the abcs of free-trade agreements

7/31/2019 The ABCs of Free-Trade Agreements

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The ABCs of "Free-Trade" Agreements

by the Dollars and Sense Collective

Dollars and Sense magazine, January/February 2001

In the United States, the corporate media have framed the debate over"globalization" largely as a struggle between cosmopolitan advocates and theirprovincial opponents. The pro-globalization types are celebrated as championsnot only of a "global marketplace," but also of a worldwide community ofpeoples brought together by communications, transportation, and commerce, a"global village." Meanwhile, "anti-globalization" protesters face not only tear

gas and truncheons, but also accusations of protectionism, isolationism, anddisregard for those outside the United States.

International institutions - like the World Trade Organization (WTO),International Monetary Fund (IMF), and World Bank - as well as regionalassociations - such as the North American Free Trade Agreement (NAFTA), theEuropean Union (EU), the Association of Southeast Asian Nations (ASEAN),and, perhaps soon, the Free Trade Area of the Americas (FTAA) - are primarilyconcerned with granting capital the freedom to move from country to country. Itis true that many opponents of globalization have invoked national sovereignty

as a first line of defense against this new wave of aggressive capitalist expansion.In some cases, this reaction has been accompanied by ugly nativist impulses,which join hostility towards international institutions and multinationalcorporations with hostility towards "foreign" workers. To its credit, however,much of the "global economic justice" movement has deftly avoided the nativistpitfall - avowing a solidarity that crosses all lines of nation and national origin,that stands up "for humanity and against neoliberalism."

Already, part of the movement is grappling with the problematic defense ofnational sovereignty, advocating instead a brand of grassroots democracy that

does not exist very often in either international institutions or national states.Many activists even reject the "anti-globalization" label that has been hung onthem, posing their own vision of "globalization from below" against a"globalization dominated by capital." Today, goods and capital pass freelyacross national frontiers while people run a gauntlet of border patrols andbarbed wire. "Globalization from below" turns this status quo, which combinesthe worst of both worlds, on its head. Instead of the free movement of capital


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across national borders, "globalization from below" champions the freemovement of people. Instead of equal treatment for all investors, no matterwhere they are investing, it demands equal human and civil rights for all people,no matter where they are living. Instead of greater worldwide integration ofmultinational corporations, it raises the banner of greater international

solidarity among popular movements and organizations. Instead of the "race tothe bottom," it calls for an "upward harmonization." Instead of the rule ofcapital, the rule of the people. Instead of more inequality, less. Instead of lessdemocracy, more.

That is an appealing vision for the future. At this point, however, "globalizationdominated by capital" is still on the march - operating through both globalinstitutions and regional associations. The recent protests against the WTO andIMF (not only in the United States, but across the world) have shown thatresistance is not futile. The immediate effect, however, may be to channel theglobalization agenda back into regional "freetrade" agreements. Ultimately, theforces of resistance will need to be far greater to turn the tide. In the meantime,here's what we're up against. -Alejandro Reuss

The North American Free Trade Agreement (NAFTA)

The North American Free Trade Agreement (NAFTA) came into effect onJanuary 1, 1994. The agreement eliminated most barriers to trade and

investment among the United States, Canada and Mexico. For some categories ofgoods - certain agricultural goods, for example - NAFTA promised to phase outrestrictions on trade over a few years, but most goods and services were to befreely bought and sold across the three countries' borders from the start.Likewise, virtually all investments - financial investments as well as investmentsin fixed assets such as factories, mines, or farms (foreign direct investment) -were freed from cross-border restrictions.

NAFTA, however, made no changes in the restrictions on the movement of labor.Mexican - and, for that matter, Canadian - workers who wish to come to the

United States must enter under the limited immigration quotas or illegally. ThusNAFTA gave new options and direct benefits to those who obtain their incomefrom selling goods and making investments, but the agreement included noparallel provision for those who make their incomes by working.

Supporters of NAFTA have argued that both firm owners and workers in allthree countries can gain from the removal of trade and investment barriers. For


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example, the argument goes, U.S. firms that produce more efficiently than theirMexican counterparts will have larger markets, gain more profits, generate morejobs, and pay higher wages. The prime examples would include informationtechnology firms, bio-tech firms, larger retailers, and other U.S. corporationsthat have an advantage because of skilled U.S. Iabor or because of experience in

organization and marketing. On the other hand, Mexican firms that can produceat low cost because of low Mexican wages will be able to expand into the U.S.market. The main example would be assembly plants or maquiladoras.

