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A Labor and Environmentally Oriented Trading System
by William McGaughey, Minnesota Fair Trade Campaign
The ideology of free trade is based on a model of world society which no longer exists. This model features a multitude of nation states which faithfully represent the economic interests of their citizens. It includes business organizations within each nation or community whose fortunes are closely tied to the fortunes of the nation or community. The world economy would reflect various geographical, cultural, economic, and other circumstances that allow business enterprises in particular nations to produce certain kinds of goods more efficiently than business enterprises in other nations. The doctrine of comparative advantage maintains that it is better to allow national economies to specialize in the kinds of production which they are better able to produce and to trade the surplus for other products which they are less able to produce.
The free-trade agenda is inappropriate for today's world economy because the businesses which produce for trade are no longer so closely identified with particular communities. More than one third of world trade is intra-company trade. Between 50% and 70% of trade between Mexico and the United States is of this sort. Intra-company trade, which is trade between different facilities belonging to the same company, means that the corporation is operating in at least two different countries and, therefore, cannot identify exclusively with either one. The company has both nations' or neither nations' interests at heart. Also, because it is the same company operating in both countries, one cannot plausibly argue that the operations in one of the countries enjoy a comparative advantage due to better management, technology, financing, etc.
The multinational corporations which produce the bulk of goods and services traded in the world economy are no longer national entities, but ones which, operating in several different countries, have outgrown restrictions placed upon them by national governments. Interested in cutting costs, they shop around the world for the best deal. They, of course, want cheap labor, low taxes, environmental permissiveness, public subsidies, and ineffective regulation. Inevitably, one government or another is willing to oblige them. In this new environment, when we speak of "comparative advantage", we are no longer just talking about natural endowments for production but, more importantly, about a government's willingness to shortchange the interests of its own citizens to accommodate business demands. Conversely, we must discard the idea that corporations are loyal citizens of the communities where they operate. While a few corporate executives may show some lingering attachment to particular communities where their companies historically operated, the business community in general has come to regard this attitude as an emotional extravagance.
Yet, the government is still negotiating trade deals as if the national interest were synonymous with that of business firms headquartered in the US. It has, for instance, made a priority of strengthening protection of intellectual-property rights because "US" companies, such as pharmaceutical manufacturers or Hollywood film producers, sell products in other countries whose commercial value depends on enforcing patent or copyright laws. The corruption of policy in the trade area has progressed to the point that government is abetting corporate efforts which are in direct conflict with its citizens' interests. The government is actively helping firms headquartered in the US to arrange a transfer of jobs out of the US. That is what the North American Free Trade Agreement is about.
To their horror, trade researchers discovered in the text of NAFTA and GATT provisions that would require the US to invalidate numerous laws and regulations designed to protect the environment, consumer safety, or public health. Such laws and regulations are considered potential non-tariff trade barriers. The NAFTA and GATT agreements would require the federal government to pressure state and local governments to change their laws to bring them into conformity with the minimalist approach to regulation preferred by international advisory groups such as the Codex Alimentarius. In effect, these so-called "trade" agreements would allow unelected international officials, deliberating in secret, to override US political decisions reached openly and in accordance with law on many other matters besides trade. This "Stealth" agenda of international business represents a severe setback to American democracy. With respect to NAFTA and GATT, the only adequate response would be to recommend that the Congress vote "no" when President Clinton submits the enabling legislation.
Some contend that government simply lacks the power to regulate international business. If government comes down too hard on business, then business will move production to another political jurisdiction and jobs will be lost. That argument ignores an important base of government power. Government can effectively regulate business by restricting the sale of products within its own territory. If General Motors moves its production operations to Mexico to escape US regulation, the US could intercept GM products at the border and deny permission for those products to be sold in the US market. If could further make it unlawful for US-based dealers to sell GM cars and trucks. Now, of course, the US Government would not do that to General Motors. But, if this example seems far-fetched, substitute illegal drugs from Columbia for GM products. The US Government has, indeed, gone to great lengths to flex its regulatory muscles against certain kinds of prod ucts supplied by business entrepreneurs.
The alternative to an unregulated international economy is a regulated one. Government needs to create a structure of laws and enforcement procedures that will cause business firms selling in the world market to act in a socially and environmentally responsible way. If business refuses to comply, then government can and should restrict access to markets. A theoretical model of this regulation would be the Fair Labor Standards Act of 1938, which, among other things, sets minimum wages and maximum hours of work.
The Constitution gave Congress the power to regulate foreign commerce. Congress could ban from the US market any goods or services that were not produced in accordance with labor or environmental standards. Alternatively, it could burden those products with tariffs. One must recognize, however, NAFTA and GATT both include features that would prevent government from exercising that power. NAFTA would phase out tariffs on products traded between Mexico, Canada, and the US. GATT contains a provision that countries may not consider how goods were produced or harvested in restricting certain types of imports. Although environ mental concerns relating to the slaughter of dolphins underlay a US ban on imported tuna from Mexico, a GATT panel in August 1991 ruled that US enforcement of the Marine Mammal Protection Act unfairly restricted trade. The same principle, forbidding process-related evaluation of products, could apply to child labor, slave labor, or other kinds of regulatory objectives.
