By Thomas Coy

Labor leaders and Democrat Bill Clinton

The debate over free trade agreements like NAFTA (The North American Free Trade Agreement) generally pits academic and political elites against workers and their unions. The political and academic elites generally use their influence to implement free trade agreements and worker’s unions generally use their influence to oppose the agreements. So in a very real sense it was a suicidal decision for labor unions to help put into office the Democratic President who would strong arm NAFTA through the United States Congress. Labor unions knew before hand that Bill Clinton sought to implement NAFTA; Clinton openly stated his support for NAFTA during his presidential campaign. As if scripting their own scene for “Dumb and Dumber” labor unions backed President Clinton’s reelection even though the President openly said he would seek more free trade agreements with other blocks of countries. NAFTA and other free trade agreements are arguably the greatest factor causing the demise of labor unions, worker’s wages, and worker’s health care and pension benefits in the United States. They say politics makes strange bed partners. If that analogy is used, labor leader’s unsavory relationship with Bill Clinton gave unions a venereal disease equivalent to AIDS, and the labor unions knew he had the disease before they got in bed with him.

Defining free and fair trade

NAFTA is a controversial policy and a good political introduction to the free and fair trade debate, but the first step to understanding these issues is to define the debate over free trade versus fair trade. Free trade is pretty much what the name implies. It is international trade between two countries without the involvement of the two governments interfering in the transactions. Technically there is quite a bit of governmental involvement, but the theme of free trade is the less the government is involved in international trade the better deal the consumer and the businessman will get, which free trade advocates believe the goal of international trade should be. Free trade produces a so-called level playing field for manufacturers by discouraging governmental regulations and business practices that add to production costs. In effect, it encourages the United States and its manufacturers to adopt the wages and policies of manufacturers in foreign nations who have lower production costs.

Fair trade is also pretty much what its name implies. It is international trade between two countries that have agreed to certain rules of production that make the competition of production fair in laymen’s terms. It seeks a greater use of government intervention to establish the rules of production and to disqualify or penalize players who break the rules. Disqualification would entail the refusal of said products into the fair trade country, while penalties would usually involve putting tariffs on foreign products that weren’t produced by the agreed upon rules. The theme of fair trade is the increased role of the government as the rule committee and rule enforcer for the competitive market place. The goal of fair trade is to allow manufacturers and workers in an advanced capitalistic country like American to compete on a level playing field without compromising the policies that protect and sustain workers and the environment. For example, a level playing field for manufacturing can be created from fair trade policies by forcing corporations to abide by American policies at their foreign manufacturing plants, if the product is to be sold in the United States.

Arguments for free trade

Academic elites and politicians that support free trade agreements argue that free trade benefits both countries involved in trade. This concept was developed by the classical or early economists and is promoted by the new or neo-classical economists. Free trade from this classical point of view is based on two main principles. First, government involvement generally screws up naturally efficient economic processes. There are countless examples of government tariffs, subsidies, and regulations that have decreased the supply of goods, increased their prices, and created more unemployment. Both free and fair trade advocates agree that government policies can and have hurt the consumer, created unintended employment, and had the opposite affect they were intended to have.

The second argument for free trade is that a nation will fare better if it concentrates on what it is most efficient at producing and trades the surplus of its efficiency for products it is less efficient at making. Beginning economics students are taught the classic example of free trade that goes something like this. Two countries, A and B, produce wool and butter, but A is more efficient at producing wool, while B is more efficient producing butter. If nation A uses all its resources to produce wool, it will produce 10 million tons of wool a year. If all those resources were used to produce butter, nation A would produce only 4 million tons of butter. If nation A splits its resources 50/50, it will produce 5 million tons of wool and 2 million tons of butter a year. Nation B is similar in its output statistics with butter replacing wool, so that if nation B uses all its resources to produce butter, it will produce 10 million tons of butter a year. If all those resources are used to produce wool, only 4 million tons would be produced in the same time period, and if nation B splits its resources 50/50, it would produce 5 million tons of butter and 2 million tons of wool. The solution is obvious; nations A and B produce what they are best at producing and trade for what they are less efficient at producing. Nation A produces 10 tons of wool and trades 5 tons of wool for 5 tons of butter. By doing so nation A increases its annual wealth by 3 tons of butter. Likewise, nation B uses all its resources to produce 10 ton of butter and trades 5 tons of butter for 5 tons of wool, increasing its national wealth by 3 tons of wool. The benefits of trade are clearly shown in this example.

