Globalization: in the twenty-first century it is a fact, not a theory. We are living in completely interconnected world. Information, money and goods move across national borders with nearly the same fluidity that they move across the state borders within countries. Television, pop music and the internet are creating a shared culture among young people up and down the length of the Western Hemisphere. Cell phones are ubiquitous, and a college student in Guadalajara spends as much time text messaging his friends as does his counterpart in the U.S..

This is not “cultural imperialism.” It is cultural integration. When you go to a mall to buy clothing made in China, Mexico or the U.S., your mall-shopping counterpart in Argentina is buying the same items. You can hear Argentine music played in a restaurant in Mexico City; Peruvian music played on a street corner in San Francisco and rock and roll played in a cafe in Cuzco. I see people wearing Dallas Cowboys logos in cities where futbol means soccer.

Most of us are unaware of the extent to which the world around us has already become culturally and economically integrated. Let me refer to you Thomas Friedman’s “The World is Flat: A Brief History of the Twenty-First Century,” where you will get an eye-opening look at how the world has already become intellectually and financially integrated across continents and oceans:

Friedman opens his account standing on the first tee at the KGA Golf Club in Bangalore, India. Goldman Sachs, HP and Texas Instruments all have office buildings facing the back nine.

While America sleeps, accountants in Bangalore, trained by Reuters, compile financial records; update the books; and have reports ready for American businesses when their offices open in the morning.

When you call the help line for everything from your phone company to your credit card company, you are likely to talk with someone outside the country.

Pay Pal, created in 1998, has facilitated an explosion in e-commerce for such venues as eBay. Anyone with an e-mail address can send money to anyone else with an e-mail address using Pay Pal.

If you prefer, you can send money orders or pay bills using MoneyGram International at over 100,000 locations. We use MoneyGram to pay our translator, who lives in Guatemala.

Thousands of miles of fiber optic cable, along with satellite links, allow people to outsource service work – editing, publishing, accounting, teaching – to almost any part of the world.

Outsourcing – moving a specific part of a manufacturing process overseas – has given way to “offshoring,” which is the placement of an entire factory to another country. There they produce the same product with less expensive labor, lower taxes and lower health-care costs.

This process took off in China, and has made Latin American countries aware of the importance of not just tax breaks, but of infrastructure, education, and legal protections for property rights.

As an example of the latter, the Supreme Court in Mexico recently declared unconstitutional the Mexican government’s 2001 expropriation of 27 sugar refineries, allowing them to be sold to private investors.

Unfortunately, most of the discussion of this process, both in public and in the classroom, equates globalization with inequality and exploitation. Universities throughout the Western Hemisphere are still trapped in the Marxist paradigm, and know only how to present globalization in neo-Marxist terms. If you only have one tool for analysis, it will affect your ability to understand reality, or to put it another way, when your only tool is a hammer everything looks like a nail.

According to Marxist analysis and its variants, such as dependency theory, investment and trade are the causes of dependency and underdevelopment in poor nations. The media sells this story through images of poverty and pollution, not bothering to educate their viewers about the internal causes of those problems. Consequently, there is a false but seemingly universal assumption that these problems are a byproduct of development itself. No wonder free trade summits provoke violent demonstrations. They are the moral reaction to what students and the public see as a process that grants companies a license to exploit, pollute and profit at the expense of poor people in developing countries.

One of the most difficult and important steps toward solving any problem, whether something as simply as a leaky roof or as complicated as the effects of trade legislation, is to form an accurate picture of the problem. Before we can make judgments about causality, we need to reach some agreement about what exists – about the institutions and conditions that frame the problem. My contribution in this essay is not to provide the answers to the problems of globalization. That challenge has been taken on by a number of authors better qualified than myself (whose works are available in our Bookstore section). I would, however, like to put forward some of the arguments against free trade and free trade agreements, offer some analysis, and sort out those that have merit from those that are simply protectionist or downright silly.

By rejecting some of the spurious arguments about globalization we can avoid wandering off into unfounded assertions about the causes of inequality and underdevelopment. My purpose is to dissociate the arguments that have real merit from the emotional and rhetorical arguments, and to offer an explanation for why I feel some arguments regarding globalization deserve to be heard and discussed (specifically the arguments against U.S. agricultural subsidies and “dumping” of subsidized products on the world market) while others deserve to be ignored. Unfortunately, most arguments presented by “fair trade” advocates against free trade are misinformed or misguided.

As the opponents of globalization have come to recognize its inevitability, anti-globalization rhetoric has shifted to anti-trade rhetoric. This is expressed in the argument that those who oppose trade agreements such as NAFTA and the proposed FTAA are in favor of “fair trade” instead of “free trade.” The obvious implication is that free trade is not fair, especially to those nations who are entering the international market at a financial or technological disadvantage to their trading partners.

