What is Free About Free Trade?

The following was written with his son in August 1991.


Since even the critics of GATT and of the agreement with Mexico have accepted free trade as an ideal, the real issue has not yet been discussed. Few have asked the fundamental questions: Is free trade desirable in general? When trade is "free," who is "free" from whom? What are the results of free trade, and do we favor them?

The destiny of the planet is now being settled in relatively obscure negotiations called the Uruguay Round of the General Agreement on Tariffs and Trade (GATT). It is likely that the outcome of these negotiations will be more fateful than the Persian Gulf War, yet they are still discussed only in narrow circles. The negotiations are about extending free trade, and to most people that seems a very technical matter best left to the experts.

Free trade has almost sacred authority. To question its virtue is regarded as naive. Opposing it is equated with protectionism, and that is understood to mean selfishly supporting special interests against the wellbeing of the people as a whole.

Indeed, most opposition to free trade is based on particular interests that will be hurt. Every proposal for "freeing" trade is vigorously opposed by those who will suffer most directly from it. These opponents assure us of their belief in the general principle. It is only the particular that they oppose. This means that if proponents can modify agreements so as to reduce the pain and destruction, opposition melts away.

Congress recently approved "fast track" authorization of free trade agreements; so it can only approve or disapprove the final packages without modification. Without this condition, the administration argued, it could not continue to negotiate the Uruguay Round of GATT. Nor could it continue to negotiate a free trade agreement with Mexico. The administration claimed that other countries will not negotiate seriously with a U.S. delegation that does not have authority to make reliable agreements. Once Congress adopted the "fast track" approach, it virtually promised to accept any agreement the administration makes.

For this reason, opponents of anticipated features of the two international trade agreements, argued strongly against "fast track." These opponents represented two groups: labor and environmentalists. Each had a particular concern.

The concern of labor was that the result of free trade is to move production of goods to be sold in the United States across national boundaries. Many factories that were once employing U.S. workers are now located across the Rio Grande where labor is cheaper and more docile. A free trade agreement with Mexico will accelerate this trend. The proposed new GATT will mean that production will move more freely around the world, with all nations competing for investment. The result will be the continuing reduction of real wages in the United States. It will also eviscerate the remaining power of unions.

The response by the Bush Administration is that while there will be particular hardships for some workers, other U. S. industries will flourish with the expanded markets. Total production will increase, with more goods and services available to all at cheaper prices. Since only one segment of society will suffer and society as a whole will be more prosperous, the administration has promised to help with the re-training of those who lose their jobs.

The concern of environmentalists is that many hard won gains are imperiled. When factories move across the Mexican border, they escape the environmental regulations of the United States. Even if the factory stays in the U.S., the company can gain environmental concessions by threatening to leave if new rules raise production costs. In addition, operations that move across the border continue to send their wastes back to this country in the form of air and water pollution and agricultural products contaminated with chemicals that are banned in this country. Above all, however, there is reason to fear that free trade will limit the sovereignty of our government in protecting the environment, if protective laws are regarded as "restraint of trade." For example, as a result of the Canadian free trade agreement with the United States, the province of British Columbia has had to abandon its support for reforestation. The U. S. timber industry charged that this support has given the Canadian lumber industry an unfair advantage over U. S. lumber. Free trade requires a "level playing field," in which the rules of the game are determined internationally rather than locally or nationally.

The response to the environmentalists' concerns has been that other countries do not like pollution either and that Mexico in particular is in the process of improving its environmental legislation. GATT negotiators are now introducing environmental considerations. The focus, they say, should be on improving environmental regulations worldwide rather than on defending the advances in this country.

With administration assurances that the concerns about labor and the environment had been heard, "fast track" was passed by Congress. The administration is working vigorously to lead the world into a golden age of free trade.

Since even the critics of GATT and of the agreement with Mexico have accepted free trade as an ideal, the real issue has not yet been discussed. Few have asked the fundamental questions: Is free trade desirable in general? When trade is "free," who is "free" from whom? What are the results of free trade, and do we favor them?

