What is free trade? In its most simplistic mainstream political interpretation it means that there are no barriers to trade between businesses based in different countries. Supposedly we are living in a world of "free trade" right now.
We often hear the term "free trade" used within the context of globalization. This term often drums up images of sweatshops in far off lands making cheap plastic crap for fat Americans to purchase at their local WalMart forcing local merchants and manufacturers into bankruptcy. Is this what we mean by "free trade"? Weren't we promised that free trade organizations like the WTO and NAFTA were going to benefit all nations involved? Is free trade to blame for the world's economic woes? In order to answer these questions we must first examine the nature of international trade.
Trade is made up of 3 components: capital, goods, and labor. Under a true free trade system, these three components can move freely across national borders. Go to your local 99 Cent Store and take a look at the products on the shelves. Very few of those products, if any, will say "Made in the USA". Nearly everything in the store was imported from another country at prices that American manufacturers could not compete with. These items made their way to your neighborhood retailer unencumbered and were allowed to compete with local products. The component of trade that we call "goods" is allowed to freely move across national borders.
At this 99 Cent Store you pick up a package of paper plates and notice that it was made in Bangladesh. You imagine somewhere on the other side of the planet a young woman working in a sweatshop packaging up these plates for delivery to the U.S. The product of her labor found it's way into your shopping cart with very little restriction.
Capital can move across national borders easier than goods. Let's imagine that the young woman in Bangladesh working at the paper plate factory managed to save up and buy a new issue of 99 Cent Store stock using an online trading account. She has now become a partial owner of our local U.S. based 99 Cent Store with the click of a mouse. Capital, like goods, moves freely across national borders every second of every day.
Now, what about our third component of trade? Can our friend from Bangladesh move to the U.S. to try to get a job at our local 99 Cent Store without restriction? Of course not. Our government would never allow an unskilled worker from Bangladesh to freely enter the U.S. and start working. Sure, she may be able to apply for a work visa, but the process is cumbersome at best and targets only skilled workers.
So how can we say that we are condcucting business under a free trade system if labor cannot move freely across national borders? Free trade does not exist unless workers are free to move from country to country without restriction just as goods and capital do. This is obviously not the system that we have today. Immigration restriction is a protectionist trade policy. I'm not saying whether or not it is good or bad...I'm just calling it how I see it. Now, what are some of the effects of this protectionist policy? To answer that, lets see what would happen if our brothers and sisters working in sweatshops all around the world were able to migrate to the US without restriction under a system of true free trade. Let's start with wages.
Wages are a function of supply and demand. As demand for labor rises, wages go up. If the supply of labor increases, wages go down. As people pour into the U.S., the domestic supply of labor drastically increases. Wages would fall. Jobs would become more scarce...at first.
What happens to wages in Bangladesh as their paper plate factories find it harder and harder to find workers? Wages will rise. As wages in Bangladesh rise, the cost of their goods will rise in order to make up for rising labor costs. This will make Bangladeshi paper plates less competitive in the U.S. market. Now we have a situation where factories in the U.S. may be able to compete with factories in Bangladesh. Absent political intervention, the U.S. paper plate factories would eventually gain a competitive advantage due to their locality and drive out Bangladeshi products. Some Bangladeshis might even find that going back home to wages that are now higher than when they left may be a desirable situation. Many would emigrate home. Eventually we would find equilibrium in terms of wages, and the cost of goods. What would happen to capital?
As workers poured into the US, several forces would push and pull on the value of the dollar vs. foreign currencies. Immigrants would be trading in their local currencies for dollars. This demand for dollars would increase the dollar's value. At the same time, these new additions to the U.S. labor pool have to consume goods and services locally thus heating up the economy and pushing prices for local goods and services higher. This signals a weaker dollar and balances out the strong dollar effect described above. So, we would find equilibrium in terms of currency value. For more on how money works, please see the Money as Debt page.
Capital, Goods, and Labor would find balance through market forces as long as governments allowed the system to evolve. The dislocations caused by our current system of international trade would find equilibrium absent government intervention.
One of the reasons for present dislocations in the global economy is due to the variation in workers' rights from nation to nation. The reason why Bangladeshi paper plates in our example are more competitive in US markets than American paper plates is because there is a lack of workers' rights in Bangladesh allowing sweat shops to thrive. This keeps labor costs down which allows them to sell their paper plates to the 99 Cent Store at such low prices (for a more thorough explanation of globalism please see the Globalization page). A country like the United States with long established labor and environmental protections will never be able to compete with nations who do not enjoy these safeguards.
Labor and environmental laws, or lack thereof, act as government controlled variables which hinder market forces from balancing out global dislocations. In other words, the playing field is far from level. Unless all nations play by the same rules, there will never be balance.
It should be self-evident that governments of the world will never adopt a uniform code of labor and environmental protections, let alone enforcing labor and environmental laws. Market forces are never going to be able to balance out the global economy under these conditions.
What can we do to stop the exploitation of our brothers and sisters slaving away in sweat shops in the developing world? What can we do to prevent the loss of manufacturing jobs in the U.S., which were once the source of our economic stability? Let me answer that by saying that before the personal income tax was enacted in the U.S., the federal government received almost all of its income in the form of corporate taxes and tariffs on foreign goods. Let us tax heavily (or ban) goods coming from countries who do not protect labor or their environment just as we once protected local businesses from imported British goods in the 18th and 19th centuries. Our factories and manufacturers should not have to compete with manufacturers in developing countries operating sweat shops. It is evil to support any business, foreign or domestic, who perpetuates a system of slavery for the sake of profits.
Through legislation, the U.S. needs to either ban or tax the hell out of goods imported from countries with poor track records. We also need to allow workers from these countries to enter the U.S. in order to escape slave labor conditions. This will start a renaissance of domestic manufacturing and financial stability for the middle class because American businesses would not have to compete with sweat shops.
The pressure on foreign governments with poor labor and environmental track records to shape up would be tremendous as their labor pools evaporate and customer base deteriorates due to U.S. protectionist measures. We would free our brothers and sisters enslaved by foreman of sweatshop factories and, at the same time, restore our middle class by initiating a rejuvenation in our manufacturing base.
This policy towards international trade in combination with a complete overhaul of domestic monetary policy would help to end debt slavery in the US and cause the worldwide distribution of income to start to normalize (see the Money as Debt page for more on monetary policy). Absent any change in these systems, the elite will continue to siphon wealth from the poor of the world until we are all slaves. The rich are getting richer and the poor are getting poorer each and every day. It must stop now!
Closing our borders is not the answer. Allowing multi-national corporations to exploit humanity anywhere in the world is not tolerable. The fate of the lower and middle classes of the U.S. are entwined with the fate of our brothers and sisters in Mexico, China, Vietnam, Iraq, Afghanistan, Ecuador, Indonesia, and every other nation of the world. Unless laborers all over the world are free, we Americans will not be free.