The Common Good
May 2007

World Market 101

by Elizabeth Palmberg | May 2007

Understanding the perils and promise of international trade. Includes Web Exclusive: List of additional readings and resources.

Imagine you're a Mexican corn farmer in 1994. On a small plot of rain-watered land, you grow corn for your family, with a bit left over to sell so that you can buy medicine, clothes, and other necessities. You may or may not be aware that your government has just negotiated a trade deal, the North American Free Trade Agreement, with the governments of the U.S. and Canada. But if you don't know, you will soon—up close and personal.

Hundreds of miles north, impelled by market forces, U.S. farmers are using petroleum- and pesticide-intensive farming methods that produce large yields but pass on environmental costs to future generations. Because of this, and also because they receive massive government subsidies (most of which wind up going to agribusiness), their corn sells for a much lower price than yours. For decades, your government, like that of many low-income countries, has protected its farmers with tariffs on imported corn, which makes it easier for your corn to compete in Mexico. Now NAFTA will end the tariffs that protect you, without affecting the production model or subsidies that make U.S. corn so cheap. To ease the impact, the Mexican government had negotiated a 15-year transition period on corn tariffs—but large-scale Mexican cattle growers, who want cheap feed and have more political pull than you do, will talk the government into getting rid of tariffs in a mere 30 months. The price you get for your corn will plummet nearly 50 percent.

According to the rosy predictions of NAFTA boosters, at this point you're supposed to reallocate your land to something more profitable than corn. But you and your neighbors in rural Oaxaca don't have anywhere close to the credit, seeds, or connections you would need to start growing a specialty crop such as arugula for the U.S. So to make up for your lost income, you plant more corn, further lowering the price. The plummet in corn prices doesn't even help Mexican consumers; tortilla prices actually increase a bit. Over the next decade, low prices force you off your land (more than a million other Mexican farmers are likewise affected).

By the end of the 1990s, your brother has made the perilous desert crossing to become an undocumented worker in the United States; you've found a job at a "maquiladora" factory near the U.S. border. The corporation that owns the factory has moved it from the United States to Mexico, attracted by cheaper labor and the lack of real unions—but is thinking about moving again to where wages are lower still, playing countries against each other in a "race to the bottom." Part of what enables companies to do this is that in 1995 Mexico, the U.S., and more than 100 other countries created and joined the World Trade Organization. The WTO, which is both a forum for ongoing negotiation of trade agreements and an enforcer of finished negotiations, applies anti-tariff pressure worldwide.

Fast-forward to January 2007: Increasing ethanol production in the U.S. causes corn prices to rise sharply. Your cousin, who is still a farmer, will benefit—at least until falling oil prices or increased U.S. corn production causes corn prices to tank again, once more transferring the risks of world markets to those least able to bear them.

Despite the many flaws in trade agreements like NAFTA and the WTO, more agreements on the same model are being signed every year, many of them between the U.S. and its most easily intimidated allies—for example, the U.S.-Chile Free Trade Agreement in 2004, the Central America Free Trade Agreement in 2005, and the U.S.-Morocco FTA in 2006.

 

IT DOESN'T HAVE to be like this. Many countries—from the U.K. and the U.S. in the 1800s to East Asian countries in past few decades—have used trade as part of highly successful, individually crafted strategies for building wealth and lifting hundreds of millions of people out of poverty. Well-considered trade can be a win-win proposition for all countries involved, and societies do not have to accept a corporation-driven economic model that sees only this quarter's earnings and not the larger costs and benefits to communities and the planet.

How do we get there from here? For starters, we need to fix two closely related things: the "market fundamentalist" ideology used to justify current trade agreements, and the corrupt, bullying way in which such agreements are negotiated and sold to legislatures.

First, we need an ideology reality check. It's certainly true that, all other things being equal, increased exports can give your citizens better jobs and increased imports can allow your citizens to buy cheaper stuff. In a well-thought-out system, all countries involved can come out winners, in part as each focuses on what it can do most efficiently (what it has a "comparative advantage" in).

So far, so good. But market fundamentalism (aka "neoliberal economics") goes berserk with these ideas, vociferously arguing that all barriers to trade (including tariffs, quotas, and other laws, such as health and environment standards) should come down, and stay down. This philosophy has holes you could drive a truck through. For one thing, it's not the way that virtually any country got wealthy—all nations, from the U.K. to China, used tariffs and other strategies to protect their growing industries, and only cut trade barriers when their industries had grown strong enough to compete. For example, Korea in the 1950s had a comparative advantage in growing rice, but its government decided to use policies, such as import restrictions, to branch out into higher-tech fields (a prescient decision, as the prices of raw farm commodities, such as grains, have trended down over the past four decades).

