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Catching a Falling Financial Knife

We Don't Need Free Trade Agreements with Panama, Colombia, and Korea

Politics / US Politics Jul 17, 2011 - 05:23 AM GMT

By: Ian_Fletcher

Politics

Best Financial Markets Analysis ArticleObama is still pushing for free trade agreements with Panama, Colombia, and Korea, albeit with the thin fig leaf of demanding they be accompanied by money for so-called Trade Adjustment Assistance, a "painkiller" program designed to blunt the harm to laid-off workers.

The Republicans don't like TAA, which has held up passage of these agreements momentarily, but both sides are still gunning to pass these agreements some time soon.


You think America has learned its lesson from NAFTA, which the Labor Department has estimated cost us 525,000 jobs? Think again.

Take the Korea agreement, for example. President Obama and the Republican leadership want it despite the fact that the Economic Policy Institute has estimated it will cost us 159,000 more jobs over the next five years.

Yes, you read that correctly. At a time when the president says that his number one economic priority is job creation, and has created an entire commission for that purpose, they're going ahead with it anyway.

Even the official U.S. International Trade Commission has admitted that KORUS-FTA will cause significant job losses. And not just in low-end industries: the ITC foresees the electronic equipment manufacturing industry, with average wages of $30.38 in 2008, as a major victim.

The supposed logic of America swapping junk jobs for high-end jobs simply isn't the way the economics really works out. Pace free-market mythology, there are actually well-understood reasons for this, if you dig a little into what economists already know.

Was this the Obama America voted for in 2008?

No. That Obama is at an undisclosed location somewhere. He campaigned against KORUS-FTA during the 2008 campaign. (It was originally negotiated, but not ratified by Congress, by Bush in 2007.) Among other things, that Obama said:

I strongly support the inclusion of meaningful, enforceable labor and environmental standards in all trade agreements. As president, I will work to ensure that the U.S. again leads the world in ensuring that consumer products produced across the world are done in a manner that supports workers, not undermines them.Nice words. Unfortunately, none of them are reflected in KORUS-FTA, which contains no serious new provisions on these issues.

This agreement is essentially a NAFTA clone. It is, in fact, the biggest trade agreement since NAFTA, and the first since Canada with a developed country.

This agreement, like NAFTA and the dozen or so other free trade agreements America has signed since NAFTA, is fundamentally an offshoring agreement. That is, it is about making it easier for U.S.-based multinationals to move production overseas with confidence in the security of their investments in overseas plants.

The provisions to protect workers and consumers are unenforceable window dressing. (That's why they're allowed to be in there in the first place.)

Don't be fooled by the fact that some unions, like the United Auto Workers (UAW), have endorsed the agreement. This is just a cynical ploy by the White House to split the trade union movement in order to keep the AFL-CIO neutral.

The UAW's out-of-touch leadership is so punch-drunk from the 2008 collapse of the U.S. auto industry that it has lost touch not only with what is good for the American economy as a whole, but with what is good for rank-and-file auto workers. (There's a rumor in circulation they did a deal with the White House in exchange for protecting pension and other obligations in the auto industry bailout. I can't prove this, but it would certainly explain a few things.)

Don't take my word for it, either: in the words of Al Benchich, retired president of UAW Local 909:

The UAW Administration Caucus is the one-party state that controls the UAW at the International level. Every International officer is a member of the Caucus, and they surround themselves with appointed international reps that unquestioningly do their bidding.No wonder other, more democratic and more intelligent, unions, like Leo Gerard's United Steelworkers, are criticizing the UAW for its decision to support KORUS-FTA.

Interestingly, the UAW's past record of criticizing KORUS-FTA is more honest than anything they're saying right now. For example, here's what they originally said about this agreement:

KORUS-FTA has inadequate protections and enforcement mechanisms to enforce either the spirit or the letter of the law.Precisely. And changes made since then are, as noted, minimal.

As an example of how one-sided the treaty is, consider that it now allows -- to great rejoicing -- America to export 75,000 cars a year to Korea. This translates to a measly 800 jobs. Korea's exports of cars to the U.S. in 2009, on the other hand?

Try 476,833.

Furthermore, even if the U.S. does get to sell more cars in Korea, American companies will mostly not be making the steel, tires, and other components that go into them, because the agreement allows cars with 65 percent foreign content to count as "American."

Worse, it allows goods with as much as 65 percent non-South-Korean content to count as "Korean," opening the door not only to North Korean slave labor but to the whole of China. Talk about the camel's nose in the tent!

