Fading Faith in Free Trade

In a Presidential election year that has evoked controversy about trade, it is especially tempting to cast the 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 poll conducted nationwide in January 2004 by the University of Maryland’s Program on International Policy Alternatives reveals the division in American public opinion about major trade issues. For starters, in probing the public’s overall views, the PIPA poll did not ask whether people are for or against free trade; instead, it sought their opinion on the “growth of international trade,” providing not two, but three choices.

Of the three choices, only 18 percent of respondents took the truly “anti-free trade” position, 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 choices both began with “I support the growth of international trade in principle,” but then branched off into two different positions. Only about 20 percent approved of “the way the U.S. is going about expanding international trade.” Most of the respondents, 53 percent, support the growth of international 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 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, among both those who approve and those who disapprove of the agreements, express concern about whether those agreements, and U.S. policy in general, adequately address 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 percent said that international trade agreements should require minimum standards for working conditions and for environmental protection.

Public opinion alone, of course, does not determine public policy, especially when trade policy has 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 in favor of free trade; 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, free trade has both of these supports. But something startling is happening. First, the consensus on trade among elites is no longer as firm as it used to be. Second, while 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 and widely respected economists are expressing reservations. 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’s history of concern over “unbalanced” (i.e., unfair) public policies spans his career as both 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 of the World Bank. Seven years in Washington gave him an on-the-job education in how economic theories do not necessarily advance the common good 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.

Stiglitz recognizes that patents, copyrights and other intellectual property rights need a measure of cross-border protection. But at the behest of drug companies and over the objections of the Council of Economic Advisors during Stiglitz’s 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 that requires countries to remove controls on the movement of financial capital across borders. He blames this policy for promoting global instability, notably in the East Asian economic crisis of the 1990’s, since it makes developing countries “subject to both the rational and irrational whims of the investor community, to their irrational exuberance and pessimism,” as he wrote in Globalization and Its Discontents (2002). More recently, in a New York Times op-ed piece (Jan. 6) titledThe Broken Promise of NAFTA,” Stiglitz warned against the plan to extend Nafta’s provision on capital mobility to Latin America, writing, “the International Monetary Fund has finally found such liberalization promotes neither growth nor stability in developing countries.”

Another top-ranked economist, Jagdish Bhagwati, while championing globalization in his latest book, In Defense of Globalization (Oxford, 2004), also attacks key elements of the trade consensus. Bhagwati, whom the Nobel laureate Robert Solow calls “our most powerful and persuasive advocate of free trade,” expresses concerns that, surprisingly, he shares with Stiglitz: the overprotection of 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 to adopt unfair rules. He cites, as “a prime example,” the U.S. pressure that led to the W.T.O. agreement on Trade-Related Aspects of Intellectual Property Rights. “Pharmaceutical and software companies,” he says, “muscled their way into the W.T.O. and turned it into a royalty-collection agency simply because the W.T.O. can apply trade sanctions” to violators of its rules. Unlike the legitimate trade responsibilities given the W.T.O. at its founding in 1994, TRIPS, in Bhagwati’s view, was like introducing “cancer cells into a healthy body,” by which he meant that it “distorted and deformed an important multilateral institution, turning it away from its trade mission and rationale.”

Bhagwati has also been unrelenting in his attack on the pattern of removing restraints on cross-border capital mobility. In an essay titledThe Capital Myth,” first published in Foreign Affairs in 1998 and now summarized in his latest book, Bhagwati argues that the unfettered flow of capital around the world is “inherently crisis-prone.” Bhagwati blames a “power elite à la C. Wright Mills,” “a definite network of like-minded luminaries among the powerful institutions—Wall Street, the Treasury Department, the State Department, the I.M.F. 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 interests of Wall Street, which it equates with the good of the world.” Bhagwati expresses satisfaction that both The Economist and the I.M.F. have lately lost their enthusiasm for free capital mobility, although “a watchful eye over the Wall Street-Treasury complex remains a necessity.”

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

Unexpectedly, that consensus is also under assault from a third economist, Paul Craig Roberts, former assistant secretary of the treasury in the Reagan administration and a former editor of The Wall Street Journal.

Roberts, whose long career in journalism and government service has been devoted to promoting free trade, 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 perspective earlier this year in three forums: a New York Times op-ed piece (“Second Thoughts about Free Trade,” co-authored with New York’s Democratic 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 the fundamental economic principle of “comparative advantage” expounded in 1817 by the British economist David Ricardo. (The principle is explained as follows by the W.T.O.: “According to the principle of comparative advantage, the gains from trade follow from allowing an economy to specialize. For example, if a country is relatively better at making wine than wool, it makes sense to put more resources into wine, and to export some of the wine to pay for imports of wool.”) Roberts argues, however, that comparative advantage is simply irrelevant; it doesn’t apply today, two centuries after Ricardo and in a vastly different world. Why not? Ricardo’s theory assumes that two major “factors of production”—labor and capital (factories, machinery)—cannot be moved off-shore; but today they can be, and this is being done 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 even labor effectively moves across borders as well, with Indian radiologists examining U.S. X-rays, for example, and Chinese software engineers writing computer 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 makes it possible for multinational corporations, in their relentless search for lower costs and higher profits, to shift manufacturing and service operations to populous, labor-surplus countries like China and India.

More and more American workers now see that happening to their jobs. Of course people do not 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 the law. Protecting worker rights internationally is called protectionism; protecting property rights is not. But to large segments of the American public this distinction is meaningless.

U.S. foreign trade and employment 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 in his first four months in office, he would 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.

America’s elites, and even the general public, are starting to raise serious questions about America’s free trade consensus. 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 influence of U.S. policy. Let us hope that presidential politics allows for such a discussion in 2004.

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