Jagdish Bhagwati's Free Trade Today and Douglas Irwin's Free Trade Under Fire
Robinson, Ian
Princeton University Press, 2002 248 pp $27.95 IN 1985, THE first few environmental organizations were beginning to look critically at the World Bank's road and dam projects. They had little...
...An important consideration will surely be whether India plans to eliminate its remaining capital controls, making its currency more vulnerable to currency trader panics...
...Here is Bhagwati's backhanded rationale for this policy: For reasons that are difficult to fathom, the anti-globalization agitationists seem to think that globalization is some sort of gigantic blob of a concept or phenomenon where every element necessarily implies every other and that if you are for free trade, you must also be for free short-term capital flows, for free direct foreign investment, for free immigration, for free love, for free whatever...
...Consider the Ford Focus plant in Hermosillo, Mexico, which I visited last February...
...But it does weaken their credibility as even-handed judges of the morally and politically loaded issues under discussion...
...Plant closings, and decisions to invest in new, labor-saving production technologies—both of which were heightened by international competition— contributed to that decline, as did intensified employer resistance to union organizing efforts...
...The movement is so large and diverse that one might despair of finding any underlying coherence to its criticisms...
...Irwin, in fact, was a student of Bhagwati's...
...The AFL-CIO had been opposing further trade liberalization since 1969, but it was the exception among labor federations in the global North...
...Although this accurately describes some, it is not true for the majority...
...That is, firms will shift production to other countries in response to smaller and smaller differences in labor costs, other things being equal...
...He favors considerably less of the former than we have today, and much more of the latter...
...But the best test of his argument would be to compare plants with very similar productivity levels in high- and lowwage countries...
...The difference in wages between union and non-union blue collar workers doing the same jobs remained quite stable in the U.S...
...Another large swath of the critics' concerns is thus ruled out of bounds...
...Bhagwati acknowledges that, in theory, trade liberalization could result in falling wages for unskilled workers in the countries where labor is scarce, relative to the rest of the world—the North, for practical purposes...
...Both authors characterize the critics as "anti-globalization...
...From this, he concludes that there is no evidence that free trade—narrowly construed to rule out of bounds Rodrik's argument about the impacts of international capital mobility—is an important cause of the falling real wages experienced by unskilled workers in the United States since the mid-seventies...
...Dani Rodrik has argued that increased international capital mobility could significantly increase the "price elasticity of the demand for labor...
...trade deficit is a product of macroeconomic policies and increased international capital mobility, rather than the trade policies of the United States or its trading partners...
...But they fear the emergence of a new protectionist coalition with political clout unprecedented since the Second World War...
...Irwin's survey is useful for the newcomer to U.S...
...The size and depth of the international coalition that came together to protest the WTO was striking...
...The resistance was itself motivated in no small measure by the search for ways to cut production costs in the face of intensified international competition...
...To characterize most environmental organizations, or most contemporary trade unions, as "anticapitalist" is absurd, if that means that they are committed to the abolition of capitalism...
...For example, it is not unreasonable for Indian policy makers to look at how currency markets are 104 n DISSENT / Spring 2002 BOOKS working—including the risks that their currency will be devalued—when deciding whether to replace their long-standing policy of food self-sufficiency with one that relies on food imports in a liberalized agricultural trade regime...
...The books reviewed here take a few very small steps in that direction...
...Most important, though, it captures the embattled state in which mainstream trade economists loyal to free trade doctrines now believe they exist: "there are not too many out there, fighting the fight for free trade," Bhagwati worries, "We need to change that...
...If the term means that they are critical of the way that capitalism currently operates, the characterization is accurate, but then the authors' summary dismissal of that position becomes puzzling...
...For example, Irwin makes a strong case that the U.S...
...They had little interest in trade policy...
...Irwin, for example, tells us that for many of these groups, "Free markets and capitalism are seen as embodying and furthering environmental destruction, male dominance, class oppression, racial intolerance and colonial exploitation...
...The two books are very similar in their underlying assumptions...
...In Western Europe, similar coalitions first emerged in resistance to some features of the European Union's Maastricht Treaty of 1992...
...If so, this would pressure firms producing domestically at lower profit rates to cut their costs, which is most effectively done by cutting wages in a labor-intensive industry...
...This suggests that we should focus more on the wage effects of trade liberalization (and increased international capital mobility), and less on the rival predictions of trade-induced job loss/creation that so dominated the debate over NAFTA...
...trade policy and examines the structure of the WTO...
...Bhagwati defends free trade against critics who claim it adversely affects equality and economic growth...
...These coalitions were re-energized and expanded when the Organization for Economic Cooperation and Development sought to negotiate a Multilateral Agreement on Investment that would extend the essential features of NAFTA's investment chapter to the organization's thirty member countries and beyond...
...Bhagwati is right that one does not have to support or oppose all of these things...
...This could dampen wage growth not only in the North, but in the South as well...
...I am also persuaded by his argument that the net job creation (or loss) associated with changes in trade policy is probably quite small...
...As economists like to point out, what happens at the margin is enormously important...
