Friday, November 17, 2006

International Trade

First, a brief announcement. My posting may be eratic for the next 10 days or so, and I may disappear entirely until the 27th of November. However, at the end of the time I hope to be able to offer some of my writings in a book form, for those who would be interested.

Now for today's posting.

I want to discuss free trade - such as represented by the NAFTA and LAFTA treaties. I am going to argue in principle in defense of these treaties, as long as they contain provisions to protect workers and the environment - the latter being understood as protecting people from indirect harm.

I am very much in favor of free trade. However, this is one area where a lot of people confuse being pro-business and pro-market.

Here is one difference.

Under the treaty, a business fires their high-priced workers in America, goes to another country, hires their people for pennies, builds a factory, produces goods, and pockets huge profits as a result.

Or, alternatively, the business expands its operation into another country, giving people wallowing in filth, sickness, and poverty the only real chance to improve their lot in life, lowering the overall price of goods and services, allowing the average American consumer to buy more with their money, increasing demand, creating new jobs, and creating new opportunity, both at home and beyond.

Both of these descriptions are possibilities. Typically, the real situation will lie somewhere between these extremes. I would argue that the truth is somewhere between these two options, and are made closer to one end or the other, depending on the options we choose.

Let's start off by saying that businesses are not the models of social benevolence. What many business leaders call 'free trade' is actually a liberty to harm others - sometimes to the point of death - in order to improve the bottom line.

The actions of the tobacco industry and the energy industry in this country are perfect examples. I will not tire of mentioning how Exxon-Mobile and other countries muddied the debate on global warming with intention deception because its executives felt that defending their profits was worth risking the destruction of every coastal city on the planet.

Here is an example of the difference between being pro-business and pro-market. A person who is pro-market says that, if the actions of the energy companies cause (or put at risk) the life, health, or property of another, then the energy company pays. If tobacco companies act in ways that make their product more addictive or more deadly, they pay their victims for the harm done, and punitive damages.

On the other hand, being pro-business means that a company can kill and main others to their heart's content. If their actions are profitable, then they are good.

Many of the programs that corporations put under the banner of 'free trade' are actually anti-market, pro-business policies.

So, what we need to ask with respect to these treaties is whether they are pro-market or pro-business.

Who pays for the environmental harm that the business produces? Is the country one that allows businesses to harm the life and health of others (by poisoning them with pollution) with impunity? Or does it have laws that say that those who do harm to others pay for the harm done?

Many free-market economists say that the sweatshops that people work in, however deplorable, are better than the squalor that provides the only alternative for these people. Saving people from the horrors of the sweatshop is actually condemning these people to far worse. If the sweatshops were not actually an improvement in the lives of the people, they would not work in the sweatshops. The worker's lot in life is made better, the company profits, and everybody wins.

It is sad to note that this is sometimes true. Those who are anti-trade do, in fact, condemn others to live in a state that is far worse than the sweatshop. As such, these anti-trade activists inflict unspeakable suffering on real people.

On the other hand, this is true only if the people have genuine options. If the company comes in, goes to the government, and demands legislation that makes it hard for people to change jobs (by making it a bureaucratic nightmare), or legislation to prevent other businesses from entering the same area and hiring the same workers, we have an instance of companies setting up serfdoms, and profiting from their exploitation of the serf.

Another way to keep an employee trapped in a job and to prevent them from seeking alternatives is by refusing to give the employees enough time to acquire new skills. Employees who are working 16-hour days do not have time to go to school or to practice some other skill that might pay better.

Yet another popular move among businesses is to require that workers suffer the costs of any on-the-job injuries. The argument that businesses like to use in this case is, "The employee knew that there were risks, and took the job anyway. Therefore, we are not responsible for the costs." Yet, this is a bit like saying, "The driver knew that there was a chance of getting hit by a drunk driver when he got on the roads. Therefore, he voluntarily assumed those risks, and the drunk driver is not responsible." Yes, we are aware that there are risks. Yet, we also hold that the person who turns a risk of harm into actual harm is the person who should pay the consequences.

The pro-business side will say that businesses would never do this, perhaps by saying that businesses need trained employees and would consider this counter-productive. Well, if the businesses would never do this, then they should not object to the treaty containing provisions that prohibit them from doing that which they will never do. If they are protesting, then we have reason to assume that this is something they would do.

Do our trade treaties provide employees with protection from companies limiting their options for employment in order to keep wages low? If they do not, then they are pro-business, and create a situation closer to the first option described above. If they do protect the workers’ options, we can say they are pro-market, and closer to the second option.

We are unfortunate in that both major parties in the United States have adopted a destructive policy. The Republicans seem to favor a pro-business attitude - one that creates rules that will allow companies to harm and even kill others when it is profitable to do so. The Democrats tend to favor an anti-trade policy, that leaves people wallowing and even dying in poverty with no way out.