In contrast, Latin America, which slashed trade barriers in the 1980s and 1990s in response to neoliberal pressure, saw per capita income, which had grown 82 percent from 1960 to 1980, increase only an anemic 9 percent from 1980 to 2000. As the title of an important book on this topic by economist Ha-Joon Chang puts it, rich countries urging poorer ones to cut all trade barriers are arguably "kicking away the ladder" by which they themselves had ascended.

In addition to a weak grasp on history, market fundamentalists have a very narrow understanding of theory. Nobel-winning economist Joseph Stiglitz points out that neoliberal economic models, among other failings, often assume full employment—i.e. that after a trade agreement goes into effect, everyone whose job gets exported to Mexico or China (or, in the case of peasant farmers, to a GPS-guided tractor in the U.S.) will be able to get a different job right away.

In the real world, governments realize that too much unemployment is a serious problem, so countries often push to expand markets for their exports, and only reluctantly agree to open their own markets to more imports. This is why, when the U.S. alleges that another country's producers are selling catfish or steel below the cost of production, the statement is often part of a threat to file an international trade lawsuit, and never an expression of gratitude for such great low prices.

WHICH BRINGS US TO how our current dysfunctional trade agreements are created. They don't occur on a "playing field" (certainly not a level one), but at a negotiating table—where rich countries such as the U.S. use their heft to get all they can for themselves. In part, this is a literal negotiating table at which the U.S. government's trade representative—who is appointed by the president and has more than 200 staff people to research the fiendishly complex question of what the U.S. wants—hashes out agreements (hundreds of pages long) with other nations' trade ministers.

Behind these literal negotiations between nations, though, is a different, but very real, competition—the ever-shifting balance of power between corporations and other parts of society, such as government, workers, and civil society. To put it bluntly, the trade agreements we've got so far do a very good job of stacking the decks in favor of large corporations and other wealthy investors. The mechanics of this can be seen at international trade negotiations, where congressionally sanctioned "Industry Sector Advisory Committees," made up almost entirely of corporate employees, get privileged information about—and input to—the U.S. Trade Representative's playbook.

The trade agreements that result from this process preferentially expose working-class employees to foreign competition: Corporations can hopscotch their factories from country to country, producing that "race to the bottom" in wages and working conditions. Companies that don't move their jobs overseas can still use the threat of moving to pressure workers into accepting lower wages and benefits or not joining unions. In contrast, higher-income workers, such as lawyers, doctors, and economists, are largely protected from foreign competition by immigration and licensing laws. In one extreme case, a CEO who had moved thousands of jobs to Mexico, General Electric's John Welch, made more money in 1997 than the combined paychecks of his 10,000 Mexican employees, according to United for a Fair Economy.

As a result of this stacked deck, as an increasing number of binding trade agreements have been signed in recent decades, the rich are getting richer, and the poor are getting poorer—both between and within countries. Eighty percent of the world's population lives in countries in which income inequality is on the rise. In the U.S., the poorest 40 percent of households are making less than they did in 1975 (taking inflation into account), while only the top 20 percent of households saw their share of income rise. Wealth inequality is even more skewed than income: Worldwide, the richest 2 percent of individuals own more than everyone else put together.

Trade agreements also include a number of rules that tie the hands of governments (which are often answerable to citizens) in exercising authority over corporations (which are only answerable to stockholders). A host of things that the average person might consider important—job-creation strategies, policies that help protect farmers' livelihoods, laws to protect clean air and water, and more—are redefined, by trade agreements and the rhetoric of their backers, as "market distortions" or "barriers to trade." National governments are pressured or encouraged to give up these policy options in trade negotiations. Agreements can cover not just coconuts or toasters, but also "services" such as water, electricity, insurance, and much, much more.

 

Why should we care? Well, if you violate a trade agreement, another country can file a trade lawsuit against you in, say, the WTO's or NAFTA's closed-door trade tribunals. They can thus win the ability to slap high tariffs on your exports—tariffs designed not to protect their developing industries, but to punish your economy. While the word "tariffs" might sound snoozeworthy, actually it's anything but: It's what gives the WTO and other trade agreements real teeth, in contrast to many other types of international treaties. So when rational observers argue that secret CIA prisons, which hide detainees from the Red Cross, violate the Geneva Conventions, the international community can't do all that much. But when the U.S.-based Ethyl Corporation filed suit in a NAFTA tribunal because Canada had banned the import of MMT, a gasoline additive and suspected neurotoxin, Canada repealed the offending law, paid Ethyl damages, and publicly stated that it had no evidence against MMT.

