Don’t Believe the Hype About the Benefits of Free Trade

9 September, 2013: Protesters display signs at demonstration opposing the Trans-Pacific Trade Partnership in Aushburn Junction, Virginia. (Photo: Global Trade Watch)Protesters display signs at a demonstration opposing the Trans-Pacific Trade Partnership in Aushburn Junction, Virginia, September 9, 2013. (Photo: GlobalTradeWatch)

Harvard political philosopher Michael Sandel has argued that to discuss contested political issues, people must engage directly with the moral and ethical convictions of society. Only in this way can we discover the essential nature of the conflicts that might divide us politically.

The essence of the free trade debate revolves around a critical question: Who benefits? This question should shape all our public policy discussions related to free trade. Political elites who negotiate these agreements have consistently argued that free trade is beneficial for both industrialized countries and emerging markets: Neoliberal policies based on free markets will increase gross domestic product through job growth, the institution of worker rights and protections against environmental damage.

On the day he signed the North American Free Trade Agreement (NAFTA) in 1993, Bill Clinton said, “I believe we have made a decision now that will permit us to create an economic order in the world that will promote more growth, more equality, better preservation of the environment, and a greater possibility of world peace.” When George W. Bush negotiated the Central American Free Trade Agreement in 2005, he observed, “As CAFTA helps create jobs and opportunity in the United States, it will help the democracies of Central America and the Dominican Republic deliver a better life for their citizens.”

In a recent speech in Portland, Oregon, at the headquarters of Nike corporation, President Obama said the Trans-Pacific Partnership (TPP) was based on the principles of “fairness, equity, and access,” would increase middle-class jobs, create national prosperity and protect workers’ rights with “enforceable provisions” that would also protect the environment. Just how accurate are the claims that free trade is beneficial to its signatories? Analyzing the last multilateral free trade agreement negotiated by the United States in 2005, CAFTA, sheds light on this question and may provide insights into the perceived economic benefits associated with the Trans-Pacific Partnership.

A review of indicators from the 2014 “United Nations Human Development Report,” and recent World Bank data focusing on GDP annual growth rates and poverty rates, suggest the signatories of CAFTA have experienced uneven and clearly limited economic and social benefits from the agreement. Free trade does increase economic growth, however, the extent of that growth may be exaggerated. In a review of GDP per capita from the UN report, all the signatories of CAFTA experienced an increase in GDP per capita from 2005 to 2012. However, there was a significant gap in this growth. The United States saw its GDP per capita grow by nearly $5,000 while Honduras grew by $471 during that period.

According to the World Bank, GDP annual growth rates were uneven in Central America. From 2005 to 2013, GDP was halved in the Dominican Republic. Declines also occurred in El Salvador, Honduras and Costa Rica. GDP was stable in Guatemala and Nicaragua. Poverty rates varied from 22 percent in Costa Rica to 64.5 percent in Honduras. Only the United States and Costa Rica increased health-care expenditures beyond 3 percent from 2005 to 2012. All other countries saw increases of 2 percent or less. Homicide rates skyrocketed in El Salvador and Honduras. Literacy rates increased 2 percent in Costa Rica and Honduras, but the other countries had minimal or no increases. On one environmental indicator, “change in forest area,” the percent of area under forest cover declined significantly in Nicaragua, Guatemala, Honduras and El Salvador.

One piece of data stood out from the rest: income inequality. The Human Development Index measures the national average of human development in three areas: health, education and income. The inequality-adjusted index (IHDI) measures a percentage of overall loss in human development due to inequality. According to the report, the United States had an overall loss of 17.4 percent. Costa Rica had a rate of 19.9 percent while the other Central American nations were above 23 percent.

Globalization has created contentious economic, political and social forces: rich versus poor, North versus South, multinational corporations versus civil society and intergovernmental organizations versus sovereign states. Free trade agreements have exacerbated these tensions by providing multinational corporations with an inordinate influence on making rules for the global economy, and by establishing procedural norms that lack transparency in the creation of these rules. The process, principles and outcomes of free trade agreements promote corporate power while ignoring the concerns of civil society. It is no irony that discussions of “free trade” routinely violate democratic processes and discourse.

TPP exemplifies these violations. Critical areas of the TPP negotiations – rules of origin, currency manipulation, the rights of labor, environmental sustainability and investor-state dispute settlement (ISDS) – have been kept secret, sheltered from public or journalistic review. ISDS provisions in CAFTA provide evidence of how multinational corporations might utilize these provisions in TPP. Manuel Perez-Rocha and Julia Paley have described the “devastating effect” corporate power has had on displacing farmers from their land, weakening or eliminating environmental protections from destructive mining practices and compromising national sovereignty of the Central American countries that are CAFTA signatories. They argue the mere threat of litigation can lead to local regulations being overturned in these countries.

Public Citizen claims free trade agreements allow foreign investors to “skirt national court systems and privately enforce extraordinary new investor privileges by directly challenging national governments before extrajudicial tribunals.” Public Citizen estimated $440 million in compensation has been paid out to corporations in investor-state cases in Central America. What is notable is the types of cases that are typically litigated: environmental protection regulations, state controlled pricing of energy, public health systems, land rights and transportation systems. For example, ISDS proceedings are increasingly being used by mining companies in Central America to bypass locally established environmental protection laws in their zealous pursuit of gold in the region.

In all these instances, national sovereignty has been co-opted by the power and legal acumen of multinational corporations. Columbia economist Jeffrey Sachs notes ISDS would allow foreign companies and individuals to sue a host country through ad hoc arbitration proceedings rather than the judicial system of the country. The World Bank has been complicit in providing logistical support for the ad hoc tribunals that carry out these proceedings. It is important to recognize multinational corporations’ use of ISDS provisions is not isolated to developing countries. They can be used to weaken local regulatory laws in the United States. State laws and constitutional protections could be subject to all sorts of corporate litigation. In this sense, ISDS represents a threat to democratic processes associated with representative democracy. Regulatory measures, workers’ rights laws and environmental protections passed in Congress as well as state legislatures could be rescinded, violating the fundamental principles of the consent of the governed.

Free trade agreements have upset the balance between private wealth and the commonwealth as corporate power and deregulation policies associated with a neoliberal agenda ride roughshod over the public interest. It is time to re-establish the balance between private and public wealth. In the upcoming congressional vote on TPP, the House has an opportunity to strike a serious blow to the neoliberal agenda. This would be the first step toward a new concept of free trade, one where the beneficiaries are the citizens and the social institutions that support them.