I will acknowledge that there is a moral argument here. One can certainly find examples of what North Americans would regard as exploitative wage levels, poor working conditions, and unacceptable levels of pollution in maquiladora factories and special enterprise zones. You can also find poverty that is linked to trade in the local producer who is out of work because of competition from imports. Further, large, well-financed global companies have some obvious advantages over smaller competitors in Latin American and Caribbean countries. That does not mean, however, that these countries cannot, or have not, profited from trade and investment with Europe, Japan and the United States. They have.

How could anyone be in favor of “unfair” trade? Well one reason is that most of the arguments in support of “fair” trade have a common point in advocating host-country protective trade barriers and government control of foreign investment. There is a profound distrust of free markets underlying the “fair trade” position. There is also a stealth agenda by American labor in the “fair trade” movement, and that agenda is strictly protectionist. The outsourcing of “American” jobs means the loss of union wages to thousands of middle-income Americans, but that issue is sold to the public in terms of protecting overseas workers from exploitation.

I had the chance to hear these arguments first hand at the convention against the Free Trade Area of the Americas (FTAA) in Miami in November 2003. I attended the lectures (some in English; some in Spanish); read the literature; and spent some time speaking with representatives from the various “fair trade” groups. (I will call it a convention instead of a protest, as the real discussions were held in seminars at the Holiday Inn; not in the streets.) There were speakers from Latin America at the seminars, but the majority of the opposition to the FTAA came from groups based in the U.S., such as Oxfam, Global Exchange, The American Friends Service Committee, the U.S. Steelworkers and the AFL-CIO. I wrote about this in a previous editorial.

From that experience I complied my list of the “Best and Worst” arguments against free trade, which appears below. By the way, I took these arguments primarily from the “fair trade” literature that the protest groups themselves provided at the FTAA protest and conference in Miami. They are their arguments, not my own. I have drawn on a number of sources for my responses, and provided footnotes accordingly.

1.  Free trade agreements (FTAs) impose commercial goals over social goals. They limit host-country governments from directing investment, setting prices or subsidizing domestic producers.  FTAs even provide that public services be contracted to private enterprises, which reduces the government’s ability to protect the public’s resources.

It is true that FTAs limit government’s role in the private sector in a number of important ways. That is what privatization does. It deliberately reduces government subsidies to industry; reduces the state’s authority over private property; minimizes the state’s role in the employer-employee relationship; and forces the state to contract some public services to private managers. The emphasis on reducing the state’s role is to reduce the opportunity for political interference in the exchange of goods and services between people. This reduces the opportunity for arbitrary acts of interference in private business decisions. This is particularly important in developing countries where local political bosses abuse their positions in order to enrich themselves, their relatives, or their business partners.

State enterprises around the world have a dismal record of management, efficiency and transparency. These public enterprises are supposedly run for social, rather than economic, goals. The beneficiaries, however, are often politically well-connected groups – usually wealthy minorities and large labor organizations. In either case the citizens are the ones who lose when state companies or utilities are operated for goals other than to simply provide efficient service to the public. Privatization does create unemployment as the padded workforce is trimmed down to meet the real needs of the enterprise. This is universal. It happens in the U.S.  as companies adopt new technology and efficiency measures such as just-in-time inventory. They outsource packaging and delivery functions to companies that specialize in those areas (such as Fed Ex). Even in China privatizing and modernizing state-owned enterprises has caused the state sector to shed about 27 million workers since the early 1990s. (Chen Zhao, The Bank Credit Analyst, Special Report, February 13, 2006)

The purpose of privatization is not to make the state weak, but rather to define what is properly public versus private activity, and to limit the state’s role to the former.  There is no reason why this should reduce the state’s role in protecting its citizens. Nor should privatization and free trade force the state to abandon relief or welfare that is targeted at the poor. In fact, by getting governments to contract services more efficiently, privatization frees up resources that can be used for education, infrastructure, or public welfare.

If, in fact, government money is not used for these purposes that is a failure of the in-country politicians and institutions to serve their own people. It seems unfair and misguided to blame these host country failures on multinational corporations, international investors and the IMF. In fact, it is patronizing! Developing countries are not prostrate before these international actors. On the contrary, the fact that investors’ money, foreign loans, and the physical assets of foreign companies are on host country soil gives host country governments considerable leverage in dealing with international actors.

