David Coates

Free Trade/Fair Trade: An update for Chapter 3


The unalloyed advantages of free trade are among the most unquestioned premises of the age. On both sides of the political divide here in the United States, all but a few isolated voices subscribe to the view that free trade is necessarily good for all the parties associated with it: good for companies and workers in advanced industrial economies, good for companies and workers in the developing world, and good for the consolidation of peaceful relationships between competing nations. In arguments that parallel those for the deregulation of internal markets – about which there is greater political controversy – the conventional wisdom in Washington DC, and indeed in the finance and trade ministries of most industrialized economies, is that the lowering of trade barriers, and the concentration by each economy on the production of goods and services in which it enjoys a comparative advantage, can only add to the prosperity and growth of the entire global economic system. Lowering trade barriers, and exposing domestic producers to global competition, lowers prices, enhances quality and widens variety and choice[1] and so boosts the living standards of consumers in both the global “north” and the global “south.” It squeezes out inefficient producers, so enhancing the general productivity of both the manufacturing and service sector. It encourages the adoption, by all producers, of the latest technology and the cheapest raw materials. It encourages innovation, and it avoids the corrupt “crony capitalism” that came with import substitution industrialization (ISI). ISI was the development strategy widely canvassed, particularly in post-World War II Latin America, as a better route to economic growth and rising living standards to that guaranteed by opening domestic markets to the full force of global competition; and ISI failed.

 

In the view of most advocates of free trade policies, as the world’s leading economy the United States is especially well-placed to benefit from the lowering of tariff walls; and indeed the U.S. has pressed for such lowering at each global trade round since 1945. The 2007 Economic Report of the President even put a figure on that benefit: post-1945 free trade, we were told, “has contributed an additional $10,000 to the typical American household of four.”[2] The Petersen Institute had a grander figure still: gains from trade liberalization since 1947 of $1.4 trillion were claimed, equivalent by 2003 to roughly 10 percent of total US GDP.[3] In a world that is unavoidably “flat” [4]– and mid the greater globalization of the U.S. economy “driven by three fundamental changes: growth of the global economy, reduced government barriers to international trade and investment, and the spread of new technologies[5]– protectionism in any form can only buy temporary advantage at the cost of long-term decline. By contrast, once an economy equips its labor force with the skills to compete, then increased trade across open borders can only generate a cumulative race to the top, raising living standards north and south by creating ever-wider global markets into which U.S. corporations will be able to sell with greater and greater ease. Daniel T. Griswold put the general case this way:

 

I hope that readers open to persuasion will see that we should really be ‘mad about trade’ … – mad as in crazy in love with the opportunities that our new and more open world is creating before our eyes, not only for ourselves but, more importantly, for our children. We should have the same positive feelings towards free trade and globalization as we do towards digital cameras, iPods, email, online shopping, a well-fed child going off to school, and peace on earth.” [6]

 

The counter-argument for managed trade is that “the benefits of free trade and globalization are overrated and the costs thereof underestimated.”[7] The counter-argument is that given the uneven development of a global economy inherited from an age of colonialism and capitalist-communist competition, lowering tariff barriers and inviting in cheaply-produced goods from previously second/third world economies, can only produce a generalized “race to the bottom” that will ultimately destabilize both the global system as a whole and its leading high-wage economies.[8] As U.S. corporations struggle to compete with foreign-based producers enjoying access to the latest technology and to large pools of skilled but low paid labor, the outsourcing of core manufacturing employment becomes endemic. Recent data on this is clear. U.S. multinational corporations employing a fifth of all American workers “cut their workforces in the U.S. by 2.9 million during the 2000s while increasing overseas employment by 2.4 million….a big switch from the 1990s when they added jobs everywhere: 4.4 million in the U.S. and 2.7 million abroad.”[9] The result, in the United States, is a self-sustaining downward spiral often labeled “the Wal-Mart effect”[10] In that spiral, pressure on suppliers to hold down prices triggers the redeployment of production to cheap labor sites in Asia and South America, eroding internal U.S. employment and wages as it does so, and leaving more and more American consumers so income-depleted that their life-style depends on the availability of low-cost products in big-box stores like Wal-Mart – stores that themselves survive only by intensifying the pressure on suppliers to hold down costs still further.

