Protectionism with a Green Face and a Union Bug

This article appeared on Cato​.org on October 14, 1997.

Republican leaders in Congress should resist pressure to wrap labor and environmental standards in any bill to renew fast‐​track trade authority. Their position should be “clean” fast track or no fast track.

Labor unions demand the US impose trade sanctions against poorer countries that do not enforce what they consider to be minimum labor 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 trading partners 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 in mutually beneficial trade. In the real world, the international standards and trade sanctions that opponents of fast‐​track insist upon could in fact slow progress toward better living standards in poor countries.

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

The only way to raise the overall wage level and working conditions in less developed countries is to increase the productivity of workers, and this can only be achieved by investing more in physical and human capital. Trade sanctions would have the opposite effect. They would reduce the incentive to invest by lowering the return on capital and by thwarting the greater efficiencies brought about by the specialization of trade. As evidence, the Organization for Economic Cooperation and Development found in a 1996 study that greater openness to trade tends to be associated with an increase in labor standards, including freedom of association.

The same logic applies to environmental standards. Trade and the rising prosperity it tends to promote make possible the very standards the environmentalists want poorer countries to enforce. Less developed countries allow more pollution because they simply cannot afford the same standards as developed countries. When a sizeable share of the population lives on the edge of subsistence, pristine air and water are luxuries, not necessities. Economic development must come first.

As incomes rise, controlling pollution becomes relatively more affordable. The same expansion of economic activity that creates pollution ultimately pays for its alleviation. A study by two Princeton economists, Gene Grossman and Alan Krueger, found that air pollution levels began to improve in countries when per capita income reaches $4,000 to $5,000 per year.

Trade sanctions aimed at improving environmental standards, like those tied to labor, would arouse resentment in the targeted country while slowing the growth that makes higher standards possible. 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 choosing between the potential social benefits of more regulation, on the one hand, and more opportunity and disposable income on the other. There is simply no rational reason why two countries at different stages of development and with differing social preferences should be forced to “harmonize” their environmental and labor standards.

Most policy makers understand that competition in the market place is a good thing. It breaks down monopolies and encourages efficiency and rational decision making. “Harmonization,” in contrast, is just another word for a policy monopoly that forbids governments from competing to enact better, less economically destructive rules.

This need not mean a “race to bottom.” Countries that trade with each other remain free to enact different regulations on labor and the environment. Free trade and mobile capital can place a more accurate, and perhaps higher, price on regulations, but they do not force governments to adopt a single standard, whether higher or lower.

Any fast‐​track bill and the trade agreements it spawns should focus solely on reducing barriers to the movement of goods, services and capital across borders — leaving other countries free to determine their own internal regulations. It would be folly to try to force developing countries to act as though they were richer by threatening trade sanctions that will only make them poorer.