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Tricks of Free Trade

Such a deal! We give up our jobs and environmental safeguards for the greater glory of transnational corporations.

by Mark Weisbrot

Future historians will certainly marvel at how trade, originally a means to obtain what could not be produced locally, became an end in itself. In our age it has become a measure of economic and social progress more important even than the well-being of the people who produce or consume the traded goods. President George W. Bush recently declared free trade “a moral imperative.” His predecessor, Bill Clinton, was prone to making wild economic claims for unfettered trade—for example, that it had added to employment and growth in the 1990s, contributing to the longest business-cycle expansion in American history. This is an economic and accounting impossibility, since our trade deficit, now running at a record $400 billion annually, actually ballooned during Clinton’s presidency. Nevertheless, such assertions are rarely challenged in the press.

Technically, “free trade” refers to the absence of tariffs or other barriers that hinder the flow of goods and services across international boundaries. But it has recently morphed into a marketing tool to sell a whole range of new property rights for investors and corporations through an alphabet soup of sweeping international pacts: NAFTA, GATT, MAI, FTAA. In the last few years the environmental movement has increasingly opposed these agreements. Together with organized labor, environmental groups were a major force in the collapse of the World Trade Organization’s Millennium Round in Seattle at the end of 1999. More recently, they helped organize mass protests at the April 2001 “Summit of the Americas” in Quebec City.

Environmentalists were drawn into this debate because they were among the first to recognize that these trade deals were not primarily about “free trade” at all. For example, the most important provisions in the North American Free Trade Agreement (NAFTA) had nothing to do with the removal of tariffs, which were already quite low on goods imported from Mexico to the United States—about 2.5 percent on average. While Mexican tariffs on U.S. goods were higher, the Mexican economy was only one-twenty-fifth the size of ours. President Clinton did not spend months of his time, billions of taxpayer dollars (to win over NAFTA skeptics in Congress), and precious political capital fighting the rank and file of his own party just to open the relatively small Mexican consumer market to Big Macs and Krispy Kreme doughnuts.

The payoff for all this pork and political cliffhanging was not “free trade” but the exalted goal of a more secure investment climate for U.S. corporations. Under NAFTA, Mexico is bound by an international agreement that supersedes its own laws. Equally important, U.S. corporations got a safe haven of cheap labor where environmental regulations are rarely enforced.

In practice, however, NAFTA’s biggest environmental threat turned out to be one that received little attention at the time the agreement was debated: Chapter 11, which allows foreign investors to sue governments directly for regulations that cause a loss of profits. This turned out to be a continental coup d’état for corporations, elevating them to the level of sovereign nations—something they had never achieved either under the General Agreement on Tariffs and Trade (GATT) or through the World Trade Organization (WTO). In the past, U.S. law has generally limited the definition of “expropriation” (for which the Constitution requires restitution) to government actions such as the taking of private land to build a highway. In the 1990s, the property-rights movement fought a (mostly unsuccessful) battle to broaden this definition to include what they called “regulatory takings”—for example, compensation for the reduced value of beachfront property due to environmental restrictions on its development.

But through NAFTA, in a solidaristic act of corporate internationalism, businesses and investors have granted each other what they couldn’t win for themselves in their home countries. Chapter 11 allows companies that experience even a partial loss of profits because of regulatory action to seek reimbursement from the offending government. Consider the complaint brought under Chapter 11 against the state of California by Canada’s Methanex Corporation over its gasoline additive, MTBE. Because MTBE is a known animal carcinogen, a possible human carcinogen, highly soluble in water, and very costly and difficult to clean up, it is seen as a major threat to groundwater. In California, more than 10,000 groundwater sites have already been contaminated by the additive. When California sought to ban MTBE, Methanex filed a Chapter 11 complaint. If the state wants to outlaw the substance, it may have to pay the company nearly a billion dollars.

A similar Chapter 11 case involving the Ethyl Corporation, the company that brought us the lead in leaded gasoline, turned the national tables. In 1997, the Canadian government banned the import of MMT, a manganese-based gasoline additive made by Ethyl that is a suspected neurotoxin, especially when its airborne particles are inhaled. “The history of leaded gasoline holds a very important lesson,” says Elizabeth May, executive director of the Sierra Club of Canada. “If we want to put poisons in the blood and brains of our children, an excellent delivery mechanism is to add them to gasoline.” Faced with a $250 million lawsuit brought by Ethyl, however, the Canadian government repealed its legislation banning MMT and paid the company $13 million in damages.

