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Much of contemp orary economic policy is based on the notion that free trade raises the standard of living of all countries. This is the position espoused by advocates of neoliberal economic policies such as those of the World Trade Organization (WTO), its precursor, the General Agreement on Treaties and Tariffs (GATT), and the North American Free Trade Agreement (NAFTA). Yet, many environmentalists and antiglobalization activists remain critical of that assertion that free trade benefits the environment, suggesting that free trade actually leads to a race to the bottom in which polluting industries migrate to countries with the lowest standards.
The argument about free trade begins with the assumption that tariffs, taxes, subsidies, and regulations across international boundaries distort the terms of trade. The purported consequences of this leads to economic inefficiencies and imposes artificial costs on the movement of goods. One of the central tenets of free trade is the principle of comparative advantage, a theoretical explanation for why two countries can both benefit from international exchange. The first mention of comparative advantage is in economist Robert Torrens’s Essay on the External Corn Trade. But the idea is often attributed to the English economic philosopher David Ricardo who sought to explain why both Portugal and England benefitted from their exchange of wine and cloth. Ricardo argued that Portugal could produce wine more cheaply than England. Even though England and Portugal could both produce cloth at similar costs, it was still beneficial for Portugal to produce more wine for trade with England because of benefits from economies of scale.
Since the time of Ricardo, the theory of comparative advantage has come under fire for some of its primary assumptions. For example, Ricardo assumes that transportation costs are negligible. This assumption may hold true in today’s economy of subsidized oil, but it certainly does not account for externalities. Ricardo also assumed negligible labor costs because he assumes that there would also be a free market in labor, something that does not hold up in today’s economic and political circumstances.
Perhaps the biggest pitfall to following the comparative advantage policy prescription is the narrow, even risky, set of economic enterprises that a country relies on. A good example of this can be found in the Yucatan, Mexico, as told by historian Sterling Evans. In the early 1900s, the Yucatan exported extensive quantities of sisal fiber, derived from an agave plant (spp. Agave sisalana) similar to that used to produce tequila, to the United States where it was used to bind wheat. Successive years of bumper wheat crops and a free trade zone in New Orleans made sisal production so profitable that by the 1920s and 30s the Yucatan was the wealthiest Mexican state and the first with electricity. But soon after extensive sisal monoculture plantations were established throughout the region, the combine harvester, which could bind the wheat at harvest, was invented, rendering the fiber useless to the U.S. wheat industry. The sisal plantations were subsequently abandoned and soon the Yucatan was one of the poorest states in Mexico. The low diversity of economic engagements and the dependency on a single industry were to blame.
Before free trade became the dominant economic ideology, it was opposed by mercantilism. The mercantilists argued that the state should protect national interests through policies that promote protectionism. The protectionism was in the form of tariffs and import restrictions. Since mercantilism rested on an economic base of gold and silver bullion, it provided much of the impetus for early European imperial ambitions. Mercantilism was the dominant economic ideology of the 16th-18th centuries until it was supplanted by the laissez-faire economic policies of free trade proponents such as the physiocrats and later by the teachings of Adam Smith and Ricardo.
Often, nations will enact trade restrictions in order to improve the health of its citizenry, yet they will still be accused of protectionism, creating a conflict between the autonomy to protect human health and the global goal of free and unrestricted trade. The most disconcerting of these conflicts culminated with the two 19th-century Opium Wars. The Chinese emperor had completely restricted the import of opium as the nation was suffering from an addiction epidemic. Subsequently, British gunboats surrounded Chinese ports demanding that they open their markets to British imports of opium because the British had a considerable trade imbalance with China.
Often environmental regulations are considered barriers to free trade. Some rulings at the WTO have made this explicit. For example, the United States banned the import of Mexican tuna caught with purse seine nets because it inadvertently killed significant numbers of dolphins; the ban was justified by the U.S. Marine Mammal Protection Act. However, a GATT tribunal ruled that all like products should receive like treatment and that how a product was harvested could not be considered in the determination of likeness. Another case involved an amendment to the Endangered Species Act to include a ban on shrimp imported from countries that do not require turtle excluder devices. After suit was brought by Malaysia, Thailand, Pakistan, and India, the WTO dispute settlement tribunal reasoned that the requirement was excessive and an illegal barrier to trade.
