The ABCs of Free Trade Agreements

The Dollars & Sense Collective

This article is from the January/February 2001 issue of Dollars and Sense: The Magazine of Economic Justice available at http://www.dollarsandsense.org/archives/2001/0101abcs.html

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This article is from the January/February 2001 issue of Dollars & Sense magazine.

In the United States, the corporate media have framed the debate over "globalization" largely as a struggle between cosmopolitan advocates and their provincial opponents. The pro-globalization types are celebrated as champions not only of a "global marketplace," but also of a worldwide community of peoples 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, and disregard for those outside the United States.

International institutions—like the World Trade Organization (WTO), International Monetary Fund (IMF), and World Bank—as well as regional associations—such as the North American Free Trade Agreement (NAFTA), the European Union (EU), the Association of Southeast Asian Nations (ASEAN), and, perhaps soon, the Free Trade Area of the Americas (FTAA)—are primarily concerned with granting capital the freedom to move from country to country. It is 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 multinational corporations with hostility towards "foreign" workers. To its credit, however, much of the "global economic justice" movement has deftly avoided the nativist pitfall—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 of national 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 on them, posing their own vision of "globalization from below" against a "globalization dominated by capital." Today, goods and capital pass freely across national frontiers while people run a gauntlet of border patrols and barbed wire. "Globalization from below" turns this status quo, which combines the worst of both worlds, on its head. Instead of the free movement of capital across national borders, "globalization from below" champions the free movement of people. Instead of equal treatment for all investors, no matter where they are investing, it demands equal human and civil rights for all people, no matter where they are living. Instead of greater worldwide integration of multinational corporations, it raises the banner of greater international solidarity among popular movements and organizations. Instead of the "race to the bottom," it calls for an "upward harmonization." Instead of the rule of capital, the rule of the people. Instead of more inequality, less. Instead of less democracy, more.

That is an appealing vision for the future. At this point, however, "globalization dominated by capital" is still on the march—operating through both global institutions and regional associations. The recent protests against the WTO and IMF (not only in the United States, but across the world) have shown that resistance is not futile. The immediate effect, however, may be to channel the globalization agenda back into regional "free-trade" agreements. Ultimately, the forces 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 on January 1, 1994. The agreement eliminated most barriers to trade and investment among the United States, Canada and Mexico. For some categories of goods—certain agricultural goods, for example—NAFTA promised to phase out restrictions on trade over a few years, but most goods and services were to be freely bought and sold across the three countries' borders from the start. Likewise, virtually all investments—financial investments as well as investments in 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. Thus NAFTA gave new options and direct benefits to those who obtain their income from selling goods and making investments, but the agreement included no parallel provision for those who make their incomes by working.

Supporters of NAFTA have argued that both firm owners and workers in all three countries can gain from the removal of trade and investment barriers. For example, the argument goes, U.S. firms that produce more efficiently than their Mexican counterparts will have larger markets, gain more profits, generate more jobs, and pay higher wages. The prime examples would include information technology firms, bio-tech firms, larger retailers, and other U.S. corporations that have an advantage because of skilled U.S. labor or because of experience in organization and marketing. On the other hand, Mexican firms that can produce at 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 extreme differences among the member countries in living standards, wages, unionization, environmental laws, and social legislation. The options that NAFTA creates for business firms put them at a great advantage in their dealings with workers and communities. For example, U.S. unions are weakened because firms can more easily shut down domestic operations and substitute operations in Mexico. With the government suppressing independent unions in Mexico, organization of workers in all three countries is undermined. (Actually, the formal Mexican labor laws are probably as good or better than those in the United States but they are usually not enforced.) While NAFTA may mean more jobs and better pay for computer software engineers in the United States, auto-assembly and parts workers in the United States, for example, see their wages stagnate or fall. Similarly, the greater freedom of international movement that NAFTA affords to firms gives them greater bargaining power over communities when it comes to environmental regulations. One highly visible result has been severe pollution problems in Mexican maquiladora zones along the U.S. border.

