Fading Faith in ‘Free Trade’

By Robert A. Senser

This article, in a slightly different form, appeared in the July 5-12, 2004, issue
of America, a Jesuit magazine published in New York, N.Y.

    In a presidential election year that has evoked keen controversy about trade, it is especially tempting to cast the issues, and opinions about the issues, into pro-free trade versus anti-free trade molds. But that dichotomy obscures the real issues and muddles public discussion and decision-making.

    A little-noticed new poll conducted nationwide in January 2004 by the University of Maryland’s Program on International Policy Alternatives (PIPA) delineates today’s major trade issues and reveals the division of American opinion about them.  For starters, in probing people’s overall views, the PIPA poll did not ask whether they are for or against free trade; instead, it sought their opinion on the “growth of international trade,” and provided not two choices but three.

    Of the three choices, only 18% of respondents took the truly “anti-free trade” position, by agreeing with the statement, “I do not support the growth of international trade because I think the costs will inevitably outweigh the benefits.”  The other two options both began with “I support the growth of international trade in principle,” but then branched off into two different positions. Only about 20% approved of  “the way the U.S. is going about expanding international trade.”  Most of the respondents, 53%, support the growth of trade “in principle,” but were “not satisfied with the way the U.S. government is dealing with the effects of trade on American jobs, the poor in other countries, and the environment.”

    In short, judging from this survey, most Americans support expanding trade but favor changes in the U.S. government’s actual trade-related policies. An indication of this is the approval they give to specific trade agreements. About half of those surveyed support the 10-year-old North American Free Trade Agreement and its proposed extension through the Central American Free Trade Agreement and the Free Trade Area of the Americas. But many of the respondents, both among those who approve and those who disapprove of  the agreements, express concerns about whether those agreements, and U.S. policy in general, adequately reflect human rights (including worker rights). Nearly three out of four respondents held that “as we become more involved economically with another country...we should be more concerned about human rights in that country.” Even more respondents (nine out of ten) said that U.S. corporations operating in other countries should be expected to abide by U.S. health and safety standards for workers. An overwhelming 93% said that international trade agreements should  require minimum standards for working conditions and for environmental protection.

    Public opinion alone, of course, doesn’t determine public policy on trade, any more than it does on gun control or agricultural subsidies. And majority opinion, whether measured at the 53% level or even up to 93%, does not necessarily lead to sound public policy.  That's so especially when prevailing government policies on trade have two strong supports:
● a firm consensus among an elite of policy makers, degree-credentialed professionals, and other leading opinion-makers, including those in respected think tanks; and. 
● a governmental and intergovernmental structure  that institutionalizes that consensus.

    In the United States, which is the leading force in setting and maintaining the international trade regime, current U.S. government policies on trade has both of those necessary supports.  But something startling is happening to one of them.  First, the consensus on trade is no longer as firm as it used to be.  Second, although the international network of trade institutions built under that consensus, from the U.S. Trade Representative on up to the World Trade Organization, is not in danger, some of its policies are being challenged as never before.

    Three leading challengers have garnered wide public notice because of their standing as economists, and as economists who express themselves clearly.  One is Joseph E. Stiglitz, the eminent economist who won the 2001 Nobel Prize for economics. Stiglitz argues in his latest book, The Roaring Nineties (Norton, 2003), that the United States has mismanaged the global economy.  In a talk last November at the Carnegie Council of Ethics in International Affairs, Stiglitz expanded on this charge:

    "At the end of the Cold War, the United States as the sole superpower had an opportunity and a responsibility to reshape the global economic order, to try to create an international economic order based on principles like social justice....But we lacked a vision. The financial and commercial sector in the United States did have a vision. They might not believe in government having an active role, except when it advanced their interest. The active role they pushed for was to gain market access....As a result we got some very unbalanced trade agreements."

    Stiglitz’ history of concern over “unbalanced” (i.e., unfair) public policy spans his career both as a scholar and as a policy maker. He served as a member and later chairman of the Council of Economic Advisors during the first Clinton Administration and then as chief economist and senior vice president at the World Bank. Seven years in Washington gave him an on-the-job education in how economic theories, which are supposed to advance the common good, do not necessarily do so in practice. Two important examples that Stiglitz often cites are the protection of intellectual property rights and the requirement for free movement of capital across borders.

   Patents, copyrights, and other intellectual property rights do need a measure of cross-border protection, as Stiglitz recognizes. But, at the behest of drug companies and over the objections of the Council of Economic Advisors during Stiglitz’ tenure there, U.S. negotiators delivered overprotection. “Unlike trade liberalization, which, at least under some idealist (and somewhat unrealistic) conditions can make everyone better off, stronger intellectual property rights typically make some better off (the drug companies) and many worse off (those who otherwise might have been able to purchase the drugs),” Stiglitz writes in The Roaring Nineties.

   Stiglitz is especially critical of the Clinton Administration for launching a major change in the international development and trade system: requiring countries to remove controls on the movement of financial capital across borders.  He blames this policy,  capital market liberalization, for promoting global instability in the past, notably in the East Asian crisis of the 1990s, and potentially in the future, since it makes developing countries “subject to both the rational and irrational whims of the investor community, to their irrational exuberance and pessimism,” he writes in Globalization and Its Discontents (Norton, 2002).  More recently, in a New York Times op-ed piece (Jan. 6) titled “The Broken Promise of NAFTA” (the North American Free Trade Agreement), he warned against the plan to extend NAFTA’s provision on capital mobility to Latin America even though “the International Monetary Fund has finally found such liberalization promotes neither growth nor stability in developing countries.”

