Three Misconceptions About International Trade

            In the coming days the United States Congress will be considering approval of the so-called “Free Trade Agreement” (FTA) between the United States and Colombia. The provisions of this bilateral accord have been debated in the U.S. Congress for several years, with a focus upon labor rights and the extraordinary level of violence against labor leaders in Colombia. Although attacks against labor leaders continue in Colombia and the effectiveness of promised protections for labor organizations is questionable, President Obama and U.S. Trade Representative Ron Kirk have now embraced the FTA with Colombia as a likely source of new jobs for U.S. workers.
            The fact is, however, that the expected benefits of this FTA are illusory. This expectation is based upon some important misconceptions about international trade and who benefits from it. For the United States the suggestion that the FTA will benefit U.S. workers fails to take into account certain realities of the current economic system. The fact that Colombian import duties for U.S. products will be reduced or eliminated does not necessarily mean an increase in jobs in the United States, because many U.S. –based companies produce their goods outside the United States, taking advantage of cheap labor and limited or nonexistent environmental and workers’ health and safety provisions in the cheap labor countries. Thus, for example, Caterpillar, a company historically based in Peoria, Illinois, may benefit from reduced Colombian import duties on heavy construction machinery the company produces. But Caterpillar has reportedly undertaken construction of new plants for production of its machinery in China, which has low labor costs. What is to prevent Caterpillar from producing the equipment it sends to Colombia in China, thus not increasing employment in the United States? As far as I know nothing is in place to prevent this. And there are plenty of other companies in the U.S. that will behave as I have indicated Caterpillar would.  The first misconception, therefore, is that elimination of import duties in Colombia must necessarily lead to job creation in the United States.
            A second misconception has to do with how businesses operate. We hear that the goal of a corporation is to maximize profits, and that a fundamental part of the work of a company executive and the company’s board of directors is to squeeze out the largest possible profits from company operations. This means that companies acting rationally will look to produce their products in the way that results in the largest profit margin, basically looking for the lowest labor costs.  In our society it seems even “liberal” commentators take this as a given. But this is a fundamental misconception. A company may operate profitably even if it employs labor at a higher cost than it might find overseas, treating its employees well and providing them with what we have come to call “fringe benefits”. Maximization of profits is not, and should not be, the principal goal of business. The goal should be to produce items that are useful for society and to provide a healthy work environment and compensation to employees that will enable them to obtain what they need to live in dignity. This used to be called, with reason, a “living wage”.
            Which brings us to the third misconception, which is that protective tariffs are ipso facto bad, and that “free trade” is by its very nature good and desirable. Years ago in the United States the goal of this country’s participation in international commerce was “balanced trade”, not “free trade”. This meant that the government would consciously try to protect employment in this country by limiting the amount of products coming into this country at lower cost through application of tariffs to the lower cost products. The glorification of multinational or transnational businesses, which typically have very little commitment to any one country, has led the U.S. government essentially to abandon the concept of balanced trade. We need to re-establish this concept as a guiding principle of U.S. trade policy.
            This discussion has not highlighted the extraordinarily negative effects of the proposed FTA on Colombia. These effects are discussed in detail elsewhere on the CSN website. Suffice it to say here that the effects will be virtually to end market access for food products of small-scale farmers (“campesinos”), leading to an increase in displacement in a country which already leads the world in internally displaced people with some 4.5 million displaced persons (nearly 10% of Colombia’s 46 million people), while not providing significant protection to workers and their union organizations. Nor will the intellectual property provisions of the FTA protect indigenous communities’ access to their traditional medicinal herbs or allow numerous Colombian businesses to develop products already produced by multinational businesses, which are the real potential beneficiaries of the FTA.
                                                                        John I. Laun
                                                                        July 3, 2011
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