has unwittingly provided an issue around which diverse grassroots groups have built coalitions. Bush's free trade proposals have also opened public discussion of the negative effects of global economic integration. This presents an opportunity to broaden the traditionally narrow debate in the United States over economic and political ideology. This Bulletin explores that broader debate, and attempts to demystify the economic jargon that surrounds it. Comparative Advantage English economist David Ricardo introduced the idea of comparative advantage in 1817--four years before Mexico won independence from Spain. He demonstrated that if England could produce textiles more efficiently than it could produce wine, and more efficiently than could Portugal, the country would benefit from trading its textiles for Portuguese wine. By the standards of the day, his theory was good economics. By any standard, it was good politics. Mathematically, England as a whole could be shown to gain from free trade. Ricardo, a London businessman, chose to ignore how the new income would be distributed. In fact, English industrialists stood to expand their markets if England adopted free trade, but English farmers would be wiped out if tariffs on imported grain were repealed, as Ricardo advocated. Subsequent versions of comparative advantage explored the question of who gains and who loses from international trade. Mainstream economists believe that the answer is found in the "factor endowment" of each country. "Factors of production" refer to the basic ingredients of an economy: land and natural resources, unskilled labor, skilled labor, and capital. The factors that are abundant in a country will benefit from trade, according to the theory, and those that are scarce will be hurt. Overall, though, the conclusion is the same as Ricardo's: the nation as a whole will benefit from trade. What does this mean for Mexico and the United States? Mexico, with a relatively high ratio of workers to good farmland, is said to have a comparative advantage in "labor- intensive" agricultural goods--those that involve much manual labor, such as vegetables and fruits. Mexico also has a relatively high ratio of low-skilled workers to capital, giving it a comparative advantage in low-technology, labor-intensive manufacturing. As Mexico opens trade with a capital-abundant country like the United States, the theory holds that Mexico will be able to sell more of the labor-intensive products it makes to the United States, and will buy more of the capital-intensive products that U.S. firms produce. Mexican workers will benefit, as will capitalists and skilled workers in the United States, the theory concludes. Indeed, this is what virtually all studies based on economic modeling have predicted will happen under free trade. Because such studies are taken seriously by policy makers hungry for data, it is important to examine more closely how they work. Employment in Wonderland A joke popular with the victims of introductory economics courses has it that a physicist, an engineer, and an economist are stranded on a desert island with only a can of soup to eat. The physicist and engineer are unable to figure out how to open the can given the island's resources, but the economist saves the day. "Assume a can opener," she says. Because they do not have the tools to analyze the real economy, economists must hope that making a few simplifying assumptions will at least enable them to predict general trends, if not specific outcomes. But if you start by assuming full employment and the equations you use are based on maintaining full employment, it should hardly be a surprise that your results show continued full employment. Under these conditions, jobs merely shift from one area of the economy to another. These are the assumptions made by the theory of comparative advantage. It could be very difficult to figure out how these job shifts will take place, but not to worry: economists assume perfect markets. When demand for a company's products increases thanks to greater exports, it will hire more workers to boost production. In a perfect market the company must offer a wage higher than that paid elsewhere to attract new workers. By doing so it raises the cost of labor for all other companies, forcing less-productive firms to lay off workers or even go bankrupt. According to free-market theory, firms will continue to hire workers until the wages they pay equal the value of the increased production contributed by each additional worker. That means that wages will end up closely tied to productivity. Almost all models designed to predict the effects of NAFTA are based on comparative advantage and make the assumptions of full employment and perfect markets. Inevitably, the results they spit out "confirm" the theory. A 1991 study by KPMG Peat Marwick found that NAFTA would create 29,800 new jobs in some sectors of the U.S. economy, would cause the loss of 29,800 jobs in others, and would increase real wages by .02 to .03 percent. A 1991 University of Michigan study estimates U.S. job gains in some sectors to be 99,993 as a result of NAFTA, job losses in others to be 99,993, and real wages to increase by .2 percent. Such forced symmetry reflects the unreality of the underlying assumptions: neither study shows a net gain or loss of jobs since at full employment neither is possible. (At least