Foreign Policy In Focus
Moratorium on Free Trade Agreements
By Laura Carlsen
6 April 2007
At literally minutes to midnight on April 1, the United States signed a free trade agreement (FTA) with South Korean negotiators and rushed it to Congress. Congress now has 90 days to review the Korea, Peru, Colombia, and Panama agreements, before fast track authority expires on June 30.
Any way you look at it, the clock is running out on free trade agreements.
The four agreements go to a new Congress controlled by the Democrats, many of whom ran on anti-free trade platforms. The Democrats have called for new standards on labor and environment, and increased job retraining programs for U.S. workers. Rep. Charles Rangel (D-NY) of the Ways and Means Committee heralded the proposal, stating “we are on the brink of restoring bipartisanship to American trade policy.” The administration hopes to build bipartisan support for its own aggressive trade agenda but is offering few real concessions so far. Considerable distance exists between the two proposals.
The last major deal, the Central American Free Trade Agreement, squeaked through by only two votes in July 2005. In recent years, the on-the-ground costs of free trade have been increasingly evident to workers in both the United States and in FTA countries abroad. Practical experience with plant closures, eroding wages and benefits, anti-union practices, and unemployment have led to a strong rejection of free trade agreements among the U.S. public.
A NBCNews/Wall Street Journal nationwide poll in March 2007 showed that 46% of those surveyed believed FTAs had hurt the country while only 28% believed they had helped. Other polls show even higher disapproval. The November elections gave a mandate to the new Congress to fix trade policy and free itself from the thrall of the multinational corporations that are the consistent winners under these policies.
But so far, the response of the Bush administration and organizations like the World Bank to the failure and consequent unpopularity of free trade agreements has been to change the language and the justifications while leaving untouched the basic tenets. The Peru and Colombia deals are now called “trade promotion agreements” rather than free trade agreements, and “free trade” has been downplayed or routinely coupled with “fair trade” in Bushian discourse.
None of this represents any real change in course. The agreements continue to be drawn up according to the North American Free Trade Agreement (NAFTA) template, and the administration and organized business interests vehemently resist any substantial change in the model.
The Need for an FTA Freeze
As the Bush administration hustled to present the FTAs before the congressional deadline, the Democrats were already working on the counterthrust. “A New Trade Policy for America” sets out a number of palliative measures but falls short of defining a coherent new trade policy.
It is not surprising that Democrats have been unable to come up with an alternative trade policy. As the most experienced critics of the current model freely admit, no one is prepared to offer such an overarching plan. However, elements have been identified that can make trade more fair and sustainable. Some of them have been incorporated into the Democrats’ proposal-sort of.
On labor, the outline presented to the public calls to “enforce basic international labor standards.” It does not specifically refer to the International Labor Organization’s eight core human rights conventions, which cover child labor, forced labor, discrimination, and freedom of association. Of course, there’s a problem in requiring trade partners to adhere to ILO standards. The United States itself has one of the worst ratification records in the world. Of the eight, it has only ratified two.
The Democrats’ proposal also refers to using the “same dispute settlement” mechanisms. These mechanisms are practically unenforceable. Under the labor side agreement of NAFTA, the number of labor violations sanctioned in thirteen years comes to a grand total of zero. Needless, to say, this is not because there have been no trade-related labor rights violations in the United States, Canada, or Mexico since 1994.
The proposal also calls for free trade agreements that would “re-establish a fair balance between promoting access to medicines and protecting pharmaceutical innovation” and require adherence to multilateral environmental agreements, among other changes in the current model. All these intentions are laudable but fail to deal with the root cause of the problem-the FTA model itself.
Free trade agreements forged in the NAFTA mold have failed to show their usefulness in raising general standards of living at home and within partner countries. At the very least, the U.S. public and policymakers deserve comprehensive studies on the results of these agreements before extending them.
But such studies simply do not exist. Reports issued by the Office of the U.S. Trade Representative, whose job it is to promote the model, evaluate solely in terms of “significant barriers to U.S. trade and investment and the broad array of U.S. actions to reduce and eliminate those barriers.” This approach reflects the view of the administration that freer trade has only benefits and no costs. This view has been belied by actual experience in every single country where these agreements have been applied, including the United States. Studies by Congress and the U.S. Government Accountability Office have been partial, outdated or in some cases, simply ignored.
Of the studies that do exist, most of them are negative. Even the World Bank study of ten years of NAFTA begrudgingly admitted that results in Mexico were disappointing. The report cites “big events and little time” as the cause for NAFTA’s poor performance: events disrupted predictions, and there was not enough time to evaluate. More recent evaluations, however, show an even greater negative impact on Mexico, and the huge rise in immigrants to the United States attests to the fact.