I will give you an example. In 1982 Mexico owed over $100 billion to international lenders, making it the most indebted nation in the world in comparison with its GDP. In1983 world prices for crude oil fell by about 20% and Mexico, in a typical example of commodity export dependency, found itself without the revenue it had been counting on to resume payments on those debts. When crude oil prices fell again in 1985, the IMF and private banks suspended further credit. Mexico retaliated by suspending all debt payments.

Mexico’s head of Planning and Budget met with it’s U.S. creditors and the IMF and told them that Mexico’s problem was caused by a scarcity of funds, rather than excessive spending. He sold the international community on the idea of an “operational deficit” while Mexico worked its way out of debt. That year the IMF, the World Bank and U.S. banks together approved an additional debt-relief package of $9 billion dollars. Mexican president Miguel de la Madrid would later comment to author Jorge Castañeda that he had a strong bargaining position. The U.S. banks were faced with the untenable proposition of “foreclosing” on a sovereign country – something they had not thought would happen. (Proving that people who major in history do not become bank executives.)

The debt crisis was resolved when the U.S. and Mexican governments worked out an arrangement where private banks exchanged their Mexican debt for  new 20-year Mexican bonds secured by the U.S. Treasury. Lenders then cashed out of the deal by selling these new bonds in the marketplace. (Jorge Castañeda, Perpetuating Power: How Mexican Presidents Were Chosen, (New York: The New Press, 2000, 123)

Americans who have never started a business in a Latin American country do not appreciate the real threat of expropriation, unfair taxation, or arbitrary actions by host governments designed to extract money from foreign enterprises. Privatization reduces the ability of public officials to use state money or authority for personal opportunities or to reward political client groups and gives it to professional managers who are subject to the discipline of the market. Rather than dig up a list of acts of expropriation by Latin American governments, let me make the point with this quote by author Alvaro Vargas Llosa:

We have not established in Latin America the difference between the law and the legislation.  We think that the law is anything the government or the president decides it is.  And well in countries like the United States and Britain and others, that's not the way it works.  What you have is the law which is a higher principle than the legislation, meaning that the government can only go so far in a, you know, in its legislation and cannot go beyond certain limits which are really the rights that citizens have over and above the power of the state.  We haven't established that in Latin America.  So the government does anything it wants to do.  Anything it decrees is the law and therefore, the rights of the citizens are very precarious.  They're just subject to whatever the government wants. (Alvaro Vargas Llosa, from Uncommon Knowledge, http://www.uncommonknowledge.org/900/921.html , downloaded 2/20/06)

2.  NAFTA and other Free Trade Agreements represent the imposition of U.S. corporate goals over the goals of host country governments and their people. Free trade agreements are just a way of U.S. corporations to exploit low-cost labor and avoid the regulatory environment of the United States.

Opponents fear that the U.S. has the most to gain from a free trade agreement, since our economy has internal “linkages” that add value to imported or exported materials. Latin American nations have commodity-export economies, and would subsequently benefit less from trade – or so goes the theory. Actually, economic relationships should be viewed in a relative context, and the benefits of trade may be more meaningful to a poor country than to a country like the U.S.. In fact, most of the criticism of trade relationships coming from poor countries focuses on inequities caused by U.S. protectionism rather than on free trade itself.

This is one of the ironies of the free trade debate. Anti-globalization protesters claim to speak for vulnerable groups – from U.S. workers to campesinos.  They claim that the benefits of free trade accrue only to the rich, and that consequently the impetus for free trade agreements comes from international corporations and their allies in the U.S. government. Actually, much of the initiative for free trade comes from South and Central American countries themselves.

A free trade agreement among the nations of the western hemisphere is not being imposed by Washington. Far from being unwilling or subservient to the U.S., Latin countries are pushing for the FTAA, and are making demands on Washington to eliminate subsidies and tariff barriers on imports to the United States. The opposition to the recent proposal for a Free Trade Area of the Americas (FTAA) came from Brazil and Argentina, not because they oppose the free trade concept, but because they want the U.S. to drop its own protectionist barriers and subsidies on agricultural products, textiles and steel. Most of Latin America’s leaders recognize that their countries will benefit economically from international investment and better access to the U.S. market in particular.

3.  Small and mid-sized producers, particularly rural producers, will be displaced by large commercial entities with an edge in technology and financing. In textiles and manufactured products, international companies can make better quality products, and make them more cheaply, which crowds out the local producers.

This argument has two applications, and I will address them separately. First is the case of rural grain producers, who cannot compete against subsidized wheat, corn, soybeans and oranges grown in the U.S.. Our subsidized grains oversupply the domestic market and are then “dumped” on the international market, depressing prices.