In 1995, the U.S. government led an attempt to extend this liberalized standard for takings—along with those three fateful words, “tantamount to expropriation”—to the 29 countries of the Organisation for Economic Co-operation and Development (OECD). The vehicle, a treaty known as the Multilateral Agreement on Investment (MAI), also sought to confer a host of other new rights and privileges on multinational corporations. But in doing so it sparked an enormous backlash against globalization, rallying more than 500 nongovernmental organizations against the proposed agreement. The treaty was almost complete before the American public became aware of its existence in 1996; within three years it was dead, largely because of this international campaign—one of the first, by the way, to be organized over the Internet. (See “All Hail the Multinationals!” July/August 1998.)

The body was dead, perhaps, but the soul migrated to the Free Trade Area of the Americas (FTAA). Proponents are portraying the new treaty as a helping hand to low-income countries because it creates a single open market that spans the hemisphere. But the helping hand is actually reaching out to corporations, offering them—as with the MAI—veto power over nations’ environmental and public-health regulations.

The biggest threat posed by these commercial agreements and institutions is their usurpation of a nation’s authority to rule in the interest of its own citizens. This is part of a long-term trend that has increasingly removed economic decision-making from parliamentary and other national institutions—which are at least potentially accountable to the wishes of an electorate—to unaccountable supranational bodies.

The most powerful of these by far are the International Monetary Fund and the World Bank. The IMF’s clout comes from its position as the head of a cartel of creditors. (What OPEC is to oil the IMF is to credit.) A country that does not win the IMF’s approval for its economic policy will be ineligible for most credit from the World Bank, other multilateral lenders, governments, and very often the private sector. While OPEC uses its control over oil resources to determine (as much as it can) the price of oil, the IMF uses its vast power to dictate economic priorities to dozens of developing countries.

The consequences are often disastrous for both the economy and the environment. For example, the IMF’s and World Bank’s advocacy of export-led growth, often based on nonrenewable resources, has caused enormous environmental destruction in countries that might otherwise have pursued more balanced growth strategies. Instead of developing local industries and talents, these countries are building gigantic dams, razing rainforests, and digging mines.

But it was NAFTA and the WTO that generated massive protests in the United States, where these institutions get most of their direction and are therefore most vulnerable. The huge popular rejection of the WTO came, in particular, because NAFTA failed so miserably to live up to the promises of its advocates. President Clinton and other NAFTA boosters claimed that the agreement would create new jobs in the United States, when instead it spurred hundreds of factories to close up and move south of the border. They also promised environmental improvement in Mexico, where in fact conditions have worsened. (See “Free-Trade Triage,”)

Opposition was further galvanized by the new trade regimes’ imperious insistence on their supranational authority. Should Europeans have the right to exclude hormone-injected beef from their markets? Most people would say yes, but the WTO ruled otherwise, even though the ban steered clear of protectionism by applying equally to both foreign and domestic beef. The scientific evidence did not justify the ban, the WTO ruled, thus substituting its own secretive deliberations for the judgment of the European Union’s scientists and the desires of the European public.

More recently, another life-and-death issue has emerged to discredit the notion that “free trade” guides these institutions. A major objective of the WTO, NAFTA, and the proposed FTAA is to extend the enforcement of patents, copyrights, and other “intellectual property rights” beyond the borders of the wealthy countries where they are owned. A crucial test concerns the 36 million people who now have HIV/AIDS, most of them in the developing world. The “triple-therapy” drugs now widely used in the United States can keep people with HIV/AIDS alive and relatively healthy for many years, but at a cost of $12,000 per person annually, a prohibitive price for those in the developing world. Recently, the Indian generic-drug manufacturer Cipla offered to provide these drugs for as little as $350 per year. This would make treatment possible for millions of people, and millions more could be saved with relatively modest amounts of foreign aid from the high-income countries.

The United States, backing its major pharmaceutical companies, has fought to prevent such widespread distribution of generic versions of these and other life-saving medicines. For example, it went to the WTO to challenge Brazil’s laws dealing with the manufacture and import of generic AIDS drugs—laws that form an important part of Brazil’s remarkably successful AIDS-treatment program, which has already saved 100,000 lives and has cut the number of AIDS-related deaths there in half. (Stung by international criticism, the United States announced in June that it was dropping its challenge to Brazil.)

Extending patent rights to life-saving pharmaceuticals is the antithesis of free trade. It is, in fact, the most costly and deadly form of protectionism in the world today. By any standard economic analysis, a patent monopoly creates the same kind of economic distortion as a tariff. The major difference is that while tariffs rarely increase the price of goods by more than 25 percent, patent-protected prices can be 10 or 20 times the competitive price. The pharmaceutical companies maintain that their enormous profits are needed to fund necessary research and development. This is partly true, under present arrangements. But it merely strengthens the case for shifting R&D for essential medicines to the public and nonprofit sectors, which already account for about half of all U.S. biomedical research. The waste and inefficiency of using patent monopolies to fund this work is simply no longer affordable—especially in the face of AIDS, a pandemic more devastating than any since the bubonic plague killed a quarter of Europe’s population in the 14th century.