six other studies were released in 1991 using this methodology, known as computable general equilibrium modeling. Most declined to put specific numbers on job shifts, but all agreed that the United States would gain in capital-intensive areas and Mexico would gain in labor-intensive areas.) Some studies proceed one step further, to attempt to include the possibility of changes in employment levels. They first estimate an increase in overall wage earnings, based on full employment, just as the first set of studies do. They then reason that some portion of the rise in wages paid is due to increased employment rather than just changed wage rates. These studies are less honest than their cousins since they acknowledge the existence of unemployment but still use assumptions of full employment and perfect markets in the equations that form their models. A third set of studies focuses on the expected increase of exports from the United States to Mexico, and uses the U.S. government's estimate that 20,000 to 30,000 jobs are created by every $1 billion in new exports. The fallacy of this argument can be seen in the example of Zenith Corporation. In the early 1980s Zenith--the last U.S.-owned producer of televisions-- surprised workers, industry analysts, and politicians by laying off one-fourth of its work force and building plants in East Asia and Mexico. By 1983 Zenith's maquiladora in Reynosa was the largest in Mexico, employing 7,000 people. Zenith and its suppliers now exported millions of dollars of subcomponents, but these exports had not created new jobs--they were the same subcomponents that had previously been shipped to U.S. plants. Ricardo meets the Global Economy Arguments based on comparative advantage continue to be good politics, but they are no longer good economics. For Ricardo a country's capital and technology were as fixed as its land. But as demonstrated by Zenith, modern corporations can move capital with ease, and can establish operations in most parts of the world. No longer can a country rely on its capital base and technological lead to give it a trade advantage. Until the 1970s, imports into the United States threatened mostly those jobs in low-skill, labor-intensive production, as low-paid workers overseas enabled foreign companies to undercut domestic producers. Most economists saw the loss of jobs in such activities as a good sign. Firms would be forced to become more efficient, workers would be forced to retrain for jobs in more productive sectors, and wages would rise with productivity. But the evidence of the 1980s demonstrates that it is not just low-wage, low-skill jobs that are likely to move to Mexico. Workers in the United States began to face competition from low- paid workers in increasingly high-skill industries, challenging a fundamental assumption of comparative advantage. Often the competition was from overseas subsidiaries of their own firms. In 1983 Ford Motor Company set up a state-of-the-art engine plant in Chihuahua, Mexico that directly competed with a Ford plant in the United States. With wages less than one-tenth of those in the northern plants, the only question was whether inexperienced Mexican workers could operate the robots efficiently and achieve high quality standards. Within 30 months the Mexican plant had proved that it was comparable in both respects to the U.S. plant. Examples of high-quality, high-tech production by low-paid workers on the U.S.-Mexican border have multiplied. From super- clean rooms and surface-mount technology in advanced electronics production to flexible manufacturing systems for automobiles, corporations have found that it pays to set up shop in Mexico. In addition to lowering their labor costs, there is a second, indirect benefit for corporations. Evidence that advanced production can be shifted to Mexico gives employers a big stick in contract negotiations with workers. The threat of relocation and the loss of jobs when plants do move away drive wages down. In the mid-1980s General Motors' Packard Electric Division told its union local in Cleveland, Ohio that workers would have to accept a 62 percent pay cut for new hires or their jobs would go to Mexico. Packard had no trouble backing up the threat, since GM already employed tens of thousands of workers in Mexico at $1.00 per hour and less. When negotiations ended, the union had a small victory: the pay cut was only 43 percent. In Centralia, Ontario, Fleck Manufacturing carried out the threat: only hours after its work force went on strike the plant closed down and moved to Ciudad Ju rez, Mexico. As jobs move to low-wage areas, income distribution grows increasingly skewed, and fewer and fewer workers are able to purchase the goods they produce. The number of U.S. manufacturing jobs fell from 21 million to 19 million over the course of the 1980s. A large portion of the U.S. labor force became unemployed on a long-term basis, and were dropped off of government unemployment figures. Manufacturing wages declined an average of 5 percent during the decade, after taking inflation into account. Under free trade, wages have a long way yet to fall. Acknowledging the effect of global integration, a Goodyear executive vice-president said "until we get real wage levels down much closer to those of the Brazils and Koreas, we cannot pass along productivity gains to wages and still be competitive." Increasing