Equal trade, fair trade, honest, decent trade requires reasonable balance between trading partners and strong domestic economies. When that happens, Adam Smith’s model works pretty well: prices for labor, materials, and finished goods all settle near the area where they “naturally” should be.
But as we’ve seen from the immensely imbalanced statistics on distribution of wealth in chapter 19, something is not working the way Smith envisioned. Wages appear to be dwindling, and the number of strong, healthy competitors appears to be shrinking.
Watch: Free Trade - POOF goes the Money & the Stimulus
Teddy Roosevelt Weighs In
President Theodore Roosevelt brilliantly defined the American Dream in the context of the dynamic difference between a business that is a builder of community and one that hollows out community. “We are a business people,” Roosevelt said at the Ohio Constitutional Convention in Columbus in 1912.
The tillers of the soil, the wage workers, the business men—these are the three big and vitally important divisions of our population. The welfare of each division is vitally necessary to the welfare of the people as a whole.
The great mass of business is of course done by men whose business is either small or of moderate size.
The middle-sized business men form an element of strength which is of literally incalculable value to the nation. Taken as a class, they are among our best citizens. They have not been seekers after enormous fortunes; they have been moderately and justly prosperous, by reason of dealing fairly with their customers, competitors, and employees. They are satisfied with a legitimate profit that will pay their expenses of living and lay by something for those who come after, and the additional amount necessary for the betterment and improvement of their plant.
The average business man of this type is, as a rule, a leading citizen of his community, foremost in everything that tells for its betterment, a man whom his neighbors look up to and respect; he is in no sense dangerous to his community, just because he is an integral part of his community, bone of its bone and flesh of its flesh. His life fibers are intertwined with the life fibers of his fellow citizens...
So much for the small business man and the middle-sized business man. Now for big business.
It is imperative to exercise over big business a control and supervision which is unnecessary as regards small business. All business must be conducted under the law, and all business men, big or little, must act justly....“Big business” in the past has been responsible for much of the special privilege which must be unsparingly cut out of our national life.
I do not believe in making mere size of and by itself criminal.
The mere fact of size, however, does unquestionably carry the potentiality of such grave wrongdoing that there should be by law provision made for the strict supervision and regulation of these great industrial concerns doing an interstate business, much as we now regulate the transportation agencies which are engaged in interstate business. The antitrust law does good in so far as it can be invoked against combinations which really are monopolies or which restrict production or which artificially raise prices....
The important thing is this: that, under such government recognition as we may give to that which is beneficent and wholesome in large business organizations, we shall be most vigilant never to allow them to crystallize into a condition which shall make private initiative difficult.
It is of the utmost importance that in the future we shall keep the broad path of opportunity just as open and easy for our children as it was for our fathers during the period which has been the glory of America’s industrial history— that it shall be not only possible but easy for an ambitious man, whose character has so impressed itself upon his neighbors that they are willing to give him capital and credit, to start in business for himself, and, if his superior efficiency deserves it, to triumph over the biggest organization that may happen to exist in his particular field.
Whatever practices upon the part of large combinations may threaten to discourage such a man, or deny to him that which in the judgment of the community is a square deal, should be specifically defined by the statutes as crimes. And in every case the individual corporation officer responsible for such unfair dealing should be punished.
We grudge no man a fortune which represents his own power and sagacity exercised with entire regard to the welfare of his fellows. We have only praise for the business man whose business success comes as an incident to doing good work for his fellows. But we should so shape conditions that a fortune shall be obtained only in honorable fashion, in such fashion that its gaining represents benefit to the community....
We stand for the rights of property, but we stand even more for the rights of man.
We will protect the rights of the wealthy man, but we maintain that he holds his wealth subject to the general right of the community to regulate its business use as the public welfare requires.2
In this speech Roosevelt identified the key distinction and pointed directly to the situation the world finds itself in now.
Corporations have become so large and powerful that We the People— citizens and their governments around the world—no longer have the ability to control or restrain corporate misbehavior when it endangers the common good. And so we have epidemics of cancer, acid rain, ozone holes, and massive species die-offs as multinational corporations roam the world, strip-mining it for human labor, minerals, fossil fuels, and the fragile remaining bounty of its forests and oceans.
The ultimate in unequal trade has ensued from increasing corporate influence. Very large corporations—Roosevelt’s “big businesses”—have now become able to sue an entire nation, in a court that they, the companies, lob- bied to create, and can overturn the laws of independent nations with virtually no appeal. And unlike any court in the civilized world, this court is as secret, private, and difficult to appeal to as any military tribunal.
Free Trade Ravages National Economies
Free trade is a phrase behind which multinational corporations have essentially strip-mined both the developed and the developing world. That’s strong language, but the metaphor holds up under examination. In strip-mining, a company comes in, strips off anything necessary to get at what it wants, and leaves. Similarly, the developing world is being mined for its resources, including human labor. At the same time, the already-developed world is being mined for its wealth, as its middle class and working poor sink farther into debt while multinational corporations become richer than any historic kingdom the planet has ever seen.