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

Finally, one of NAFTA's greatest gifts to business has been the removal of restrictions on the movement of financial capital. The immediate result for Mexico was the severe financial debacle of 1994. Investment funds moved rapidly into Mexico during the early 1990s, and especially after NAFTA went into effect. Without regulation, these investments were able to abandon Mexico just as rapidly when the speculative "bubble" burst, leading to severe drops in production 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 fast track to a hemisphere-wide free-trade zone. In 1994, Clinton proposed to have the world's largest trade bloc in place by 2005. Instead, the Free Trade Area of the Americas (FTAA)—which is the name of a real international organization with 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 domestic U.S. politics. In 1997, Clinton did not get the "fast-track" negotiating authority he sought from Congress, so the United States was not the mover-and-shaker for FTAA that it had been for NAFTA only a few years before. ("Fast-track" authority permits the administration to negotiate a trade agreement that Congress then votes on as a whole, instead of reworking line-by-line.) Much of the administration's enthusiasm for "free trade" went instead into the WTO. With the WTO agreement headed off by popular protest, it would not be surprising to see a revival of FTAA.

A patchwork "free-trade" zone of the Americas is forming anyway, only not through the FTAA and without the United States as the spearhead. The government 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, and negotiating with Belize, Ecuador, El Salvador, Guatemala, Honduras, Panama, Peru, and Trinidad (as well as China, Japan, South Korea, Israel, and the European Union). Each country that concludes a trade agreement with Mexico effectively gains, because of NAFTA, access to all of North America. In exchange, Mexico gains preferential trade access to the countries with which it has signed trade accords.

Latin America's largest trading bloc, the Common Market of the South (Mercado Comun del Sur, or Mercosur), is already negotiating a trade agreement with Mexico, to come on line in 2003. Plans are also in the works to create a larger "free-trade" zone in South America, including the members of Mercosur (Argentina, Brazil, Paraguay, Uruguay, and "associate members" Bolivia and Chile) and of the Andean Community (Bolivia, Colombia, Ecuador, Peru, and Venezuela), by 2002. These countries, it seems, are jockeying for a more favorable position—in an eventual "free-trade" zone of the Americas—with respect 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 unless popular movements force the issue. Canadian Trade Minister Pierre Pettigrew, for example, told Parliament this year that labor and environmental side agreements like those in NAFTA would only impede negotiations. (Canada chaired the FTAA negotiations process until late 1999 and remains an important booster of the pact.) As the Montreal Gazette reported in June 2000, "Mercosur…includes no environmental or labor standards, and the political leadership in those countries view such caveats as hidden trade barriers. The Canadian government, which is just as anxious to please corporations that profit nicely from the lack of environmental or labor standards in Third World countries, is in no mood to disagree." Second, the United States, which accounts for about 70% of the hemispheric economy, would dominate any hemisphere-wide economic bloc. As a Brazilian businessman succinctly put it at a July 2000 meeting of Mercosur, "Who rules in FTAA is the U.S."

Three Latin American countries, Panama, Ecuador, and El Salvador, actually use the U.S. dollar as their official currency, the last two having adopted it in 2000. The IMF and the U.S. government both praised El Salvador for taking the "dollarization" plunge, which Treasury Secretary Lawrence H. Summers said would "help contribute to financial stability…in El Salvador and its further integration into the global economy." Proponents of "dollarization" view it as a way of inflation-proofing Latin America's economies. Fighting inflation (rather than reducing unemployment, fighting poverty, etc.) has been the principal goal of the region's governments since the 1980s, as it has been in the United States, Great Britain, and elsewhere. This suggests that, unpopular though it may be now, "dollarization" is not just going to drop off the agenda—especially if it has U.S. and IMF support.

