Free Trade and the Trans-Pacific Partnership

If there is one issue on which my views have changed dramatically since entering graduate school it's free trade. Free trade is good. Free trade is good in theory and it is often good in reality. The law of comparative advantage is fairly iron-clad. Country A should pursue production in the sectors in which it is relatively more efficient. Country B should pursue production in the sectors in which it is relatively more efficient. The two should trade and the population of both countries will benefit from lower cost goods and higher demand for their products. According to the Hecksher-Ohlin (HO) model, countries generally have a comparative advantage in their abundant factors. When countries trade their productive capacities will be transferred to their most efficient sectors. Thus, through liberalizing trade the US's technology and information sectors will gain, its agricultural sector will lose. Brazil's agricultural sector gains, its technology sector will lose. The US gets cheaper food and jobs in technology. Brazil gets cheaper information and technology services and jobs in agriculture. I don't think these theorems are in any way opposed to the expansion of the welfare state or the institution of worker-owned means of production. Socialist/Anarchist thought often assumed the existence of trade unions that would trade goods across borders (or through the abolition of such borders).  

So why then am I opposed to the Trans-Pacific Partnership (TPP) and other US led trade deals like it? Why am I opposed to the actions of the World Trade Organization (WTO) and many bilateral trade agreements? First, there is a lot in these agreements that has little to do with free trade. For example, the TPP is likely to include protections of "intellectual property" even for "plants and animals." Giving corporations rights to plants in animals is not free trade. In fact, it can reasonably be interpreted as a trade-barrier or a barrier to entry for small firms that cannot afford the high prices of US patented goods. These measures are generally meant to protect US pharmaceutical and technology firms rather than promote cross-border trade flows.

Second, US-led free trade agreements empower corporations to erode environmental or health and human safety regulations through "dispute-settlement mechanisms." Corporations argue that environmental or health standards are de-facto trade barriers. The WTO has often considered labeling "discriminatory." Earlier this year, the WTO dispute settlement panel ruled canned tuna labeled "dolphin-safe" was "inconsistent" with existing trade rules, and just days ago the WTO ruled against US meat labeling regulations. In the 1990's the WTO ruled against EPA environmental standards as well. Other trade agreements such as the Central American Free Trade Agreement (CAFTA) contain no environmental protections. Because much of the TPP is negotiated in secret it is unclear what environmental and health protections will be included and how they will be enforced. However, if the past is any indicator, this trade agreement will be a "Bill of Rights" for corporations to tear down regulations meant to protect the environment and inform consumers.  

Third, comparative advantage is often made, not granted. The US has a comparative advantage in technology and information because the government invested in the infrastructure that made this development possible. Japan and Korea have a comparative advantage in automobiles because the government consciously decided to build these productive capabilities. Countries should not take their comparative advantage as stagnant but should attempt to build new industries. Unfortunately the measures needed to undertake industrialization and technology adoption are derided by "free trade" advocates as "protectionist" and are therefore often outlawed by free trade agreements. The global South is therefore relegated to producing cheap goods and agriculture, which in the long-run, limit their development potential.   

Additionally, workers in the US are not losing their jobs in manufacturing simply because labor is "more abundant" in poor countries, but because cheap labor is more abundant in poor countries. Why? Partially because $2 an hour can buy a lot more in other countries, but partially because these countries are simply able to oppress their workers more than the US can. Unions are illegal, working conditions are less regulated, and worker's benefits are non-existent. If China is better at manufacturing because there are more low-skilled laborers there and living expenses are less, that's fine. However, if China is "better" at manufacturing because managers can lock workers in a room for 16 hours a day and call in police to arrest union organizers this is comparative advantage achieved through worker oppression. Part of the TPP that is being debated is an anti-slavery provision that the Obama Administration wants removed. In a "free trade" logic removed from reality, the fact that Malaysia has slave labor simply means that Malaysia has a comparative advantage in labor.

Last, although I think free trade is often good in reality, there are times when the theoretical assumptions simply do not hold. The HO model assumes that factors of production move costlessly and instantaneously between industries. So workers who are fired from less productive sectors instantly have jobs in more productive sectors. This is obviously not true. While comparative advantage is sometimes created, it will often naturally exist. This means that workers in less productive industries will lose their jobs. If massive retraining and reassignment efforts are not instituted, factors of production have gone from low efficiency to zero efficiency and the benefits of free trade are not realized. Therefore, any free trade agreements should include funds to retrain and rehire workers displaced by trade.

It should also be noted that how we decide what industries are advantaged is based on market pricing, which can be highly inaccurate due to externalities and social costs that go unaccounted for. To illustrate, it is often thought that even with the elimination of US subsidies, the US will produce corn more efficiently than Mexico. Mexican agricultural workers therefore lose their jobs and move to manufacturing where they have higher wages. Increased production, increased wages, and cheaper trade worked right? No. Mexican farms had family and community based social structures that aren't replicated in the maquiladoras. The social benefits of the Mexican agriculture sector are not accounted for in the price of Mexican corn but are found in the costs of high crime rates and erosion of social welfare surrounding the resulting maquiladoras. This is perhaps part of the reason why Mexico has generally been made worse off as a result of NAFTA.     

Free trade can lead to enormous benefits but the way in which it has been pursued has been detrimental for the global South and has had a negative impact on American workers. These outcomes were not inevitable. Free trade agreements need not embrace comparative advantage that results from worker oppression, the stifling of Third World development, and environmental degradation. Let's be wary of shouts for "free trade" (even when they're coming from our own President) before those shouting explain what exactly they mean by the term.