To understand what we can do about this, we first need to understand the mechanism. And there most definitely is a mechanism. When properly executed, it works quite reliably.3
Every product from shoes to nails to computers requires some human labor to manufacture. This can be done under working conditions that are safe and comfortable (or unsafe and uncomfortable) and using chemicals, techniques, and energy from toxic or safe/renewable sources.
For the cost of one American or European or Australian laborer, a company can hire between fifteen and fifty laborers in a developing country; and as an added bonus, the company can go back to using toxic chemicals banned in the United States over the past fifty years and buying cheap electricity from coal-fired power plants that would be illegal in this country. And when workers are injured or die, there’s virtually no cost to the company.
Thus as transnational corporate lobbying succeeded in bringing about a “flat” world opened for free trade, about 4 billion people suddenly came into the same labor market that was once a protected space occupied by about a half-billion, and the other costs of manufacturing fell through the floor.
The first result of this was that companies that moved manufacturing from the developed world to the developing world were able to decrease labor and externality costs and increase earnings (profits). As companies used this principle to their advantage and built empires in industries from shoes to retailing by selling products made in low-labor-cost nations into the retail channels of the high-labor-cost nations, it seemed like it was a good thing (it was certainly promoted as a good thing!). Cheaper products were available in the wealthy nations, jobs were created in the poorer nations, and the people who made it all happen got rich.
But there were complications.
- If an American company wanted to compete with the one that had gone offshore for labor or to avoid environmental regulations, it faced only two choices: shut its domestic factories and move manufacturing offshore, or go out of business. The result—on a vast scale—has been that the larger companies have moved offshore and the smaller companies that lacked the resources to do that have gone out of business. The number of competitors has dwindled, and markets have become concentrated in fewer and fewer hands.
- As a consequence well-paying manufacturing jobs in the developed world have evaporated at a startling pace. This echoes all the way up from the local level, through state and national economies, finally showing up as a general lowering of the standard of living in the developed world. Wages drop, benefits vanish, jobs become scarce, and people become insecure.
- Along with the economic changes come social changes. The worst of it shows up at the bottom first—the number of people in prison explodes, as do other negative social indicators. Antidepressant drug use goes up, suicide goes up (particularly among teenagers, who are developmentally most fragile and are watching their future earnings prospects evaporate), and spouses and even children go to work to help support the household. Debt goes up as the society becomes progressively poorer.
- Wealthy nations respond to the offshore challenge by trying to be competitive, which means further lowering wages and benefits. Companies may even cut promised benefits to their longtime employees who have already retired. But even if the local company cuts wages in half (doing enormous damage to the local economy), a transnational corporation is still able to hire a dozen or more workers for the same job in a poor nation. Consequently, the race to the bottom gathers momentum—the bottom is where more than 6 billion people compete for the same work that was, until recently, performed in a tariff-protected economy of 1 billion people (the developed world). Resources won’t stretch that far. The bottom is worldwide poverty supervised by a wealthy few, also known as feudalism.
- In the developing nations where these “new jobs are created,” people who have been doing traditional farming leave the land for the sweat-shops, and the land is turned over to intensive corporate agriculture. People who in previous generations were independent, self-sufficient farmers become urban slum-dwellers, the working poor, dependent on agribusiness and supermarkets for their food.
- When the new sweatshop nation’s urban working poor begin demanding higher wages and benefits, clean air and water, and a safe workplace, the corporations move to another country where labor is cheaper and regulations are looser. It happened in the 1990s when a mass exodus of multinational corporations left Korea, Taiwan, and Thailand for the ultracheap labor of Vietnam, Myanmar (Burma), and China, shattering the economies of those former “Asian tigers.”* Poverty explodes as slums overflow with crime, drugs, and prostitution—the symptoms of desperate people seeking some sort of income when the real jobs are gone. It is just like strip-mining, and it’s a sign of the worst sort of corporate citizen—one without the slightest concern for the impact it has.
- In the process the multinational corporations become richer, moving their “mining” activities from one nation to another as profits dictate. As multinational corporate wealth increases, stock prices go up and the top few percent of the socioeconomic pyramid become wealthier. Nations learn to watch the stock market, thinking—in complete error— that it is an accurate indicator of the nation’s wealth and economic health. In fact, from the Dutch tulip market collapse in 1637 to the U.S. stock market rises and crashes of 1929 and 2008, rapidly increasing markets have historically been indicators of an economy on the edge of implosion or undergoing radical social transformation.
