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May/June 2016 issue.

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Do Trade Agreements Foreclose Progressive Policy?

By Arthur MacEwan | May/June 2016

Dear Dr. Dollar:

Doesn’t the increasing liberalization of U.S. international economic policies foreclose the possibilities for progressive policies in this country? Don’t these policies undercut the effectiveness of fiscal policy efforts to stimulate employment and output? And don’t they virtually rule out many progressive reforms, such as a single payer health care system or new environmental regulations?

—Anonymous, by voicemail

The simple answer to this set of questions is: yes and no. But let’s step back for a minute.

From the North American Free Trade Agreement (NAFTA), adopted in the early 1990s, to the Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP) being advanced today, criticism has focused on the negative impacts of these agreements on employment in many U.S. industries. These negative impacts are real and are one factor contributing to the decline of manufacturing in the United States, to the stagnation of wages, and to the hollowing out of the “middle class.”

Yet, another impact of these agreements generally gets ignored—namely their negative impacts on progressive economic and social policies. Here too the impacts are real, but they are not absolute.

Take the issue of fiscal stimulus—that is, when the government runs a budget deficit, spending more to increase output and create jobs than it is taking in as taxes. In 1970, imports of goods and services were only 6.3% as large as GDP, but in 2014, imports were equal to 18.2% of GDP. This implies that in the earlier era, of a dollar spent on goods and services in general, only 6.3% would go towards imports. Today, as liberalization of trade has brought about the larger role for imports in GDP, a much larger share would go for the stimulation of jobs and output abroad. That is, the impact would in part “leak” out of the U.S. economy.

However, stimulus spending need not be spending “in general.” If the government focused its spending on physical infrastructure (roads, bridges, public transport systems) and early childhood education, for example, less of the impact would “leak” out of the country. And certainly there are great needs for spending on infrastructure and early childhood education. (There would still be “leakage” in the later rounds of spending, as those who received the government funds—for example, construction companies and workers, preschools and early-childhood teachers—spent what they had received.)

To an extent, the American Recovery and Reinvestment Act of 2009 (ARRA) did focus spending on infrastructure investment. And, while there is controversy regarding its impact, it did seem to have a positive, though limited impact (it wasn’t big enough) in contributing to the recovery from the severe recession of 2007–2008.

The constraints that the decades of liberalization of U.S. international economic activity places on social programs is related to investment, not trade. Various agreements—like NAFTA, TPP, and TTIP—incorporate provisions that derive from the General Agreement on Trade in Services (GATS), a treaty of the World Trade Organization (WTO) that came into force in 1995. These agreements allow firms from outside a country to sue the government of that country if it imposes “over-burdensome” regulations or policies that undermine the firm’s profits. (See Robin Broad, “Remembering the ‘Tokyo No’: Fifty Years Later,” Dollars & Sense, January/February 2015; also published at Triple Crisis blog, here.)

For example, a mining firm based in one country could sue the government of another county in which it is operating if environmental protection regulations are put in place that harm the firm’s profits. Or, for a second example, a private health care firm based abroad could sue if the establishment of a single-payer health care system were established in the United States, harming the firm’s profits. The threat of such suits could deter the government form implementing these sorts of programs. It might seem, then, that the government’s hands would be tied, preventing the enactment of progressive programs.

But let’s not forget what government we are talking about here. These profit-protecting provisions of the WTO and particular international economic agreements have been largely the creation of the world’s most powerful government—i.e., the U.S. government. If the U.S. government wanted to change those provisions—that is, if it wanted to clear the way for progressive programs—it would not have great problems in doing so. If it is not unrealistic to believe that a U.S. government would want to create a single-payer health care system or a strong set of environmental protection regulations, it is not unrealistic to believe that it could also abrogate or get around those profit-protecting provisions.

The example described in the box shows the real threat to public services that is created by the provisions in trade agreements. It also shows how in a relatively rich country—Canada in this case—with the resources and expertise to fight such a threat, a government can prevail. The situation of less-powerful, low-income countries is very different.

So, yes, the liberalization of U.S. international commerce does create constraints on progressive economic policies and social programs. But, no, these constraints are by no means absolute. Ultimately, the constraints are political, not technical constraints of economic agreements.

ARTHUR MACEWAN is professor emeritus of economics at UMass-Boston and a Dollars & Sense Associate.

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