Wednesday, August 13, 2014

Free Trade Theory, Globalization and International Trade Agreements

Free trade theory, which had its origins during the period in which Britain developed its colonial empire, is regarded as gospel by most economists today.  The assumption is that everyone is better off with free trade.  If every nation capitalizes on its comparative advantage, global productivity will increase, and more goods will be available at lower cost.  Trade theory has developed since the Ricardian era in which the doctrine of comparative advantage was written in stone by economists.  However, trade between nations is nothing like it was 200 years ago.  The big change is that manufacturing capital is mobile.  Capital can be moved almost anywhere.  That enables corporations to locate production in nations that provide cost advantages, as well as enabling entry into foreign markets.  Investments in foreign nations is not without risks.  This article, argues that trade agreements no longer focus on reducing tariffs, which are a barrier to trade; they are designed to facilitate the mobility of capital and to protect investors.

The focus of this article is on NAFTA which integrated the US, Mexico and Canada into a single market.  While the focus is on NAFTA it argues that trade agreements that are currently being negotiated in the Atlantic and Pacific regions have a similar design and a common purpose.  NAFTA was not good for workers in Mexico, and it was not good for labor in the US.  Labor productivity improved in Mexico and manufacturing jobs were created.  However, manufacturing wages have been stagnant in Mexico.  They are only 2.3% above their level in 1994.  Moreover, 1.9 million agricultural jobs were lost in Mexico due to imports from US agribusiness firms.  NAFTA also served one of the primary purposes of trade agreements.  It reduced the bargaining power of labor. The free mobility of capital has restrained wage growth in the US.

The conclusion is that trade agreements are designed to serve corporate interests.  They protect the rights of the investor class by limiting the ability of national governments to regulate critical aspects of their political economies.  It assumes that national governments are willing to give up sovereign control over their economies because they are under the control of the investor class.  They advocate a form of globalization that limits the power and authority of the nation state.  Its hard to understand why governments would be so willing to become a junior partner in the development of international treaties.  They must believe that what is good for their multinational corporations is good for their country (or perhaps for their political party). 

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