As Sir James Goldsmith suggested in the epigraph of this chapter, we have forgotten that the purpose of economies—the whole reason why humans began trading with each other from the earliest days—was to provide for social stability. Your country makes good cheese, we make good clothing, another country makes good wine: let’s all trade these products with one another so all three of us can enjoy good cheese, clothing, and wine.
But in a “flat” free-trade world dominated by corporate values instead of human values, social stability is not a consideration unless or until it affects profits. This is the lesson of unequal values. And when a country becomes socially unstable, rather than working to restore the stability of the nation, multinationals simply leave town and go somewhere else, as Asian nations learned in the 1990s and Argentina learned in 2002.
This is not a new model, by the way. It’s how the East India Company treated India, the early American colonies, and numerous smaller countries that it considered its property. It reflects the mentality not of communities but of pirates, a mentality that gives birth to phrases like robber baron, corporate raider, and private equity.
Herman Daly and Robert Goodland used to work at the World Bank. They didn’t like what they saw. Consider this prophetic 1992 comment, two years before GATT was approved:
If by wise policy or blind luck, a country has managed to control its population growth, provide social insurance, high wages, reasonable working hours and other benefits to its working class (i.e., most of its citizens), should it allow these benefits to be competed down to the world average by unregulated trade?...
This leveling of wages will be overwhelmingly downward due to the vast number and rapid growth rate of under-employed populations in the third world. Northern laborers will get poorer, while Southern laborers will stay much the same.4
And this is exactly what we have seen happening.
The Corrective, Balancing Power of Tariffs
Historically, nations used tariffs—taxes on imported goods—to equalize differences between nations. Expensive-labor nations would charge tariffs on imported goods that were labor-intensive in their manufacture, to protect their domestic industries. Nations that wanted to protect unique natural resources or strategic products would use import/export policy to ensure their long-term survival and wise use. Trade was possible—it’s always happened among nations—but it was fair trade, fair to the humans in the trading nations and in the interest of the nations themselves.
Now multinational corporations have finally succeeded in freeing themselves from the constraints of social commitment to any nation whatsoever.
In the absence of tariffs and self-interested national trade policies, they are free to roam anywhere on a moment’s notice, looking for minerals, rain forests, and cheap labor. And because increasingly all money flows through them, they have essentially infinite power in all negotiations.
Finally, in a replay of events on American shores, they have in some cases taken roles in governments around the world. More than 150 countries have joined the WTO, and the giant transnational corporations are now dangling the carrot of cash to the leaders of the poorer nations. We’ve seen this movie before; it’s easy to tell what happens next. These governments readily comply, join the WTO, and subscribe to free trade. But what they get may not be quite what they bargained for. That’s what happened to no less a power than America.
How US Legislators React
The world’s largest transnational corporations are among the biggest contributors to politicians in America, and most members of Congress have supported the WTO even if they get a bit testy when the Dispute Resolution Panels rule against their favorite legislation. One good example comes from a speech to Congress by Representative John D. Dingell of Michigan on June 21, 2000:
Our major trading partners, including Japan, Korea, and the EU [European Union nations], have turned the WTO dispute settlement process into a de facto appeals court that reviews U.S. trade agency determinations and strikes down our trade laws. Japan and Korea have gone so far as to say they will launch WTO appeals of every U.S. trade determination that is adverse to their interests. Already, WTO decisions are gutting the effectiveness of U.S. trade remedies in ways that the Administration and Congress expressly rejected during the negotiations on the agreement establishing the WTO.
Increasingly, both governments and citizens of nations all over the world are expressing concern about the WTO’s process of leveling the corporate playing field across 153 member nations. Corporations manufacturing and exporting from countries that have lax or minimal environmental and labor laws are aggressively challenging and striking down the stronger laws passed in more-developed nations.
Countries with laws that banned the import or marketing of products they consider dangerous to their citizens are finding those laws struck down because other countries with weaker laws can now, to some extent, define the standard to which every WTO-member nation must be held accountable. They do this through WTO’s primary trade-law model, which says that a country cannot ban the import of a product because of how or with what type of labor it was produced.
Overturning Our Laws
Thus it’s now largely illegal to ban the import of products made by slaves or under inhumane conditions or made with chemicals that poisoned the local environment. This has sparked an explosion of industrial activity in labor-cheap and environmentally lax nations. At the same time, the industrial core of more-developed nations with higher labor and environmental standards has been hollowed out in just the past few decades, leaving vast landscapes of abandoned factories and a populace increasingly on edge about employment security.
In a developing nation where there is little or no cost or penalty to dump-ing toxins into the air or water, manufacturing is vastly more profitable than in a developed nation where toxins must be captured, stored, tracked, and cleanly disposed of in environmentally responsible ways. In the developed world, we have minimum-wage laws, laws regarding the maximum hours that may be worked per week, and safety and environmental laws. In the past, if an offshore product wasn’t made in ways we approved, we either banned its import or added taxes or tariffs to give our cleaner domestic companies a competitively level playing field.