Critics of the agreement have focused on problems resulting from extremedifferences among the member countries in living standards, wages,unionization, environmental laws, and social legislation. The options thatNAFTA creates for business firms put them at a great advantage in theirdealings with workers and communities. For example, U.S. unions are weakenedbecause firms can more easily shut down domestic operations and substituteoperations in Mexico. With the government suppressing independent unions inMexico, organization of workers in all three countries is undermined.

(Actually, the formal Mexican labor laws are probably as good or better thanthose in the United States but they are usually not enforced.) While NAFTA maymean more jobs and better pay for computer software engineers in the UnitedStates, auto-assembly and parts workers in the United States, for example, seetheir wages stagnate or fall. Similarly, the greater freedom of internationalmovement that NAFTA affords to firms gives them greater bargaining powerover communities when it comes to environmental regulations. One highly visibleresult has been severe pollution problems in Mexican maquiladora zones alongthe U.S. border.

An additional and important aspect of NAFTA is that it creates legalmechanisms for firms based in one country to contest legislation in the othercountries when it might interfere with their "right" to carry out their business.Thus, U.S. firms operating in Mexico have challenged stricter environmentalregulations won by the Mexican environmental movement. In Canada, thegovernment rescinded a public-health law restricting trade in toxic PCBs as theresult of a challenge by a U.S. firm; Canada also paid $10 million to thecomplaining firm, in compensation for "losses" it suffered under the law. Theseexamples illustrate the way in which NAFTA, by giving priority to the "rights"of business, has undermined the ability of governments to regulate the operationof their economies in an independent, democratic manner.

Finally, one of NAFTA's greatest gifts to business has been the removal ofrestrictions on the movement of financial capital. The immediate result for


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Mexico was the severe financial debacle of 1994. Investment funds moved rapidlyinto Mexico during the early 1990s, and especially after NAFTA went into effect.Without regulation, these investments were able to abandon Mexico just asrapidly when the speculative "bubble" burst, leading to severe drops inproduction and employment. -Arthur MacEwan

The Free Trade Area of the Americas (FTAA)

After the implementation of NAFTA, it looked like the Americas were on a fasttrack to a hemisphere-wide free-trade zone. In 1994, Clinton proposed to havethe world's largest trade bloc in place by 2005. Instead, the Free Trade Area ofthe Americas (FTAA) - which is the name of a real international organizationwith no corresponding real "free-trade" agreement - has been stalled in its

tracks for the last six years or so. Part of the delay is attributable to domesticU.S. politics. In 1997, Clinton did not get the "fast-track" negotiating authorityhe sought from Congress, so the United States was not the mover-and-shaker forFTAA that it had been for NAFTA only a few years before. ("Fast-track"authority permits the administration to negotiate a trade agreement thatCongress then votes on as a whole, instead of reworking line-by-line.) Much ofthe administration's enthusiasm for "free trade" went instead into the WTO.With the WTO agreement headed off by popular protest, it would not besurprising to see a revival of FTAA.

A patchwork "free-trade" zone of the Americas is forming anyway, only notthrough the FTAA and without the United States as the spearhead. Thegovernment of Mexico has been trading on the country's potential as a"gateway" to the U.S. market, concluding free-trade agreements with Bolivia,Colombia, Costa Rica, Chile, Nicaragua, Uruguay, and Venezuela, andnegotiating with Belize, Ecuador, El Salvador, Guatemala, Honduras, Panama,Peru, and Trinidad (as well as China, Japan, South Korea, Israel, and theEuropean Union). Each country that concludes a trade agreement with Mexicoeffectively gains, because of NAFTA, access to all of North America. In exchange,Mexico gains preferential trade access to the countries with which it has signedtrade accords.

Latin America's largest trading bloc, the Common Market of the South(Mercado Comun del Sur, or Mercosur), is already negotiating a tradeagreement with Mexico, to come on line in 2003. Plans are also in the works tocreate a larger "free-trade" zone in South America, including the members ofMercosur (Argentina, Brazil, Paraguay, Uruguay, and "associate members"


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Bolivia and Chile) and of the Andean Community (Bolivia, Colombia, Ecuador,Peru, and Venezuela), by 2002. These countries, it seems, are jockeying for amore favorable position - in an eventual "free-trade" zone of the Americas - withrespect to the United States.

