What Race to the Bottom?

What Race to the Bottom?

Osorio and Sahlgren Article for The American Spectator
January 16, 2008

Free trade creates new opportunities, jobs, and value for consumers. Now will someone please tell Congress? As it begins its new session, Congress's agenda includes ratification of trade deals with Colombia, Panama, and South Korea. However, the Democratic majority has made no effort to push these through. And now their excuse is wearing thin.

Free trade allows nations to focus on those goods and services over which they enjoy a competitive advantage and can produce most efficiently at lower cost. This creates value for consumers by increasing their purchasing power. It also creates jobs as capital is directed to where it can produce the best results.

Yet for organized labor and their allies in Congress, this isn't enough. If they get their way, the days of trade agreements dealing with trade, and trade alone, will be long gone.

Hill Democrats, heeding the call of organized labor and environmental lobby groups, are demanding that any new trade deals include enforceable labor and environmental standards. Such provisions are included in the recently ratified U.S.-Peru free trade agreement.

Currently, all of the pending free trade agreements include the labor and environmental provisions outlined in the Bipartisan Trade Deal that the White House and Congress agreed to last summer. But now, that's not considered strict enough.

How strict is strict enough? And what price would trade critics be willing to extract to get their way?

Some Democratic lawmakers are prepared to scuttle the pending Colombia, Panama, and South Korea trade deals, even though they include enforceable labor and environmental standards.

WHY ARE ORGANIZED labor and its congressional allies so hostile to free trade agreements? The primary reason given by the unions is that countries would weaken their labor laws to obtain a comparative advantage. They contend that because capital is more mobile than labor, and because it seeks the highest profits possible, it will flow to wherever the standards are the lowest.

Similarly, environmental activists argue that poor countries will use laxer environmental regulation as a comparative advantage, which would force American companies to weaken their own standards in the U.S. to keep up.

Critics contend that stringent provisions in trade agreements are needed to avoid this "race to the bottom" in labor and environmental standards.

In the aftermath of the Bipartisan Trade Deal, this would amount to making the enforceable provisions even stricter, which in practice would require developing countries to adopt labor and environmental regulations similar to those applied to Western industrial nations.

This view of trade agreements is not only misguided, but dangerously wrong. Burdening trade agreements with so much additional baggage could well undermine the very goals of higher labor standards and improved environmental quality.

Free trade is one of the best tools to improve labor and environmental standards in the long run. It is with rising wealth, and rising productivity, that wages rise and labor conditions improve. Wealthier is also healthier; wealthier societies are better at taking care of their environment.

MOREOVER, THE "race to the bottom" is a myth. Consider the highly debated North American Free Trade Agreement (NAFTA). According to the Bureau of Labor Statistics, after the enactment of NAFTA, the U.S. unemployment rate fell from an annual average of 6.9 percent in 1993 to 4 percent in 2000.

If the doomsdayers were right, we would have seen either gigantic job losses to Mexico following NAFTA's enactment, due to the lower wage costs prevalent there ($2.63 compared to $23.65 hourly compensation in the U.S., in 2005), or weakened labor and environmental standards in the U.S. Neither occurred.

The same is true of manufacturing. The decline in manufacturing's share of U.S. employment simply means that American productivity is increasing. Between 1993 and 2006, manufacturing output per hour increased by 73.8 percent.

Instead of protecting manufacturing jobs by force, the economy can develop and become more innovative, which can then lead to the creation of new jobs in other sectors of the economy.

Mandating and enforcing more stringent labor and environmental standards would price workers in developing countries above what their labor will earn in the market -- thus shutting them out of the market altogether. This will drive out foreign investors, leading to increased unemployment.

However, even with these labor and environmental provisions, scrapping these trade deals now would be a bad idea, since opportunities from increased trade would be lost.

It would also hurt U.S. national security. Colombia, a steadfast U.S. ally, faces deteriorating relations with the authoritarian, belligerent, anti-American government of Hugo Chavez in neighboring Venezuela. Likewise, the U.S.-South Korea trade agreement could bolster the relationship with that country, which faces a nuclear-armed Kim Jong-Il.

Open trade is one of the best tools to promote prosperity in societies both rich and poor. Of course, the road to a better future is often bumpy, and fraught with possible disruptions. Such disruptions should be taken into account, but to focus on them at the expense of the greater goal of liberalized trade is to lose sight of the forest for the trees.