For example, say there’s an hour’s work in the manufacture of a pair of American-made shoes. In the United States, that hour costs $12.77, including benefits and overhead.5 That same labor may be 10 cents an hour in Malaysia. So for the past century or so, the United States would have added a tariff, or tax, of $12.67 on any shoe imported from Malaysia that had an hour’s labor in it. That way U.S. shoe manufacturers could stay in business. It would level the playing field between the two cultures and nations, thus providing for fair trade.
Nations have often used tariffs to discourage manufacturing operations from moving their factories and jobs to less regulated nations.
But according to WTO, those tariffs are considered “restraint of free trade.” It’s illegal under WTO rules to consider how or who makes a product or at what level of pay it is manufactured. The loss of jobs to offshore began decades ago, but the elimination of tariffs during the Reagan and Clinton administrations accelerated it markedly. In the past few decades, more than 20 million Americans in labor-intensive industries have lost their jobs.
The other upshot of this is a dramatic increase in people around the world who are working either as overt slaves or at a wage rate that makes them virtual slaves in dangerous and toxic workplaces and living in an environment of company stores and company housing. The developed world, and particularly the United States, at first appeared to have benefited from this. It allows our consumer-based economy to continue to hum, with low inflation and rising profits, just as the American South benefited so much from cheap slave labor before the Civil War. But at best this was a short-term benefit.
The “New World Order”
In most nations of the world today, there are basically two types of political parties. Those two parties stand on either side of a nearly invisible line—one party huge and imposing and the other thin and sickly, a political sumo wrestler pitted against an aging and infirm Woody Allen. The parties, regardless of local labels, are “We Who Represent the Interests of Multinational Corporations” and “We Who Represent the Interests of Human Beings.” The first group has gotten laws passed that allow the easy movement of capital from nation to nation under rules far different and more relaxed than those for humans.
In the United States and most other developed nations, most of the distinctions between politicians are becoming increasingly blurred, and in many nations all the local politicians have joined the parties of the corporations. Those parties and politicians that exist to represent the interests of human beings have been marginalized or overwhelmed by the parties and politicians that exist to represent the interests of the corporations. The reason for this is simple: most of the world has followed our lead regarding “free speech” campaign contributions.
After the end of apartheid in South Africa, American corporations donated the services of corporate lawyers to help draft the new South African constitution. Pointing to the 1886 Santa Clara case, they essentially said that in America corporations have the same constitutional status as humans, so you should write this into your constitution, too.
South Africa did that, as have many other countries that have emerged or developed or separated from the former Soviet Union. It’s a challenge to find the details and the statistics, and I’m hopeful that this book may spur somebody to do that hard, nation-by-nation, language-by-language research, but it appears that many of the countries of the world have written corporations-as-persons into their constitutions or laws, thinking that they were following the original intent of the Framers of the U.S. Constitution, which, of course, is not the case.
The result is that corporations have functionally taken control of governments the world over, particularly through their participation in the funding of the electoral process. Thus, corporations have become the honey pot from which many politicians and political parties draw their nourishment.
In a Democracy...
In the 1996 election cycle in the United States, 96 percent of Americans didn’t make any direct contribution whatsoever to a politician or political party, and fewer than one-quarter of 1 percent of Americans gave more than $200. By contrast, each of America’s top five hundred corporations gave more than $0.5 million to the Democrats and the Republicans during the decade preceding the 1996 elections.
In the 1998 election cycle, which was not even a presidential election year, those corporations contributed $660 million to candidates, while the last remaining organized groups that represent workers—unions, which are not considered persons in the United States and most other countries but are instead regulated as artificial persons—were able to pony up only $60 million in campaign contributions raised from their members.
Unions have to operate under the same types of rules and laws that corporations did before 1886, and, in fact, additional restrictions have been placed on them since then. So-called “paycheck protection” legislation is being pro- moted by corporate lobbyists that would essentially criminalize union contributions to candidates. And, increasingly, in corporate-controlled nations around the world, unions are being deemed illegal, political, or even labeled as terrorist organizations and ferociously stamped out.
Can it change? I believe so. But only if the word gets out.
2. Theodore Roosevelt, “A Charter for Democracy” speech at the Ohio State Constitu- tional Convention, February 21, 1912, http://teachingamericanhistory.org/library/ index.asp?document=1126.
4. Herman Daly and Robert Goodland, “An Ecological-economic Assessment of Dereg- ulation of International Commerce under GATT” (Washington, DC: World Bank, 1992), quoted in The Trap (see note 1 above).
5. Example from http://www.aflcio.org.
This material is not covered under Creative Commons license and cannot be published without the permission of the author and Berrett-Koehler Publishers.
Copyright Thom Hartmann and Mythical Research, Inc.