What would a realized FTAA look like? There are two near-certainties. First,labor and environmental standards are unlikely to be on the agenda unlesspopular movements force the issue. Canadian Trade Minister Pierre Pettigrew,for example, told Parliament this year that labor and environmental sideagreements like those in NAFTA would only impede negotiations. (Canadachaired the FTAA negotiations process until late 1999 and remains an importantbooster of the pact. ) As the Montreal Gazette reported in June 2000, "Mercosur. . . includes no environmental or labor standards, and the political leadership inthose countries view such caveats as hidden trade barriers. The Canadiangovernment, which is just as anxious to please corporations that profit nicelyfrom the lack of environmental or labor standards in Third World countries, isin no mood to disagree." Second, the United States, which accounts for about70% of the hemispheric economy, would dominate any hemisphere-wideeconomic bloc. As a Brazilian businessman succinctly put it at a July 2000meeting of Mercosur, "Who rules in FTAA is the U.S."

Three Latin American countries, Panama, Ecuador, and El Salvador, actuallyuse the U.S. dollar as their official currency, the last two having adopted it in2000. The IMF and the U.S. government both praised El Salvador for taking the"dollarization" plunge, which Treasury Secretary Lawrence H. Summers saidwould "help contribute to financial stability ... in El Salvador and its furtherintegration into the global economy." Proponents of "dollarization" view it as away of inflation-proofing Latin America's economies. Fighting inflation (ratherthan reducing unemployment, fighting poverty, etc.) has been the principal goalof the region's governments since the 1 980s, as it has been in the United States,Great Britain, and elsewhere. This suggests that, unpopular though it may benow, "dollarization" is not just going to drop off the agenda - especially if it hasU.S. and IMF support.

"Dollarization" would threaten sovereignty over economic policy for thecountries that embrace it. One key tool for economic policymakers is the controlof the money supply and interest rates. Central banks lower interest rates andincrease the money supply to stimulate growth (and combat unemployment).They raise interest rates and tighten the money supply to combat inflation. Thegovernment of a "dollarized" country would no longer be able to stimulategrowth if the U.S. Federal Reserve were trying to combat inflation, and vice-versa. Granted, U.S. policymakers already exert a great deal of control over


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Latin American economies (the Fed's interest-rate increases in the early 1980s,for example, sent rates skyrocketing worldwide and detonated the LatinAmerican debt crisis) and the people of Latin America (as opposed to theregion's elites) have historically not enjoyed much popular sovereignty overeconomic affairs. But openly ceding authority over regional economic policy to

the Fed would hardly help matters. -Alejandro Reuss

Resources: Esther Schrader, "Mexico learns lesson well in pursuit of tradeaccords," Los Angeles Times, September 14, 1999; "Mexico and Uruguay knockdown barriers," Gazeta Mercantil Online, January 3, 2000; "FTAA pressuresMercosur pace," Gazeta Mercantil Online, February 25,2000; Mark Mulligan,"Chile and the EU in new trade talks," Financial Times (London), April 11,2000; Geoff Dyer, "'Father of the Euro' stirs up South American currency row,"Financial Times (London), May 9, 2000; "FTAA seen as way ahead forMercosur," Gazeta Mercantil Online, July 5, 2000; "Chile to talk about joiningLatin American trade bloc," Bloomberg News, August 22, 2000; "Mercosurseeks to consolidate before creation of FTAA," Gazeta Mercantil Online, August24, 2000; "Cardoso wants South America free trade by 2002," Gazeta MercantilOnline, September 1. 2000; "Mercosur and Mexico negotiate trade accord,"Gazeta Mercantil Online, September 6, 2000.

The European Union (EU)

The European Union (EU) forms the world's largest single market. From itsbeginnings in 1951 as the six-member European Coal and Steel Community, theassociation has grown both geographically (now including 15 countries inCentral and Western Europe, with plans to expand into Eastern Europe) andespecially in its degree of unity. Eleven of the EU's members now share acommon currency (the Euro), and all national border controls on goods, capital,and people were abolished between member countries in 1993.

