CAFTA

by hilzoy

My basic views on economics are as follows: I like markets, except in certain specific situations (e.g., health insurance) where I think they don't work well, usually for fairly specific reasons. But I think that markets obviously require regulation. For this reason I have always found the idea that support for markets somehow implies opposition to all regulation bizarre. Markets need regulation for various reasons, including: (1) Creating the ground rules that allow markets to operate efficiently (e.g., antitrust laws, requiring transparent accounting for publicly traded companies, laws governing intellectual property, etc.) (2) Dealing with market failures. (3) Codifying a national decision that there are certain things we do not want companies to do in their quest for profits. (E.g., child labor laws.)

My views on free trade are basically similar. In general, I support it. (I supported NAFTA, though I would not have done so had I known about its Chapter 11, described below.) I am not swayed by the argument that free trade costs Americans jobs: I don't particularly like it when Americans lose their jobs, but I do like it when people in poor countries get jobs, and I think that when free trade agreements are done right, the gains outweigh the losses. But my support for free trade agreements is conditional on their incorporating the sorts of regulatory structures just described, like strong provisions protecting labor and the environment.

Environmental laws are attempts to deal with negative externalities: costs associated with producing goods that are not borne by the producer or the consumer, but are instead foisted off on unconsenting third parties. If, for instance, a company pollutes the groundwater in a given community, everyone in that community suffers, but the company does not compensate them for the costs it imposes on them. Environmental laws deal with this either by banning certain forms of pollution or through taxes or fines, which attempt to place the burden of paying for the pollution on the company that produced it. In either case, they are attempts to rectify a market failure, and if they are well designed, they make the market fairer. Trade agreements, in my view, should not undo this by forcing our companies to compete against foreign firms that are allowed to externalize the environmental costs of producing goods, any more than they should force our companies to compete against firms that receive any other sort of subsidy.

Labor laws, if properly designed, do two things. First, they codify social decisions about the minimum conditions in which people should have to work. Absent such laws, companies would face competitive pressure not to try to ensure (for instance) worker safety. If we want people to be assured of some minimally safe environment, we should enact safety regulations to prevent this sort of "race to the bottom", and to allow companies to provide safe working environments without placing themselves at a competitive disadvantage. Second, they provide for collective bargaining and grievance procedures, thereby helping to ameliorate what is usually a serious power imbalance between employers and labor. Protections for individual actors are a large part of free trade agreements: for instance, they always include strong protections for investors, rather than leaving those investors' fates to the legal system in the countries they invest in. I have never seen why the same logic should not apply to workers.

I do not want our companies to have to compete against companies who trash the environment or abuse their employees, and I do want to use the leverage we have in negotiating free trade agreements to create these protections, which I believe will benefit us all. If we have the right ground rules for free trade, then it benefits people on both sides; if not, not.

That is my general view of free trade agreements. I present it so that you will know where I'm coming from. However, I also think that general views on free trade agreements are virtually useless. When it comes to free trade agreements, the devil is in the details, to a much greater extent than in most other areas of policy. And unfortunately, the details are hard for lay people to assess. I have tried to read the actual text of CAFTA, but gave up when I concluded that I was just not going to understand it. (I stopped reading Ulysses for similar reasons.) All those terms of art: what do they mean? Does CAFTA depart from established norms, and if so, how? Are there innocuous-sounding passages that would play out horribly in real life, or vice versa? I have no clue.

Below the fold, I am going to explain some areas of concern about CAFTA that I have unearthed. These lead me to oppose CAFTA. However, the real purpose of this post, besides providing a useful collection of links and thoughts, is to ask for help from anyone who understands any of the issues involved. (von, there's a question about IP below.)

(1) NAFTA's Chapter 11, redux: CAFTA is reported to contain a provision similar to NAFTA's Chapter 11, the one that gives investors from one signatory the right to challenge the laws of another, or of any of its states or municipalities. Chapter 11 is basically an investor protection provision that contains several features that are dreadful in combination. First (a non-dreadful feature), it allows investors from signatory countries to sue other countries when their property is expropriated. This is fine. However, it stops being fine once we add in the next point: 'Expropriation' is defined to include not just, well, expropriation, but any regulation that affects one's potential future profits. (You may recognize this as kin to one of the more awful bits of right-wing judicial activism: the attempt to redefine the part of the Constitution that says that the government may not take your property without compensating you to mean that it may not do anything that adversely affects the value of your property without compensating you.)

Almost all regulations affect the value of someone's property -- think of zoning regulations that forbid you to set up what might be a profitable factory on land in a residential neighborhood, or environmental laws that forbid you from profiting by polluting. And yet any such law or regulation is grounds for suit under chapter 11 of NAFTA. Moreover, this is so whether the law or regulation in question is federal, state, or local: since NAFTA obliges the federal government to eliminate laws that conflict with it, whether or not those laws are federal, the federal government can be sued by foreign investors because of a state or municipal law.

Finally, these suits are not heard in normal courts, but in special tribunals. From the New York Times: "Their meetings are secret. Their members are generally unknown. The decisions they reach need not be fully disclosed. Yet the way a small group of international tribunals handles disputes between investors and foreign governments has led to national laws being revoked, justice systems questioned and environmental regulations challenged. And it is all in the name of protecting the rights of foreign investors under the North American Free Trade Agreement."