Free trade is the freedom of individuals or firms to exchange goods without governmental interference. Yet even a purely laissez-faire system requires government to enforce contracts, protect private property, prevent fraud, produce public goods such as defense and roads, and protect third parties from "externalities" such as pollution and public hazards. Moving beyond laissez-faire, democratic governments have also formed safety nets for those who cannot compete effectively, regulated workplaces to protect worker safety, and guaranteed universal access to education and health services.

Within the confines of a political jurisdiction (a nation), commerce occurs under the terms set by the government. As long as the government is not heavily involved in setting prices or in producing goods and services from a monopoly position, we might reasonably say the country has a free market. By contrast, free trade involves commerce between entities in separate nations, without government regulation. In the absence of a supra-national government with the power to tax and regulate, free trade moves in the direction of the purest form of laissez-faire capitalism--a condition in which those with large concentrations of capital set the rules of exchange.

Thus, when we ask who is freed by the transition from free markets (within the framework of a legal authority) to free trade (without accountability to any government), the answer realistically today is the transnational corporations. With governments not allowed to inhibit their activities, they can move capital around the world to wherever it can be most profitably invested. When we ask from whom they are free, the answer is political agencies of all sorts.

The result of expanding the size of the market beyond national boundaries is, therefore, a revolutionary change in the relation of economic and political power. Moving from free markets to free trade means transferring control over working conditions, environmental policy, and social welfare from governments to transnational corporations.

Those who are frustrated by inefficient government regulation, subsidies, and pork barrel politics may regard free trade as a way of transcending parochial interests. They argue that markets allocate resources more efficiently than politics. For example, they might point to the fact that Detroit auto makers could no longer resist demands for higher emissions standards when Japanese car companies showed they could meet the standards. Or they might show how agricultural price supports, which subsidize millionaire farmers, waste resources, and lead to depletion of aquifers and soil, could be eliminated by a free trade agreement. In other words, when government protects the interest of one group at the expense of the society as a whole, free trade can dislodge some of these privileges.

Nevertheless, even if nations do not always act in the best interests of their people, they are far more amenable to influence from the public than are transnational corporations. For example, the auto emissions standards to which Japanese manufacturers responded more quickly than American companies were imposed by governments. Free trade would reduce or eliminate the capacity of individual governments to set standards higher than those set internationally.

However enlightened the executive officers of a corporation may be as individuals, they are expected to act, are even morally bound to act, primarily in the interests of their stockholders. A world operated in the interests of the major stockholders of the transnational corporations is not an appropriate goal of national policy. It is not one that deserves the support of the Christian community. Yet because this world is advocated under the rubric of free trade, millions of Christians, and, indeed, the public at large, support the steps that lead toward it.

Why are most people so willing to transfer the controlling power of the planet from governments they can influence to transnational corporations they cannot? It is, of course, because the experts assure them that this is progress and promise that the result will be greater prosperity for all. This promise needs examination.

One argument for free trade between nations is called "the principle of comparative advantage." This argument was formulated by David Ricardo. He showed that even if one country could produce all goods more efficiently than another, it was more profitable for it to concentrate its capital on production of those goods where its comparative advantage was greatest. It could exchange its surplus of those goods for those where its comparative advantage was least. In other words both countries gained when they concentrated their capital in the production of those goods they could produce most efficiently in comparison with the trading partner.

Ricardo's formulation was sound. But Ricardo himself pointed out that the principle applies only when capital remains within the country of origin. Now capital flows unimpeded around the world; so the principle of comparative advantage is no longer applicable. In fact, governments have already sacrificed a good deal of their control over the money supply and interest rates by allowing the international monetary system to become relatively autonomous.

In the absence of the conditions for comparative advantage, the rationale for free trade rests entirely on the principle of specialization and the potential for increased aggregate production. Expanding output promises to increase profits for producers and to provide consumers with a wider range of choices at the lowest possible prices. Yet these gains are offset by losses, which are not shared equitably.