 

Critics of free trade find no comfort, as many free trade advocates do, in the notion that only low-skilled jobs are outsourced. They see low-cost foreign producers steadily moving up the value chain, with U.S. based corporations responding by outsourcing employment among skilled workers and even professionals. They see the new jobs created in the wake of deindustrialization paying less than did the jobs that were lost.[11] They see the resulting trade imbalance – between low-cost producers (particularly China) and previously high-wage economies now sustaining their consumption by a mixture of lower wages and increased personal debt (particularly the United States) – as inevitably leaving Americans ever more dependent for their living standards on foreign creditors, and leaving the global system as a whole ever more vulnerable to credit-crises triggered by that indebtedness. As Jeff Faux put it:

 

For three decades, both Democratic and Republican administrations have been making trade deals with elites of other countries that favor the interests of multinational investors over the interests of American producers and workers. U.S.-based banks and corporations get access to cheap labor and to the financial systems of other nations. In return, U.S. workers are exposed to competition from countries where wages are suppressed (Mexico) or where governments run effective industrial policies (Germany) or both (China). As a result, a chronic trade deficit has made us the world’s largest debtor, undercut the bargaining power of the working middle class, and hollowed out U.S. manufacturing. Because our labor markets are integrated, the damage has spread to virtually every industry, occupation and region. Real wages and benefits have stagnated even as the value of what Americans produce keeps rising.”[12]

 

Those more sanguine about the limits of free trade tend to the view that “the impacts of international trade can be beneficial or they can be adverse, depending on how it is managed.”[13] Advocates of “fair trade” canvass the right of developing economies to protect their local producers from full exposure to competition from heavily-capitalized industrial economies, and urge consumers in those more advanced economies to pay heed, as they purchase, to the working conditions surrounding the commodities they buy.[14] Advocates of managed trade in the north argue for free trade between economies of roughly equivalent levels of development and wages, and managed trade between unevenly developed economies – managed in ways that pull wages in the south up to those of the north, and protect in the north hard-won welfare rights now threatened by the spread of unregulated global competition.[15]

 

The political battle between these fiercely held and competing views of the contemporary fit between U.S. national interests and the lowering of tariff barriers remains hugely lopsided. The interests of large U.S. corporations in ever bigger global markets, and the immediate interests of U.S. consumers in lower prices, normally combine to keep Washington DC a free-trade town. The Obama administration, like the Bush Administration before it, regularly pushes for trade agreements with targeted economies. The Bush administration signed seven such trade agreements, and the Obama administration is currently pushing for new ones with South Korea, Panama and Colombia. Resistance to those agreements is currently coming from a coalition of labor interests (keen to protect U.S. wages and jobs) and human rights activists (keen to weaken repressive forces abroad). Disputes about worker-retraining are currently blocking the South Korean deal. The appalling state of human rights in Colombia is currently blocking that deal; while in the global system as a whole, the evidence is strong on the persistence, even increase, in the number of restrictions on trade imposed by governments north and south.[16]

 


[1] Griswold, Daniel T. (2009), Mad About Trade: Why Main Street America Should Embrace Globalization Washington DC, p.17

 

[2] Data in Terry Miller, (2007) Free Trade: Media Should Include Facts with Opinion Polls, Heritage Foundation WebMemo No. 1670, October 18; available at http://www.heritage.org/research/reports/2007/10/free-trade-media-should-include-facts-with-opinion-polls

 

[3] Scott Bradford, Paul Grieco and Gary Hufbauer (2006), “The Payoff to America from Globalisation,“ The World Economy, Vol. 29 (7), July

 

[4] Friedman, Thomas L. (2006), The World is Flat, New York: Farrar, Straus and Giroux

 

[5] Op.cit, p. 5

 

[6] Ibid, p. 10

 

[7] Dunkley, Graham (2004), Free Trade: Myth, Reality and Alternatives, London, p. xv

 

[8] Tonnelson, Alan (2002), The Race to the Bottom, Boulder CO.

 

[9] Wessel, David (2011), “Big U.S. Firms Shift Hiring Abroad,” The Wall Street Journal, April 19.

 

[10] Coates, David (2011), Making the Progressive Case: Towards A Stronger U.S. Economy, New York, pp. 70-72

 

[11] Bivens, Josh (2008), Everyone Wins, Except Most of Us, Washington DC.

 

[12] Faux, Jeff (2011), “America’s Trade Policy of the Absurd,” The American Prospect, February 7: available at http://prospect.org/cs/articles?article=americas_trade_policy_of_the_absurd

 

[13] George, Clive (2010), The Truth About Trade: The Truth About Liberalization London.

 

[14] Ransom, David (2006), The No Nonsense Guide to Fair Trade, New York: New Internationalist

 

[15] Dunkley, op.cit, pp. 213-15; Coates, op.cit, pp. 152-3

 

[16] Coates, op.cit, p. 205

David Coates holds the Worrell Chair in Anglo-American Studies at Wake Forest University. He is the author of Answering Back: Liberal Responses to Conservative Arguments, New York: Continuum Books, 2010.

He writes here in a personal capacity.

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