Why Free Trade Agreements Don’t Work, But Could

by on January 7, 2014 · 6 comments

in Business, Government, Labor

naftaOutsized influence by corporate interests continue to prevent free trade agreements from delivering on their promises of economic prosperity.

By Andy Cohen

There has been a lot of consternation and handwringing lately about free trade agreements and their benefits/detriments to our overall economy.  My San Diego Free Press colleague Anna Daniels recently penned a piece largely lamenting the 20th anniversary of the signing of the NAFTA treaty:  “Twenty Years of NAFTA:  Capital Freely Crosses Borders While People Can’t”.

Anna is entirely correct:  NAFTA did not deliver on the promises that were made upon its signing.  And it laid the foundation for an exodus of capital and good paying jobs to other low wage locales, in Mexico and around the world.  But NAFTA’s failures—and the inherent problems with the Trans Pacific Partnership (TPP) that is currently being negotiated—are not due to the fact that free trade is inherently bad or unsustainable.  Quite to the contrary:  The concept of free trade can be potentially extremely beneficial to all parties involved, if the treaty is done right.

To understand why a free trade agreement can be successful, and might be desirable, it is necessary to understand the premise:  The removal of barriers to trade and capital makes investment in all nations involved more attractive.  It’s a mutually beneficial arrangement that can ensure growth in the participating countries.  But in order for a free trade agreement to be successful, it requires a fairly level playing field.

Think of it this way:  Staunch conservatives are constantly expounding the virtue of the free market; that the free market will take care of itself without any outside intervention, and that since the principles of the free market are always fair, everyone can potentially benefit.  The trouble is that the basic premise of the free market is dependent on the existence of perfect competition; the explicit exclusion of outside influences or bad actors manipulating the market.  That’s how the free market would work in a perfect world.

But as we know, the world is not perfect, and thus the free market is never free.  There is always someone in the market trying to manipulate it, to gain an unfair advantage over competitors.  Left to their own devices, market actors will game the system for their own profit without proper oversight (regulation).  An unregulated market can never work.  See:  Enron, Tyco, WorldCom, etc.  The entire San Diego economy was nearly brought to its knees by the deregulation of the electricity market in the name of open competition (the free market).

The premise of free trade is not all that different.  In a perfect, free and open market, everybody stands to gain, from the workers to the corporate interests that employ them.  It depends on the market actors acting on behalf of the greater good.  But we know that never happens, and the corporate entities involved in setting the terms of the free trade agreements always seek to game the terms of the accord to the benefit of their own corporate bottom lines.

This is why the NAFTA didn’t work, and why the TPP as it’s being constructed won’t work—and could do further damage to our already fragile economic recovery.  Governments are supposed to act on behalf of their citizenry at large and not the involved corporate entities.  But instead, the playing field has been tilted toward the “job creators” under the auspices of trickledown economics.

When NAFTA was written, the authors knew that Mexico was at a heavy disadvantage to its trade partners, the United States and Canada.  At the time, Mexico was still a borderline third world country.  Mexican environmental regulations fell woefully short of American and Canadian standards; workplace safety regulations lagged; the education level of the average worker was incomparable; there was a huge disparity in the basic standard of living.

The agreement, therefore, provided Mexico with a grace period during which they would be somewhat exempted from meeting the environmental and economic standards of the US and Canada, with the provision that the government make the necessary investments to bring Mexico in line with its partners.  And to an extent, that did happen, but not enough to fully level the playing field.  Eventually the lure of a more highly skilled, cheaper workforce with fewer regulations and less hope of economic parity sent the corporate interests to other markets, where they could be even more exploitative.

The expectations of economic parity in the NAFTA were never realized to the extent we were told they would be because the Mexican government never fully lived up to its commitment of investment in its own people, but also largely because the corporate interests were allowed an outsized influence in determining the extent to which the treaty rules were enforced.

And now, with the TPP, corporate interests are being treated as full partners, given de-facto nation-state status.  This bodes well for the financial success of the involved companies, but not at all for the success of the trade partnership, or the workers in all of the countries involved.  When the playing field is tilted so heavily in favor of the corporate interests’ bottom line, and by default the developing nations trying to lure them with the promise of cheap skilled labor, the trade deficit the United States currently suffers will only be exacerbated, and there will be little hope for the growth and development of the American economy.

Free trade agreements would work if the focus was turned away from the “job creators” who are looking to tweak the system to their advantage for profit, and instead centered on the greater good, i.e. the workers, the middle class who actually drives the economy….or in the case of developing nations, creating a middle class and thus real economic growth.  But that isn’t the case with the NAFTA, and it certainly isn’t the case with the TPP.  Until the drafters of these agreements become more interested in the broader economic implications instead of the profit margins of their corporate benefactors, these agreements will continue to fail.

On the other hand, if the focus is turned to where it should be, we might just be surprised by how the rising tide lifts all of the boats involved.

