Free trade provokes concerns

Dom Yarnell

As clouds of tear gas drifted through the streets, thousands of police equipped with riot gear and surrounded by a 3-meter high chain link fence stood guard. In addition to their shields, batons, and gas masks, police used water cannons and guns armed with rubber bullets and laser sights in order to keep out the throng of people trying to tear down the barricade with ropes and chains. The crowd, equipped with gas masks of their own, hurled chunks of concrete, Molotov cocktails, and the police’s own tear gas canisters over the fence at the thousands of police officers trained to handle riot situations.

The scene was one that some Americans might expect to see in photographs of the West Bank in the Middle East, or some war-torn, far off country. This battle zone, however, occurred last weekend in Quebec, Canada, when the Summit of the Americas met to discuss a free trade agreement that would include each of the 34 participating countries in the Western Hemisphere.

The leaders of all nations in the Western Hemisphere (except Cuba) met to discuss a plan that would end trade barriers between each of their countries. The meeting was the third summit of the Americas and included three pillars of the summit process: strengthening democracy; creating prosperity; and realizing human potential.

On the other side of the physical barrier erected to protect the leaders of the Western nations, however, protestors believed that further trade would hurt more than help the people of the Western Hemisphere, all things considered.

This anti-globalization sentiment is based on a variety of concerns, including job security, environmental protection, and ethical treatment of workers. With free trade, critics say, manufacturing jobs are exported to where wages (and living conditions) are substantially lower. Along with low standards of living, difficulties in enforcing labor laws and environmental restrictions make the prospect of transplanting business operations to relatively poorer countries even more enticing. Then, after several years of slightly elevated wages, increased standards of living, and better enforcement of environmental regulations, should there be another country in even worse condition, corporations would shift their operations to that country, leaving the first country as it began. The result is a higher unemployment in the U.S., little if no improvement for foreign countries, with the environment suffering during the process.

The proponents of free trade, however, laud the prospect as a way to improve the situations of all countries involved. Without tariffs, it becomes profitable to export more goods to other countries, making for an expanded marketplace. Countries will be directly competing with each other for the sale of goods, which will drive the prices of goods down for the consumers. Lower prices means more goods for consumers, higher sales for producers, and a corresponding increase in employment to meet the new demand for goods. Jobs are made available to people in foreign countries where no jobs existed before free trade, increasing the countries’ standards of living, while increasing the profits of domestic corporations.

The resolution of these two seemingly plausible analyses requires a look at the businesses producing goods and the people consuming them in each country. An economic model of trade, known as the Ricardian model, sheds some light on the prospect of free trade by categorizing factor inputs (resources necessary for production) into capital or labor, and goods into labor-intensive or capital-intensive. Capital can be described as machines and technology used by workers (labor) in the production of a good. For instance, due to the improvements of agricultural technology over the course of this century, the farming industry has transformed from labor-intensive to capital-intensive, meaning that fewer workers are needed to produce the same crop yield.

Before trade, each factor input is paid according to its relative abundance (i.e., how much of one factor there is compared to the other) for any given country. The less there is of one factor (relative to the other), the more it gets paid (again, relative to the other). This comparison makes sense if you think about valuable objects like gemstones. Diamonds are more expensive than garnets because, among other reasons, they are more rare. If diamonds were more abundant, they might be cheaper than garnets. The same goes for capital and labor; the less there is of one, the more it gets paid.

Although a country that does not trade is forced to produce the blend of capital and labor-intensive goods its citizens require, the country open to free trade will find it profitable to concentrate on producing the goods that heavily require the factor input of its relative abundancy. For instance, the U.S. has a relatively high abundance of capital, and would thus find it profitable to produce and export capital-intensive goods, like agricultural products. Meanwhile, the relatively labor abundant Mexico would find it profitable to produce labor-intensive goods, like textiles.

This increased demand for relatively abundant factor inputs increases the amount paid for these factors. Thus, the owners of capital in the U.S. would be paid more for their equipment, and the laborers of Mexico would be paid more for their work. On the flip side, however, the U.S. laborers would be worse off because demand for their factor input would decrease relative to capital and decrease their wages, just as the rent paid to Mexican owners of capital would decrease. This would explain why U.S. labor unions support trade barriers: to protect their wages.

The proposed Free Trade Agreement of the Americas (FTAA) would basically extend the reach of NAFTA, the controversial trade agreement implemented to create free trade throughout North America.

Assistant Professor of Economics John Higgins pointed out some of the aspects of NAFTA that are sometimes ignored: “NAFTA included a clause that…would compensate workers who lost their jobs because of increased trade. Approximately 250,000 workers received compensation the year NAFTA went into effect…but when the country has been producing 180,000 to 200,000 jobs per month, is it really that bad of a situation? Of course, when you’re worker that loses his job, you don’t feel like it’s all that fair.”

The values of the parties involved are the impetus for the strong reactions to trade agreements. As Higgins said, “You can’t argue that free trade will increase the income…with an environmentalist who sees income as part of the problem.”

Likewise, those with humanitarian concerns will be indifferent to the prospect of increased national income, and members of labor unions are not likely to sympathize with the increased profits of capital-owners when they lose their jobs due to increased trade.

Despite the outcome of the FTAA, scheduled to commence in 2005, the economic change will benefit some to the detriment of others. This fact evokes strong reactions to the people making the decisions that dictate the “winners” and “losers,” as evidenced by the violence of the protest in Quebec.