Arguments for fair trade

Worker’s unions and those who advocate for fair trade agree that trade between nations benefits both nations. They are not against trade between nations. What they argue for is a structure of trade that makes the competition of production fair, because they believe this form of competition should be fair in a similar way to how competitive sports are made fair. In a very real sense the market is a competitive game with winners and losers. The winning corporations make the most profits and the losing corporations sometimes go out of business. The role of the government is to make and enforce the rules of the game.

Those arguing for fair trade acknowledge that the economic market game will always have winners and losers, but what is most important is how the economic game is played. Just as in a sports competition, fair trade advocates believe the winners in the marketplace need to play by the same rules as the losers. Fair trade advocates rightly argue that America has lost a large part of its manufacturing base because foreign manufacturers play by a different set of rules than American manufacturers, and the solution is not to lower American priorities for workers and the environment, but to raise the standards in the foreign countries.

In addition, American fair trade advocates argue that the short term benefits of current free trade policies are not worth the long term costs. Americans are getting many foreign products at lower costs than if they were manufactured in America, but it has resulted in a trade deficit that is undermining America’s national security. In the classic example on trade both nations benefit from trade because each nation is trading products produced by its workforce. America’s trade deficit signifies that America is not equally trading the products it produces for products other countries produce. America is trading its currency for products. Foreign interests are using the American currency from America’s trade deficit to buy corporations, to buy the technology of the future, to buy American property, and to finance the American government’s debt. It is the equivalent in the classic trade example to the country making the butter not trading for wool, but for a currency it can use to buy the land and sheep in the reciprocating country. This emphasizes another fair trade principle that products need to be traded for other products. A nation should not be allowed to trade its products for the means to buy the another nations businesses, agricultural resources, and economic future.

Modern free trade competition

Let me create a modern example of free trade competition using textiles and appliances, accounting for the evolution in labor specialization and lower transportation costs. In this example nation A represents America and nation B represents a developing country like Indonesia or Mexico. For purposes of this example we will assume that the American unskilled labor force is 30 percent more efficient that the workforce of nation B due to higher education, good work habits, and better health. Both nations A and B are competing with each other to have international textile and appliance corporations build manufacturing plants in their countries. The products of these international corporations will be sold in both nations without government restriction. To survive in this global market the international corporations competing against each other will seek to produce their textiles and appliances with the lowest production costs.

First, a brief description is needed to explain how specialization has changed the production process. Specialization has taken a production process and broke it into many segments. As machinery has improved each production segment has needed less skilled labor. Each change has increased production quantities significantly. At the same time it allowed labor to be paid lower wages because less knowledge and skill was required. Specialization increased a company’s profits because more quantity was able to be produced at less cost. The great benefit to society was that most of the cost saving was passed onto the consumer and the wealth of industrialized nations increased. The bottom line is specialization has enable more goods to be manufactured with less labor, which is the definition of a productivity increase.

With the advances in the specialization of labor an international corporation can take its manufacturing processes to almost anywhere in the world. Any country with a minimum infrastructure for manufacturing can host a manufacturing plant for textiles and appliances. At the manufacturing site the international corporation will need a small group of highly specialized engineers and a large supply of low skilled labor. In general, manufacturing can move from one nation to another without concern of equipment cost and the skill level of the indigenous labor force. It is the other factors of production that determine the site of the manufacturing plant.

The number one consideration of where an international corporation sets up its manufacturing plant is the security and the protection provided by the host government. In our example we are assuming both nations offer sufficient security. After that concern the wages of low skilled workers rise near the top. In effect the workforce willing to work for the lowest wage offers the biggest attraction to the international corporation. Other factors of production worthy of consideration are the labor wage of the construction workers who will build the plant, environmental regulations governing toxic emissions, laws regarding worker’s compensation when workers are hurt, whether the government gives workers the right to form unions that could seek health insurance or pensions, workers unemployment compensation laws, costs for complying to the safety regulations of the host nation, and so on.

Let’s compare the many factors of production that the international textile and appliance corporations in our hypothetical example would consider.