More disconcerting to environmentalists are the investor rights provisions of free trade agreements that offer an opportunity for private companies to sue nations for regulatory takings. Part of the neoliberal free trade policy paradigm is the belief that regulations that affect investment are also seen as barriers to trade. NAFTA’s Chapter 11 provides protections to the rights of investors and has been considerably controversial. In one case the Ethyl Corporation of North Carolina sued the Canadian government for banning the fuel additive MMT, a manganese-based fuel additive already banned in the United States. Fearing a NAFTA dispute tribunal would rule that the Canadian government ban was made without enough scientific evidence to support its environmental and health consequences, the Canadian government paid $13 million to the Ethyl Corporation and reversed their ban on MMT. This was the first of several cases under NAFTA’s Chapter 11 that had direct implications for environmental policies. A similar, but global, investor rights provision called the Multilateral Agreement on Investment was targeted by activists in 1997 and defeated.
Free trade in cross border capital transactions has trended toward short-term speculation, putting some countries at the mercy of international investment trends. This can greatly affect the relative strength and stability of some national currencies. Opposed to the idea of free trade is the proposed Tobin tax, a tax that aims to discourage short-term currency speculation by taxing individual cross border financial investments in currency. Because the proposed tax is small and done on a per volume basis, long term investments, necessary for maintaining the strength of some currencies, would not be affected. It has been proposed that the United Nations manage the tax fund, which is estimated to generate hundreds of billions of dollars per year and apply it to humanitarian and emergency situations. The Tobin tax is championed by many environmental nongovernmental organizations (NGOs), green movements, and the antiglobalization movement.
One of the significant questions debated is whether or not free trade is a race to the top or a race to the bottom regarding environmental regulations. Critics of free trade’s impact on the environment argue that polluting industries will move to poor nations that have weak environmental regulations, creating pollution havens. Proponents of free trade argue that it will result in a ratcheting up of environmental policy, citing the famous Kuznets curve, which argues that environmental conditions improve with increased national income. Cases have shown both to be true. For example, the regulation of genetically modified organisms in the European Union has led the United States to improve its environmental regulations. On the other hand, in the United States, some polluting industries have moved across the Mexican border out of the Los Angeles Basin in the years subsequent to NAFTA. It might be argued that if the nations involved are on equal footing, it is possible that free trade will lead to a situation where regulations improve. But if the countries are in disparity regarding wealth or environmental protections to begin with, it could lead to a situation where regulations improve.
The negotiation of global free trade agreements has proceeded in a series of rounds since the founding of the GATT after World War II. It was during the Uruguay Round that the WTO was founded as an organization to implement the principles previously held by the GATT. Perhaps the most widely covered trade negotiation session in the popular press was in Seattle where the WTO Millennial Ministerial was shut down by tens of thousands of activists and labor union organizers in 1999. Since then the WTO, while still sticking to the neoliberal orthodox of free and unhindered trade, has become enmeshed in the discourse of sustainable development.
Since the Uruguay Round, when many developed nations promised to decrease subsidies to their producers of agricultural goods, and many developing countries actually removed their own, agriculture has been a sticking point in free trade negotiations. The high level of protectionism and the entrenched subsidies provided to developed world agricultural producers has led to a disparity in the impact of free trade on agricultural producers where many farmers in developing countries are exposed to the whims of international competition, unlike their counterparts in the developed world. These debates and negotiations are played out through the WTO Agreement on Agriculture.
There are still debates about whether or not multilateral environmental agreements like the Convention on Biodiversity, the Montreal Protocol, and the Basel Convention have jurisdictional precedence over WTO rules, a question of considerable importance to international environmental law. For example, the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights comes into conflict with the Convention on Biodiversity on the issue of benefit sharing with indigenous farmers regarding plant genetic resources. The Cartagena Biosafety Protocol of the Convention on Biodiversity also comes into conflict with the Agreement on Technical Barriers to Trade because it is often asserted that regulations and bans are surrogates for protectionism.
Whether by slip of tongue, or honest confusion, people often confuse free trade with fair trade. But the terms have very different meanings. Proponents of free trade often suggest that free trade is fair trade. But advocates of fair trade use the term to signify an attempt to link consumers more directly to producers, redistribute inequality in terms of trade, and provide a minimum price to low-income producers, notably in cocoa, bananas, and coffee.
- Sterling Evans, Bound in Twine: Transnational History and Environmental Change in the Henequen-Wheat Complex for Yucatan and the American and Canadian Plains: 1880-1950 (Texas A&M University Press, forthcoming 2007);
- Kevin P. Gallagher, Free Trade and the Environment: Mexico, NAFTA, and Beyond (Stanford University Press, 2004);
- Howard Mann, Private Rights, Public Problems; A Guide the NAFTA’s Controversial Chapter on Investor Rights (International Institute for Sustainable Development, 2001);
- Gary Sampson, The WTO and Sustainable Development (United Nations University, 2005).