That's free enterprise, friends: freedom to gamble, freedom to lose. And the great thing - the truly democratic thing about it is that you don't even have to be a player to lose.-- Barbara Ehrenreich (2)
On November 10, 1997, President Clinton withdrew the fast-track treaty proposal from the U.S. Congress when it became evident that the Senate was unwilling to give his administration a freehand in formulating and negotiating free trade agreements. Since 1974, fast-track has given presidential administrations the ability to negotiate trade treaties on behalf of the U.S. government, requiring them only to present a final version of any negotiated treaty to Congress for ratification, as was the case with trade agreements like NAFTA and CUFTA. Because Congress could not vote on specific parts, but only on the treaty as a whole, this process allowed for faster negation of treaties. Many observers believe, given the upcoming negotiations for the Free Trade Agreement of the Americas (FTAA), that without a Fast-Track proposal in place the US will be unable to negotiate any new trade agreements. Some go even further, claiming that the failure of fast-track is one of the greatest foreign policy catastrophes in American history. (3) Consequently, many believe that with the defeat of fast-track, the prospects for expanding free trade principles through the expansion of new or existing trade agreements have abated.
To critics of free trade, the failure of fast-track is considered a watershed, giving greater weight to anti-free trade criticisms and heightened attention to their demands for a regression to nationalist trade policies. Such proposals and demands, however, are wrong. Given the rapidly changing economic system, a retreat from increased trade with other nations and a relapse to inward looking protectionist policies are no longer viable options. Today, moving away from free trade principles is the surest way to destroy growth and increase instability throughout the globe. Yet, the failure of fast-track does give a necessary pause to reexamine the free trade treaty that the U.S. has already signed and implemented - NAFTA - and study the areas that need to be revised in order to create a more open and effective future trade agreement.
This is the goal of NAFTA and Beyond: Economic Policy Making in an Interdependent World: to evaluate areas in which NAFTA needs to be revised and improved so that an expanded NAFTA can create a more equitable and dynamic pattern of growth. It is important to note that, though this task force examines NAFTA within a critical light, it is not our intention to present our criticisms as a move away from trade and growth through international connections, but rather as a way to harness the positive aspects and mitigate the harmful effects of the present NAFTA.
In the past, critical debates have failed to agree on the value of free trade and its effects, as discordant voices were quickly labeled as lacking a larger understanding of the mechanisms and theories of free trade. As Senator Byron Dorgan lamented sarcastically in an article after the 1993 passage of NAFTA, "NAFTA opponents like myself just couldn't match [their] mental voltage, and to take us seriously was merely to propagate our ignorance." (4) Thus, the debate about free trade and the benefits of NAFTA have been stuck between two poles. On one end are the nationalist politicians, like Ross Perot and Patrick Buchanan, who demand that the U.S. revert to protectionist trade policies, since free trade is 'exporting' U.S. wealth to other nations, like Japan. On the opposite side are politicians and economists like former President Reagan and economist Milton Friedman, who argue that any attempt at mitigating the negative aspects of free trade will end up destroying all of the benefits that free trade produces. During the recent NAFTA debate, "Trade negotiators repeatedly argued that there are no losers in trade liberalization, [because it] is a win-win situation and those who see free trade as flawed are ignorant of economic theory, irrational, or motivated by special interests. " (5) Lost within this debate, however, is a more sober and rational examination of the real effects that free trade has created for the U.S. and how these effects can either be promoted or mitigated.
Unrestricted free trade proponents argue that those who criticize free trade lack a concrete understanding of the aspects of free trade theory. Ironically, it is these theorists who fail to understand that the environment that shaped free trade theory has changed fundamentally over the past thirty years, and thus has seriously affected the assumptions that we can make about the benefits that free trade can provide. These theorists, such as Rostow, argue that the removal of trade barriers will lead to 'optimal utilization of the factors of production,' which will lead to increases in collective welfare. (6) Yet, in many ways free trade has fallen short of these ideals. These shortfalls of free trade, however, have been caught up in the larger debate about free trade and NAFTA, either being used to advocate the abolition of free trade treaties or used as further proof that government regulation still destroys growth potential. Not surprisingly, the truth lies between these two understandings of free trade. Over the past thirty years fundamental, albeit gradual, shifts in the global economic system have changed our ideas of the meaning of such important concepts as state, sovereignty and interdependence, and therefore the assumptions upon which free trade is based. Understanding the changes in these concepts is essential to understand if we are to examine both the successes and shortfalls of free trade. To understand these concepts, and thus to understand how they have changed, it is necessary to examine the changes that have occurred in the international economic system over the past thirty years.
