Putting the Brakes on US Fast Track

MEDFORD, US: President Bush’s fast-track authority is about to expire. This authority from Congress allows the US executive to negotiate trade pacts and then subject the agreement to an up or down Congressional vote. Congressional Democrats, many long suspicious of free trade, want to impose environmental and labor conditions on foreign countries as a condition for extending fast-track authority. An extension of the authority under those terms would be bad news for global trade.

Currently, there are free-trade agreements (FTAs) coming up for a vote for South Korea, Columbia, Peru and Panama. Longer term, countries like Vietnam will negotiate. The existing agreements have provisions for labor rights and environmental protections, but these are not strong enough in the view of some analysts. They would try to reopen the agreements to push the trade partners into agreeing to stronger provisions.

While the goals may be worthy, most economists think such linkages are a really bad idea. Why?

The political impetus from this is not a sudden concern with labor or pollution in far-off countries, but a fear that trade is unfairly destroying US jobs. With a 4.5 percent unemployment rate and steady job growth, this might seem odd, but it is true that US manufacturing jobs have been falling at a rapid rate. From 2000 to 2005, about one-sixth of manufacturing jobs were lost, far more than trends based on past gradual declines would suggest. At the same time, the US has a huge trade deficit. So is cheap foreign labor working for polluting firms abroad displacing US labor?¹

The evidence is no. Most of the decline in jobs comes from technology rather than trade. Poor countries have low productivity, and low wages are one of the few ways they can get started or sustain export growth. Similarly, there is very little data supporting the idea that “dirty” industries in foreign countries take markets from clean industries in rich countries. Newer equipment typically emits less pollution, while also lowering costs and providing better quality. New equipment is usually needed to expand output and exports.

If Congress seriously wanted to do something about labor and environmental conditions abroad, it has several superior choices: One step would be to approve the International Labor Organization (ILO) core labor standards. The US has approved only two out of eight standards, apparently because of fear that approving more would impinge on US sovereignty! The US might at least lead by example and appear less hypocritical by formally approving the standards in legislation that it would impose on others.

Another option would be to assist the ILO in enforcing existing laws in developing countries. Often, the problem is not a lack of laws but poor enforcement. For example, few nations in negotiations with the US condone child or forced labor. This formula is used in the pending FTAs – that the nations pledge to enforce their own labor and environmental laws. These pending agreements also have provisions for all nations to “adopt and maintain in their laws and practice the five basic internationally-recognized labor principles,” as stated in the ILO Declaration of Fundamental Principles and Rights at Work. These principles are freedom of association, the right to collective bargaining, elimination of both forced and child labor, and the elimination of discrimination.

Third, there are many ways to promote cleaner and greener technologies without imposing trade conditions. Providing information, technologies and even subsidies, via cheap licensing of clean technologies, for less polluting choices is one way. Indeed, increased trade and growth often leads to installation of newer capital equipment, usually cleaner than the older models, especially if it is made in rich countries where high standards push capital equipment makers to design pollution out of the process.

As with labor standards, assistance in enforcement of existing environmental laws would also be helpful. Few nations complain if they are asked or helped to enforce their own laws. Observing international environmental treaties, such as bans on trade of endangered species or ozone-depleting chemicals is also non-controversial and already in the pending FTAs.

If the real issue is the insecurity of US workers, as it may well be, then there are also several measures that Congress could take rather than overload trade negotiations. Health-care costs act as an employment tax that causes fewer “good” jobs to be created. A lack of training opportunities or aid to impacted communities also makes people fear change, whatever causes it. Providing for health insurance at a reasonable cost or retraining would do more to help workers than telling foreign countries how to write their own laws.

But what happens if the conditionality works? What if, say, Ecuador, agrees to the labor standards and pollution controls in order to get lower tariffs? In all likelihood, the impact would be negative for Ecuador. Sure, some workers would benefit from higher wages. But the main income divide in Ecuador is urban-rural, or perhaps formal-informal sector. Keeping the number of urban formal sector workers down – and their wages high – is not going to help inequality or growth. More likely, trade opportunities will drift to lower-wage countries, perhaps in Asia, where costs of production will be lower. Ecuador would have trouble competing, even with marginally lower tariffs. The outcome would be negative, except for the few formal sector workers who get better pay. Outcomes for pollution are likely to be similar. Light industry seldom is a major polluter, and keeping the output of that sector down and its growth lower is unlikely to reduce pollution much.

If all of this seems much too convoluted, Americans might ask how they would feel if a foreign government sought to dictate how their laws should be written. The response would be highly negative. There is no reason to believe that foreign governments or people like being told what to do any more than Americans do. Imposing conditions is likely to increase resentment and the threat of backlash against both trade and the US.

Much less contentious is if there is a mutual requirement to enforce existing laws, or negotiate two sets of tariffs – a lower one if existing laws are enforced and another one if they are not. Allowing civil-society groups to enter complaints is another possible condition that might be acceptable. In any case, less presumption and more cooperation is likely to yield better results in economic and diplomatic terms. Simply because highly ethical goals are proclaimed does not make a poor policy a good one. If the change in fast track leaves trade barriers higher, angers people and weakens the economy in the developing country – and does not help the workers in the US – then it would be counterproductive.

An aggressive attempt to force labor and environmental changes on others is unlikely to be a happy or successful experiment and, at the very least, would make trade pacts harder to negotiate. Perhaps that is the real goal anyway, and in that sense the change may be successful for those insisting on it.

1 This question was covered in Edward Leamer's review of "The World Is Flat" by Thomas Friedman in the March 2007 Journal of Economic Literature. Leamer, on p. 117, reports that from 2000 to 2005, job loss relative to trend in nondurable manufacturing was -16.3 percent, but technology alone caused a 17.6 percent drop, while demand and trade had minor roles. In durable manufacturing, the role of trade was under 20 percent of the deviation. This is typical of the literature - trade is not a major cause of job declines in manufacturing.