This is true, but it is an argument against subsidies; not an argument against free trade. If leaders in the U.S. and Europe had the political courage to reduce these subsidies and stand up to the special interests they protect, the ultimate beneficiaries would be the American and European taxpayers and consumers as well as Third World grain and dairy producers.

The protest coalition raised the issue of U.S. farm subsidies and “dumping” of grain below the cost of production as an example of how U.S. trade policy impoverishes Latin American farmers. That’s a fair criticism. My criticism of the Citizens Trade Campaign is that they have failed to follow through with the logic behind that accusation. The policy that is most damaging to Latin American farmers is the enormous level of subsidies embodied in the 2002 Farm Bill. Instead of protesting against that bill and the level of agricultural subsidies here in the United States, they have incorporated the National Family Farm Coalition into the CTC, and advocate reciprocal subsidies and tariffs by Latin countries as a remedy for U.S. dumping!

Instead of protesting in favor of protectionism – embodied in the “fair trade” slogan – we should protest against tariff barriers the U.S. maintains on textiles and our heavily-subsidized agricultural sector. One can demonstrate a positive correlation between trade and economic growth, even in poor countries that depend on commodity exports. If our objective is to improve the lives of workers and farmers in developing countries, then why not support free trade, and protest against the inadequate social programs of Latin American governments? I am surprised at the size and ferocity of the protest movement toward the U.S. and international business. Its rhetoric, images and slogans give the impression that the anti-globalization movement is an emotional reaction to inequality itself rather than a reasoned response to the problems of poverty.

The other application of this argument is to cottage industries and undercapitalized businesses, which cannot compete with international producers. This is true everywhere, even in industrialized countries. It represents the effect of consumers choosing higher quality or less expensive goods over locally-produced goods. Small local producers will have to find a way to tailor their product to the local market, or go into a different line of work. Rather than fight against this process, anti-trade groups should focus on encouraging investment in small industries in order to help them with this transition process. This could be done by promoting micro-lending, or setting up investment groups that would guarantee or insure small business start-ups in developing countries. In any case, the remedy should be part of the host countries’ efforts to offer a safety net to their own citizens. This safety net might include government loans or subsidies to local producers to help them reach the point where they can compete against foreign producers in their own markets. This is a “positive” response to the problems of globalization as in encourages local growth. Instead, “fair trade” advocates focus on the “negative” response of simply trying to block international trade or punish international actors.

The entity that is in the best position to help cottage industries and small producers capitalize their businesses or shift to other sources of income is the host-country government itself. This would involve a commitment to education, training, infrastructure and perhaps marketing assistance. It would also involve a commitment to laws that protect private property and the enforceability of contracts! This will be a long process, and may take years to show results, but it is important to start down the path of encouraging grass-roots capitalism. Socialist and populist intervention in Latin American economies has been the rule rather than the exception for decades. It has not supplied an answer for poverty and underdevelopment, and reverting to the “nationalist” solutions of the past will most likely reproduce the economic results of the past. Those results have been: hyperinflation; debasing the currency and a proportional increase in the country’s dollar-denominated debt; and a bloated public sector that soaks up a disproportionate share of the citizens’ tax payments.

Worse, protectionism and subsidies have a long life. They further ingrain the social attitudes of dependency on the government for “guaranteed” income and employment. As an example, when Mexico began to privatize its state industries in earnest in the 1980s, union workers realized they would have little success negotiating with company management. Instead, they went straight to Mexico City and demonstrated in front of the Ministry of Labor or the Ministry of Tourism in an effort to get the government to do what it had always done in the past – intercede with public funds and guaranteed jobs. Critics of trade claim it creates dependency, but the opposite is historically true: government subsidy and trade barriers create dependency.

4.  Free trade agreements limit the role of the state in controlling foreign investment flows. In effect, the position of the state in directing investment is undermined by banks and private investors.

That is exactly right. Free trade implies a limited role for the state, and a focus on those things the state does best – public services, infrastructure and direct aid. The role of the state in the market has not been to protect resources or foster sustainable development (which, by the way is a provision of the NAFTA treaty). Rather, governments in both developed and developing countries enter the market to dole out public money to political client groups; to generate income for the state through taxes and licenses; and to promote nationalist goals by directing investment to outdated and inefficient industries. Who pays for this? The consumers and taxpayers in the host countries pay for it! Is  it “fair” to the majority of people in developing countries to ask them to subsidize a politically well-connected minority, or the government officials who are in league with them?