The major multilateral economic institutions such as the World Bank, IMF, and WTO are not only unaccountable to any electorate, they have fundamental goals at odds with environmental protection. This is true in the extreme for the WTO, which was formed in large part to make sure that environmental and other policy goals of national governments did not “unnecessarily” impede international trade and investment flows. Its main actors—the top government officials and corporate CEOs of the G7 (the United States, Japan, Britain, France, Germany, Canada, and Italy) would rather ditch the whole project than watch it evolve into something that would allow trade sanctions to be used to advance such aims as environmental protection or labor rights.

The same is true for commercial agreements such as the FTAA, which is also very much corporate driven. (CEOs of corporations such as IBM and Coca-Cola, for example, are allowed to comment on drafts of the agreement before they are made available to the general public.) For these folks, such deals are gravy: They can do just fine with the status quo, and it would be irrational for them to accept anything that restricted the freedoms that they presently enjoy.

The IMF and the World Bank are another story: They have multiple goals and are many times more powerful than the WTO. Because they have the authority to impose a host of policies on borrowing countries, often under the threat of economic strangulation, these institutions cause more environmental destruction in a typical month than the WTO has brought about since its inception.

A major obstacle to reducing the damage caused by these bodies is their image as bulwarks against global economic chaos. Proponents depict the WTO as the protector of poor countries, because it allows trade to take place under a “rule-based system.” Similarly, the IMF is seen as a lender of last resort, the global analog to an individual nation’s central bank—rescuing countries in crisis just as the U.S. Federal Reserve System would bail out a private bank to prevent a financial breakdown from spreading.

This vision, however, presumes that the world really does have a “global economy” rather than a collection of national economies. Eighty percent of what is produced in the world (88 percent in the United States) is not traded internationally at all, and while it is true that most nations have evolved regulatory institutions like our Federal Reserve to resolve some of the problems inherent in a system of unregulated markets, the IMF does not play a similar role at the international level. Nor can we expect it to do so; in fact, it is much more of a world anti-government than a world government, promoting privatization of the public sector and deregulation of trade and investment flows (with the exception, of course, of intellectual-property rights, where “world government” seems to be the goal).

Most environmental policy—like the economic policy to which it is generally tied—will continue to be made at the national level. In addition to stopping the FTAA and WTO, then, we must reduce the power of the IMF and World Bank to impose environmentally unsound policies (such as export-led growth) and projects (like the disastrous World Bank–financed oil pipeline through the rainforest of Cameroon). This strategy of “harm reduction” means breaking up the creditors’ cartel that these institutions control and weakening their grip on the policies of borrowing countries—which would include the IMF and the World Bank canceling the debts of poor nations. We cannot realistically expect to see environmentally sustainable economic strategies adopted in the developing world so long as these institutions hold sway.

In taking on NAFTA and the WTO, the environmental movement found itself in a powerful alliance with organized labor. Challenging the World Bank and IMF would yield many more allies throughout the world, like the hundreds of millions of small farmers in poor countries, whose markets the WTO seeks to flood with subsidized food from the highly mechanized farms of the United States and Europe. The IMF and World Bank squeeze more debt service from the poorest nations than these countries spend on health care or education. And the whole experiment in globalization has been an economic failure, even ignoring the environmental costs. In Latin America, for example, income per person has grown only 7 percent over the last 20 years, as these economies have opened up and followed the IMF’s “structural adjustment” programs. In the previous two decades, per capita income increased by 75 percent, more than ten times as much.

In the United States, the marketing of “free trade” may have won over press and pundits, but it has failed to impress the general population, which has also suffered under globalization. The real median wage in the United States today is the same as it was 27 years ago. This means that the majority of the American labor force has been excluded from sharing in the gains from economic growth over the last quarter-century, an unprecedented event in our history. When asked to describe their views on trade in a Business Week/Harris poll last year, only 10 percent chose “free trader.” Fifty percent chose “fair trader” (that is, a supporter of trade that pays a living wage to producers), and 37 percent chose “protectionist”—a word that is never used positively in the mainstream media. Although there were mixed feelings about globalization in general, most people chose “protecting the environment” and “preventing the loss of U.S. jobs” as major priorities for trade agreements—putting them very much at odds with our policymakers and trade officials.

This is not to say that there is no need for international institutions. On the contrary, agreements of the sort embodied in the Kyoto Protocol on global warming are essential. But the institutions and agreements promising “free trade” have a very different agenda. There is nothing “free” about creating new property rights for corporations while eroding national environmental protections.

Mark Weisbrot is codirector of the Center for Economic and Policy Research in Washington, D.C.

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