The most evident impact of free trade agreements is increasing inequality. Although a direct causal relationship is difficult to establish empirically due to the number of intervening factors, even in nations where growth has occurred, the gap between the rich and poor has grown. Income inequality in the United States climbed again in 2005, to where the top 10% received nearly 50% of income. In liberalized developing countries the gap is often much larger.
Positive evaluations of FTAs invariably cite increases in trade as proof of the success of the trade policy. While this is a good measure of success for trading companies, it is not a measure of how the policy has functioned within overall economic policy to improve the standard of living of the general population.
By declaring a moratorium on FTAs and not renewing presidential fast track authority, Congress can heed the message of the majority of the people and take a deep look at the way these agreements are restructuring our economy, our communities, and our foreign policy. Much of the repudiation that President Bush faced on his last trip to Latin America stems directly from U.S. trade policy. A long-term view toward sustainable trade policy must take into account its effect in U.S. society and in other parts of the world.
Four Reasons to Block FTAs
The four agreements presently before Congress provide ample reason to freeze FTAs. Each one raises major questions. In Peru, the greatest risk of the free trade agreement centers on its development impact. A nation with high poverty and inequality, Peru still faces major challenges in consolidating its economy and democratic institutions. The projected negative impact on employment-generating small and medium industries and the loss of development policy tools have sparked grave concern about the political and economic effects of the agreement. Peru’s indigenous peoples warn that the treaty will lead to violation of indigenous rights and pillaging of natural resources.
In Panama, labor and farm groups have also protested the FTA. For months the agreement was held up by sovereignty issues surrounding the U.S. demand to adopt U.S. meat inspection standards, which Panama later conceded after the minister of agriculture resigned in anger at the U.S. position. Panamanians also object to the projected influx of U.S. construction firms as the $5.2 billion dollar canal expansion begins, calling it “giving back the canal to the Americans.” Panama’s successful management of the Canal Zone is among the greatest sources of national pride.
Even in Colombia, a staunch U.S. ally in Latin America, opposition to the FTA has run high. Over 2,000 labor activists have been assassinated in the country since 1990, and the agreement adds no effective protections while at the same time encouraging further gouging into workers’ rights. A Colombian health negotiator also resigned in protest, this time due to U.S. insistence on restrictive pharmaceutical patents that would affect access to medicines.
Negotiations with South Korea took place in a different context. The agreement is the largest FTA since NAFTA and has significant strategic importance for proponents of the NAFTA-style FTAs. According to plans, the U.S.-South Korea agreement would provide a beachhead for extending the model in Asia and containing the spread of Chinese influence.
Although the Korean FTA follows the basic model, some interesting concessions were made. Most remarkable is the complete exclusion of rice-the basic staple, major crop, and cultural nerve center of Korean society. This was absolutely necessary in terms of the signing and possible ratification of the agreement in South Korea. Previously U.S. negotiators have forced partners to include sensitive crops, albeit with longer transition periods. Mexican farmers’ demand to remove corn - an equally sensitive product in that country - has been refused outright.
Despite concessions, Korean farmers and workers who have been at the forefront of protests against WTO free trade rules and the FTA will fiercely oppose ratification, citing projected displacement of small farmers and loss of labor rights.
The battle over the latest round of free trade agreements before Congress will be couched differently than the last ones. The administration knows it cannot credibly use the argument it gave during CAFTA ratification - that the United States owes it to developing countries to provide the market access and investment conditions embodied in FTAs. Few nations have welcomed U.S. FTAs with open arms. Countries that have signed agreements with the United States face strong opposition movements, and their governments have to pay a political price for agreements that are seen as prejudicial to the poor.
The foreign policy implications of imposing divisive FTAs around the world have scarcely been taken into account. But U.S. trade policy has fed anti-American sentiment and polarized allied nations. On the day of the signing of the South Korean agreement, a protester lit himself on fire.
CAFTA is already widening fissures in Central American societies. In El Salvador, the Supreme Court has accepted a challenge to the free trade agreement, based on unfair competition and violation of the constitutional right of the legislature to determine tariffs. Costa Rica still has not ratified. There, massive public opposition centers on protecting the structure of government services and regulation that gave that country a giant leg-up over its Central American neighbors and led to a more uniformly high standard of living.
The False Dichotomy of Free Trade vs. No Trade
Proponents argue that rejection of FTAs is tantamount to a return to protectionism and isolationism. But U.S. international trade would not come grinding to a halt if Congress stopped passing unfair free trade agreements. In many cases, tariffs are relatively low before the FTAs and disputes hinge more on non-tariff barriers that are not necessarily resolved in the context of the agreement. Indeed, many of the most controversial provisions of the FTAs, including the imposition of supra-national investment guarantees and intellectual property exclusivity, have little to do with trade.