The correct position would be to allow trade, so long as businesses are not permitted to do harm to others with impunity in the nations that we trade with.


Anonymous said...

Two points here: First, I think you overlooked the reason why businesses go to third world countries to begin with: cheap labor. The more you restrict business's abilities to exploit third world workers, the less willing they'll be to move their operations there to begin with. Those nice worker-friendly regulations probably won't do much good if businesses don't even build factories in their countries. So making trade agreements "nicer" may ultimately defeat their purpose. However, as I am not an expert on international trade, I can't tell you just how much you can regulate without causing firms to just stay in their home countries. If I were to support a free trade agreement, I would certainly support regulation up to that point, but the location of that point is in the end an empirical issue. Perhaps even the limited regulation you suggest would be counter-productive.

Second, I think you overlooked the long run (lack of) fairness of free trade. Of course, if you look at things statically (i.e. ignoring economic growth), then free trade benefits all parties (assuming that the things traded are actually good). Sweatshops are better than no sweatshops, because they offer higher wages than the workers could get otherwise. However, in the long run, that static conclusion doesn't really amount to much, if you care about fairness. Free trade could make poor countries better off right now, and yet it could leave them behind in the long run if it doesn't promote their economic growth. And I’m very skeptical that free trade actually does that. After all, most of the wealthiest countries today did not actually get rich by practicing the free trade that they preach.

Here’s an analogy that might be helpful: a traveler, stranded in the desert, falls into some quicksand. He’s stuck and he knows he’ll probably die soon without help. A merchant comes along, and sees the traveler in trouble. He offers to save the traveler, but in exchange the traveler will have to be his servant for life for the wage of $1 a day (after all this maximizes the merchant’s utility, and the traveler should accept since any life – positive utility – is better than no life – zero utility). This “free exchange” takes place, and both parties are indeed better off than they were before. The merchant gets some free labor, and the traveler lives. In terms of desire utilitarianism, more desires are being fulfilled in the short run than if the trade did not take place. But clearly, this is unfair in the long run: nearly all the benefits are going to the merchant, and the well being of the traveler stagnates. Perhaps the government could have forced the merchant to give the traveler a better deal, but maybe then the merchant, seeing less opportunity for profit in that case, wouldn’t have even bothered saving the traveler. Maybe instead, the government should just tax the merchant and use the funds the rescue the traveler itself.

Of course, it would be a bit of an exaggeration to say that free trade actually works like this, but perhaps not much of an exaggeration in some cases. In an environment where firms compete over workers, working conditions and wages will of course rise. But in an environment where there is a “surplus army of unemployed/underemployed” (such as in Third World countries) firms don’t even need to compete with each other to get labor – they can exploit to their pocketbooks’ content.

Additionally, Dr. Anwar Shaikh (among others) has argued that there are some serious, fundamental flaws in free trade theory:

Also, I want to say that I’m not against free trade per se. On an individual level, I want to say that if you want to freely exchange things with other people for your mutual benefit, great. But free trade has negative social consequences that I can’t ignore.

Anonymous said...

What the government should do in your hypothetical situation is place a limit on the length of time for which such contracts will be binding (i.e. the time for which the government will enforce them). If the traveler has the inalienable right to renegotiate after one year, or even five years, then most of the problems are avoided. The merchant can still get a return on his investment, but once circumstances have changed and the traveler is no longer in quicksand, the merchant and traveler can adjust their relationship to one that suits their new circumstances. Long-term contracts limit the ability of economic actors to respond to changing conditions.

I mainly agree with this post, except for your use of the phrase "destruction of every coastal city on the planet." Whether intentionally or otherwise, I think this phrase is misleading: it creates the false impression that sea level rise due to global warming will be sudden and catastrophic, rather than a gradual process taking place over decades. If sea levels rise steadily at one inch per year, it's possible that some waterfront buildings and other facilities will have to be abandoned, or at least redesigned, but it is unlikely that any greater loss of human life would result, for the simple reason that it is much slower than humans are capable of moving to get out of the way.

Now, of course, gradually moving the city to higher ground and abandoning some buildings is a process that has some cost, and there's certainly an argument that that cost should be assessed and applied to those whose activities contributed to global warming (fossil fuel burning and deforestation are the big ones, I think), but it's primarily an economic cost and not a danger that can kill anyone.

beepbeepitsme said...

I think all that anyone wants from big business is accountability and responsibility.

These are traditionaly sacrificed in honour of the holy dollar and the bottom line.

Oh, and they also treat human beings as infinite resources, which can be used according to their need.

I have always found this idea contrary to the "happy face of free market capitalism" which seems to willingly snipe about the dehumanization which can occur in other economic systems such as communism, whilst all the time being blinkered to the same processes occurring within its system.