Wages (based on standard of living costs): America $15.00 per hour; nation B $2.00 per hour
Worker productivity: America 100%; nation B 70%
Social Security benefits: America $1.80 per hour; nation B $.20 per hour
Health Care benefits: America $3.00 per hour; nation B 1.00 per hour
Retirement benefits: America – none: nation B – none
Unemployment benefits: America $1.20 per hour; nation B none
Environmental emission controls: America $20 million/plant; nation B $5 million/plant
Required safety equipment: America $1 million/plant; nation B $.2 million/plant
Construction wage and material costs: America $20 million/plant; nation B $10 million/plant
Right of workers to unionize America – yes; nation B – no
Bribes to government officials America – none; nation B $2 million/plant
Taxes to government America 20%; nation B 10%

An examination of the many factors of production shows that the edge in American worker productivity does not offset the difference in wages required to maintain a minimum standard of living. The extra expense for the payoffs to government officials in the developing countries does not even offset the extra construction costs of building in America. It is quite evident that if, the textile and appliance plants are built in nation B, they will be able to produce their products at a lower cost, more than enough to offset any shipping costs to America. The reality of this example is that a textile or appliance plant will not be built in America because it will not be able to compete in this free trade environment. Producing the products in nation B will allow America and nation B will get their textiles and appliances at the lowest cost.

What is obvious from this example is that the production incentives for luring an international corporation to build a manufacturing plant are: low wages for the indigenous workers; little or no liability to workers who get injured, sick, unemployed, or retire; and little or no environmental responsibility. These incentives are unacceptable to advocates for fair trade, especially for advocates in the United States of America because these production incentives undermine what American workers believe to important.

Tradeoffs and spillover costs

For the fair trade advocate the solution to the downward spiral of the modern free trade example is fair trade agreements or no international trade. For example, international corporations importing textile and appliance products sold in the United States market would have to abide by American minimum wage laws, plant safety regulations, and environmental regulations. An equivalent type of social security or pension would have to be provided to the workers as well as unemployment compensation and workers compensation for injuries on the job. This would naturally increase the production costs of manufacturing in a developing nation whose intent is to import their products into the United States. Fair trade agreements ideally seek to eliminate the competitive disadvantage these regulations place on manufacturing in nations like the United States. Fair trade agreements also encourage developing nations to adopt laws that benefit workers and protect the environment.

Free trade advocates who argue against this type of government interference in commerce rightly point out that these fair trade policies would mean higher prices for consumers. That is a trade off of fair trade along with fewer products for consumers to choose from. Each option – free versus fair – has its trade offs. The trade off for the low prices and many product choices free trade offers is lower wages for American workers in the manufacturing sector, loss of the manufacturing base that has moved to other countries, and a soaring trade imbalance that has still unforeseen consequences (probably inflationary consequences because other nations have an excess of American dollars and America no longer manufactures enough products at competitive international prices).

There are other costs of free trade that economists consider, which are not figured in the retail cost of a product or the bottom line of an international corporation’s profit. One in particular is called spillover costs. These are costs that reflect how manufacturing affects a community and the environment. Spillover costs can be positive as well as negative, but the spillover costs to obtain the lowest possible production costs in a free trade environment are usually negative. A community with high rates of cancer due to pollution from a factory would be experiencing negative spillover costs. The demise of fish in a river that was polluted would be a negative spillover cost to fishermen. Extra worker injuries and deaths due to less stringent safety precautions is a negative spillover cost of manufacturing in our modern trade example. While the loss of manufacturing jobs in America is a direct result of free trade, an increase in alcoholism and drug addiction, spousal abuse, and child abuse, resulting from the frustration of unemployment or underemployment is a negative spillover cost. The loss of smaller local businesses as well as local suppliers resulting from a major manufacturing plant in America moving to nation B in our example would be a spillover cost. In a way fair trade agreements lessen negative spillover costs at home and abroad.

Concluding opinion

In concluding this introduction on free and fair trade I would like to argue that fair trade is possible despite the many examples of inept government interference in economic regulation. The general principles of fair trade should be similar to the governing of sports, which would limit government involvement to the establishing of rules and making sure the players in the American marketplace abide by the rules. Government interference should not try to make winners and losers, or fix prices. The government needs to let the market operate freely in the parameter of the fair trade rules – a much more elaborate set of rules than current free trade policies. In a real sense fair trade should be free trade operating under more restrictive parameters.

Democratic and Republican politicians usually claim that education is the key to making America more competitive. I contend that is hogwash. America is not as competitive as developing nations because its workers require higher wages, and the laws that benefit workers and the environment add costs to the production process. Education is not the key to manufacturing competitiveness. When students go to college they are told many times that they will forget at least 70 percent of what they have learned. College graduates are trained on the job just as much as non-college educated workers. I would also argue that without a strong manufacturing base America does not have sufficient opportunities for workers. Manufacturing plants create opportunities for both the college graduate and the high school graduate, and historically, the manufacturer has routinely taken the high school graduate and trained him in a specialized high skill job. Fair trade is the best policy option to bring back manufacturing to the United States and to balance the trade deficit. It is the government policy needed for America’s struggling economy and it offers America a better future than where it is currently headed.

Copyright 2008