Three-Dimensional Economics

If you believe the Bush administration, its free trade agreement with five Central American countries and the Dominican Republic will open ​“BIG” (its emphasis) markets to American products, forge an alliance to save domestic textile jobs, ​“protect labor and environment,” and, of course, ​“strengthen freedom and democracy.” 

Judging from their protests, many workers and peasants in those countries disagree. And judging from Bush’s reluctance over the past year to bring the Central American Free Trade Agreement (CAFTA) to a vote, a majority of even this Republican Congress don’t believe him. But the push for a vote is now on: The region’s leaders are visiting the United States and trade officials are striking special interest deals for support – such as the $500,000 federal grant that tilted The Humane Society to support CAFTA after years of criticizing similar trade pacts.

There are good reasons to doubt the administration claims. Even if they’re wide open to American exports, the signatories are small, poor countries – including Guatemala, El Salvador, Costa Rica, Nicaragua and Honduras. The largest, the Dominican Republic, is a market about the size of Bakersfield, California. Even optimistically exaggerated trade with them isn’t going to make a dent in the record U.S. trade deficit, which reached $617 billion, or 5.3 percent of the U.S. economy, last year. 

CAFTA isn’t likely to expand markets by reducing Central American poverty much either. Flooding their markets with subsidized U.S. corn will hurt many of the rural poor. The North American Free Trade Agreement (NAFTA), the model for CAFTA, offers scant inspiration. Over NAFTA’s first eight years, Mexico lost 1.3 million jobs and suffered declining real wages, according to the Carnegie Endowment for Internal Peace, and the United States lost 880,000 jobs, according to the Economic Policy Institute.

No boon to workers

Hemispheric cooperation is not likely to save either Central American garment workers or the remaining U.S. apparel and textile workforce. The global quotas on export of apparel and textile products to Europe and the United States established under the longstanding Multifiber Agreement had dispersed the industry to dozens of poor countries. But when it ended on December 31, Chinese garment exports to the United States shot up in January by 75 percent, with 20 times more cotton knit shirts coming in than a year earlier. Apparel factories in both Central America and the United States have been shutting down. Not even China’s upwards reevaluation of its currency, which is needed to reflect economic reality and to redress a rapidly growing trade imbalance with the United States, is likely to stop the Chinese from capturing a projected 70 percent of the U.S. market in a few years, much of it at the expense of small, poor, garment-exporting countries. 

On labor rights, CAFTA is no improvement over NAFTA’s deeply flawed labor side agreement, and it retreats from the labor rights standard that unions praised in the free trade agreement with Jordan signed in 2000. It simply requires the countries to enforce their own laws and ​“strive” to protect labor rights, with no meaningful penalties if they fail. Under current preferential trade agreements, unions and human rights groups have been able to petition the U.S. government for trade sanctions – and win some improvements – when Central American governments have violated international labor standards.

Central American laws and enforcement of the rights of workers to organize and strike fall far short of international standards, according to studies by the State Department, the International Labor Organization, Human Rights Watch and labor organizations, including the AFL-CIO. And the International Labor Rights Fund, whose study of Central America the Bush administration refused to release officially, reports that even during CAFTA negotiations several governments ​“were taking steps to downgrade their labor laws.”

The weak protections for labor rights are not the only way in which CAFTA is a blow against democracy. More than a deal to lower tariffs, CAFTA is an agreement to protect corporate rights (including intellectual property) and to restrict government controls over investment, public procurement and provision of public services that breaks new ground, according to Lori Wallach, director of Public Citizen’s Global Trade Watch. ​“The procurement rules are horrific, even broader than NAFTA, way broader than WTO,” she says. In many ways, CAFTA grants investors and corporations far more rights than NAFTA or the proposed inclusion of public services under World Trade Organization rules. It even incorporates some of the very broad and controversial language of the failed Multilateral Agreement on Investment.