Many theorists and economists recognize the recent shift to global production and trade, and the subsequent changes in ideas about interdependency. However, increases in the depth and level of globalized production have fundamentally changed the meaning of interdependency and sovereignty. This is exemplified by the exponential growth in trade from 1950 to 1987 when total world exports grew by over 1400%. (7) Thus, leading Riccardo Petrella to note that, "For centuries, people have traded goods and services across nations, [but] the globalization of the economy and society is characterized fundamentally by the transfer of resources." (8) These changes are due to the shift from a nationalist system of production to a system where production is ordered along a global system. Many theorists have studied this change in economic priorities; however, most have primarily based their examinations upon the economic changes that have occurred, and not the changes in the state structure, capability and the cohesiveness of national economies.
Before the 1970's, the nation-state was the basic building block of the international economic system. Questions of economics were largely concerned with the makeup of national economies (access to labor, natural resources, capital, etc.) Thus, access to factors of production was largely determined within national borders. This process of national production, in which most factors of production remain within the borders of a nation, is often referred to as a Fordist production model due to its similarity to Ford's method of assembly line production. During this period, international trade occurred, but its levels were relatively low and trade consisted primarily of products that were manufactured entirely (or predominantly) within the borders of one nation. (9)
Furthermore, Fordism was similar to another of Ford's business practices; the creation of the $5 day in the early 1920's. Ford argued that if Ford Motor Company was to be a successful company, it was dependent upon its own workers' ability to purchase a Ford automobile. This concept illustrates one of the bedrock fundamental concepts of Fordism -- national production is important because corporations' success depended upon the ability of common consumers to purchase their manufactured goods. (10) Consequently, during this period, corporations concentrated upon mass production for widespread consumerism.
By establishing these links between production and consumerism within the boundaries of a national production system, states were able to promote the interests and wealth of their citizens by promoting and protecting the success of national companies. Thus, economic success was based upon the consensus and cooperation between local political, economic and social interests. (11) Consequently, in the Fordist model, there was a direct relationship between the standard of living of laborers, wages and the success of national companies - since the prime market for goods were the laborers in the national economy. Therefore, during the Fordist production era, it was in the best interests of corporations to sustain the buying power of their workforce.
However, this link between the success of laborers and the success of national industries began to decline in the 1970's as the Fordist model began to fall apart. This is because productivity gains began to slow in most developed economies. As a result, the purchasing power of workers began to decline. Since the success of national industries depended upon the purchasing power of their laborers, when labor increasingly demanded wage increases, it created a corresponding rise in the costs of production for US firms. (12) This left firms uncompetitive in the face of new and more economically flexible producers like Japan. As a result, US firms began to de-link the traditional relationship between laborer and producer, and took advantage of new technologies, such as Just-in-Time production, that allowed production to move to a globalized system - often referred to as a Post-Fordist system of production. As Riccardo Petrella explains, "Global markets are putting an end to the national economy and national capitalism as the most pertinent and effective basis for the organization and management of the production and distribution of wealth." (13)
Along with the dismantling of the traditional relationship between laborer and producer, the Post-Fordist system also witnessed the dissolution of state power. This was illustrated by the disintegration of the Bretton Woods agreement in 1971. This exemplified that neither state power nor state interests had the capacity to defy the power of international markets - not even the power of a hegemon like the US. In response to these changes in the global economic system, states moved toward a neoliberal economic ideology that emphasized the benefits of comparative advantage through free trade practices. (14) Consequently, the role of the state changed from managing the interests of the national economy to reducing the transaction costs and barriers to trade that comparative advantage economics required.
In the Fordist system of production, a country like the U.S. could have a comparative advantage in the production of automobiles. In this system, production of these automobiles would use U.S. steel, local labor and be assembled within the boundaries of the United States. Since, production requires different levels of value-added inputs - both high and low, it allows for different segments of society to contribute to the building of a car. As a consequence of this new system of production, however, sectorial specialists (or what the former labor secretary Robert Reich calls symbolic-analysts) have become the primary international actors. (15) Thus, no longer is comparative advantage based upon what is nationally produced and then traded, but rather what specialists are internationally competitive. This is because globalized production allows each geographic location to provide a value-added input to a final product. Therefore, a new conception of interdependency has been created, since interdependence is no longer between nations, as in the Fordist system, but rather between different competitive groups. Petrella states that, "The production of wealth is no longer dependent upon the performance of their 'local firms' in local technology, capital and labor markets. And they are not bound to national needs." (16)
In the Fordist system of production, the success of corporations translated into a broader success for a national population. Exemplified by the words of Charles Wilson, president of General Motors in the early 1950's, "What's good for General Motors is good for the country.... it goes with the [country's] welfare." (17) However, this relationship between corporations and a national population is no longer relevant since comparative advantage is not based upon national output but rather groups' global competitiveness. Yet, in the Post-Fordist system, this type of system is no longer relevant. For example, if the U.S. has a comparative advantage in engineers, but not in low value-added production, the only U.S. based production would be engineering. Lower value-added production would then take place in another geographic location. Consequently, the success of American engineers does not necessarily translate into a broader success for the rest of the U.S. population. This is especially true for corporations, since they have globalized their production facilitates, their success may mean little to those who live in the same geographic locale.