Open trade within the EU poses less of a threat for wages and labor standardsthan NAFTA or the WTO. Even the poorer member countries, such as Spain,

Portugal, and Greece, are fairly wealthy and have strong unions and decentlabor protections. Moreover, most EU countries, including top economic powerslike France, Germany Italy, and the United Kingdom, are ruled by parties(whether "socialist," social democratic or labor) with roots in the working-classmovement. This relationship has grown increasingly distant in recent years; still,from the perspective of labor, the EU represents a kind of best-case scenario forfreeing trade. The results are. nonetheless, cautionary.


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The main thrust of the EU, like other trade organizations, has been trade. Laborstandards were never fully integrated into the core agenda of the EU. In 1989, 11of the then-12 EU countries signed the "Charter of the Fundamental SocialRights of Workers," more widely known as the "Social Charter." (Only theUnited Kingdom refused to sign.) Though the "Social Charter" did not have any

binding mechanism - it is described in public communications as "a politicalinstrument containing 'moral obligations' " - many hoped it would provide thebasis for "upward harmonization," that is, pressure on European countries withweaker labor protections to lift their standards to match those of membernations with stronger regulations. The 11 years since the adoption of the "SocialCharter" have seen countless meetings, official studies, and exhortations but fewappreciable results.

Since trade openness was never directly linked to social and labor standards andthe "Social Charter" never mandated concrete actions from corporations,European business leaders have kept "Social Europe" from gaining anymomentum simply by ignoring it. Although European anti-discrimination ruleshave forced countries like Britain to adopt the same retirement age for men andwomen, and regional funds are dispersed each year to bring up the general livingstandards of the poorest nations, the social dimension of the EU has never beenmore than an appendage for buying off opposition. As a result, business movedproduction, investment, and employment in Europe toward countries with lowstandards, such as Ireland and Portugal.

The EU also exemplifies how regional trading blocs indirectly break down traderegulations with countries outside the bloc. Many Europeans may have hopedthat the EU would insulate Europe from competition with countries that lackedsocial, labor, and environmental standards. While the EU has a common externaltariff, each member can maintain its own non-tariff trade barriers. EU rulesrequiring openness between member countries, however, made it easy tocircumvent any EU country's national trade restrictions. Up until 1993, memberstates used to be able to block indirect imports through health and safety codesor border controls, but with the harmonization of these rules across the EU,governments can no longer do so. Since then, companies have simply imported

non-EU goods into the EU countries with the most lax trade rules, and thenfreely transported the goods into the countries with higher standards. (NAFTAsimilarly makes it possible to circumvent U.S. barriers against the importation ofsteel from China by sending it indirectly through Mexico.) EU members thatwished to uphold trade barriers against countries with inadequate social, labor,and environmental protections ended up becoming less important trading hubsin the world economy. This has led EU countries to unilaterally abolish


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restrictions and trade monitoring against non-EU nations. The logic of tradeopenness seems to be against labor and the environment even when thegovernments of a trading bloc individually wish to be more protective. -PhineasBaxandall

Resources: Brian Hanson, "What Happened to Fortress Europe?: ExternalTrade Policy Liberalization in the European Union," InternationalOrganization, 52, no. I (Winter 1998), ss-86.

The Association of Southeast Asian Nations (ASEAN) and Asia-Pacific EconomicCooperation (APEC)

Founded in 1967 at the height of the Vietnam War, the Association of Southeast

Asian Nations (ASEAN) sought to promote "regional security" for its fiveoriginal members (Indonesia, Malaysia, Philippines, Singapore, and Thailand)After 1975, it focused on counteracting the spread of communism following thedefeat of the U.S. military in Vietnam. Beginning in the 1980s, and especiallysince the collapse of the Soviet Union, the ASEAN agenda turned from fightingcommunism to "accelerating economic growth" through cooperation and tradeliberalization. At the same time, the organization added the remaining countriesof Southeast Asia (Brunei Darussalam, Cambodia, Laos, Myanmar, and evenVietnam) to its member list. Today ASEAN oversees a cohesive geographicalregion with a population of nearly 500 million (about twice that of the United

States) and combined output of nearly $750 billion (about one-tenth that of theUnited States).