economic globalization has not brought the prosperity Ricardo envisioned. Instead, it is contributing to the deindustrialization of the United States and the demolition of the social contracts corporations had with the communities in which they were located. The Invisible Hammer of the Free Market Globalization's downward pressure on wages is accompanied by downward pressure on environmental and labor protections. The increasing ability of capital to go where costs are lowest has eroded the political will to regulate the economy in the interest of society and of future generations. When regulations differ among countries or regions, corporations that are less burdened have an obvious advantage over those subject to strict regulations. Free trade agreements prohibit governments from using import restrictions to protect their firms from being undercut by competitors who save money by damaging the environment or abusing workers. Citing concern for the international competitiveness of U.S. firms, the Bush administration has launched an all-out attack on regulations intended to protect workers, consumers, and the environment. In 1990 President Bush empowered his Council on Competitiveness--headed by Vice-President Dan Quayle- -to review all new and existing regulations for their impact as an "anti-competitive" force. The council has since forced changes in many EPA regulations, has pressed the heads of the USDA and the FDA to reconsider several consumer safety regulations, and is seeking to overhaul the nation's civil- justice system to reduce the threat of lawsuits against businesses. In each of these cases the council has claimed the regulations cost U.S. businesses money, allowing foreign competitors to gain an edge, and costing U.S. workers their jobs. The same deregulatory struggle is occurring in Canada in the wake of its free trade agreement with the United States. The country is moving away from its strict standard for pesticide safety toward the weaker U.S. version. Social programs are being eliminated, as with the government's support for unemployment insurance, or attacked, as with Canada's higher minimum wage and public health system. Failure to enforce environmental laws may not be challenged as an unfair subsidy to polluting businesses, but higher standards for product safety may be. Thus Canadian companies are seeking to overturn the U.S. ban on asbestos as blocking their exports to this country, and U.S. firms are attacking Canada's efforts to reduce acid rain. It is not necessary for free trade to take this anti- regulatory course. Instead the United States and its trading partners could decide to adopt the strictest rather than the loosest regulation in any given area. This would level the playing field for businesses, eliminate unfair competition based on abusing workers, the environment, or consumers, and force companies to compete on the basis of productive factors such as quality, productivity and innovation. NAFTA could include a clause restricting trade with nations that failed to respect accepted standards to discourage firms from relocating outside of North America to avoid regulations. Ironically (or hypocritically), the Bush administration makes precisely this argument when it comes to protecting the property rights of corporations. Countries that fail to adopt and enforce strict laws concerning patents, trademarks, and copyrights can be subjected to high tariffs on their exports to the United States. Mexico was required to greatly strengthen its protection of these rights before concluding NAFTA negotiations, under pain of losing preferential tariff treatment for $220 million worth of its exports. There is a precedent for requiring countries to enforce minimum labor standards in order to export goods to the United States duty-free. The Trade Act of 1974 established a "Generalized System of Preferences" under which the U.S. president decides which developing countries will have duty-free access, and for which products. In 1984 Congress prohibited the president from naming a country as a beneficiary "if such country has not taken or is not taking steps to afford internationally recognized worker rights to workers in the country." These measures include the right to organize and bargain collectively, standards for minimum working age, maximum hours of work, occupational safety and health, and an "acceptable" minimum wage. Since it became law, however, the labor rights clause has been used as a political tool by the Reagan and Bush administrations. It has been applied to out-of-favor states like Paraguay, Nicaragua and Romania, but not to "friendly democracies" like El Salvador and Guatemala, where the abuse of labor rights is widespread and sanctioned by the government. Labor Rights in Mexico When pushed by Congress to discuss labor issues with Mexico in tandem with the free trade negotiations, the Bush administration claimed there was little to discuss. "Mexico has strong protections in its Constitution and laws," U.S. Trade Representative Carla Hills told the Senate Finance Committee. Indeed, Mexico has one of the most advanced labor laws in the hemisphere. The law guarantees a minimum wage, an eight-hour day, the right to strike (except for public employees), severance pay, overtime pay, workers' compensation, and liberal maternity-leave benefits. Unions are strengthened by government policy