...After all, a particular U.S...
...we cannot afford to lose you...
...Organizations concerned with equitable development in the "Third World" tended to support trade liberalization, though most argued that this would be far from adequate for genuine economic development...
...And then there were the television images and the stunning denouement: Teamsters marching with "turtles," tear gas and police charges in the darkness, the collapse of the negotiations...
...We are not against globalization per se...
...Unfortunately, Irwin and Bhagwati, by tilting at anticapitalist windmills, fail to join the real argument...
...It is to be expected that, in such a politically charged context, they will marshal their evidence more like lawyers than engineers coolly adding up the various stresses acting on a bridge...
...Irwin surveys the traditional arguments in favor of free trade and looks at how trade liberalization is likely to have an impact on jobs...
...The unit labor costs that matter are those for the plants that compete directly with their own...
...NAFTA stimulated the formation of a similar coalition in the United States...
...His findings have been published for more than a decade, yet neither Bhagwati nor Irwin mentions this work...
...IN THEIR EFFORT to extract free trade from the wider matrix of economic globalization, the authors downplay the degree to which trade deals such as NAFTA and the WTO shape the character of the larger economic system...
...The implication is that there is little downward pressure on the wages of high-productivity workers even in the DISSENT / Spring 2002 •I05 BOOKS traded sectors...
...In economics this is known as the StolperSamuelson theorem...
...Free Trade Agreement in 1988...
...The reason that such combinations were seldom found in the past, despite their unparalleled competitive advantage, was that "developing" countries lacked sufficient domestic capital to build such plants in any significant number...
...The coalition was re-activated to challenge efforts to extend CUSFTA to Mexico under the North American Free Trade Agreement of 1993...
...It is true that high-productivity, low-wage plants are not the norm in Mexico, where many of the plants built before trade liberalization are less productive, yet pay higher wages, than their maquiladora counterparts...
...He defends recent WTO decisions striking down environmental regulations and argues against including labor standards in the WTO...
...This should not surprise us...
...This is a critical piece of their arguments, given the importance of wages for poverty and economic inequality...
...A second obstacle to engaging the critics persuasively is the authors' refusal to address economic globalization as a system...
...As citizens who need to hear all of the relevant arguments before we make judgments about which policies to support, we need and deserve much more...
...These lower prices will force U.S...
...Bhagwati and Irwin want to focus exclusively on the free trade component of this larger system...
...IRWIN TAKES a different tack on the wage question, arguing that international variations in wage levels are largely determined by differences in labor productivity...
...and world trade policy...
...But with dramatic increases in international capital mobility—a growing share of which entails transfers of capital from the North to the global South—this is no longer such a serious constraint...
...Both authors seem to think that the main reason critics are against globalization is that they are anticapitalist and antimarket...
...Thereafter, the effort to build an enforceable international regime of investor property rights shifted to the next round of WTO negotiations, scheduled to begin in Seattle in late November 1999...
...Focusing narrowly on "free trade" also means that the interactions between trade liberalization (that is, reductions in tariffs and quotas at the border) and other aspects of the global economic system are ignored...
...IAN ROBINSON is the associate director of the Labor and Global Change Program of the Institute of Labor and Industrial Relations at the University of Michigan-Ann Arbor...
...producers of the same goods to cut their prices to remain competitive, which will then force them to cut their wage levels...
...plant does not compete with the average unit labor costs of the Mexican or the Chinese manufacturing sector...
...The books differ, however, in focus and style...
...Why not...
...Harley Shaiken has documented the existence of many parallel cases in Mexico...
...The multinational social movement mobilization against the MAI was one important 102 n DISSENT / Spring 2002 BOOKS reason why it was shelved in 1998...
...The protests at the 1999 World Trade Organization meeting in Seattle marked a turning point in trade politics...
...Ford Hermosillo production workers were paid about $2.70 per hour...
...Even if we accept the narrow parameters within which the authors wish to assess the impacts of free trade, their discussions of the trade-and-wages issue is unpersuasive...
...He reviews the evolution of U.S...
...We think that the global economy can be made more democratic by DISSENT / Spring 2002 n 103 BOOKS regulating international capital mobility and changing the decision-making processes of global institutions such as the WTO, the International Monetary Fund, and the World Bank...
...This plant has productivity and quality levels very close to those of Ford's only other Focus plant, located in Michigan...
...The critics insist that there are better and worse forms of market economy, that the neoliberal model of regulation toward which we are currently moving (one that expands property rights while ignoring human rights) is worse than feasible alternatives, and therefore, that the current model of global economic regulation can and ought to be changed...
...That Bhagwati and Irwin ignore these potentially important counter-arguments to their analysis of trade and wages is not reassuring...
...The first hint that something fundamentally new was afoot in trade politics was the unprecedented coalition of Canadian social movement organizations that mobilized to force a national election on the Canada-U.S...
...trade policy...
...West European and Canadian trade unions supported the Tokyo Round of the General Agreement on Tariffs and Trade (GATT), signed in 1979 and implemented over the next seven years...