   Another top-ranked economist’s latest book, In Defense of Globalization (Oxford, 2004), also attacks key elements of the trade consensus.  In this and previous books, Jagdish Bhagwati, whom Nobel Laureate Robert Solow calls “our most powerful and persuasive advocate of free trade,” uses his persuasive powers against – guess what?  Against two of Stiglitz’ targets: intellectual property rights and the unfettered flow of capital around the world. 

    Although he praises multinational corporations for the good they are doing, Bhagwati, by way of significant exception, condemns their “interest-driven lobbying” that caused the World Trade Organization (WTO) to adopt harmful rules.  He cites, as "a prime example," the multifaceted U.S. pressure that led to the WTO agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS, for short). "Pharmaceutical and software companies," he says, "muscled their way into the WTO and turned it into a royalty-collection agency simply because the WTO can apply trade sanctions [to violators of its rules]."  Unlike the legitimate trade responsibilities given the WTO at its founding in 1994, TRIPS, in his view, was like introducing "cancer cells into a healthy body," meaning that it "distorted and deformed an important multilateral institution, turning it from its trade mission and rationale."

    Bhagwati has been unrelenting in his attack on the pattern of removing restraints on cross-border capital mobility. In an essay titled “The Capital Myth,” first published in Foreign Affairs in 1998, then expanded as the lead article in his The Wind of the Hundred Days: How Washington Mismanaged Globalization (MIT 2002), and now summarized in his latest book, In Defense of Globalization,  Bhagwati argues that the unfettered flow of capital around the world is “inherently crisis-prone.” He blames a “power elite a la C. Wright Mills,”  “a definite network of like-minded luminaries among the powerful institutions – Wall Street, the Treasury Department, the State Department, the IMF [International Monetary Fund], and the World Bank most prominent among them,” for promulgating the myth that the unfettered flow of capital is a good thing.  “This powerful network...is unable to look much beyond the interest of Wall Street, which it equates with the good of the world.” In his new book, Bhagwati expresses satisfaction that both the Economist and the IMF have lately lost their enthusiasm for free capital mobility, but warns that “a watchful eye over the Wall Street-Treasury complex remains a necessity.”

    Thus, two world-renowned economists with different perspectives on the state of today’s global economy have attacked two key elements of the trade consensus still embraced by Washington (and still being pushed in current U.S. bilateral and regional trade negotiations).

    Unexpectedly, the underpinning of that consensus is now under assault from another economist, Paul Craig Roberts, former assistant secretary of Treasury in the Reagan administration and a former editor of the Wall Street Journal.  Roberts, whose long journalistic, think tank, and governmental career was devoted to promoting free trade in thought, word, and deed, now holds that the U.S. commitment to free trade is based on a “delusion” so serious that it threatens to turn the United States into a Third World economy in 20 years. He disclosed his changed view early this year in three forums: a New York Times op-ed piece (“Second Thoughts about Free Trade,” co-authored with Senator Charles Schumer), a Brookings Institution briefing, and a Washington Post interview.

   “We all know free trade is good for us,” he told the Brookings panel. “We've all learned this. [But] we live in the delusion that what is going on is free trade. It is not free trade."

   Roberts does not reject a cornerstone of most economic thought -- the principle of "comparative advantage" expounded in 1817 by the British economist David Ricardo. The theory is just irrelevant, he insists; it doesn't apply today, two centuries later, in a vastly different world.  Why not?  Mainly because: 1) Ricardo's theory assumes that two major "factors of production"  -- labor and capital (factories, machinery) -- can't be moved off-shore, but 2) today they can be, and are being, moved on a massive scale.

  "The way it's working today," he told the Washington Post's Paul Blustein, "firms close facilities here, remove them to China, produce there, and send the products back here. This is not the Ricardian case for free trade."  Moreover, now labor effectively moves across borders as well, with Indian radiologists examining U.S. X-rays, for example, and China’s software engineers writing software codes. As a result, insists Roberts, "the case for ‘free trade’ -- that it benefits all countries -- collapses." He predicts “tremendous dislocations, just as there were in the transformation out of feudalism to capitalism," because today’s global economy enables multinational corporations, in a relentless search for lower costs and higher profits, to shift their manufacturing and service operations to populous, labor-surplus countries like China and India.

   More and more American workers now see that happening, actually and potentially, to their own jobs. Their own jobs?  People don’t own jobs, many economists argue; only capital – in the form of investments and other property, real and intellectual -- confers true ownership, the type that merits active protection under domestic and international law. So protecting worker rights internationally is called protectionism; protecting property rights is not. But to large segments of the American public that distinction does not persuade, and so U.S. employment and foreign trade policies have become a central campaign issue in this year’s race for the Presidency. 

    Among his ideas on those policies, Senator John Kerry says that he would, in his first four months in office, make sure that all current and proposed trade agreements have enforceable labor and environmental standards (enforceable being the operative word). For this measured  proposal, the editors of the New Republic accused  Kerry of descending to protectionist rhetoric. They implied that, with Senator John Edwards no longer a candidate, Kerry will most likely moderate his position. Or, as other pundits put it, he will move to a place they call the “center,” where the trade policy elite, liberal and conservative, is alive, well, and powerful. 

   A presidential contest should be a time during which the nation can have a spirited and frank discussion about the changing reality of global trade and the wisdom of U.S. policy.  Let us hope that presidential politics allows for such a discussion in 2004.


Human Rights for Workers
Robert A. Senser, editor
Copyright 2004
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