The host country has a regulatory role to play in the era of globalization. Cultural attitudes toward private enterprise, nationalism, and under-developed regulatory institutions create government regulations that are often predatory rather than strictly regulatory. In other words, they are focused on extracting money from the private sector (both the host country’s private sector and the foreign sector) rather than focusing on “good” regulation such as labor laws and environmental controls. Unfortunately, the environmental laws that are on the books are often not enforced, leading to deforestation through illegal logging. Both Mexico and Guatemala, for example, have severe problems with deforestation, yet both countries have laws that ostensibly protect their forests. In this case it is not the IMF that is responsible for the environmental problem. It is the state’s failure to crack down on an internal problem of illegal logging and to respond with reforestation efforts. It is an enforcement issue; not a trade issue.

5.  Free trade agreements can be judged by the history of NAFTA, which took effect in 1994. NAFTA has been “a disaster” for workers in both Mexico and the United States. According to literature published by Global Exchange, “765,000 jobs have disappeared” in the U.S. because of NAFTA. An article in Dollars and Sense magazine claims that wages in Mexico are down 23% since NAFTA’s inception, and that the number of Mexican households in poverty has risen dramatically since 1984. (Timothy Wise, “Fileds of Free Trade: Mexico’s Small Farmers in a Global Economy,” Dollars and Sense, November/December 2003, 17) Even Lou Dobbs of CNN solemnly affirmed in front of millions of viewers that “average wages in Mexico have declined” since NAFTA.

Part of the problem with this analysis is a confusion about causality. The fact that job losses occurred in the U.S. manufacturing sector during the time when NAFTA was in effect does not mean that NAFTA caused a net loss of jobs. Consider what the economy has been through since 1994: the bursting of the tech “bubble” and the stock market crash; the following recession; the terrorist attacks of 2001; the war in Iraq; and the effect of all the above on corporate and government budgets.

Arguments about the loss of U.S. jobs have been taken out of context – dissociated from the state of the economy. (The same is true for statements about the impact on jobs in Mexico, which I will address below.) Labor groups in particular reduce their NAFTA arguments to an “it helps them so it hurts us” dichotomy. The AFL-CIO says, for example, that 727,000 jobs have been lost in the U.S. manufacturing belt in large part because China exploits its own workers. A specialist on Chinese economics at the Washington research institute called the Institute for International Economics disagrees. Nicholas Lardy says those figures are “close to worthless. They pile on assumption after assumption after assumption. You get to a result that isn’t plausible.” (See story by James Cox, USA Today, 8/11/04 pp 2A – 2B)

The truth is, even in good times jobs are always being lost as others in new industries and sectors are created. Global Exchange admits in their literature that many American workers have been re-hired, but at lower average wages. This represents the loss of union jobs in manufacturing, and these former employees finding work at something less than union scale. Starting over in a new career usually entails a pay cut, especially to blue-collar workers. To blame this on NAFTA, or even on job outsourcing ignores the comparatively small effect that trade has on U.S. job turnover.

Brink Lindsey of the CATO Institute wrote a paper on this and noted that between 1993 and 2002 the U.S. private sector added a net 17.8 million jobs, even after accounting for job losses due to plant closings and outsourcing. (Brink Lindsey, “Job Losses and Trade: A Reality Check,” CATO working paper No. 19, March 17, 2004. See more at www.cato.org) It is true that manufacturing employment is dropping – by about 2.8 million jobs in the last three years. Yet during that same time imports of manufactured goods have risen only by about .6 percent. Lindsey concludes, “There is no significant difference between jobs lost because of trade and those lost because of technologies or work processes.”

Is trade robbing U.S. workers of their jobs by making them compete in a global marketplace? Union opponents of trade say, “yes.” They say this results in “a race to the bottom,” but the reality is that it is a race to the middle. Multinational companies do not go where wages are lowest, but where low wages, infrastructure, and political stability coincide. Except in the most routine of manufacturing processes, companies still look for a skilled workforce with reliable work habits, situated around good infrastructure, such as utilities, shipping, and communications. U.S. workers can compete with workers in other countries if their productivity remains high. That is partly a function of manufacturing technology, but it is also a function of work ethic and education. I know this comment won’t be well received in Cleveland or Detroit, but American workers cannot expect to receive higher pay and guaranteed employment when their education and skill levels are being challenged by people around the globe who are motivated to work harder to earn what American workers earn.

We could “protect” our workers with government subsidies, trade barriers, and other forms of government welfare, but this path has not worked well in other countries where it has been tried. The result is inefficient industries that produce substandard products; unions that jealously guard their privileged position in the workplace; and a consumer who pays higher prices and taxes for this “protection.” Offering this as a solution to either U.S. or Latin American workers is to show them a road they have already taken! You can always create extra jobs through subsidies or work rules, but you cannot make those jobs sustainable.

