Tuesday, May 31, 2005

What Is Free Trade?

Looks like the Trade Wars are about to heat up again. The Central American Free Trade Agreement, a NAFTA-esque treaty involving six developing Latin American nations and the U.S., is headed for a hell of a battle in Congress. Prepare to have esoteric economic models hurled at your head at light speed.

But there's a more significant question to consider when we talk about CAFTA. The question is this: are we really dealing with a "free trade" agreement? Or are we talking about a sham meant to benefit corporate interests under the guise of free trade?

Take NAFTA for example. After NAFTA was passed, Mexico had to do away with its grain subsidies. However, as we all know, the US retains its export subsidies. The result was that cheap grain was dumped on Mexican markets, ruining the Mexican farmer. A real free trade agreement would have eliminated both our agriculture subsidies and theirs and allowed the market to work its supposed magic. But US agribusiness dictated the terms of the agreement, and so we got an agreement that ravaged Mexican subsistence farmers, driving thousands of peasants off their lands and into the cities. The resultant migration resulted in an increase in food demand that raised prices (since less people were growing their own) and a decrease in labor costs.

Fast-forward to now. With CAFTA, we are currently refusing to eliminate our barriers to sugar imports. CAFTA is supposed to open North American markets to Central American exporters - but not if they're selling sugar, apparently. As a result, "free trade" in the strictest sense of the word will be a casualty to U.S. agribusiness interests, just as it was in NAFTA twelve years ago.

It isn't just CAFTA, and it isn't just the U.S. government, that reveals "free trade" for the political power play that it is. Governments use trade agreements to jockey for power on the world stage at the expense of pretty much everyone. Take China. China has used its government to require laborers to work hours no Western worker could possibly work. China enables its manufacturers to sell at cost - something no profit-based business could do. China represses labor agitation for better hours and more pay - unions must be approved by the Chinese government. (Not that our government doesn't have anti-labor policies, but that's another story.)

Possibly worse than all that, though, is China's egregious currency manipulation. In theory, if a nation runs a trade surplus, it would drive the value of that nation's currency up, thus encouraging more imports and less exports. But China has pegged the value of its currency to that of the U.S. dollar - the currency of a country with a massive trade deficit. The result is that China has inoculated itself against the surplus-lessening effects of currency fluctuation. Meanwhile, since much of our trade deficit is with China, it prevents us from reaping the export benefits we're supposed to reap from a devaluing currency.

And now China is threatening to lodge a grievance against us with the WTO for daring to reinstate some textile tariffs to offset the currency manipulation. Ridiculous.

Your eyes are glazed over now, so I'm going to wrap it up and open the floor for comments. My point is that "free trade" is often nothing but an illusion when governments are instating it. (The free market is a similar illusion.) We don't have any free trade now, and probably won't in the future. As a result, I have no idea what the real effects of free trade would be.


Anonymous said...

"Free Trade" is unfortunately one of the most misunderstood and misinterperted terms ever. Which is unfortunate, because it is such a simple concept: Person A asks Person B for X, in exchange for Y, and then the transaction takes place. It's really nothing more complicated than that.

- miguel

Jacob Grier said...


I agree with you completely that free trade is often an illusion when implemented by governments (but who else would implement it? Only governments can get themselves out of the way.). The US and EU are especially hypocritical, with US sugar tariffs being among the worst examples.

I'm also a bit skeptical of regional free trade agreements, because while they may be steps in the right direction they may also undermine the WTO's mission of attaining true free trade among all its members. So this is an issue that we actually have a lot of common ground on.

I'm a bit unclear on your logic in the third paragraph, however. First you say that Mexican farmers were ruined by cheap agricultural imports. Then you say that people were hurt by food prices being too high. Which is it?

My cautionary note is that focusing on only certain affected parties is not the way to judge the impact of new trade agreements. Removing trade barriers will always displace some workers, but in a well-functioning economy they will shift into more productive work. Perhaps it lowers the cost of food, frees up more labor for manufacturing and therefore lowers the costs of production, and results in more goods being consumed for less.

The initial transition may be painful for some, but that doesn't mean it's a bad move in the long-term for the country as a whole. It's worth asking how best to ameliorate the transition costs for those who are made worse off, but not to refuse to open up trade because of them.

One last point is that it could often be in a country's interest to open up trade unilaterally, regardless of what its trading partners do. For example, the US would benefit from dropping its tariffs on textiles whether or not anyone else does the same for our goods. The media tends to present "trade concessions" as losses to the country making them, but that's terribly inaccurate. They're only losses to the protected industries and the politicians who are supported by them; for the rest of the country they're a net gain. We should be begging our politicians to make more concessions!