that generally recognizes only one union per workplace, and labor contracts may require that all employees belong to the union. If these standards were enforced, Mexico would have better union conditions than many states in the United States, where "right-to-work" laws make it nearly impossible to organize a workplace. But the Mexican government wields tremendous power over unions, and labor practices often violate both the letter and the intent of the law. Governmental labor authorities and union bosses consistently deny workers the freedom to choose representation. Selective firings, legal shenanigans, and intimidation on and off the job are common tools of worker repression. Violence, including murder, has been used consistently to demobilize labor. "Although Mexico has progressive labor laws, it has a very poor record of enforcement of those labor laws," reported the staff of the Subcommittee on International Economic Policy and Trade of the House Committee on Foreign Affairs. "Non-enforcement of labor laws in Mexico permits non-complying companies a competitive advantage over companies in the U.S." To gain legal status a prospective union or union local must register with the federal Ministry of Labor and Social Welfare or a similar state-level authority. There is no appeal process for union applications that are denied. With the exception of a brief period of reform in the 1970s, government authorities have refused to recognize independent unions--that is, those unions not affiliated with the political party that has ruled Mexico since 1929. Union activists have therefore turned to the reform of existing unions. This is an extremely difficult proposition. Union bosses collude with employers in engineering the firing of activists. Union-hired thugs are commonplace at union voting drives. The government controls the ratification of union elections, leaving little recourse in the event of fraudulent balloting. A legally registered union has the right to call a strike, but to do so legally, the union must petition the government for approval to strike. Unapproved strikes are declared illegal or "nonexistent," and employers are relieved of legal obligations to the strikers. From 1963 to 1988 the federal government approved only 2.2 percent of all strike petitions. Free Trade: A Political Agenda The Bush administration's diligence in pursuing the enforcement of intellectual property rights and the elimination of barriers to trade and investment contrasts with its lack of concern for labor rights, environmental standards and social programs. This contrast reveals the political nature of NAFTA. Free trade is a tool in the effort to shrink government and to turn over as much decision-making power to the private sector as possible. On a more general level, free trade has become part of the U.S. government's "democracy offensive" (see Resource Center Bulletin No. 18). The concept of democracy being promoted by various U.S. agencies and government-funded groups is one of individual sovereignty rather than collective action, of competition rather than cooperation. Economic "reforms" that put corporations and wealthy individuals in charge of investment decisions and that give those consumers with money the option of buying more foreign products are seen as advancing personal liberties and therefore democracy. "Throughout Latin America there is a bold new spirit of freedom and free markets," wrote U.S. Trade Representative Carla Hills recently. "We now share a common economic and political vision...of the extraordinary achievements possible when the imagination and industry of the individual are allowed to emerge >from the shadow of government control into the bright light of liberty." That the economic reforms she refers to were imposed by governments under severe pressure from the International Monetary Fund and in the face of large-scale public protests and even riots escapes Hill's attention. The administration's push for free trade is not confined to North America. President Bush has proposed a hemispheric agreement on free trade and investment, called the Enterprise for the Americas Initiative. A year and a half after the initiative was launched, 11 Latin American countries have signed "framework agreements" with the United States, setting forth preliminary outlines for reducing trade and investment barriers. The United States has signed similar agreements with the 13- nation Caribbean Community and the four nations of the Southern Cone Common Market (Argentina, Brazil, Paraguay and Uruguay). On a global scale, the United States continues to push for lower trade and investment barriers at the Uruguay Round negotiations of the General Agreement on Tariffs and Trade (GATT). Free trade as envisioned by the administration and the business community will frame domestic political debate in a context of unrestrained economic competition. The standard of Vice-President Quayle's Council on Competitiveness--how much will it cost business?