...It is surely misleading to tell readers that trade liberalization has no serious negative impact on the wages of unskilled workers without mentioning these causal pathways and making a serious effort to assess the magnitude of the effects along each of them...
...Human rights and women's organizations likewise ignored trade agreements, focusing on authoritarian regimes and death squads...
...The author of one of the books reviewed here, Jagdish Bhagwati, was in Seattle as an adviser to the WTO's director...
...I'm afraid not...
...We think that it is possible to construct an alternative model of global economic regulation that will generate better outcomes for the bottom two-thirds of the world's people and for the global ecosystem, just as it has proven possible— and desirable—to construct national market economies along principles other than those of laissez-faire...
...At the plant level, we find a different story from the one suggested by Irwin's aggregate data...
...Rather, we are critical of the particular kind of globalization that exists today, which we would characterize as free market or neoliberal...
...manufacturing sector throughout the 1970s and 1980s, but the share of the workforce belonging to unions diminished sharply...
...Even if these factors are not at work, the closing of union plants due to trade competition—think of the apparel, electronics, steel, and auto sectors—resulting in the loss of relatively high-paying union jobs for blue collar workers cannot be dismissed...
...The causal mechanism is the lower prices that should obtain for laborintensive commodities produced in laborabundant countries and imported into the United States...
...Bhagwati is more appropriate for those with a more theoretical backgroundand orientation...
...This failure does not prove that they are wrong about the impact of trade liberalization on wages...
...A colleague then "drew me away from a confrontation that would surely have left me bloodied, saying, 'You are the foremost free trader today...
...If such controls are eliminated, the argument for free trade in food becomes less persuasive because the potential costs—a large devaluation that leaves the country without the foreign reserves to meet the population's food needs—would be much greater, while the potential benefits would remain unchanged...
...To begin with, we cannot infer from the fact that consumer prices for such goods were rising that import prices were also rising...
...That is why genuine engagement between those on different sides of these policy questions is essential...
...I find them convincing on some issues...
...For example, some of the most novel and important provisions in NAFTA and the WTO—pertaining to investor property rights and the deregulation of financial services—undoubtedly increase international capital mobility...
...Bhagwati's book originated as three lectures delivered at the Stockholm School of Economics in 1998...
...Bhagwati argues that the relative prices of labor-intensive imports actually rose in the 1980s, when the worst decline in real wages occurred...
...These books are essays in persuasion, written at what the authors (correctly, I think) regard as a critical moment in the evolution of U.S...
...But while conceptually distinct, the fact is that both principles are promoted in NAFTA and the WTO...
...Bhagwati and Irwin both devote considerable effort to exploring how free trade affects wages, yet neither so much as mentions Rodrik's wellknown argument...
...Still, I think that several things can be said that apply to most of the people and organizations at the center of this movement...
...Both authors are mainstream trade economists...
...Free capital mobility is one thing, Bhagwati says, free trade is another...
...Higher consumer prices in the United States might simply mean that firms importing their clothing from abroad were marking up their prices more, and so reaping higher profits...
...These cases swamp those like the Ford Hermosillo plant in the aggregate national data...
...It follows that the unit labor costs (that is, the labor cost of producing one unit of a good) of high-wage, high-productivity plants in the global North are similar to those of low-wage, low-productivity plants in the global South...
...Slippage in the way the concept of "free trade" is employed permits Bhagwati and Irwin to evade this challenge...
...But insofar as these things are tangled together, interacting with one another in a single global economic system, we have to concern ourselves with its logic (or lack thereof...
...A refusal to discuss the wider context shuts down discussion of such interaction effects...
...Irwin offers national manufacturing sector data from sixty-three countries to support his claim that wages are largely determined by productivity, and on the surface this looks convincing...
...This conclusion is premature at best...
...However, Bhagwati and Irwin do not succeed in engaging the most important of the concerns that animate critics of NAFTA and the WTO, because they do not listen very carefully to what these critics have to say...
...Do Irwin and Bhagwati understand that this is what most of the critics believe...
...They themselves tell us that they are advocates for free trade and that they are strongly committed to defeating arguments against it...
...But high-productivity, low-wage plants are the trend "at the margin," because when low wages can be combined with high productivity and quality they result in unbeatable unit labor costs...
...While trying to get to the meeting, he found himself "confronting a tough Chinese Red Guards-style female demonstrator who was blocking my way illegally...
...If we want to assess the impacts of these international agreements, we must consider how they affect capital mobility, and how it in turn affects workers, the environment, and so on...
...ARE THESE BOOKS persuasive...
...I admit that this can be a daunting task...
...Once again, the authors are highly selective in the arguments that they choose to explore...
...A parallel network also formed in Mexico...
...They did not begin to challenge the GATT until the Uruguay Round that created the World Trade Organization (WTO) in 1994...
...Those of us who have participated in the globalization debates have succumbed to this tendency all too often...
...Bhagwati's story speaks to several things, including his considerable ego...
...106 n DISSENT / Spring 2002...
...Bhagwati and Irwin write with passion and confidence about free trade...
Vol. 49 • April 2002 • No. 2