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Andy Cohen

Andy spent 15 years working in the highest levels of the San Diego professional sports world, including both the Padres and the Chargers. He began his foray into writing while a volunteer for Francine Busby's 2010 Congressional campaign, eventually becoming a contributor to the now defunct SDNN. He has reported on local and national politics for both the OB Rag and the San Diego Free Press. When not reporting news and events, he offers political and policy commentary from a liberal perspective, occasionally turning back to his sports roots. While he does not hide his more liberal political bent, Andy always strives for fairness in the telling of a story.
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{ 6 comments… read them below or add one }

avatar Anna Daniels January 7, 2014 at 5:28 pm

First off- it’s essential to state that there is no such thing as unregulated “free trade,” nor should there be. So “free trade” is a misleading term and I don’t know how to have a meaningful discussion about free trade in theory. Free trade as it is drafted into a set of policies and legal procedures is the relevant point.
The questions as to who should do the regulating, what should be regulated and to whose benefit are tantamount in a democracy. In a democracy the issue becomes one of “fair trade” that takes into consideration the interests of all people impacted which includes environmental implications. NAFTA and the proposed TPP are undemocratic by design; they are neither free nor fair.

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avatar Andy Cohen January 8, 2014 at 9:25 am

That’s kinda the point I was making. There is no such thing as the “free market,” and there is no such thing as truly free trade. What it really refers to is the elimination of tariffs and other barriers to trade that inhibit economic growth particularly in a global market such as we have today. The problem is, as you pointed out, that these agreements as they stand now are not fair.

Perhaps, instead of calling them “free trade” agreements, they should more aptly be called “fair trade” agreements?

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avatar John Lawrence January 7, 2014 at 8:26 pm

” In a perfect, free and open market, everybody stands to gain, from the workers to the corporate interests that employ them.” I would disagree that even in a perfect world, everybody would stand to gain from a free market. The most efficient and effective corporation with the most brilliant work force would outcompete all others to the point where it would have a monopoly. And plutocrats would praise this corporation and its workers as being the best and the brightest, having made the most intelligent decisions and having come up with the most brilliant technical innovations leaving all others in the dust. This is the problem with a perfect free market. It doesn’t take into account what to do with the losers, the ones who have been out-competed. The net result would be a lot like what we have today in a market which isn’t actually free. A few corporations like Amazon, Apple and Wal-Mart would take over a huge percentage of market share. Other corporations would be forced out of business. There would be widespread, structural unemployment, and those not deemed “the best and the brightest” would be left to beg for a few crumbs from the table.

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avatar Andy Cohen January 8, 2014 at 9:30 am

Again, John, the point is that there is no such thing as a perfect free and open market. They do not, and cannot exist. They can only exist in a metaphorical vacuum. It’s simply the model that is used to help us understand the basic principles of economics.

But the true believers (those who believe in the gospel of trickledown) insist that it DOES exist, which is a fundamental misunderstanding of basic economics. And you are absolutely right about the monopolistic nature of some market actors, which is why we have regulations to prevent them. But the issue now is that we have far too many oligopolies–where a very small number of firms control the majority of the market with very limited competition (i.e. today’s US banking system, “too big to fail”). Oligopolies can be just as destructive as monopolies.

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avatar John Lawrence January 8, 2014 at 7:30 pm

Andy, my point is that the same things are happening in a less than perfect free market like we have today as would be happening in a perfect free market. That is the trend toward monopoly and oligopoly and the concentration of economic and political power. It doesn’t make any difference whether the free market is perfect or not. The same trends occur.

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avatar Ray Tapajna August 15, 2014 at 6:26 pm

First of all, free trade is not trade as historically practiced and defined. The so called free trade in our times is primarily based on moving production from place to place for the sake of cheaper labor markets. Production has been divorced from investments with each acting on their own. Owners also have been separated from the responsibilities when production is in far away places and where impoverished workers are used to make the things we use. There is no balance in this process.
Workers in the more prosperous nations lose their jobs. In the U.S., a working poor class had replaced the production worker middle class that we once had. More than 700, 000 workers in the steel industry, more than 500,000 auto workers and more than a million workers in the computer industry have lost their jobs. Now the working poor class is even having a difficult time affording the cheaper imports with many also needing government support to survive.

The value of workers and labor has been degraded and deflated. This represents trillions of dollars in value lost forever. The trade deficit is 8 trillion dollars since 1975. Just think of what all this money could have accomplished for us in the U.S. and others around the world.

President Obama had to bail out the whole process when he took over. He bailed out big money interests, investment communities, banks, wall street and the “too big to fail” corporations while he ignored all who lost everything due to free trade. The bail out also suggests that we really never had a free market.

The Federal Government itself sponsored the moving of factories outside of the U.S. starting in 1956. It was a temporary program that never ended.
Free trade is tool of globalist free traders who use it to control the flow of wealth around the world. It is a “Bewildered New World” economically and the social consequences have followed. http://tapsearch.com/communications-by-rank

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