First, free trade tends to concentrate wealth rather than to disperse it. Increased world output will be unevenly distributed within and between countries. Since the transnational market will discourage national efforts to redistribute wealth, the results will be more extreme than in the past. But they will only be the continuation of existing trends. For example, as the U. S. government in the 1980's sought greater market freedom and reduced its concern for redistribution through the tax system, the gap between rich and poor grew. Although total output, income from capital, and consumer choices may have expanded, inflation-adjusted hourly and weekly wages (and thus purchasing power among people who depend on wage income) have declined.

In the Third World the results of development policies geared to the international market are more dramatic in their tendency to concentrate wealth and power. Differential access to credit and markets, for example, means that small farmers and businesses cannot compete with large plantations and corporations that are export-oriented. The subsistence sector of the economy declines. Landlessness and unemployment rise. Free trade reduces the capacity of government to encourage autonomous development.

Second, unrestricted commerce has many effects that are costly and require what economists call "defensive expenditures." The Gross World Product includes both the market activity involved in trade and the defensive costs. For example, the growth of markets everywhere concentrates people in cities. Urbanization necessitates an increase of public expenditures on streets, sewers, schools, police, law courts, and jails. All of this adds to Gross World Product, but it does not improve the economic lot of the people.

Third, the unimpeded market grows at the expense of the environment. It is the nature of this market to exploit natural resources and to pollute the environment. Many careful observers believe that human economic activity is already at an unsustainable level in many parts of the world and even globally, as indicated by global warming. The only institutions capable of reducing production of carbon dioxide and other "greenhouse gases" are national governments. Yet free trade will limit the capacity of individual governments to act. For example, a carbon tax that reduced oil consumption might be deemed an illegal restraint of trade unless it were mandated by some international body.

In order to show that increasing total production does not improve human welfare, we have developed an Index of Sustainable Economic Welfare (ISEW) for the United States. This index considers distribution, defensive expenditures, and the sustainability of the economy, as well as personal consumption of goods and services. From 1951 to 1988, per capita GNP rose from $3741 to $7664, while per capita ISEW rose only from $2793 to $3120. More significant, from 1979 to 1988, per capita GNP rose from $6573.5 to $7664, while per capita ISEW fell from $3525.6 to $3120.

Such figures are, of course, far from precise. Many estimates and projections go into them. But we have no doubt that in the United States sustainable economic welfare is declining while the Gross National Product rises. To adopt policies designed to increase GNP more rapidly while further lowering the sustainable economic welfare of the nation is foolish. While we have no means of calculating analogous figures for the globe, the ecological devastation and increasing suffering of the poor in many parts of the world suggest to us that increased GNP in many Third World Countries is accompanied by increased misery and unsustainability.

There is one other argument common among church people. It is held that free trade is the only hope of the Third World. It is certainly true that now that we have drawn so many nations into the global trading system, destroying their ability to feed and clothe themselves, any curtailment of that system would produce major disruptions. But it is also true that the expansion of the system envisioned in GATT and the agreement with Mexico will produce at least equal disruptions. The question is whether it is better to continue to disrupt life in a way that makes people less and less able to deal with their own problems and meet their own needs, or to begin the painful process of reducing dependence on world markets.

In Latin America and in Africa there are major movements advocating reduced dependence. Latin American economists have described dominant forms of development in terms of "dependency theory." What many Christians in this country celebrate as "interdependence" is recognized there as the increasing one-sided dependence of whole nations on distant centers of economic power over which they have no control. In Africa many agree that it is important that the nations of that continent become more nearly self-sufficient in food production so that they are less dependent on the transnational food conglomerates. A number of Third World countries have already experienced the consequences of the American policy of using food as a weapon. Their leaders foresee that the proposed changes in GATT will only make them more dependent on U. S. agriculture and thus less able to manage their own affairs.

Christians have learned to demystify many features of our world. Many are concerned about what the existing economic order is doing to the poor at home and the neocolonialized nations abroad. What is discouraging is to note how little free trade has yet been demystified and how little connection has been made in people's minds between free trade and the economic injustices of which they are painfully conscious. Unless that connection is made, and made soon, a shift of control to centers of economic power will have occurred that will be almost irreversible. There is still time for a national debate that could affect the final decision of Congress -- but just barely.