From: pauld@cs.washington.edu (Paul Barton-Davis)
Subject: Rethinking the economics of free trade
Organization: Computer Science & Engineering, U. of Washington, Seattle
Distribution: na
Date: Fri, 17 Apr 92 18:35:51 GMT

[ This was posted on misc.activism.progressive. I think it worth
  bringing to the attention of sci.econ readers, if only in the hope
  of provoking a discussion, however meaningless, of what happens
  when "free trade" meets the "real world".
			
				-- paul ] 

/** 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
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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
<MI>Bulletin<D> 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 <P10.5MI>maquiladora <P255D>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 **



-- 
Just when I thought I understood US politics, 
	it turns out Kevin Costner's a Republican !
Computer Science Lab, University of Washington 	<pauld@cs.washington.edu>