As this spring's congressional debate heats up over ratification of the recent China-U.S. trade agreement, the mainstream media have once again dragged out the hoary morality play on "free trade." On the dark side are protectionist unions, irresponsible eco-freaks, and the jingoist right. On the side of light and reason are the president, the Republican leadership, and the high-minded CEOs of America's great multinational corporations. In the script, the triumph of virtue is continually put at risk by the public's ignorance of economics.
To be sure, there are irrational isolationists among those who oppose permanent normal trading relations (PNTR) with China, as there are child labor abusers and despoilers of the environment who support it. But the underlying issue is not the motivations of either side. The question is, what rules will guide the emerging global marketplace?
The most successful national economies have learned, often through violent struggles, the necessity of rules that constrain the otherwise overwhelming power of capital to ignore the social costs of maximizing profits. For example, the rules of such "mixed" economies protect the rights of capital to property ownership, contract obligations, and limited liability; they protect labor with safety nets, the right to organize, and minimum standards for working conditions. But these lessons seem lost upon the global elites busy dismantling national social contracts in the name of international free trade.
In reality, "free trade" is a misnomer. If the trade agreements of the past few years (e.g., North American Free Trade Agreement and PNTR with China) were aimed at establishing free trade, they could have been written on one page--a simple treaty to eliminate tariffs. Instead, they add up to hundreds of pages largely devoted to strengthening protections of international corporate investors' rights and weakening protections of human rights as well as worker and environmental standards. As these documents make clear, the agreements' primary purpose is not free trade, but to dismantle social protections and financial regulations in order to allow capital to invest across borders rapidly and unhindered.
The response of the global policy elites who have created the Washington Consensus--as the package of investor protections is widely known--is that the benefits of more liberalized trade will make up for any shredding of the social contract. As countries prosper from those benefits, they, on their own, will transform themselves into Western-style capitalist democracies.
This central claim of the Washington Consensus is accepted passively by many otherwise progressive policy intellectuals who would ridicule it if it were proposed for the United States. Suppose, for example, that the state of Mississippi argued it should be exempt from all federal laws concerning child labor, antidiscrimination, the minimum wage, clean air standards, and even the Bill of Rights, on the grounds that the resulting increase in economic growth would eventually enable a more prosperous Mississippi to fashion a social contract of its own. It does not pass the laugh test.
Even Charlene Barshefsky, the U.S. trade representative, has called the notion that labor rights should be disconnected from trade "intellectually indefensible." And the president himself has acknowledged the common-sense proposition that labor rights should be enforced with trade sanctions, just as investor rights are. Yet when confronted with business demands to accept a China trade agreement without labor protections--much less enforceable protections--the administration simply ignores the issue.
There are of course clear economic efficiency gains to be had from more liberalized trade. But, as in any policy discussion, the question is, how big are the benefits compared to the costs?
Given the importance of this question, one would think that the proposed China agreement would be accompanied by an in-depth analysis of the benefits and costs. Think again. The sole effort was a study by the U.S. International Trade Commission (ITC), based on an economic model that assumed no unemployment could result from increased imports because all workers would be instantly re-employed. Even so, the best the ITC could come up with was a net benefit to the United States of $1.7 billion, a number so trivial in a $9 trillion economy that it is less than the statistical error allowed in the calculation of the country's gross domestic product (GDP).
Ignoring that embarrassing report, the administration relies on free trade generalizations, which are reported in the media as sacred economic truths. Thus, President Clinton argues that because the United States has less than 5 percent of the world's population and more than 20 percent of its income, the country "must sell its products to other nations to survive economically." This oddly Leninist notion of advanced capitalism sails through the media without comment from the Paul Krugmans, Robert Samuelsons, Thomas Friedmans, Michael Kellys, and others who have filled their columns with cackles of contempt for street protesters whose concerns about sweatshops have not been published in scholarly journals.
And there has been no scrutiny of the administration's mantra that, over the past decade, a substantial amount of American economic growth can be attributed to growth in exports. What the voter-reader has not been told is that imports have grown much faster. Since the contribution of international trade to GDP is calculated by the sum of exports minus imports, the rising trade deficit must by definition reduce growth. In the case of the U.S. economy, the booming domestic sector has of course compensated for the negative effect of increased total trade.
The assumption that the benefits of trade are so vast that they ipso facto justify any costs has simply no basis in economic literature. Harvard University's Dani Rodrik, a mainstream economist, has observed that "no widely accepted model attributes to postwar trade liberalization more than a very tiny fraction of the increased prosperity of the advanced industrial countries." He adds, "Yet most economists do believe that expanding trade was very important to this progress."
The claim that investor-protected liberalization policies will help those in poor countries also goes unchallenged, in spite of the evidence. Since third world nations have opened up to the flows of goods and capital, economic growth has slowed; in 70 countries, average incomes are below where they were in 1970. Even middle-income developing countries have suffered. In the early 1980s, the International Monetary Fund (IMF) and other financiers demanded that Mexico abandon its national development strategy in favor of an export-led growth model emphasizing the privatization and deregulation of industry. What followed was a two-decade decline in the growth of per capita income, a rise in poverty, and a dramatic increase in crime (including political violence) and social instability.
One does not have to agree with the street chants against globalization in order to recognize that there is a serious case against the Washington Consensus. But instead of pausing to reassess their obviously shaky assumptions, the Clinton administration and its ideological allies stubbornly demand more of the same.
One recent example is the administration-supported African Growth and Opportunity Act, which offers African countries some limited further access to U.S. apparel markets. U.S. union opposition to the bill brought down the wrath of Thomas Friedman of The New York Times. "Shame ... shame ... shame," he wrote in a moral diatribe against those who would deprive poor Africans of economic opportunity, virtually blaming American unions for the African AIDS epidemic.
But Friedman failed to tell his readers that the bill would require countries getting a tiny economic benefit to submit to IMF-type conditionality, which typically includes cutting back on public spending, lowering corporate taxes, and privatization--a rather draconian prescription for countries with massive health and education problems, few sources of public revenue, and a history of corrupt relations between business and government.
He also failed to explain that unions supported the competing and more comprehensive Hope for Africa bill, introduced by Congressman Jesse Jackson, Jr., and backed by 74 colleagues. Jackson's bill included trade benefits over a wider range of goods, a requirement that a certain share of their content be produced in Africa, and debt relief. It did not impose restrictions on government spending or the privatization of banks to foreign investors. It did increase loans and guarantees to African development. It also required adherence to minimum labor rights.
Friedman also neglected to mention that Jackson's bill was supported by dozens of HIV/AIDS organizations, a large number of African nongovernmental organizations, and the head of the South African apparel workers' union, or that the administration's bill was opposed by Randall Robinson of TransAfrica and Nelson Mandela!
The two bills represent distinct views of development. They could have inspired a real debate over the rules of globalization and who should benefit from them. Instead, the public was misled, and a serious and badly needed discussion over the structure of the global economy was suppressed in the nation with the most power to influence its future.
At this point, the only hope for such a national discussion is for the Washington Consensus to lose the upcoming vote on PNTR for China. That might be just enough to convince them to junk the tired free-trader and protectionist theatrics and get on with building a global economy with rules that protect everyone.