In the last lesson we started making the case that trade, whether international or local, is a mutually beneficial process, and restricting it doesn't help anyone. But that comforting notion doesn't square with some of the news we've been hearing recently. Tens of thousands of people gathered at meetings of the World Trade Organization in Seattle, Rome and other places, protesting the spread of free trade and "globalization". Among other things, the protesters claimed that unrestricted trade would degrade worker health and safety protection and help to destroy the environment. How are we to unravel all this?
While it is true that restriction of trade hinders overall prosperity, it does ease the competitive pressure on the industry being protected. Each industry, then, can hire lobbyists, and Representatives can trade off benefits to industries in their various home states. That is how protective tariffs can get so entrenched. Each individual tariff greatly benefits a special interest, and only slightly harms the entire community -- therefore, nations tend to add tariff upon tariff, eventually creating a complex glob of trade restrictions, rather like the buildup of gunk in a drain.
These things serve no economic purpose, but politically they can be useful. Let's say that even though it would have made sense to import sugar from the island of Dulcinia, the Diggemup Corp. managed to lobby Congress to enact a protective tariff, raising the price of sugar enough to make Diggemup's product profitable. Then, if we wish to bestow a political favor on the Dulcinian government, we can ease the tariff on its sugar, while continuing to penalize all other sugar exporters in the world. The US does this sort of thing frequently; often the same product will have four or five different tariff rates, depending on where it's coming from.
It being difficult for nations to get rid of their own trade restrictions, sometimes they band together to do so, like a bunch of scaredy-cats agreeing to jump together into the chilly lake. This is how Multilateral Trade Agreements such as GATT (General Agreement on Tariffs and Trade) or NAFTA (North America Free Trade Agreement) come into being. Such agreements are the result of long and detailed processes of negotiation and, hence, are quite detailed (the NAFTA agreement is of 300 pages long). Free trade, however, wouldn't have to be so difficult: tariffs could be abolished by a one-sentence law.
These multilateral trade agreements have sometimes verged beyond the issue of tariffs into things that are called "nontariff barriers to trade" -- and this is one of the things that those protesters were so excited about.
To make sense of this, we'll have to step back for a moment and consider the set of processes that are lumped together under the term "globalization". We should recall that international trade has been an important phenomenon for centuries -- so globalization isn't a new thing. What has happened recently to intensify it is that there has been a tremendous increase in the power of communication and information-processing technology. This has made possible a higher degree of specialization and interdependence in production than ever before. This has made it easier than ever before for multinational corporations to move parts of their manufacturing process to lower-cost places.
Costs might be lower in another country for a number of reasons. The country may be less developed -- poorer in general, with higher unemployment and lower wages. There may be a highly favorable rate of exchange with the local currency, which would serve to stretch investors' dollars. The nation may not have minimum-wage laws, or worker-safety or environmental regulations -- all things that raise production costs in developed countries. Searching for such advantages to lower their production costs, corporations move operations overseas: they "downsize" (laying off workers at home), "globalize" (hire less-expensive workers overseas) and join the "race to the bottom" (the lowest possible production costs and -- they hope -- the highest profits).
Now, if a nation decided to enact a law protecting workers' health and safety, or its primeval forests, such laws would make it more costly for multinational corporations to establish operations there -- and this is what is deemed, in the language of NAFTA and GATT, to be a nontariff barrier to trade. The penalty for such behavior would be tariffs slapped on that nation's exports.
Now, our friends in Dulcinia have little to export but their sugar -- and they have a huge need to export something, because, like many "developing" countries, they have a large external debt, on which they must make payments. Richer nations, who have many things they can sell on the world market, and whose people don't mind paying a few cents more a pound for sugar, can get along pretty well without Dulcinian imports. Unfortunately, they have the Dulcinian government over a barrel. If they enact sensible restrictions on child labor, say, or the use of pesticides that contaminate groundwater, they risk economic ruin -- the loss of their one major good for export!
Nevertheless, people believe that fundamental human rights entail, among other things, children not being enslaved and drinking water not being poisoned -- and, in the wealthier democracies, they enact laws against such practices. If smaller nations are penalized for enacting such regulations themselves, then the kind of trade that results is not free -- it is coerced.
It might be argued, though, that workers willingly come to work in the jobs that globalization brings in to their communities, and that often these jobs pay (slightly) better wages than they could get anywhere else. Advocates of pacts such as NAFTA and GATT argue that when more people have jobs, it helps a backward nation develop more quickly than it otherwise could. And while, certainly, every bit of prosperity helps, we are still left to wonder why the country was so "underdeveloped", and why its wages were so much lower in the first place. While the current wave of globalization cannot be blamed for causing those problems, it is evidently taking advantage of them.
Background Questions