6.  What about NAFTA’s effect on Mexico?

First, let’s look at just exactly what NAFTA is. It is a traded pact between the U.S., Canada and Mexico that was inspired by the success of the European Community in eliminating trade barriers in order to stimulate economic growth among its members. Most of the NAFTA agreement already existed as a free trade agreement between the U.S. and Canada, signed in 1988, and was extended to Mexico in 1992.

NAFTA’s main provisions call for a reduction in import tariffs between the three countries – some immediate and others phased in over a 15-year period. The treaty was also designed to facilitate the flow of capital across borders, giving U.S. and Canadian companies greater access to the Mexican banking, insurance and telecommunications industries. Anti-trade activists point to Mexico’s poor economic performance during the decade of the 1990s and place the blame on the free trade and investment provisions of NAFTA. They point out that Mexico’s unemployment rate increased during the 1990s, and that real wages fell as much as 37% from their levels of 1980. (Nick Campolo presents a critical but cogent and rather balanced argument on his website. See it online at http://my.execpc.com/~squall1/nafta/nafta.html)

What Campolo, Public Citizen and other critics do not acknowledge in their literature is that from 1982 through 1995 Mexico suffered a debt crisis, a prolonged recession and severe devaluations (50%) to its currency that had nothing to do with NAFTA. These economic problems were the result of Mexico’s own economic policies, and were largely responsible for the unemployment and wage reductions during that decade.

To put Mexico’s economy in a better context, let’s look at where Mexico was before NAFTA. Through the 1970s the governments of Luis Echeverría and López Portillo gave large subsidies to all sectors of Mexican society. Big business received government-subsidized inputs and tariff protection. Unions received government-mandated wage hikes. Consumers enjoyed subsidized transportation, basic foodstuffs, and public utilities. Campesinos received guaranteed prices for grain and public works projects such as schools and clinics. Did all of this protection result in a “fair” outcome?

Price guarantees to farmers came with strings attached: it was illegal to sell farm produce to any entity other than the government monopoly CONASUPO. The government did not really give rural producers a good deal. Instead of benefiting the small farmer, CONASUPO’s monopoly allowed the government to provide cheap food to urban consumers, who were a more important source of political support. Politics trumped the market, but the result was not a fair deal for the poor. Politically powerful groups benefited the most. Protected unions in oil, communications, railroads and federal service received protection and benefits not available to smaller or “unofficial” unions. Yet the cost of those subsidized wages were born by everyone.

Admittedly, Mexico’s state-led import substitution model worked well from the end of World War II into the 1970s. Mexico’s economy produced economic growth rates of over 6 percent for several decades. Its import substitution model was credited for the “Mexican Miracle,” but this success should be qualified in two respects. First, it came against a backdrop of global growth. Mexico was riding the tide that lifts all boats. Second, Mexico used its oil reserves to boost government spending and support the economy. By the 1980s Mexico was the world’s fourth largest producer and exporter of crude oil.

In 1982 the world oil market became saturated and prices fell, forcing Mexico to borrow in order to maintain its level of government spending. Even if PEMEX had pumped an extra million barrels of oil a day it would not have been able to sell that oil on world markets without affecting prices. When that source of free money ran dry, the funding for the patron state shifted from oil to debt. Two years later, Mexico defaulted on its foreign debt and its economy collapsed. (There is a lesson here for U.S. policymakers. Enormous national debt is not harmless, even when “we owe it to ourselves.” Debt and interest eventually have to either be repaid or forgiven.)

Those who were hurt most in the recession years that followed were the urban poor and working-class families who faced stagnant wages, reduced subsidies, and rising inflation. This is why I say that prolonged government subsidies or trade barriers are unsustainable. NAFTA was initiated under the Salinas de Gortari presidency as a deliberate departure from state subsidies and tariff protection that had led to uncompetitive industries, padded union payrolls, and high inflation. The initiative to adopt “orthodox” economic policies and abandon import substitution policies was not imposed by the U.S. or by international lenders. It was a reform movement that came from within Mexico itself – principally from the middle and professional classes. It was an attempt to put the Mexican economy on a sustainable footing.

What privatization has done for Mexico since 1984 is provide thousands of jobs to Mexican workers and force Mexico’s protected industries to become competitive. This has resulted in the loss of thousands of jobs from padded work roles, and the dissolution of uncompetitive industries. It has also resulted in the creation of thousands of new jobs – jobs that are not dependent on oil revenue or political patronage.