I want now to spell out how government might effectively regulate trade to protect labor and the environment. Congressional initiatives undertaken in the 1980s linked access to US markets to respect for worker rights. The 1983 Caribbean Basin Initiative and the 1984 Trade and Tariff Act allowed products from certain developing countries to enter the United States duty free on the condition that that those countries observed internationally recognized worker rights. The list of worker rights included workers' rights of association (in free trade unions) and collective bargaining, prohibition against convict labor and child labor, and the right to enjoy reasonable wages, hours, and occupational safety and health. The US suspended Paraguay, Nicaragua, and Romania from the Generalized System of Preferences trade program because their governments had violated worker rights. The Omnibus Trade Act of 1988 required the President to attempt to include worker-rights criteria in the GATT.
This approach, while a step in the right direction, contains a fundamental shortcoming. The current structure of trade assumes an adversarial relationship between national governments. A nation's government is supposed to negotiate with the governments of other nations for a better position in world trade. Yet, if the principal conflict is between business and government, then national governments ought to cooperate with each other in regulating business regardless of the business firms' "nationality." We need a structure of world trade that will regulate international business firms to promote the well-being of humanity. As state governments cooperate with each other and with the federal government to promote the general welfare, so national governments should work together to set standards of business conduct and to punish violations of them. It makes little sense to accuse Mexico of abusing labor when the violations occurred at Mexican companies named RCA, Zenith, or Ford. Evaluations of conduct should be targeted to particular employers rather than to nations.
The alternative to an unregulated international economy is a regulated one. Government needs to create a structure of laws and enforcement procedures that will cause business firms selling in the world market to act in a socially and environmentally responsible way. If business refuses to comply, then government can and should restrict access to markets.
Current discussions between Mexican and US officials about repairing damage to the environment in the border region illustrate what is wrong with the present structure of trade relations. Maquiladora employers have created an environmental "cesspool" by dumping untreated industrial waste and by refusing to help pay for community infrastructure to accommodate their burgeoning work force. When the Mexican government proposed in 1988 to levy a 2% tax on maquiladora wages to pay for infrastructure improvements, companies protested. "Several (employers) say that they are in Mexico to make profits and that infrastructure is Mexico's problem," explained a Wall Street Journal article. Now the Salinas government is arguing that Mexico is too poor to clean up the border environment and so the US should provide the funding. The same US corporations that created the environmental mess would be allowed to escape its financial consequences under the Salinas plan as would the Mexican government which used environmental permissiveness to lure those corporations to Mexico. Instead, the US taxpayer, whose employment opportunities have been eroded by the flight of jobs to Mexico, will bankroll the cleanup. Obviously, economic justice requires that the cleanup costs be targeted more accurately to those whose environmentally irresponsible actions caused a need for them. What approach can be taken?
The US should not eliminate its tariff system on goods and services traded between Mexico, Canada, and the US; but, instead, should retain this system and convert it into an employer-specific method of screening imports according to social and environmental criteria. The degree of business adherence to certain standards would be reflected in a numerical compilation which would, in turn, drive the amount of tariff imposed upon a firm's products as they entered the US. The higher the degree of compliance with social and environmental standards, the lower the tariff. The lower the degree of compliance, the higher the tariff. So these tariffs would be designed to offset the cost advantage of "social or environmental dumping". Specifically, they would be designed to recover certain costs which the multinationals hoped to avoid by moving production to unregulated economies. The tariffs could be compiled to reflect the following three areas of concern:
(1) Environmentally responsible production. A multinational corporation producing goods in Mexico (or another foreign country) would be expected to discharge its industrial wastes according to "world class" standards for disposal of wastes into the water or air or for handling hazardous or toxic materials. If the producing company observed those standards, nothing would be added to the tariff. If the company did not observe the standards, then the regulatory authority would develop a plan for constructing waste-water or sewage-treatment facilities, for installing scrubbers in smokestacks, or for disposing of harzardous waste properly, and would determine the cost of implementing the plan. This total cost would be allocated to the units of production which the company expected to export to the US during a specified time period such as five years. The per-unit costs would be translated into a percentage mark-up to the product price. That mark-up would become the basis of the tariff which the US Government would collect as goods are shipped from Mexico to the United States. The US Government might then use the proceeds to assist the Mexican government in building sewage-treatment facilities and other infrastructure improvements needed to maintain a clean natural environment.
(2) Socially responsible production. Multinational corporations operating in Mexico would be expected to pay their employees an hourly wage equal to the highest level of prevailing wage in their industry by Mexican standards as well as to give their employees the maximum amount of paid leisure or other benefits which they would be entitled to receive by the highest Mexican standards. If the company compensated its employees according to this standard, nothing would be added to the tariff. Otherwise, the US would collect a tariff, through a percentage markup to product price, which would be equal to the difference between actual and expected labor costs per unit of product spread over a number of units of goods exported to the US during a specified time period. The proceeds might be used for services for dislocated workers in the US who were injured by the relocation of production to Mexico. In addition, I would propose that the "highest prevailing" Mexican wage be escalated upwards by a certain percentage each year as part of a development plan for the world economy.
