The last time Congress had such a dramatic shift in power was 1994 when the Democrats were swept from power after labor union members abandoned the party a year after they passed NAFTA. In 2000 The Democrats failed to win a shoe-in presidency shortly after endorsing MFN status for China.
There is a trend emerging here, and it seems to reach beyond traditional party lines.
So the questions are:
- Who is opposing these trade agreements?
- Why do they oppose the trade agreements?
The biggest opposition among Republicans came from textile producing states in the south, sugar-producing states like Louisiana and Idaho and old-line manufacturing states like Ohio and Pennsylvania.
Now let's compare this to where the turnover in Congress was.
In North Carolina, Democrat Heath Shuler -- ostensibly one of the new conservative Democrats -- attacked his opponent, Republican Charles Taylor, for backing off his commitment to vote against the Central American Free Trade Agreement. "It's not right when Congress passes trade bills that send our jobs overseas," said one Shuler ad.
The Democratic pickups -- Missouri's Claire McCaskill, Montana's Jon Tester, Ohio's Sherrod Brown, Pennsylvania's Bob Casey, Rhode Island's Sheldon Whitehouse and Virginia's James Webb -- all unseated free-trade incumbents with campaigns that stressed the need to pay far greater attention to the downward leveling that globalization entails.
That should explain all you need to know - the opposition is from working people afraid for their jobs.
Rhetoric vs. Reality
There is no shortage of politicians and media outlets who will tell you that free trade agreements are a "win-win" proposition, and that they will create more jobs than they will destroy.
Bush said CAFTA would boost textile and other U.S. manufacturers by eliminating tariffs on many American goods imported by Central American nations. Also, he said, the measure would help stabilize the democratic governments in the region by increasing U.S. trade, which he said would make Central American workers more prosperous. "It's a pro-jobs bill," Bush said. "It's a pro-growth bill. It is a pro-democracy bill."
But is that true?
What isn't well known is that CAFTA isn't simply a matter of dropping tarrifs.
Chief among the objections offered by NASDA and many other CAFTA critics is the fact that the supposed "free trade" agreement would impose what amounts to unilateral trade disarmament on U.S. agricultural producers. The six foreign nations included in the pact would be granted immediate access to U.S. food markets. However, U.S. producers would have to wait for years, or even decades, in order to be granted reciprocal access.
Since CAFTA was modelled after NAFTA (with today being the anniversary of the House passing it), it's fair to compare the two. How has NAFTA effected the U.S. economy in the last 16 years?
Since the passage of [NAFTA], the United States has lost half of its textile mill jobs, according to the Bureau of Labor Statistics.
Despite predictions that NAFTA would create 170,000 American jobs in just the first two years, Congress set up the NAFTA-TAA (Trade Adjustment Assistance) program for displaced workers. Between 1994 and the end of 2002, 525,094 specific U.S. workers were certified for assitance under this program. Since then NAFTA-TAA has merged with the general TAA, making it harder to track job losses.
The Economic Policy Institute estimated that by the year 2005, 1,015,291 U.S. jobs and job opportunities (jobs that would have existed without NAFTA's incentives to relocate factories) have vanished. Or to put it another way: "Since NAFTA took effect, the growth of exports supported approximately 1 million U.S. jobs, but the growth of imports displaced domestic production that would have supported 2 million jobs."
Also worth noting is the wages of the jobs being outsourced.
The NAFTA job losses are skewed toward high-wage jobs. We divide wages into three brackets: low (paying less than the 20th percentile of the real 1979 male wage distribution, or $8.83/hour in 1996 dollars), medium (21st-74th percentiles, or $8.83-$19.08/hour), and high (above the 75th percentile, or more than $19.08/hour). Since 1979, the real wage structure of our economy has moved significantly downward, as increasingly more workers have slipped into lower income brackets. NAFTA contributes to this trend: while only 21% of jobs in the 1989 economy were in the high-wage bracket, 23% of the jobs eliminated by NAFTA trade fall in that category. In contrast, the low-wage bracket represented 36% of 1989 jobs but only 32% of NAFTA casualties.
"Should job exports continue apace, the U.S. will be a Third World country in 20 years."