 7. Has NAFTA created jobs in Mexico?

It is inconsistent to argue 1) that NAFTA has been “a disaster” for U.S. workers, and at the same time maintain that 2) Mexico has not gained any jobs from NAFTA. In fact, Mexico recorded about a $12 billion boost in exports to the U.S. in 1995 (the year of the peso devaluation), and has maintained a trade surplus with the U.S. of about $10 billion per year since then. (source: U.S. – Mexico Chamber of Commerce. See web address below) Mexico’s overall employment may not be increasing, but one cannot blame NAFTA or the influx of foreign manufacturing for that decline! Even the maligned maquiladora industry has boosted Mexico’s exports and employment.

Here is an excerpt from the U.S. – Mexico Chamber of Commerce website on this subject:

In 1998, the maquiladora industry exports were $53.1 billion, comprising 45 percent of Mexico’s exports. By mid-1999 there were about 3,300 maquiladora plants in Mexico with about 1.14 million  employees, roughly 40 percent of Mexico’s manufacturing employment . Employment in the maquiladora sector grew 10.9 percent in 1998 and has doubled since the beginning of NAFTA. (http://www.usmcoc.org/n6.html, dowloaded 9/6/04)

8.  What about the environmental damage caused by NAFTA?

NAFTA contained provisions for honoring the three partner countries’ environmental laws, and created both an environmental watchdog agency and a development bank to fund environmental infrastructure projects. A side agreement, called the North American Agreement on Environmental Cooperation, created a commission to monitor border pollution and created the North American Development Bank (NADB) to fund environmental initiatives. The NADB was created along with the Border Environment Cooperation Commission as international institutions in which the U.S. and Mexico participate equally. The two organizations work to evaluate and fund infrastructure projects related primarily to fund water treatment, irrigation and conservation facilities to the border region – on both the U.S. and Mexican sides.

You can download a list of the Bank’s funded projects in PDF format and see for yourself what they have done. (Go to http://www.nadbank.org/ and look under “News and Updates.”)

Here is an example from the website:

Project: El Sásabe, Sonora, Mexico

Creation of a wastewater collection system.

Total cost: $935,062

Community Benefits: The project will provide first-time sewer and sanitation services to the entire community of El Sásabe, thus improving the quality of life of the residents by eliminating the health hazards and other disagreeable effects associated with the use of latrines and septic tanks. Proper disposal of wastewater will also reduce environmental contamination, thereby benefiting Sásabe, Arizona, and the Buenos Aires National Wildlife Refuge.

(NADB, “Summary of Project Financing Activities,” June 30, 2004. Available from www.nadbank.org. Accessed September 3, 2004.)

If we are serious about helping Mexico’s poor while simultaneously mitigating the pollution in industrial areas, we should increase the Development Bank’s funding, rather than attacking the trade agreement that created it.

Interestingly, the enforcement of environmental standards is accomplished in part by trade sanctions. In fact, one of the novel aspects of NAFTA is the idea that trade sanctions can be used to help enforce environmental standards. You see, lenient environmental laws or lax enforcement is perceived by the other partners to the treaty as a kind of unfair subsidy. The best watchdogs over pollution in Mexico, besides the Mexican people, are competing industries in the U.S and Canada. Who do they complain to? The environmental cooperation agreement is managed and enforced by the Commission for Environmental Cooperation (CEC), located in Montreal. The CEC has investigatory and enforcement powers.

On the subject of public awareness of pollution, Mexico has never had a system of registering and reporting pollutants to the public. The CEC has facilitated just such a system, and president Vicente Fox recently signed it into law. It requires, for the first time, industries to measure and report emissions of 104 different chemicals. This allows in-country environmental watchdogs to help with the enforcement process. For more information, see the CEC’s web site: www.cec.org.

9.  The negotiations surrounding free trade agreements are conducted in secret. The people of the developing countries have little or no voice in the final terms of such agreements. This is particularly true of rural indigenous communities.

Free trade advocates will tell you that the meetings are representative of the interests of the groups in attendance. All countries that are part of the accord send representatives to the summits. Not everyone gets everything they want, but that is the nature of multi-lateral agreements. When these agreements break down, they are replaced by bilateral agreements wherein the actors still negotiate through representatives. Marginalized groups are not represented in those agreements either.

Why the secrecy? It is partly to insulate the trade ministers or representatives from political pressures to insert subsidies, tariffs, or other special treatment for political client groups.  In other words, the governments involved deliberately remove the trade negotiations from public influence. The reference to indigenous communities is a red herring. Indigenous communities have little influence in the politics of their own countries in the first place, particularly when their interests come up against the interests of urban voters, organized workers or business groups. Trade negotiations are isolated from unions, protected industries, and public employee groups to prevent them from inserting their own agendas into the process. Even if indigenous communities were invited to send representatives to the trade talks, their voices would be lost among the numerous and more politically powerful groups who would want protections for their constituencies.

