Free Trade and Social Security Choice

June 15, 2003 • Commentary
This appeared on Cato​.org on June 15, 2003.

Chile is the first South American nation to sign, with complete bipartisan support within the country, a Free Trade Agreement with the United States. Now, why do Chilean workers support free trade policies? Because while the nation in the 1970s was initiating its free‐​trade development strategy it was also establishing a pioneering system of personal retirement accounts as the foundation of its Social Security policy.

The connection between the two is important. All around the world, trade liberalization is cast as a battle between capitalists and workers, between “global elites” and the “common man.” In Chile, however, market‐​invested retirement funds mean that every worker is a capitalist and has a visible stake in an internationally competitive economy. In Chile, to be anti‐​globalization is to be both anti‐​capitalist and anti‐​worker.

A vast majority of Chileans benefits from free trade not just as consumers, but also as owners of the productive assets of the economy through their retirement accounts. Free trade is good for the economy, and what’s good for the economy is good for investors. Thus there is a virtuous cycle of trade liberalization that has so far thrived regardless of the political party in power.

Chile already has a 6 percent flat tariff rate that is low compared to the rates of most countries and, more importantly, it is applied equally to all imports. The flat tariff decision of the 1970s was critical. A differentiated tariff not only creates economic distortions that slow economic growth, but it continually generates special interest pressures and opportunities for corruption. With a flat rate, a politician can’t be bought on trade issues… because he has nothing to sell.

Before this latest deal, Chile signed an FTA with the European Union and another with Korea. It also has several bilateral free trade agreements with countries like Canada and Mexico. Complete free trade is at hand. The mere possibility of zero import tariffs is stunning in an economy that in the 1960s was one of the most protectionist in the world. In those days, Chile was a devoted follower of the misguided import‐​substitution proposals of the Santiago‐​based United Nations Economic Commission for Latin America.

But in the mid‐​1970s the country’s trade policy changed radically. Not only did Chile completely dismantle the system of quotas and other trade barriers, but also under the so‐​called Chicago boys’ liberal economic policies, the low flat tariff policy was adopted. The end result of all these reforms: more than a decade of economic growth at an “Asian tiger” level of 7 percent a year that doubled the size of the Chilean economy and led, for the first time in history, to the highest income per person in the whole region.

Trade liberalization does not take place in a vacuum; the proper overall economic and cultural climate is essential. Social Security choice as implemented in Chile, between the government‐​run pay‐​as‐​you‐​go system and one of personal retirement accounts has solved the retirement crisis and delivered enormous benefits to workers. It also has made trade and economic liberalization more possible by linking the interests of workers to that of the overall economy.

U.S. Trade Ambassador Robert Zoellick, a real world hero of trade liberalization, courageously stated that “one of the nice things in this agreement is we have some additional access in terms of pension fund management with a Social Security system that I wish we could imitate.”

I hope this FTA is only “the end of the beginning.” There are innumerable initiatives that could spring from greater trade integration. By a kind of intellectual osmosis, we Chileans can integrate into our own reality the basic economic and political concepts of a country “conceived in liberty” by its incomparable Founding Fathers‐​just as North Americans may benefit from learning about our culture and way of life, a process that, with 37 million people of Hispanic origin in the United States, is well under way.

My dream is an “American Community” of independent nations, cherishing their own cultural identities but joined together in a common market for trade and investment, and with free movement of people and ideas. An American Community would comprise 830 million people and a gross domestic product of $13 trillion.

I salute and join Walt Whitman who once said: “The spirit of the tariff is malevolent. It flies in the face of all American ideals. I hate it root and branch. It helps a few rich men to get rich, it helps the great mass of poor men to get poorer. I am for free trade because I am for anything that will break down the barriers between peoples. I want to see the countries all wide open.”

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