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Outline of an Internationalist Proposal for “Fair Trade”

by William McGaughey


the controversy over free trade

It seems that the debate over globalism and world trade splits between supporters of two extreme positions. On one hand, there is “free trade”, a globalist position supported by the business community. On the other hand, there are critics of free trade whose rhetoric, if not policy substance, comes across as isolationist and protectionist.

I think that there is an intermediate position which encourages the growth of world trade but also includes a certain measure of political regulation to address the concerns of the free-trade critics. This political regulation would necessarily transcend the scope of national governments.

“Free trade”, in its modern conception, is an outgrowth of the Reagan philosophy that government has a generally negative effect upon society and that business should be allowed to operate with as little government interference as possible. In that context, free traders proposed to break down trade barriers between nations, cut through the tariffs and red tape, and let goods and services be traded freely between nations. While this sounds positive, the free-trade position, in effect, allows international business to evade political regulation by outgrowing government. “Fair trade” is the rather euphemistic term used to denote an alternative to this policy.

Think of the bidding wars that take place between U.S. cities when a manufacturer is considering site location for a new factory. In order to attract business, the cities each promise a package of concessions - tax abatements, direct subsidies, new roads, educational support, etc. - until it seems that the cost of the concessions may outweigh the advantage of the new jobs.

Free trade applies the same concept to the international economy. Here multinational corporations benefit from a competition between nations to attract production facilities by offering the lowest-cost labor, the lowest tax rates, and the most permissive environmental and occupational-safety regulation. To keep wages low, some governments collaborate with international business in discouraging union activity. If a union does manage to organize a foreign-owned plant, the business simply relocates to another place which is not yet organized.

That is why critics of free trade often describe it as a “race to the bottom” in terms of labor and environmental standards. The so-called “comparative advantage” of some nations’ products refers mainly to a government’s willingness to sacrifice its own people’s interests for the sake of attracting business. The political structure is lacking which would guide expanded economic activity in directions that would benefit the masses of people.

Free trade implies, first, that tariffs be sharply reduced or eliminated on products traded between nations and, second, that non-tariff trade barriers be reduced or eliminated. Non-tariff trade barriers can include restrictions on foreign ownership of business, restrictions on repatriating profits, questionable health and consumer-safety regulations, etc. For example, if Europeans object to genetically engineered food products, the U.S. Government can cite restrictions on genetically engineered food as a disguised trade barrier. The World Trade Organization calls upon its members to rescind laws that can be interpreted as trade barriers.

some goals and concepts for an alternative trade policy

The middle position between this and trade isolationism would be for the world’s peoples and nations to create an international regulatory apparatus that would promote certain social objectives while international trade is expanding.

Some of these objectives might be:

(1) that the economic benefit of trade liberalization accrues to a broader rather than narrower segment of the population - to lower-ranking employees as well as to the managerial and professional class, to the general population as well as to persons directly employed in an enterprise,

(2) that increased industrialization of low-wage areas not take place at the cost of destabilizing communities in the high-wage areas, and

(3) that expanded trade not come at the cost of environmental protection, consumer safety, or other legitimate aims of public policy.

A tool to enforce such objectives would be for national governments to impose tariffs that would penalize products that were produced in violation of those objectives while allowing products that conformed to those objectives to pass across national borders without a financial penalty. Lest increased tariffs lead to trade wars between nations, the different nations might agree upon a common set of objectives and institute a similar system of tariffs.

A key concept here is that assessments of conformity to labor standards, environmental protection, etc. should shift from evaluation of entire nations to evaluation of individual enterprises. For example, if child labor was employed at a General Motors plant in Mexico, whatever penalty might attach to the child labor should be applied not to all goods imported from Mexico but, instead, to General Motors products imported from Mexico, or, perhaps, to products built in a particular General Motors plant. Moral judgments aimed at nations inflame nationalistic passions. We should hold individuals accountable, not broad-based groups.

A second concept is that such assessments should be made through regular inspections rather than in a sporadic manner as the spotlight of public attention falls upon a particular abuse. This might be called the “accounting” model of regulation, as opposed to the “legal” model. Professional auditors should be systematically checking labor practices at factories around the world even as auditors check financial records. Their findings could become the basis of information used to compile an index that would translate into one or another level of tariff. I think that computer technology permits such record-keeping to be done quickly and efficiently so as not to become an obstacle to the trading process.

To date, U.S.-led efforts to identify and enforce fair labor standards have centered in such goals as combatting child labor and forced labor, guaranteeing the right of workers to organize labor unions, and ending gender discrimination. However, a more basic measure of labor standards would pertain to the level of wages and working hours in a nation, locality, or individual enterprise. (Perhaps, U.S. officials deemphasize such things because our own record of progress in those areas has been less impressive than in many other countries.)

a three-step process of economic development

Ultimately, the trade system can serve the needs of world economic development, with the key issue being the relationship between the fully industrialized and economically underdeveloped groups of nations. Markets in the industrialized nations will necessarily be the engine of economic growth in the developing countries of the Third World. However, the process should be orderly so as to promote the betterment of society in both sets of countries.

I see a three-step process in a society’s economic advancement:

(1) First there is a period of buccaneering capitalism and the accumulation of capital by businesses locating in a previously undeveloped area. This capital accumulation finances an increasingly prosperous business operation.

(2) Next, the employees of those businesses demand their share of the profits through wage increases and other benefits. Union activity may drive some of this escape of wealth from the business owners to its employees.

(3) Finally, continued improvement in employee benefits takes the form of reduced hours of work. Well-paid workers want more free time to enjoy their wealth. This improvement also opens up increased employment opportunities for others in society.

This model of economic development is consistent with the objective that the benefits of trade liberalization should accrue to a broad rather than narrow group of people. The second step allows low-ranking production workers to share in a firm’s prosperity. The third step lets previously unemployed persons share in the employment once had by a smaller group of workers.

Nations can be held accountable for economic policies that either promote or discourage the flow of wealth to a broad group of people. The world trade system should provide incentives to nations which have positive policies in these terms and disincentives to those which have negative policies. In other words, the trend of wage improvements and of work hours reductions should be a factor in setting the level of tariffs on goods and services exported from those nations.

The trade system should, of course, take the differing levels of development in the more industrialized and less industrialized countries into consideration in setting the level of tariff penalties. Just because Mexican workers earn $.50 an hour and U.S. workers earn $10.00 an hour does not mean that goods exported from Mexico should be penalized for failing to provide adequate wages. However, if Mexican firms continue to pay $.50 an hour after five or ten years of trade liberalization, then such penalties should be attached.

Such a system therefore requires an international assessment of the progress of economic development by nation or region for the purpose of setting tariff levels. The tariff itself would be based on differences between actual wages or hours and the target level. This system will be criticized by some as a planned economy. At the same time, it will fall within the proper scope and function of government as protector of a people’s wellbeing.

an international political order

Such a system also implies the establishment of an international political order, or world government, with certain powers of enforcement. Obviously, no single nation alone should set the standard for expected levels of wages and hours in world society as a whole. This must be worked out by diplomatic negotiations between nations and interest groups and by consultations within international political organizations.

At the present time, the International Labor Organization has the principal responsibility for setting internationally recognized labor standards. The World Trade Organization has the responsibility to set rules for world trade and the power to enforce them. It is a challenge to find ways that these two bodies can work harmoniously together within the framework of a world political order provided by the United Nations.

It is equally clear that the current free-trade system, which big-business interests have locked into place, needs to be unlocked if a socially responsive trading order can be instituted along the lines of the above discussion. That will create a rather confusing set of alliances to support this new system, at least in its beginning phase.

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