- Paul Craig Roberts
Meanwhile, all those manufacturing jobs that were lost, forced previously well-paid workers, often in union jobs, into non-union service jobs that traditionally pay much less. The unionized percentage of the manufacturing workforce has dropped by 47% since 1983 (in comparison, the unionized construction percentage has dropped 33% over the same period).
Jacob Hacker argues that the pain inflicted on the middle and lower classes by globalized competition is getting sharper. He claims that when a family loses a job today it tends to lose a bigger portion of its income than it did in the 1970s.
"The typical family that stumbled [in the ’70s]," explains the USA Today report, "lost 27% of its annual income. But over the last decade as globalization moved into high gear, the income loss averaged around 40%. For a family in 2004 earning the median income of $43,200, that would mean a crippling decline of $17,280."
This has led to income stratification. Where once in 1980 the top 1% took 8% of the national income, they now take 16%..
All this is reflected in the trade numbers. In 1993 America had a $1.8 Billion surplus in trade with Mexico. By 2004 we had a $60.4 Billion trade deficit with Mexico. Of course this would make perfect sense when you consider the hundreds of factories that used to produce goods in America, now produce goods in Mexico for export to America.
While this is terrible, you would think that NAFTA would have been great for Mexico. Surprisingly the answer is "no". Mexico has lost even more jobs because of NAFTA than America has.
"NAFTA has not helped the Mexican economy keep pace with the growing demand for jobs...The agricultural sector, where almost a fifth of Mexicans still work, has lost 1.3 million jobs" (Audley, Papademetriou, Polaski, and Vaughan 2003, 5-6).
In fact, the wages of manufacturing workers in Mexico have done nothing but go down in relative terms. In 1993, Mexican hourly compensation costs for production workers in manufacturing were 14.5% of those for their counterparts in the United States. By 2001 they had fallen to 11.5% of U.S. costs.
Basic economic theory says that any increase in trade is a "win-win" situation, but our experience with NAFTA says otherwise. This would lead to the assumption that something was flawed in the NAFTA agreement.
But then why do the pro-NAFTA people not say that? Why don't they just say, "Oops! We'll get it right next time." Instead they deny what the vast majority of working men and women in America have figured out (judging by the ballot box) despite a steady barrage of corporate and political propaganda. They deny the obvious at the risk of discrediting themselves completely. The reason is that like most economic theories, the "free trade = win-win" scenerio doesn't live up to real life experience.
To prove this we must hop aboard Mr. Peabody’s Wayback Machine and go back to the first experiments in post-industrial free trade agreements.
"You can outsource a lot of activities and get them done just as well, or better, at a lower cost. It's one aspect of trade, and there can't be any doubt about the fact that trade makes the economy stronger."
- Treasury Secretary John Snow
"Outsourcing is just a new way of doing international trade."
- N. Gregory Mankiw, chairman of Bush's Council of Economic Advisors
An ocean of protectionism surrounding a few liberal islands
First of all it is important to understand that historically free trade is the exception and protectionism the rule. Before 1846, the entire world trade system was based on mercantilism, where every nation tried to gain trade surpluses with tariffs.
So what changed in 1846? The Irish Potato Famine. Before 1846 domestic agriculture in Britain was protected by the Corn Laws, which barred importation of wheat unless the price was over 80 shillings. This law, of course, complicated the severe famine in occupied Ireland. Laws like this were true all over europe. The May 15, 1846, repeal of the Corn Laws also repealed many restrictions on manufacturing goods. Britain, the first country to industrialize, was the first modern country to enter the free trade world as well. The Netherlands, Denmark, Portugal, and Switzerland soon followed, but it wasn't until 1860 that the rest of europe began loosening their trade laws. The Anglo-French trade agreement of 1860 was passed only by avoiding parlement because all major domestic interests opposed it in France.
| Average levels of duties on manufactured goods 1875 |
| Continental Europe | 9-12% |
| Europe | 6-8% |
| United States | 40-50% |
In July 1879 Germany passed a new tariff law. This was the beginning of the end for the "Golden Age" of european free trade. By 1892 France had joined most other european countries in raising their tariffs. This left the United Kingdom and the Netherlands alone with liberalized trade laws, and that was the way it would remain. In 1932 even the United Kingdom abandoned their free trade philosophy.