(3) Production that respects human rights. This third category would identify certain corporate activities which are considered to be humanly intolerable. Among them would be production in an unsafe work environment or production with child or convict labor. If a company is discovered to be violating any of these basic standards, its products would be assessed a fine that would be collected through tariffs levied by the US in the same manner as that described above. Alternatively, severe violations of human-rights standards might warrant an outright ban on importation of the offending company's products into the US.
It is obvious that a tariff-based system of enforcing labor and environmental standards in world trade would be dealt a crippling setback if the US Congress approves NAFTA. Such a free-trade agreement requires that government surrender this important tool for regulating business activity. Tariffs, however, represent a less severe regulatory technique than litigation leading to bans on the sale of products. While the mechanism of inspection and evaluation and application to particular products might seem to increase bureaucratic red tape, existing product classifications in world trade, computer technology, and the use of bar codes and optical scanners could make the process quite manageable. Harder to achieve would be the political consensus that government ought to undertake this kind of business regulation.
Compounding the problem is the prospect that evaluating corporate performance according to legal definitions of "internationally recognized worker rights" may not be adequate to prevent the real damage likely be done if Congress approves NAFTA or the latest GATT agreement. While governments might punish employers for violating such rights of workers as the right of association, US workers would still suffer enormously from free trade with Mexico even if employers there scrupulously observed all the regulations. The proposed safeguards still do not adequately address the problem that US factory workers earning perhaps $15 an hour are made to compete on cost with Mexican workers earning $ 4 or $5 a day. Such disparities of wage have little to do with production efficiencies or the virtues of educational systems, but, instead, reflect factors relating to the two countries' differing levels of economic development.
The only way that government can effectively regulate wages and protect living standards is by intervening directly in the labor market. Such intervention would take the form of limiting the labor supply. The best way to limit the labor supply is by reducing the hours of work. When supply is reduced relative to demand, the price of the commodity sold rises. So the free market for labor would ultimately provide a higher hourly wage if work hours were reduced. Government can induce employers to cut work schedules by enacting legislation which prescribe a certain lower standard number of work hours in a week and require that work done beyond the standard be compensated at a higher rate of pay. The federal government can make this change in the context of amending the Fair Labor Standards Act. About ten years ago, Rep. John Conyers of Michigan introduced a bill in Congress that proposed to reduce the standard workweek gradually from 40 hours to 32 hours and to increase overtime pay from time-and-one-half to double-time.
But the US economy is not a closed system—shorter work hours would not necessarily reduce the labor supply. The amount of shrinkage could be made up by increased importation of foreign products. And since employers, especially in the United States, are generally phobic about granting shorter hours, one would anticipate that unilateral moves by government to cut work hours would stimulate a new effort by business to shift production to other countries. A solution, therefore, might be to internationalize the campaign for shorter work hours. Working people in several countries, through unions and other socially conscious organizations, need to build a fire under their own governments to persuade those governments to cut working hours in their national economies. Each nation might thereby do its part in shrinking the global labor supply by reducing work hours according to a cooperative world development plan. The industrially and financially more advanced nations, especially ones that enjoy a trade surplus, can contribute more to reducing labor supply than the industrially or financially weaker nations can. Fortunately, the government of Japan has developed an initiative to do just that. MITI's latest trade and industrial plan proposes to harmonize trade relations between Japan and its trading partners by encouraging Japanese workers, in journalists' language, to "work less and play more." Specifically, this plan calls for annual work hours in the Japanese economy to fall to around 1,800 hours by the mid-1990s.
Environmentalists, too, have a stake in globally reduced work hours for this would mean breaking the historic link between employment and ecologically damaging economic "growth." No longer would it be necessary to force-feed production through the natural environment just to have jobs. More people could become gainfully employed on a given volume of productive work. Moreover, with more free time, people would have more time to mend and repair consumer products instead of throwing broken products away and purchasing replacement items. The "throwaway" culture could become a thing of the past. Consumers would have more time for recycling. Given more time for spiritual growth, people could turn to a less materialistic type of personal satisfaction that treads more lightly on the environment. With a little imagination, the extra days off could be staggered to reduce traffic jams and, of course, cut down on work-related commuting trips. Happily the interests of labor and the environment combine in a requirement that work time be reduced.
Today we stand at a fork in the road in the world's economic history, contemplating whether to take the "free-trade" path that leads to cheap labor and environmental degradation or the path of social and environmental responsibility. If we choose the latter, government will need to rise to the occasion, reform itself, and assume a new economic role as a necessary regulator of the free market.
William McGaughey is author of A US-Mexico-Canada Free-Trade Agreement: Do We Just Say No?" (Thistlerose Publications, 1992).