Protectionist pressures are so powerful that it is not realistic to “include” these interests in a free trade summit and expect a free trade outcome. If everyone at a trade meeting had an interest group to protect, multi-lateral talks would quickly break down. In fact, that is exactly what happened at the Free Trade Area of the Americas summits in Cancun and in Miami. The U.S. would not abandon its position on subsidies for its own agricultural, textile and steel sectors. Brazil and Argentina were particularly adamant in their opposition to U.S. farm subsidies and textile tariffs, which they felt disadvantaged their domestic producers. The FTAA broke apart over these issues. The trade ministers left with a bland statement of agreement on principles, and now the process will default to bilateral agreements. (The Central American Free Trade Area is an attempt to resurrect a multi-lateral trade agreement with a more limited scope.)

By the way, just because the negotiations themselves are not publicized does not mean that the talks are “secret.” The issues discussed and each country’s position going into the talks are very much in the media. The charge that the parties affected by the talks are denied key information is not true. The U.S. in particular has been very public about its bargaining positions. (How do the protesters know in advance what the U.S. positions are? They read the newspapers.)

10.  The promises of FTAs cannot be realized because the regulatory apparatus of Central American countries cannot match the influence of multinational corporations. This means host governments are helpless to enforce environmental standards or to control the exploitation of labor.

Latin American states have not been too weak to regulate private enterprise in the past. To the contrary, much economic activity in Latin America has been pushed into the “informal” sector by over-regulation. It is just that this regulation has been ineffective because it was either self-serving or punitive. The results have been an unequal distribution of wealth; heavy-handed regulation of small entrepreneurs; and mismanagement of public resources. As I acknowledged above, Latin American countries do have problems with regulation and law enforcement. Kicking the multinationals out will not solve this. On the contrary, bringing states on the “periphery” into the “core” begins with economic and institutional integration. Isolating periphery countries behind trade barriers will only allow dysfunctional and secretive governments to continue their errant ways.

The wide and uncritical public fear of rogue enterprises speaks to the popular hostility toward capitalism in the anti-trade camp. There is a complimentary degree of hostility toward capitalism in general and U.S. companies in particular in Latin America. Keep in mind, however, that the “capitalism” Latin Americans have come to know has been oligarchic, as business opportunities have been controlled by a wealthy minority in most countries. Free markets have been tainted by government interference, political favoritism, and monopolies granted (officially or unofficially) to privileged groups. No wonder Latin Americans are suspicious of “capitalism.” They have little experience with it, and are still developing the laws and institutions that make it work for the majority of people.

The movement toward free trade is part of a movement toward free markets. This process should be encouraged, and Latin Americans should be given the opportunity to see that capitalism can work for people at the grass roots level. The U.S. was a developing nation just over a century ago. We relied on private investment from Europe to grow our economy and become a wealthy country (although I will acknowledge state subsidies to railroads and tariff protections for industry gave us a boost). The movement toward free markets in Latin America represents a reform movement in a very fundamental sense. It is a reaction to decades of oligarchic and state-sponsored capitalism, privileged access to the economy and populist economic policies.

What is the alternative?

It is easy to oppose free trade and free markets (or, if you prefer, neo-liberalism) on the grounds that it will not live up to our expectations. What is more difficult is to propose an alternative that will live up to our expectations. If free trade and a greater hand for the private sector is bad for Latin Americans, then what would you propose in its place that will do a better job of bringing people out of poverty and offering them better lives?

Most of the anti-globalization remedies are anti-trade remedies, and focus on protectionist barriers, domestic subsidies, foreign aid, loan forgiveness, and government owned or managed services. These remedies are not new. All have been tried before, in one form or another, over the latter half of the twentieth century. The results have been poverty, hyperinflation, and retarded economic development. The results have also been water pollution and deforestation as host governments have failed to protect their own resources. It is irrational for them to keep doing what they have been doing and expect a different result.

It has been puzzling to me that people in the U.S. and Canada would travel thousands of miles in the service of a cause that might be better carried by Latin Americans themselves. What I hoped to make clear in this essay is that state control has not resulted in a “fair” distribution of resources within Latin countries in the past. Nor has state control of trade been “fair” between Latin countries or between Latin countries and the U.S.. Free trade agreements represent reform in a very real sense in that they are a departure from state-managed trade and investment. Having experienced decades of failed experiments with statism and socialist economic policies, Latin governments are turning to free markets as a more successful model for creating wealth. The anti-globalization movement north of the border, by contrast, is reacting to the bogeyman of private ownership and a loss of state “control” of Latin America’s resources without the benefit of an historical perspective.