CAFTA, following the NAFTA precedent, allows foreign investors to sue governments under international trade tribunals to protect against loss of property, not only from nationalization but even from regulatory measures that might constrain corporations and are thus deemed ​“indirectly … equivalent to expropriation.” Despite a congress-ional requirement in the 2002 ​“fast track” legislation to restrict such investor protection, CAFTA opens the door to expanded action by foreign corporations in the United States and other CAFTA countries to fight ​“regulatory takings,” or losses of potential profits because of public interest legislation. For example, if CAFTA had been in place, Harken Energy – an oil company in which Bush was once an investor and director – could have more easily pursued its claims for $12 million in damages against Costa Rica for a government moratorium on oil drilling. Those claims are now filed in that country’s courts.

CAFTA’s larger context

CAFTA is more important politically than economically. It’s a stalking horse for the broader Free Trade Agreement of the Americas and a step toward stronger protection of corporate interests in future trade agreements. It faces unusually unified Democratic opposition, much of it focused on labor rights, and right-wing Republican hostility, focused more generally on globalism. But some Republicans also have regional concerns about increased imports of textiles and sugar, since CAFTA threatens a price support system that relies on supply control, not on taxpayer subsidies.

The debate over CAFTA highlights some of the weaknesses in the cheerleader view of globalization, exemplified in New York Times columnist Thomas Friedman’s latest effusive book, The World Is Flat. The world has been flattened, he argues, by a combination of software and communications technology, the opening of China, India and other markets, and changing corporate strategies, such as outsourcing and offshoring. Everybody competes and collaborates on this giant, open, level playing field now, offering great opportunities to rich and poor countries alike.

While this ​“flattening” – or opening – of a more global market in labor, goods and services is undoubtedly underway, Friedman ignores the vertical dimension of the new world economy. First, there’s the issue of power. Deals like CAFTA underscore how much the rules of the world economy are shaped by the United States, acting on behalf of the interests of multinational capital (and secondarily in the interests of U.S. corporations). In his previous book, Friedman said that governments had no choice but to accept the ​“golden straightjacket” of the Washington Consensus policies of austerity and privatization. When Bush advocates the spread of freedom and democracy, he is not calling for power to the people. He wants governments that will accept these external policy constraints and deal with the consequences, through the appearance of democracy and elections, but will not deviate from or challenge the corporate global agenda. The ​“flat world” has room for only a very flattened notion of democracy.

There is also the issue of inequality. The number and proportion of extreme poor, living on $1 a day or less, has declined worldwide over the past two decades, as the numbers of moderately poor have increased, but the progress has been uneven, with many countries regressing, especially in Africa. While there’s a heated debate among academics about how to measure global inequality overall and whether it has risen or fallen in recent decades, even the most optimistic pictures show rising global inequality if the dramatic changes in China are excluded. Indisputably, inequality within most countries, whether rich or developing, including China, is increasing. 

Submission to free markets and the dictates of the Washington Consensus do not guarantee economic success, and as economist Jeffrey Sachs argues in The End of Poverty, the market is no magic answer to global poverty. Indeed, several studies, including a recent analysis from the International Labor Organization, have found that protection of labor rights, democracy and greater equality are associated with higher economic growth, stronger export performance and other signs of economic success. 

China, on the other hand, proves an exception to the arguments of both neoliberals and social democrats. China has succeeded partly because it hasn’t submitted to the flat world: Its currency controls, which now pose severe problems for the United States, helped to stabilize China during the 1997 Asian financial crisis and helped it grow (often at the expense of jobs in both rich and poor countries). But CAFTA would prohibit such controls, which permit governments to slow down sudden flights of capital, and many of the other means by which China harnessed foreign investment for domestic growth.

If opponents succeed in blocking CAFTA, the victory will be important mainly as a signal that the onwards march of corporate-friendly economic agreements has at least temporarily halted. It will open political space to the demand that governments go back to the drawing board and devise new relationships and institutions that respond to the realities of both the ​“flat” world of global integration and the ​“vertical” world of power and inequality.