Free trade and social dumping: lessons from the regulation of U. S. interstate commerce. by Bruce Elmslie , William Milberg As free-trade agreements spread around the globe, and encompass more developing countries, the pressure to reduce health, safety, and environmental as well as wage standards will grow more intense. The authors look to America’s own history of interstate trade to provide a guide that might help us maintain standards around the world.
The recent political battles in the United States over the merits of NAFTA and the World Trade Organization (WTO), established in the GATT Uruguay Round Agreement, centered around the question of “national sovereignty. ” While proponents of these trade liberalization agreements argued – correctly – that U. S. sovereignty could not be lost since only the Congress has the power to make U. S. laws, their argument missed the point.
The fear of the opponents of NAFTA and the WTO was not of some abstract principle learned in civics class, but of the real threat of downward pressure on wages and labor, health, safety, and environmental standards that results from trade liberalization in a world of internationally mobile capital. This fear was expressed recently by Gary Hufbauer, senior economist of the Institute for International Economics.
In an April 7, 1995, Wall Street Journal article, he was quoted as saying, “In the wake of Mexico, you can feel the pulse of people being nervous about further integration with poorer countries. ” Hufbauer went on to argue that this nervousness would be reduced by pursuing a trade alliance with Europe because of its high wages and more similar social institutions. In the absence of some internationally agreed upon set of standards, the determination of minimum social standards is placed in the hands of “the market. This marketization of social standards is generally viewed favorably by economists, who tend to prefer market outcomes to those regulated by “short-sighted” and “self-interested” national governments (“leviathans,” in the current lexicon of economists). But to the extent that multinational firms are willing and able to locate production where conditions are most favorable, the “market solution” does not solve the problem of sovereignty loss, it simply transfers the power of sovereignty to multinational corporations.
Free international competition puts pressure on nations to bid down their social standards toward the level of the lowest-standard country. While free trade tends to harmonize standards for labor and capital across countries, in the current economic and institutional climate, international trade liberalization gives this harmonization process a downward bias. It was the fear of downward pressure on social, environmental, health, safety, and labor standards that loomed so large in the recent debates over NAFTA and the WTO.
While the effect of NAFTA and the Uruguay Round Agreement on social standards in the United States has not yet been felt, an example of the downward pressure on social standards that results from international trade liberalization can be found in Canada’s experience with the U. S. -Canadian Free Trade Agreement. Since 1989, when the agreement went into effect, Canada has experienced a substantial decrease of foreign capital and a shrinkage of its corporate tax base. This has contributed to the pressure on the Canadian government to reduce its high standards for health care provision and welfare benefits.
The level of unemployment insurance benefits as a percentage of the average weekly wage fell from 37 percent to 27 percent between 1989 and 1994. While one might want to minimize the importance of this case on the grounds that Canada is a small country with higher social standards than the large country (the United States) with whom it formed the free trade area, it is worth noting that this represents a microcosm of the current global situation in which a relatively small share of the world’s population exists in industrialized countries and enjoys relatively high social standards.
In a more recent example relating directly to the new WTO dispute resolution system, Venezuela and Brazil received a favorable ruling in a complaint against the United States for “unfairly” restricting gasoline imports. The complaint centered around the Environmental Protection Agency’s rules, developed as part of the 1990 Clean Air Act, which require “reformulated” gasoline to be sold in nine large metropolitan areas, and include an “antidumping” resolution for conventional gasoline.
Gasoline sold in the major metropolitan areas must meet higher standards than that which is sold in the rest of the United States. All gasoline, imported or domestically produced, must meet these higher standards. The complaint