ASEAN has pushed for member countries to open up to international trade andcapital. While Singapore grew rapidly beginning in the 1960s, and Indonesia,Malaysia, and Thailand grew quickly beginning in the 1970s, high levels ofJapanese foreign direct investment pushed the growth rates of these SoutheastAsian economies to near double-digit levels in the late 1980s. Still, in the 1990s,increased competition from other developing countries and regional tradingpartnerships (such as NAFTA and the EU) threatened the stability of these

export economies. In 1992, ASEAN adopted its own "free trade" agreement.AFTA, the ASEAN Free Trade Area, lowered tariffs among member nations,and promoted intra-regional trade which now stands at about 25% of theexports of these nations, about twice the level in the early 1970s. In response tothe Asian economic crisis, ASEAN member nations agreed at their 1998 summitto further open up their economies, especially their manufacturing sectors, toforeign investment. Ignoring the calls of grassroots movements for controls or


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taxes on international capital movements, the summit implemented plansallowing 100% foreign ownership of enterprises in member countries, duty-freeimports of capital goods, and a minimum for corporate tax breaks of three years.

The ASEAN tradition of "non-intervention" in the internal political affairs of its

member states meant that the organization turned a blind eye to the repressionof prodemocracy movements in Myanmar, Indonesia, Cambodia, and othercountries in the region. Nor has ASEAN insisted that member nations meetInternational Labor Organization (ILO) core labor conventions. Member stateshave failed to sign and even denounced conventions recognizing the freedom ofworkers to organize trade unions, abolishing child and forced labor, andoutlawing discrimination in employment. At times, they have brutally attackedtrade union movements. ASEAN has also failed to intervene in regionalenvironmental problems, witnessed by its inability in 1999 to fashion an effectiveregional response to Indonesia's uncontrolled forest fires. ASEAN reaction to theDecember 1999 WTO conference was no different. Leaders of ASEAN nationsobjected to U.S. calls to include core labor standards as part of trade agreements,insisting that they were an attempt to protect U.S. jobs. And Rodolfo Severino,secretary-general of ASEAN, complained that the United States and other richcountries had not lived up to the new WTO textile agreement that would allowASEAN garment exporters greater access to First World markets.

It is China's entry into the WTO, however, that most threatens ASEAN interests.China has already replaced Southeast Asia as the favorite location of Japaneseforeign direct investment, and Chinese exporters of toys, textiles, and other low-wage manufactured products have put ASEAN exporters under pressure.Unfortunately, the most likely ASEAN response to Chinese competition will be tofurther liberalize its own rules on foreign direct investment.

Long before this year's WTO conference, ASEAN member states recognized thattheir economic interests went well beyond the boundaries of Southeast Asia. Inlate 1980s, Prime Minister Mahathir Mohammed of Malaysia called for theformation of a pan-Asian regional economic bloc to include, along with theASEAN countries, Japan, China, Korea, Taiwan, and Hong Kong, the largestinvestors in Southeast Asia. Mahathir's proposal was met with stiff oppositionfrom the West. At the United States' insistence, the Asia-Pacific EconomicCooperation forum (including the United States, Canada, Australia, NewZealand, and Korea, along with ASEAN members Brunei Darussalam,Indonesia, Malaysia, and the Philippines) was formed instead.

Asia-Pacific Economic Cooperation (APEC) today consists of 21 members,having added Chile, China, Hong Kong, Taiwan, Mexico, Papua New Guinea,


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Peru, Russia, and Vietnam to its 12 founding members. Unlike ASEAN, APECmembers do not form a cohesive region other than bordering on the Pacific.APEC has no formal criteria for membership, but actual or promised tradeliberalization is a defacto condition for entry. While commitments made byAPEC members are formally voluntary and non-binding, APEC pressures

governments to remove trade and investment restrictions faster than they wouldfollowing their own agenda. APEC is heavily influenced by large corporations,going so far as to adopt as its official slogan for 1996, "APEC means business."While not an official trading bloc, APEC's push for lower tariffs has proceededfurther and faster than the WTO's free-trade agenda. APEC is calling for freetrade among APEC nations by 2010 for "developed nations" and 2020 for"developing nations." In addition, APEC pushes labor market policiesguaranteed to impose hardships on workers. For instance, in response to theAsian economic crisis, APEC counseled member countries to "maintainflexibility in domestic labor markets," advice sure to mean lower wages andmore layoffs for workers already suffering from the effects of the Asian economiccrisis. And while pledging to promote "environmentally sustainabledevelopment," APEC has done little to combat the depletion of nationalresources and deforestation, especially in developing nations. APEC has alsoinsisted that member economies harmonize food and product safety standards,which means high standards are likely to be replaced by the lowest commondenominator. H -John Miller

the abcs of free-trade agreements

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