"Dollarization" would threaten sovereignty over economic policy for the countries that embrace it. One key tool for economic policymakers is the control of the money supply and interest rates. Central banks lower interest rates and increase the money supply to stimulate growth (and combat unemployment). They raise interest rates and tighten the money supply to combat inflation. The government of a "dollarized" country would no longer be able to stimulate growth 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 Latin American economies (the Fed's interest-rate increases in the early 1980s, for example, sent rates skyrocketing worldwide and detonated the Latin American debt crisis) and the people of Latin America (as opposed to the region's elites) have historically not enjoyed much popular sovereignty over economic affairs. But openly ceding authority over regional economic policy to the Fed would hardly help matters.

—Alejandro Reuss

The European Union (EU)

The European Union (EU) forms the world's largest single market. From its beginnings in 1951 as the six-member European Coal and Steel Community, the association has grown both geographically (now including 15 countries in Central and Western Europe, with plans to expand into Eastern Europe) and especially in its degree of unity. Eleven of the EU's members now share a common 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 standards than NAFTA or the WTO. Even the poorer member countries, such as Spain, Portugal, and Greece, are fairly wealthy and have strong unions and decent labor protections. Moreover, most EU countries, including top economic powers like France, Germany, Italy, and the United Kingdom, are ruled by parties (whether "socialist," social democratic, or labor) with roots in the working-class movement. This relationship has grown increasingly distant in recent years; still, from the perspective of labor, the EU represents a kind of best-case scenario for freeing trade. The results are, nonetheless, cautionary.

The main thrust of the EU, like other trade organizations, has been trade. Labor standards were never fully integrated into the core agenda of the EU. In 1989, 11 of the then-12 EU countries signed the "Charter of the Fundamental Social Rights of Workers," more widely known as the "Social Charter." (Only the United Kingdom refused to sign.) Though the "Social Charter" did not have any binding mechanism—it is described in public communications as "a political instrument containing 'moral obligations' "—many hoped it would provide the basis for "upward harmonization," that is, pressure on European countries with weaker labor protections to lift their standards to match those of member nations with stronger regulations. The 11 years since the adoption of the "Social Charter" have seen countless meetings, official studies, and exhortations but few appreciable results.

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

The EU also exemplifies how regional trading blocs indirectly break down trade regulations with countries outside the bloc. Many Europeans may have hoped that the EU would insulate Europe from competition with countries that lacked social, labor, and environmental standards. While the EU has a common external tariff, each member can maintain its own non-tariff trade barriers. EU rules requiring openness between member countries, however, made it easy to circumvent any EU country's national trade restrictions. Up until 1993, member states used to be able to block indirect imports through health and safety codes or 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 then freely transported the goods into the countries with higher standards. (NAFTA similarly makes it possible to circumvent U.S. barriers against the importation of steel from China by sending it indirectly through Mexico.) EU members that wished to uphold trade barriers against countries with inadequate social, labor, and environmental protections ended up becoming less important trading hubs in the world economy. This has led EU countries to unilaterally abolish restrictions and trade monitoring against non-EU nations. The logic of trade openness seems to be against labor and the environment even when the governments of a trading bloc individually wish to be more protective.

—Phineas Baxandall

The Association of Southeast Asian Nations (ASEAN) and Asia-Pacific Economic Cooperation (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 five original members (Indonesia, Malaysia, Philippines, Singapore, and Thailand). After 1975, it focused on counteracting the spread of communism following the defeat of the U.S. military in Vietnam. Beginning in the 1980s, and especially since the collapse of the Soviet Union, the ASEAN agenda turned from fighting communism to "accelerating economic growth" through cooperation and trade liberalization. At the same time, the organization added the remaining countries of Southeast Asia (Brunei Darussalam, Cambodia, Laos, Myanmar, and even Vietnam) to its member list. Today ASEAN oversees a cohesive geographical region 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 the United States).

