Protectionism with a Green Face and a Union Bug

This article appeared on Cato.org on October 14, 1997.
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Republican leaders in Congress should resist pressure to wraplabor and environmental standards in any bill to renew fast-tracktrade authority. Their position should be "clean" fast track or nofast track.

Labor unions demand the US impose trade sanctions against poorercountries that do not enforce what they consider to be minimumlabor standards, such as the right to collective bargaining,minimum wages and prohibitions on forced labor and child labor.Green groups, meanwhile, insist that all agreements force tradingpartners to raise their environmental standards.

This debate is not about worker rights or a cleaner environment.It's about the freedom of people in America and abroad to engage inmutually beneficial trade. In the real world, the internationalstandards and trade sanctions that opponents of fast-track insistupon could in fact slow progress toward better living standards inpoor countries.

Workers in poorer countries do not earn less than Americanworkers because they lack union representation or a proper minimumwage. They earn less because they produce less. What gives anindustry in a developing country a cost advantage is not the wagesit pays its workers but a lower cost per unit of production. Yes,workers in Mexico and Bangladesh are paid a fraction of whatworkers receive in the United States, but they also produce afraction of what their American counterparts produce.

The only way to raise the overall wage level and workingconditions in less developed countries is to increase theproductivity of workers, and this can only be achieved by investingmore in physical and human capital. Trade sanctions would have theopposite effect. They would reduce the incentive to invest bylowering the return on capital and by thwarting the greaterefficiencies brought about by the specialization of trade. Asevidence, the Organization for Economic Cooperation and Developmentfound in a 1996 study that greater openness to trade tends to beassociated with an increase in labor standards, including freedomof association.

The same logic applies to environmental standards. Trade and therising prosperity it tends to promote make possible the verystandards the environmentalists want poorer countries to enforce.Less developed countries allow more pollution because they simplycannot afford the same standards as developed countries. When asizeable share of the population lives on the edge of subsistence,pristine air and water are luxuries, not necessities. Economicdevelopment must come first.

As incomes rise, controlling pollution becomes relatively moreaffordable. The same expansion of economic activity that createspollution ultimately pays for its alleviation. A study by twoPrinceton economists, Gene Grossman and Alan Krueger, found thatair pollution levels began to improve in countries when per capitaincome reaches $4,000 to $5,000 per year.

Trade sanctions aimed at improving environmental standards, likethose tied to labor, would arouse resentment in the targetedcountry while slowing the growth that makes higher standardspossible. Third world countries have rightly resisted this"eco-imperialism."

Differing regulations are a normal part of the trade landscape.They reflect the varied preferences that societies have in choosingbetween the potential social benefits of more regulation, on theone hand, and more opportunity and disposable income on the other.There is simply no rational reason why two countries at differentstages of development and with differing social preferences shouldbe forced to "harmonize" their environmental and laborstandards.

Most policy makers understand that competition in the marketplace is a good thing. It breaks down monopolies and encouragesefficiency and rational decision making. "Harmonization," incontrast, is just another word for a policy monopoly that forbidsgovernments from competing to enact better, less economicallydestructive rules.

This need not mean a "race to bottom." Countries that trade witheach other remain free to enact different regulations on labor andthe environment. Free trade and mobile capital can place a moreaccurate, and perhaps higher, price on regulations, but they do notforce governments to adopt a single standard, whether higher orlower.

Any fast-track bill and the trade agreements it spawns shouldfocus solely on reducing barriers to the movement of goods,services and capital across borders -- leaving other countries freeto determine their own internal regulations. It would be folly totry to force developing countries to act as though they were richerby threatening trade sanctions that will only make them poorer.