Although the events of the shift from Fordism to Post-Fordism are well documented, and incorporated into the work of many theorists, the impact this shift has had upon our basic assumptions about free trade are less well understood. Belief in the benefits of free trade depends upon theories of comparative advantage, based upon trade between nations and thus their ability to specialize. (18) However, the shift from Fordism to Post-Fordism has fundamentally changed and increased interdependency and thus our ideas of sovereignty due to the fact that interdependency now focuses less upon the state and more upon groups. Consequently, Paul Hirst and Grahame Thompson argue that, "states will come to function less as 'sovereign' entities and more as the components of an international 'polity.'" (19) Riccardo Petrella goes further, arguing that globalization has resulted in, "A weakening of all aspects of a society founded on national capitalism." (20)
An interdependency that is between different sectorial specialists and not nations, however, creates a situation where differing economic actors can compete for the lowest regulatory structure. This is because the relationship between the state and the corporations that are based within its territorial boundaries is no longer symbiotic. Therefore, states and even regions within states are now competing to attract corporations. As Agnew and Corbridge state, "territorial states now compete with one another to attract these mobile assets to their territory." (21) Consequently, states and regions are effectively reducing their tax structure and regulatory framework so that corporation will locate to their regions. The result of which, is reduced government intervention in such needed areas as the environment, labor laws and human rights. Therefore, states are becoming less active in the needs of their populations in order to attract capital from other territories. Petrella states that, "The notion of national sovereignty is increasingly challenged by events beyond its reach and perception." (22) Thus, conceptions of sovereignty and the role of states have also been fundamentally been changed as a consequence of the shift from Fordism to Post-Fordism
Despite these fundamental changes in the international economy, most theorists still view the state as acting within its traditional (and thus Fordist) role as a completely sovereign and geographically relevant entity. (23) Additionally, most economists continue to implicitly view economics with assumptions about sovereignty and interdependence that were relevant in the Fordist system, but which have now changed fundamentally. As former labor secretary Robert Reich states, "The notion that products have national origins is so deeply ingrained that governments, and the publics they represent, are unable to adjust to emerging reality." (24)
Free trade economics has yet to come to terms with the changes in the economic system. Free trade theorists' assumptions about the benefits of liberalization are theoretically correct, but are incorrectly based upon an economic system that no longer exists. Understanding the changes to the international economic system is relevant today, since the U.S. has engaged in an agreement, NAFTA, which utilizes an understanding of free trade embedding ideas of national interdependency and sovereign states. This agreement, however, fails to take into account the important changes in the meaning of these values. This, however, creates a paradox. The changes in the international system have solidified the importance of trade. Thus, a policy shift that relapses to a nationalistic system is unrealistic, yet the shortcomings of free trade in today's global economy are not being addressed.
This is exemplified by the pro-NAFTA literature. Micky Kantor, the U.S. special trade representative states that,"NAFTA will make our companies more competitive in the global marketplace." (25) He is arguing implicitly that by promoting the success of U.S. corporations, the U.S. will be supporting the American populace. The changes in the international system to globalized production, however, means that supporting U.S. corporations allows only those who are international competitive, not national populations as a whole, to gain through free trade.
The goal of this task force is to address this paradox of free trade by accepting that free trade policies are an essential component to any future international political economy, while recognizing the fundamental shifts in interdependence and sovereignty, which have inhibited the benefits of free trade from reaching everyone within the NAFTA countries. This task force explores four major areas of the present NAFTA structure that fail to address these shortcomings of free trade specifically: Economics and Finance; Jobs and Migration; the Environment; and Democracy and Human Rights. This study examines these areas with a new understanding of interdependency and sovereignty outlined here and then presents policies that can be implemented that embraces the paradox of dealing with free trade.