While europe only experienced a brief period with somewhat liberalized trading laws, the third world never experienced any of the protectionism the first world lived with. In the 19th Century, most of the third world was either colonized like India, or under the influence of european powers like China.
It was in the best interests of their colonial masters that these nations have their economies wide open for european industry (generally tariffs in Britain's colonies was 5%). What's more, the open trade policy was not reciprical. Goods bound for europe had greater restrictions than goods bound for the colonies.
So the question comes down to: what effect did the changes in trade laws have?
| Annual growth rate of economic sectors of europe |
| Tarrif Policy | Exports | GNP |
| Protectionist 1830-1846 | 3.5% | 1.7% |
| British Liberalism 1846-1860 | 6.0% | 1.5% |
| Europe Liberalism 1860-1879 | 3.8% | 1.7% |
| Shift to Protectionism 1879-1892 | 2.9% | 1.2% |
| Protectionism 1892-1913 | 3.5% | 2.4%% |
Source:Commerce exterieur et develppement economique de l'Europe au XIXe siecle Paris, 1976
"There has been a complete application for a long time of the system of unmitigated competition, not indeed from any philosophical conviction of its policy, but rather from the haughty indifference with which a race of conquerors is too apt to consider commerce. There has been free trade in Turkey, and what has it produced? It has destroyed some of the finest manufacturers of the world. As late as 1812 these manufacturers existed; but they have been destroyed. That was the consequences of competition in Turkey, and its effects have been as pernicious as the effects of the contrary principle in Spain."
- Benjamin Disraeli, February 1846
"Reciprocity must be treated as the handmaiden of Protection. Our first duty is to see that the protection granted by the tariff in every case where it is needed is maintained, and that reciprocity be sought for so far as it can be safely done without injury to our home industry."
- Theodore Roosevelt, 1901
Free Trade = Depression?
At this point it is worth noting that europe experienced one of the most serious worldwide economic downturns in history during the 1870's. It wasn't until europe started switching back to protectionism that their economies recovered.
Is there a direction connection here? Probably not. However, we can't ignore the very real implication that free trade liberalization did not bring prosperity to europe, nor did protectionism bring economic stagnation. This directly conflicts with the mainstream economic beliefs that dominate discussion in American politics, economics, and the financial media today.
Moreover, while the drop in economic growth was greater in continental europe during the 1870-1890 period, continental europe expanded more quickly than Britain during the protectionist period that followed. Meanwhile, the percentage of imports in Britain's colonies that actually came from Britain dropped nearly in half between 1869 and 1913.
| Growth of GNP compared in 10-year intervals (annual growth rates based on 3-year averages) |
| Countries | Date change to protectionism | 10 years prior | +10 years | +20 years |
| France | 1892 | 1.2% | 1.3% | 1.5% |
| Germany | 1885 | 1.3% | 3.1% | 2.9% |
| Italy | 1887 | 0.7% | 0.5% | 2.7% |
| Sweden | 1888 | 1.5% | 3.5% | 3.3% |
| Continental Europe | 1889 | 1.1% | 2.3% | 2.3% |
The example of America is even more extreme. Until after WWII American industry functioned behind the highest tariffs in the world, and in doing so grew into the premier world economic power.
The Dismal Science
It's no secret why economics is referred to as the "dismal science" because of the inability of economists to accurately predict anything. The question is: why?
Most attribute this to the unpredictability of human actions, and that certainly makes a lot of sense. But I believe there is more to it than that. I believe that greed and politics influence the field of economics far too much. For example, I created this diary some time ago detailing how the recent official economic numbers have been tortured to the point that they will give you whatever that government wants you to see. In another diary I pointed out how the whole banking and currency system was rigged.
There is no doubt that simply dropping trade restrictions has both negative and positive economic impacts. There is also little doubt that the positive impacts are almost entirely confined to the upper classes of society, while the negative impacts are confined to the lower classes. There is reason to believe that the negative impacts overwhelm the positive impacts.
The American people haven't been fooled by the propoganda. The Democrats that they elected know this to. But corporate interests are often stronger than voter influence if the voters don't hold the politicians accountable.
The question is: will it be any different this time?
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