--will increasingly be accepted as a crucial test for policy proposals. This will put pressure on existing social programs, and make introducing new programs that involve any inconvenience to business extremely difficult. It should be noted that competitiveness is not hurt by a standard or program that is adopted on an international level. The European Community recognized this fact by including a social charter in its plan for a unified market. The social charter was significantly weakened, however, partly out of a concern that high standards would put European producers at a competitive disadvantage vis--vis Asian and North American firms. If the United States, Canada, Mexico and the European Community decided to adopt similar, enforceable standards, their vast market power would convince other nations to follow suit. Continental Development: An Alternative Agenda This idea of using trade to raise social standards internationally is central to the trade and development agenda being proposed as an alternative to NAFTA by labor, environmental, church-based, and progressive political groups in Canada, Mexico and the United States. Three umbrella organizations representing the three countries have published their vision of a Continental Development Pact, which includes the following points: --Cancellation or substantial reduction of Mexico's foreign debt, and the diversion of military expenditures in all three countries to social needs. --Harmonization of labor, health and education conditions to the highest standards of the three countries. --Respect for the collective rights of workers, such as to organize independent unions, to bargain collectively and to strike. --Adoption of the highest standards in the three countries for the protection of women's rights. --An immediate increase in Mexican wages, especially the minimum wage. --Creation of a trilateral institution that will guarantee the enforcement of internationally recognized human rights. --Exclusion of culture, education and the media from the trade and investment agreement. --Guarantees for the food security of each country, and for the sovereign control of each country's natural resources. --Establishment of a code of conduct for transnational corporations along the lines of the Sullivan or Tutu principles applied to corporations with activities in South Africa. --Protection of the legal rights of immigrant workers. Representing the United States in these "Citizen's Negotiations" was the Mobilization on Development, Trade, Labor and the Environment (MODTLE). Composed of approximately 200 groups, MODTLE and other organizations have the potential to influence the shape of an agreement. The coalition nearly brought about the defeat of "fast-track" negotiating authority in June, 1991--an authority the Bush administration had said was essential if NAFTA were to be negotiated. A similar coalition, the Action Canada Network, has weakened the parliamentary majority of the Conservative Party in that country, and the anti-NAFTA New Democratic Party now controls the governments of three provinces that account for 53 percent of Canada's population. Mexico's closed political system prevents the opposition from exercising any political power, but activists there--under the umbrella of the Mexican Action Network on Free Trade--have been instrumental in raising awareness in the United States and Canada of the authoritarian nature of Mexico's government. This has helped convince some Congressional supporters of free trade to take a second look at this new potential partner. A democratic Mexico may well have pursued a very different strategy of economic integration. Cuauhtmoc C rdenas, an opposition leader who probably outpolled President Carlos Salinas in the 1988 presidential election, has been in the forefront of the effort to promote a continental trade and development pact. In a speech delivered February 8, 1991, in New York, C rdenas laid out the framework for such a pact. "We cannot be satisfied with the kind of future that would emerge from a simple economic liberalization. This would only extrapolate present trends and exacerbate present vices," C rdenas said. "Trade, we insist, must be an instrument of development, not an end in itself. "It is absolutely inadmissible that an international division of labor between the three countries assign Mexico the role of a permanent supplier of cheap labor. Raising Mexican wage levels and working conditions in the general direction of American or Canadian standards, instead of systematically lowering our salaries and incomes to attract reluctant investors, is a paramount reason for pursuing new forms of economic integration. "Development is not just the concern of developing countries. It is now clear to everybody, but above all to Americans, that they cannot isolate themselves from the poverty, deprivation, injustice and environmental degradation of their neighbors. Without the North re-adopting a humanistic ideal of development, international cooperation will be hampered by pollution, urban decay, crime, drug consumption and intolerance. The responsibility for solving these linked problems is not the market's alone. "A continental development and trade agreement will take time to build. Our two countries have that time, even if the present Mexican administration does not. . . . We have the obligation to succeed with this opportunity to bring true progress and fruitful cooperation between our nations." Resources MODTLE, Box 74, 100 Maryland Ave, NE, Washington, D.C. 20002 (202) 544-7198. Action Canada Network, 90 Parent Ave, Ottawa, ON K1N 7B1 (613) 236-9461. Red Mexicana de Acci"n frente al Libre Comercio, Godard 20, Col. Guadalupe Victoria, 07790 Mexico, D.F. (011 525) 556-0642. ** End of text from cdp:carnet.mexnews **