Moreover, existing trade agreements, including the General System of Preferences (GSP), the Andean Pact Trade and Drug Enforcement Agreement (APTDEA), and the Caribbean Basin Initiative, carry less baggage than the FTAs and have already built strong trading relations between nations. Ninety-five percent of Panamanian products are exported duty-free to the United States, and South Korea and the United States reached over $70 billion a year in bilateral trade last year. In Peru, the government promoted the FTA as a way of ensuring that the privileges under APTDEA would be made permanent. However, there is broad support for continuing Andean preferences in the United States, and in any case only 10% of Peru’s exports are sold under APTDEA — less than a third of its exports to United States. Thirty percent of Peruvian exports to the United States are raw materials that do not face tariff barriers under the GSP or “most favored nation “clause.
The United States does not have bilateral trade agreements with most of its major trading partners.
Although the Democrats’ proposal falls short of calling for a moratorium on free trade agreements, it recognizes that other types of trade agreements are more closely linked to U.S. diplomacy and security goals. The proposal calls for “immediate extension of the Andean program; and update and upgrade other trade-expanding programs and initiatives with developing countries including for Haiti and the African Growth and Opportunity Act.”
In developing countries, the argument that a U.S. FTA is indispensable to insertion in the international market is equally false. First, economic integration will continue to occur - the question is how to define the terms. Accepting WTO-plus measures in a FTA merely reduces the policy space of a given government to define the terms of economic integration. Second, FTAs are no guarantee of permanent market access. They permit U.S. protectionist measures in strategic and powerful sectors, and outlaw the same type of measures in partner countries. Moreover, non-trade barriers are often a bigger problem than tariff barriers.
Interestingly, in the March poll cited above. the same respondents who were overwhelmingly against free trade agreements also rejected protectionism and isolationism. When given a choice between two paths — restricting foreign imports and the number of legal immigrants, or expanding opportunities in the global marketplace by reducing trade barriers and attracting skilled immigrants - the majority of the same anti-FTA sample responded favorably to the latter.
New Principles for a Responsible Trade Policy
It is not easy to craft fair trade policies that can take the nation into the 21st century on an equitable and competitive basis. However, consensus is growing around some basic principles.
One is to develop enforceable labor rights and environmental standards. The way to do this is not to create more supra-national and quasi-legal courts as part of individual trade agreements. Rather, nations should adhere to clear and binding multilateral standards that define basic rights and corporate responsibilities. FTAs do the opposite of this, by locking in privileges and specifically prohibiting responsibilities defined in performance requirements.
Mechanisms should be developed that place the onus for enforcement on the entity directly responsible-the employer. Agreements like the NAFTA side agreement punish the host government for lack of enforcement while turning a blind eye to U.S. companies that are in violation of national laws. No one would deny the responsibility of developing country governments to enforce their laws within their territory, but they often find themselves trapped in the contradictions of U.S. trade policy.
For one thing, they have been pushed to adopt an economic model based on export production and forced to compete for foreign capital. A cheap and docile labor force is a prime area of competition, thus creating a disincentive to raise labor standards. For another, they have had to accept austerity programs that reduce government funds and consequently financing for enforcement activities. Finally, in many countries-Mexico being a prime example-transnational corporations and the U.S. government have pushed to “flexibilize” labor regulations with measures such as open shops, lower severance pay and benefits, temporary work, and low wages, further contributing to the downward spiral in workers’ rights globally.
Another is that trade rules should be oriented toward equitable and sustainable trade relations. This means avoiding double standards that erode U.S. credibility in the trade sphere and working on predictable and transparent trade rules. It also means recognizing asymmetries and allowing for compensating mechanisms so that developing countries can develop. Trade policy can no longer be divorced from the long-term interest of a stable and prosperous international community.
Finally, non-renewal of fast track authority is a first step to assuring a fuller role for Congress in trade negotiation, as demanded in the Democrats’ proposal. It also calls a halt to moving blindly forward on a course that is proving disastrous and has still unknown and unstudied effects on our children’s lives.
The U.S. Congress, executive branch, and civil society must now work to map a careful and long-term trade policy as part of a cohesive economic and foreign policy. This is not a radical proposal. It’s a prudent one. Economist Thomas Palley writes, “In macroeconomics there is a famous theorem that states, ‘if you don’t know, go slow.’ This insight has relevance to trade liberalization, where there is much uncertainty and dispute about impacts. Globalization poses the additional problem of lock-in; there is a danger of implanting policies that are hard to reverse.”
It’s time to let the clock run out on the failed free trade model. The hour has come for Congress and the U.S. public to assume responsibility for recrafting a trade policy that works in the interests of the majority and of fair and peaceful international relations.
FPIF columnist Laura Carlsen is director of the IRC Americas Program. The Americas Program is online at http://americas.irc-online.org/.