This is just one example of how KORUS-FTA isn't even as good as the deal the EU just signed with Korea. (The EU got a 55 percent standard on this item.) And remember that the EU and most of its member states, of course, don't really practice free trade anyway: they practice a covertly managed trade that has kept the EU's trade balance within pocket change of zero over the last two decades, while America has been running deficits around the $500 billion mark.

"Free trade agreement," in American English, means "free trade agreement." In other languages, it means "gentleman's agreement for managed trade at a low tariff." The Europeans invented this game -- called mercantilism -- back when trade was conducted with sailing ships. South Korea learned it from Japan, which learned it from Germany. Uncle Sam (and maybe John Bull and a few others) are the only naïfs who still don't get it.

Despite what the White House and the U.S. Chamber of Commerce are saying, this agreement makes no sense as a strategy to reduce our horrendous trade deficit. America's trade deficits have a long record of going up, not down, when we sign trade agreements with other nations.

Paradoxically, trade agreements even seem to sabotage our own trade with foreign nations: according to an analysis by the group Public Citizen, in recent years our exports to nations we have free-trade agreements with have actually grown at less than half the pace of our exports to nations we don't have these agreements with. So these agreements don't hold water as trade-expanding measures.

Even leaving aside trade-balance issues, this agreement is a disaster, thanks to something called "investor-state arbitration." Like NAFTA, it compromises American sovereignty and subjects American democracy to having its own laws overruled by foreign judges as interfering with trade. Under NAFTA to date, over $326 million in damages has been paid out by governments as a result of challenges to natural resource policies, environmental protection, and health and safety measures. There about 80 Korean corporations, with about 270 facilities around the U.S., that would acquire the right to challenge our laws under KORUS-FTA.

What kind of problems could this cause? The U.S. was forced in 1996 to weaken Clean Air Act rules on gasoline contaminants in response to a challenge by Venezuela and Brazil. In 1998, we were forced to weaken Endangered Species Act protections for sea turtles thanks to a challenge by India, Malaysia, Pakistan and Thailand concerning the shrimp industry. The EU today endures trade sanctions by the U.S. for not relaxing its ban on hormone-treated beef. In 1996, the WTO ruled against the EU's Lome Convention, a preferential trading scheme for 71 former European colonies in the Third World. In 2003, the Bush administration sued the EU over its moratorium on genetically modified foods.

It gets worse. KORUS-FTA also signs away our right (and Korea's, too, not that this makes it any better) to a wide range of financial regulations of the kind that might have helped avoid the crisis of 2008. For example, it forfeits our right to limit the size of financial institutions. It forfeits our right to place firewalls between different kinds of financial activities in order to prevent volatility in one market from collapsing another. It prevents us from limiting what financial services financial institutions may offer—Enron Savings & Mortgage, here we come... It bans regulation of derivatives. It ban limits on capital flows designed to tame volatile “hot money.”

Why is the U.S. flirting with making such an appalling mistake yet again? Because a) multinational corporations have bought our political system and b) because our government would rather play power politics than keep its own (declining) economic house in order.

It is remarkable how stuck we are in the 1950s, with an invincible economy at home and a Cold War abroad. As a report by the Senate Finance Committee once put it:

Throughout most of the postwar era, U.S. trade policy has been the orphan of U.S. foreign policy. Too often the Executive has granted trade concessions to accomplish political objectives. Rather than conducting U.S. international economic relations on sound economic and commercial principles, the executive has set trade and monetary policy in a foreign aid context. An example has been the Executive's unwillingness to enforce U.S. trade statutes in response to foreign unfair trade practices.Ironically, it may eventually be our own decline that solves our trade problems, by rescuing us from our own arrogance and stupidity. When we finally realize we can't take our economy for granted, we may finally stop giving away the store in international trade.

Ian Fletcher is the author of the new book Free Trade Doesn’t Work: What Should Replace It and Why (USBIC, $24.95)  He is an Adjunct Fellow at the San Francisco office of the U.S. Business and Industry Council, a Washington think tank founded in 1933.  He was previously an economist in private practice, mostly serving hedge funds and private equity firms. He may be contacted at ian.fletcher@usbic.net.

© 2011 Copyright  Ian Fletcher - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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Comments

Elgenio Dervez
17 Jul 11, 20:55
FTA

Every year we give billions of dollars to buy corrupt governments, blow trillions on straightening out other people's lives in countries that hate us, send all our manufacturing to China (a communist dictatorship), India and Pakistan ( where pay and work conditions are deplorable) and you're worried about a few thousand jobs in three little countries the size of Alaska? That's like putting a Band-Aid on someone whose throat was cut from ear to ear.


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Catching a Falling Financial Knife