ASEAN has pushed for member countries to open up to international trade and capital. While Singapore grew rapidly beginning in the 1960s, and Indonesia, Malaysia, and Thailand grew quickly beginning in the 1970s, high levels of Japanese foreign direct investment pushed the growth rates of these Southeast Asian economies to near double-digit levels in the late 1980s. Still, in the 1990s, increased competition from other developing countries and regional trading partnerships (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 the exports of these nations, about twice the level in the early 1970s. In response to the Asian economic crisis, ASEAN member nations agreed at their 1998 summit to further open up their economies, especially their manufacturing sectors, to foreign investment. Ignoring the calls of grassroots movements for controls or taxes on international capital movements, the summit implemented plans allowing 100% foreign ownership of enterprises in member countries, duty-free imports 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 repression of pro-democracy movements in Myanmar, Indonesia, Cambodia, and other countries in the region. Nor has ASEAN insisted that member nations meet International Labor Organization (ILO) core labor conventions. Member states have failed to sign and even denounced conventions recognizing the freedom of workers to organize trade unions, abolishing child and forced labor, and outlawing discrimination in employment. At times, they have brutally attacked trade union movements. ASEAN has also failed to intervene in regional environmental problems, witnessed by its inability in 1999 to fashion an effective regional response to Indonesia's uncontrolled forest fires. ASEAN reaction to the December 1999 WTO conference was no different. Leaders of ASEAN nations objected 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 rich countries had not lived up to the new WTO textile agreement that would allow ASEAN 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 Japanese foreign 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 to further liberalize its own rules on foreign direct investment.

Long before this year's WTO conference, ASEAN member states recognized that their economic interests went well beyond the boundaries of Southeast Asia. In late 1980s, Prime Minister Mahathir Mohammed of Malaysia called for the formation of a pan-Asian regional economic bloc to include, along with the ASEAN countries, Japan, China, Korea, Taiwan, and Hong Kong, the largest investors in Southeast Asia. Mahathir's proposal was met with stiff opposition from the West. At the United States' insistence, the Asia-Pacific Economic Cooperation forum (including the United States, Canada, Australia, New Zealand, 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, Peru, Russia, and Vietnam to its 12 founding members. Unlike ASEAN, APEC members do not form a cohesive region other than bordering on the Pacific. APEC has no formal criteria for membership, but actual or promised trade liberalization is a de facto condition for entry. While commitments made by APEC members are formally voluntary and non-binding, APEC pressures governments to remove trade and investment restrictions faster than they would follow 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 proceeded further and faster than the WTO's free-trade agenda. APEC is calling for free trade among APEC nations by 2010 for "developed nations" and 2020 for "developing nations." In addition, APEC pushes labor market policies guaranteed to impose hardships on workers. For instance, in response to the Asian economic crisis, APEC counseled member countries to "maintain flexibility in domestic labor markets," advice sure to mean lower wages and more layoffs for workers already suffering from the effects of the Asian economic crisis. And while pledging to promote "environmentally sustainable development," APEC has done little to combat the depletion of national resources and deforestation, especially in developing nations. APEC has also insisted that member economies harmonize food and product safety standards, which means high standards are likely to be replaced by the lowest common denominator.

—John Miller

Resources for FTAA: Esther Schrader, "Mexico learns lesson well in pursuit of trade accords," Los Angeles Times, September 14, 1999; "Mexico and Uruguay knock down barriers," Gazeta Mercantil Online, January 3, 2000; "FTAA pressures Mercosur 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 for Mercosur," Gazeta Mercantil Online, July 5, 2000; "Chile to talk about joining Latin American trade bloc," Bloomberg News, August 22, 2000; "Mercosur seeks to consolidate before creation of FTAA," Gazeta Mercantil Online, August 24, 2000; "Cardoso wants South America free trade by 2002," Gazeta Mercantil Online, September 1, 2000; "Mercosur and Mexico negotiate trade accord," Gazeta Mercantil Online, September 6, 2000.

Resources for the EU: Brian Hanson, "What Happened to Fortress Europe?: External Trade Policy Liberalization in the European Union," International Organization, 52, no. 1 (Winter 1998), 55-86.

Resources for ASEAN and APEC: Linda Lim, "ASEAN: New Modes of Economic Cooperation," in Southeast Asia in the New World Order, Wurfel and Burton, eds.; ASEAN Web; APEC Secretariat; SAY NO TO APEC.