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This Isn't Your Father's Free Trade

By David Morris

(The following article appeared in the Minneapolis Star-Tribune, Sunday January 30, 2000.)

"Perfection of means and confusion of ends seems to characterize our age."
That insight of Albert Einstein's half a century ago aptly describes the current debate, or more precisely, non-debate, about free trade.

Free trade, a means, is now viewed as an end. Indeed, it has taken on the trappings of a full-fledged religion, less an economic strategy than a moral dogma. Embrace its tenets and you and civilization itself will be saved. Dissent and you will be branded a heretic, a barbarian, or worse.

This explains the apoplectic response by most commentators to the collapse of the recent World Trade Organization talks in Seattle. To them, the 50,000 protestors were Visigoths storming Rome. The Dark Ages would surely follow.

Most pundits saw the protestors as anti-trade. But no placard read "Down with trade". The vast majority of those on the streets agreed with Adam Smith that humans have a "natural propensity to barter and exchange". Exchanging ideas and innovations and products is the way the human race progresses.

The current debate about free trade is less about trade than about the nature of sovereignty, the role of community and the reach of citizenship in the 21st century. Which is very different from the debate about free trade before the 1980s. A little historical background might be in order.

1980 was turning point

From 1848 -the year Britain adopted a free trade policy- to 1980 free traders conceded the right of countries to manage their own affairs. That included defending small businesses and family farms, enacting stringent environmental standards, banning foreign ownership of key resources, and requiring outside investors to meet the needs of their host communities. The free trade debate, and there was a vigorous debate, was about tariffs and was largely unconnected to the equally vigorous domestic debates about minimum wages, maximum hours, environmental and health protection, and social justice.

But after 1980, the term "free trade" began to acquire a much more expansive meaning and the boundary lines between domestic and foreign blurred. Free traders talked of doing away with "non tariff trade barriers". These were any ordinance, regulation or tax that inhibited the movement of goods and services across borders.

This new way of thinking guided the U.S Canadian Free Trade Agreement(1988), the North American Free Trade Agreement(1994), and the changes in the General Agreement on Tariffs and Trade(GATT) that led to the creation of the World Trade Organization(WTO) in 1996.

Today the context for the free trade debate has dramatically changed. Most commentators believe the issues are the same as they were in 1975 or 1875. They're not. The rules have changed.

The New Rules of Trade In an earlier time, countries were allowed to impose the same standards on importers as it did on domestic producers. That is no longer true.

In 1980, to their horror, Europeans discovered that 2 and 3 year old children were reaching puberty. They traced the problem to growth hormones used to promote weight gain in cattle. Consumers in West Germany, Italy, the Netherlands and Belgium persuaded their governments to ban hormone additives. In 1988 the European Union imposed a Europe-wide ban on European producers. In 1989 the ban was extended to importers.

In 1998 the WTO ruled that Europe had no right to impose such rules on imported beef. Under the new trade rules, countries were no longer allowed to implement health and safety standards that err on the side of caution, even when in response to impressive citizen demand.

The new rules of trade

In an earlier era countries had the right to take into account the way a good was made or the regime that made it when regulating imports. This is true no longer.

The WTO specifically prohibits any government from discriminating against a product on the basis of how it is made. A shirt is a shirt is a shirt, whether it is made from genetically engineered cotton or by prison labor. To date, no environmental, social, health or food safety law that has been challenged at the WTO has survived the attack.

Some 20 years ago, citizens around the country pressured local governments to put their tax money where their values were. Appalled by the brutal apartheid system in South Africa, half a dozen states and more than two dozen cities adopted purchasing and investment policies that prohibited them from doing business with corporations that did business in South Africa. This exercise in state and local authority was deemed legal by the courts. After he was freed, Nelson Mandela acknowledged the value of these efforts in accelerating the demise of apartheid.

In 1996, Massachusetts adopted a similar bill to one it adopted a decade before regarding South Africa, but this time aimed at the narco-military regime in Burma, now called Myanmar. A dozen cities followed suit. But under the WTO, Massachusetts no longer will have the right to enact such policies.

Earlier free trade agreements focused on manufacturing. Today they are slowly extending into all parts of societies. Indeed, the debate in Seattle was largely about whether and how to extend the GATT into services like education and health and finance.

In earlier years, the GATT operated like a gentlemen's agreement. There was no enforcement structure. The WTO, on the other hand, according to trade lawyer Lori Wallach of Public Citizen's Global Trade Watch, "has the strongest enforcement procedures of any international agreement now in force." World traders now have a cop on the beat.