Such an enforcement-by-lawyer system, of course, gives the advantage to rich countries that can afford to hire expensive trade lawyers. To make matters worse for poor countries, aid from donor countries such as the U.S. and loans from institutions such as the World Bank and International Monetary Fund have often come with neoliberal strings attached—requirements to cut tariffs and open markets, thus giving away what few trade bargaining chips such countries had. One common example is the privatization of water, electricity, or other services—few countries have yet agreed in the WTO to sell off their electricity systems to corporations, but the World Bank or IMF have forced a number of countries, such as Nicaragua, to do this at fire-sale prices.

THE GOOD NEWS IS that there are plenty of ways that citizens, especially in the U.S., can act to demand a better world. As advocates in the U.K. are starting to do, we can demand aid and trade agreements that allow countries, poor and rich, to make their own decisions about how to foster growth and equity. This doesn't mean leaving poorer countries out of trade agreements; it means letting them and a variety of thinkers and analysts who care about justice into the conversation. For example, Stiglitz suggests that a real anti-poverty trade agreement might ask every country to open up its markets to each nation that is both smaller and poorer than itself. Others can suggest particular strategies that value local communities and the environment. The ideas are out there—and more could flower if we opened up the dialogue.

On a practical level, we can and must demand more accountability from government. The U.S. Trade Representative—the person in charge of negotiating for the U.S.—is in the executive branch, so it's worth writing to the president about trade deals in the works. But the main place where government should exercise better control over trade deals, and where your call or letter can make a difference now, is Congress. (See "Taking Action," page 27, for details.)

Back in Mexico, a worker comes home from the maquiladora and prepares dinner for her family. After her husband and children are in bed, she takes the Bible off a shelf. In Ezekiel 27-28, she reads about how, in the ancient world, the great trading city of Tyre made an idol of its own power and wealth: "In the abundance of your trade, you were filled with violence, and you sinned." All around the world, in the churches and living rooms of richer and poorer countries, we too can read these words. And, if we are willing to listen instead of dictating, we can help to shape a world that deals with trade in terms of justice, not just power.

Elizabeth Palmberg is an associate editor of Sojourners.

 


Find out More!

All the news that didn't fit (into "World Market 101")

Surprising, but true: the price of tortillas, Mexico's staple food, actually rose in that country even as very cheap U.S. corn imports wreaked havoc on peasant corn farmers' livelihoods. This is partly because, as part of the same market-fundamentalist ideology that brought NAFTA and indiscriminately slashed tariffs, the Mexican government was cutting its tortilla subsidies. Before it did, though, it used them to muscle GRUMA, a corporation with an inferior product but good political connections, into a dominant share of the tortilla market. (GRUMA is now partly owned by U.S. agribusiness conglomerate Archer Daniels Midland.) For an update on current sharp tortilla price increases in Mexico, see this article.

For an introduction to why it's better for communities and the planet for us to eat local food (as opposed to depend on corporations shipping food staples halfway around the world), read Cathleen Hockman-Wert's Sojourners article, Check Please!

Oxfam America, whose Web site has some analysis of how current and proposed trade agreements hurt farmers and others, is pushing for the U.S. Farm Bill (which will be renewed and updated this year) to change and/or cut U.S. subsidies that drive down prices for farmers overseas. For some additional suggestions on how the Farm Bill and other U.S. policies can change to help farmers overseas and at home—including the idea of letting poorer countries once more use tariffs like the ones which used to protect Mexican corn farmers—check out the Building Sustainable Futures for Farmers Globally campaign.

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A major topic that isn't covered in "World Market 101" is the dramatically increased patent and copyright entitlements that trade agreements carve out for corporations in poor countries. This creates a huge enforcement burden for governments in the Global South, drains money from poor countries' economies, and worst of all puts lifesaving medicines out of reach of millions of people. The Center for Economic and Policy Research has good information on this—for example, on their Web site you can watch or listen to an introductory lecture on the topic, or read a commentary on the case study of Thailand.

As this recent, short New Yorker piece points out, excessive growth in patent and copyright entitlements stifles innovation—as the U.S.'s founding fathers realized.

A key issue is poor countries' right to lifesaving generic medicines to fight AIDS and other serious public health problems. Doctors Without Borders' Campaign for Access to Essential Medicines is the go-to site on this topic. (If you get really interested, the nonprofit Globalization and Health listserv delivers frequent, detailed e-mails with breaking news on trade agreements and public health.)

