News & Politics

Free Trade Isn't Free

Free traders rarely discuss the costs of free trade: costs to the democratic process, to a culture, a natural environment or a sense of community.
On Jan. 9 the Bush administration officially opened negotiations to create a free trade agreement with five Central American countries within a year. The announcement received scarce press. After all, we've had this debate before, haven't we? And the advantages of free trade are now recognized by all but a few romantic extremists yearning for the days before technology burdened our lives. Aren't they?

In 2003, as in 1994 when the debate was about the North American Free Trade Agreement, and in 1988 when the debate was about the U.S.-Canadian Free Trade Agreement it is those who argue against free trade that are on the defensive. The phrase itself conspires against the critic. Free trade, free markets, free enterprise. All bear the magically seductive word "free." Only the words "free love" seem to spur a debate about the costs as well as the benefits of "free."

To discuss the concept of free trade dispassionately we should first eliminate the magic word. Doing so will result in all of us (well, the vast majority of us) to begin the discussion with agreement. Trade is good. As Adam Smith wrote, humans have "an innate propensity" to exchange goods and services.

Historically such exchange, within and among countries, increases no matter what the rules governing that exchange are. Outside of war, world trade has dipped only twice in the last century, each in a time of global economic convulsion, 1931 and 1981.

Having agreed that trade is good, we can add the word "free," but in doing so we should remind ourselves that for its first 150 years in the public policy arena, "free trade" focused almost entirely on lowering tariffs. Even the most ardent free traders recognized the right of governments to enact rules that protect their farmers, their small businesses, their workers and their natural environment.

Only since the early 1980s has the concept of "free trade" been redefined to include a massive invasion of international law into domestic affairs to severely circumscribe governmental authority. In this respect, the free trade discussion has become the international counterpart of the deregulation and privatization debate on the domestic level. Which may explain why liberals, long the foremost advocates of free trade, and conservatives, long the most vigorous opponents of free trade, have begun to switch sides.

Domestically, conservatives argue against citizens having the right to impose maximum hour and minimum wage laws, rigorous environmental regulations, stringent anti-trust regulations. Free traders carry the argument to the international level. Indeed, the two increasingly work in tandem to promote international rules that severely restrict the authority of communities to act domestically.

Every year the European Union publishes a compendium of U.S. violations of free trade. What constitutes a crime against trade these days? Energy efficiency standards for cars. Recycling laws. Buy America legislation. Laws that protect family farmers. Small business set-asides.

The conclusion? Free trade is not free. It involves a tradeoff. We limit our right to make decisions about our futures in return for expanding the flow of goods, services and capital across borders. There is no win-win situation here. Democracy suffers while mobility benefits. Has the tradeoff been worth it?

Free traders rarely discuss the costs of free trade. Costs to the democratic process, or to a culture, or to a natural environment, or a sense of community are difficult to quantify. Even when the costs are quantifiable, like the closing of factories or the lowering of domestic wages, free trade advcocates rarely include them. Economists insist that these are simply transitional, temporary costs. If an industry goes bankrupt, investment will shift to new and more competitive industries. Wages may drop in richer countries as factories flee, but eventually wages in the poorer countries will rise, and the wage gap will diminish.

To arguments like this John Maynard Keynes famously responded, "in the long run we are all dead."

After the passage of the North American Free Trade Agreement(NAFTA) in 1994 Mexico's trade deficit with the United States changed into a trade surplus, reaching $24.2 billion by 2000. Did Mexico as a whole benefit? The average minimum wage in Mexico lost more than three quarters of its purchasing power from 1994 to 2000. Some eight million Mexicans fell from the middle class into poverty. The growth rate of Mexico under NAFTA has been far less than it was in the 1960s and 1970s under the old protectionist rules.

Some argue that NAFTA has encouraged the end of one party rule in Mexico. Perhaps. The irony is that as the country moves toward democracy, as it opens up the possibility of citizens having a greater say in the way they are governed, it has severely restricted the ability of newly elected governments to respond to the demands of the newly enfranchised.

NAFTA and the looming Free Trade of the Americas Agreement(FTAA) have been crudely fashioned as if resource mobility is all that matters. In the United States the advocates of free trade propose rules and structures whose aim is to do nothing more than expand the flow of goods and services across borders. We might look to the European Union(EU) for a free trade strategy more responsive to a skeptical public and the needs of their local economies.

Europeans understood the inherent problems involved in moving decision making away from those affected by the decisions and in merging poor countries and rich ones. They developed structures and strategies to tackle these problems.

Richer countries poured billions of dollars into poorer countries to improve their infrastructures and raise the productivity of their workers. This would reduce the economic gap between them and hopefully reduce the appeal for factories to relocate. Europe also created a continental Parliament to allow its citizens to have some say in the design and implementation of the new continental rules of the game. Finally, Europe allowed people, not only goods and funds, to cross borders.

In the Americas, the proposals on the table have been far more crude. There has been no transfer of money from rich to poor. Indeed, the key slogan for NAFTA advocates was "trade not aid". Giving Mexicans(or Canadians) a say in continental affairs was never even discussed. Mexico's then-President Carlos Salinas de Gotari's plea for open borders was ignored.

NAFTA not only diminished the rights of Mexican and Canadian and American citizens. It made corporations citizens, something no other trade agreement had ever done. Corporations were granted rights denied to people. Under NAFTA, corporations have no obligations, no responsibilities; they have only privileges.

Corporations can sue governments to overturn what they feel is an unfair regulation. But individuals cannot sue corporations under NAFTA. Nor can citizens sue to force governments to enact a regulation, even when there may be overwhelming scientific evidence supporting such an action(e.g. eliminating lead in gasoline).

An increasing portion of international trade consists of foreign investment. Foreign investment has its benefits. But it also has its costs. For centuries countries have regulated foreign investments in order to maximize their benefit to the host country and protect its control over key resources. NAFTA takes a major step toward abolishing the right of countries to impose any conditions on foreign investment. The FTAA, which negotiators hope to have ready for the signatures of heads of state by 2004, may well finish the job.

Proponents of the FTAA boast that it will be the most far-reaching trade agreement in history. Give them an A for honesty. But give them an F for ignoring the potential costs of such agreement to our sense of citizenship, the strength of our democracies, and the cultural and social fabric of our societies. Free trade is not free.

David Morris is vice-president of the Institute for Local Self-Reliance.