The WTO is beginning to look like a new world government. Indeed, the U.S. has argued that when the WTO rules against a country, that country must amend its domestic laws.

But this is different from any kind of government democratic societies are familiar with.

First of all, it operates in secret. The judges that sit on the WTO panels are appointed. They meet behind closed doors. They hear no outside witnesses. Their proceedings are not made public. Yet their decisions increasingly affect every aspect of our lives.

Second, it allows only those who accept the religion of free trade to make or influence its decisions. Judges are not chosen because of their expertise in the subject they are ruling on, but for their familiarity with the tenets of free trade. A few weeks before the Seattle meeting, a federal judge in that city ruled that President Clinton was violating US laws by refusing to allow non-corporate representatives to sit on the U.S Trade Office's advisory panels.

Third, only governments(and in the case of NAFTA, corporations) can bring a case to the trade panels. Citizen organizations and indviduals and local governments cannot.

Fourth, this government can only overturn laws. It cannot enact them. Thus, for example, when the Canadian government banned the use of a manganese based additive in gasoline, the U.S. Ethyl Corporation sued under NAFTA. The trade panel ruled that Canada lacked a compelling scientific basis for the law. Thus Ethyl would be owed considerable compensation for lost potential profits if Canada went ahead. Canada backed down. But if citizens of Canada or the U.S. compiled overwhelming evidence that manganese additives should be removed from gasoline and their governments refused to act, they could not go to a trade panel to ask that such a ban be enacted.

Fifth, the WTO allows nations to enact laws that are weaker than a global standard but not stronger. This is the opposite of how many US federal laws operate. For example, there is a federal minimum wage which acts as a floor, not a ceiling. Individual states can set their own minimum wages higher. Many environmental laws operate in the same fashion.

Sixth, the new planetary constitution includes no Bill of Rights. Our own Constitution could not have been ratified without such a section, which includes in the First Amendment, the right to petition governmenet for redress of grievances.

Seventh, the WTO offers no democratic process for change. It can be amended, but only from within.

Revisiting the Empirical Evidence

In Seattle, a petition signed by more than 1200 non-governmental organizations in 85 countries was presented to the WTO asking that it declare a moratorium on further actions and initiate a period of reflection and evaluation. Before we lose our rights as citizens, we should reflect more soberly on the costs and benefits.

The first step in this process might be to agree with economist Paul Krugman that the idea that a country's economic fortunes are largely determined by its success on world markets is "a hypothesis, not a truism". "And as a practical empirical matter", he declares, "the hypothesis is flat wrong". National living standards are overwhelmingly determined by domestic factors, rather than by some competition for world markets.

According to Harvard Economist Dana Rodrik, "no widely accepted model attributes to postwar trade liberalization more than a very tiny fraction of the increased prosperity of the advanced industrial countries." Paul Bairoch, the eminent Swiss economist is even more emphatic. "It is difficult to find another case where the facts so contradict a dominant theory than the one concerning the negative impact of protectionism."

The empirical evidence is weak. The promised benefits are trivial. A massive report issued by the World Bank and the OECD to encourage countries to create the new trade rules predicted that doing so would add about 3/4 of l% to the estimated world GNP in 10 years, a third of the normal annual growth percentage of a typical country.

Time and again the predictions of free traders have been confounded by real events.

Three years after enactment of the NAFTA, Mexicos trade with the US went from a modest deficit to a $14 billion surplus. Yet the Mexico economy imploded, living standards plunged, unenemployment soared, a wave of drugs and violence swept the country.

In the 10 years after Europe embraced its internal free trade treaty, unemployment doubled. Growth rates fell.

Two years ago, Asia plunged into a deep recession when the tidal waves of foreign short term investment that had flowed in when nations jettisoned their controls on capital, flowed out at the first signs of economic danger.

For large swaths of the globe economies grew fastest during the 1950s and 60s and 70s when by any definition they operated in what we would call a hightly protectionist fashion. And since 1980 as regions like Latin America and Africa have adopted the new free trade rules, their economies have stagnated, or gone into reverse. In many countries, exports are up, living standards are down.

The battle in Seattle was about both ends and means. It was about democracy and the benefits of local culture and community. Let's hope that in this year's political campaigns, these issues receive the attention they deserve.

--David Morris, vice president of the Institute for Local Self-Reliance in Minneapolis, did twice daily commentaries in Seattle during the minesterial meeting. They are available at www.wtowatch.org.


The New Rules Project
http://www.newrules.org/