Due to widespread outrage from civil society, the WTO has in principle affirmed that it will not restrict developing countries' right to use generics in public health emergencies. (The key jargon here is "TRIPS," which stands for the WTO's "Trade Related Aspects of Intellectual Property Rights.") However, the U.S. has pushed direct and back-door restrictions on generics into other trade agreements such as CAFTA. (Because such restrictions go further than TRIPS, they are called "TRIPS-plus.")

For example, CAFTA and later agreements' "data exclusivity" restrictions say that generic drugmakers can't use a drug's original safety trials, because the original drugmaker owns that information—this is surely news to the sick people who agreed to participate in medical trials. Of course, it would be not only too expensive, but medically unethical for a generic drugmaker to re-run trials that have already taken place (asking people to be guinea pigs when the outcome is already known). Here's a letter from members of Congress concerned about those back-door restrictions on lifesaving medicines; here's a more detailed description of the problem in the case of CAFTA, which is typical of current U.S. trade agreements. Oxfam America recently released a study showing that, after the U.S. and Jordan signed a trade agreement with "TRIPS-plus" restrictions on medicines, drug prices in Jordan increased, while the agreement did nothing to increase availability of new medicines in Jordan.

The international trade agreements that the U.S. is negotiating threaten public health (and democratic choices) within the U.S. as well: they may make illegal the Medicaid and other programs of over 40 states, which, like private insurers, use "formularies" —lists of preferred drugs—that permit the state (or insurer) to negotiate prices with the drugmaker.

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Think that laws and sausages are made in an unappealing way? They've got nothing on how trade agreements are shaped by corporations. (For a very useful Bible study on corporations, see False Gods and the Power of Love, by Bill Wylie-Kellermann.)

The easiest way to see corporations' overwhelming influence on trade agreements is to go to the United States Trade Representative's official Web page and click on the name of one of the government-created Industry Trade Advisory Committees. Under each member's name is listed his or her affiliation—almost always with a corporation or industry group.

Want to know more? This detailed, somewhat dry briefing paper describes how the U.S. Trade Representative takes industry suggestions while shutting out public health advocates (this paper focuses on the issue of patents and copyrights). Check out p. 31-33 for specific suggestions for how Congress, civil society, and Global South negotiators can make a difference.

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The heft that corporations get in shaping trade negotiations helps explain why the trade agreements we've got now favor the interests of corporations so much.

Often, the interests of corporations run counter to the interests of nations—this explains why the U.S. has got itself into agreements that cause so many jobs to move overseas. This is good for Wal-Mart, but bad for workers/voters in the U.S. (Many of those workers, in the 2006 elections, helped vote out 37 Congressional representatives who had supported market-fundamentalist trade agreements.)

As a result of trade agreements that help outsource U.S. jobs, the U.S. is running a huge and unsustainable "trade deficit" —that is, we are importing much more than we are exporting. We can do this only as long as foreign countries or individuals are willing to make up the difference by lending us money, or buying our assets; eventually, they won't be willing to do that, and the value of the dollar will go down (which will help others buy our exports, but make imports more expensive; the adjustment is going to hurt). Right now, China's government is keeping the dollar high by buying U.S. Treasury notes so that the dollar will stay high and we'll keep buying their exports.

On the protectionism double standard—why it's mainly low-wage workers whose jobs are being exported—see this overview by Dean Baker at the Center for Economic and Policy Research.

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The role of the World Bank and IMF in forcing poor countries to adopt market fundamentalist policies (neoliberal policies, often confusingly called "liberalization") is a very big topic. Because they do this by putting harmful conditions on loans and aid, the practice is sometimes called "conditionality."

Christian Aid and Oxfam often have well-written, accessible reports and case studies on this topic. Here's an Oxfam report from last November about how the IMF and World Bank are continuing to push poor countries to privatize government utility and other companies, often against the wishes of democratically elected governments.

This recent commentary on the IMF lucidly explains why that institution's middle-income borrowers are leaving it in droves (to avoid being subject to the sometimes disastrous economic policies it imposes). At the same time, a report commissioned by the IMF itself finds that its policies have actually blocked poor countries in Africa from using available foreign aid on desperately needed education and health care.

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If you liked Danny Duncan Collum's "One Side to Every Story," about the mainstream U.S. media's wildly unbalanced reporting on trade agreements, check out interviewee/cantankerous economist Dean Baker's illuminating Beat the Press blog, which points out this and other flaws in mainstream newspaper stories about economics.

 

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