To quote an article from the New York Law Journal:

"It is fundamentally wrong for the validity of important national - and international - environmental measures (or, indeed, other public policy issues affecting public health, consumer protection, antitrust policy or even securities regulation) to be decided in closed private arbitration proceedings that take place outside the jurisdiction where such measures take effect and outside of any meaningful public review or awareness. Both the UNCITRAL and ICSID arbitral rules referred to in Chapter 11 function well to settle private disputes where the parties have little desire for public scrutiny of their claims and the public has no direct interest in their outcome. The opposite is true, however, for most Chapter 11 disputes, particularly those involving claims that environmental or other public regulations constitute a compensable taking of property. Where the legality or reasonableness of governmental regulation is at issue, particularly in areas directly affecting the public’s health and environment, arbitration rather than judicial proceedings is, at best, a questionable forum. Where that forum is effectively secret, uninformed by the policy and legal bases for the challenged regulation and beyond the reach of meaningful judicial review, the public has every reason to be suspicious of both the process and the outcome, as environmentalists in the U.S., Mexico and Canada have made clear. When NAFTA’s Chapter 11 is used as a precedent for other U.S. trade and investment agreements, the political support for such agreements becomes even more fragile."

The idea that suits might be brought alleging that laws that in some way harm corporate profits are tantamount to expropriation is not hypothetical. Such suits have already been brought and won. From the New York Times article again:

"• The Canadian government lifted restrictions on manufacturing an ethanol-based gasoline additive that it considered hazardous after an American manufacturer said that the ban hurt its business.

• A tribunal ordered Mexico to pay an American company $16.7 million after finding that local environmental laws prohibiting a toxic- waste-processing plant that the company was building were tantamount to expropriation.

• A Canadian-based funeral company is asking the United States government for $725 million in compensation after a Mississippi jury found the company guilty in 1995 of trying to put a local funeral home out of business, and levied $500 million in damages. The company contends that the jury sought to punish it because it is foreign. If the tribunal awards compensation, critics say, all jury awards involving foreign investors may be challenged.

• United Parcel Service, the package-delivery company, has filed a complaint contending that the very existence of the publicly financed Canadian postal system represents unfair competition that conflicts with Canada's obligations under Nafta. Critics worry that if the tribunal upholds the U.P.S. claim, government participation in any service that competes with the private sector will be threatened."

In the most famous suit, a Canadian corporation has sued the federal government for $970 million over a California law banning MBTE, a gasoline additive that has seeped into California's groundwater, and that is suspected of causing cancer. The corporation, which manufactures one of the components of MBTE, alleges that this ban cost it business; hence the suit.

As noted, investors have won some of these cases, and others have been settled. But even if investors don't win, the prospect of being sued over environmental laws might be a real deterrent to a country's passing such laws, especially if the country in question were poor, as most of the countries that would be in CAFTA are. As I said above, my view is that environmental laws are necessary to place the costs of polluting on the polluters, where they belong, thereby preventing a market failure. And environmental protections are a necessary part of free trade agreements, since forcing our firms to compete against firms who can successfully impose their environmental costs on others is essentially like forcing them to compete against firms that are subsidized. Chapter 11, by contrast, actually prevents governments from enacting some environmental protections, and deters them from passing others. It therefore has exactly the wrong sort of effects: where a treaty should establish a floor below which companies cannot sink, Chapter 11 establishes a ceiling above which they cannot rise.

Besides the perverse environmental effects, the secret and unaccountable decisions on important matters of policy, and the bizarre 'takings' doctrine, Chapter 11 is also a real and excessive interference with state and local governments' sovereignty. Moreover, it actually harms businesses by creating serious uncertainty about the regulatory environment in which they must operate. It is therefore, in my view, really, really bad. (Here are good articles on this by William Greider and Chris Mooney.)

Apparently, CAFTA's provisions are even worse. From the Sierra Club:

"Instead of learning a lesson from the flaws of the investor rights provisions under NAFTA, the Bush Administration wants to expand this model to even more countries. The proposed U.S. - Central America Free Trade Agreement (CAFTA) and the Free Trade Area of the Americas (FTAA), currently under negotiation, threaten to expand the NAFTA trade model, along with its controversial investment rights provisions, throughout the hemisphere.

Astoundingly, CAFTA's investment rules go even further than NAFTA. For example, it specifically allows transnational corporations the right to challenge government policies about natural resource agreements, such as mining and offshore oil contracts. The potential threat to the environment of this Chapter 11 expansion can be seen in the Harken Oil Case.

Harken Costa Rica Holdings, a transnational corporation with close ties to Harken Energy of Texas, obtained an agreement to drill off the coast of Costa Rica, contingent on the outcome of an environmental assessment. When it was found that the drilling would pose a serious threat to the rich marine ecosystems of the Talamanca region, the Costa Rican government decided the drilling was contrary to its environmental law, and Harken was denied the right to drill. In response, Harken tried to bring an international suit against Costa Rica. It demanded the outrageous sum of $57 billion to compensate for profits Harken would have made from the drilling. A stipulation in the contract forced the company to taken their suit to domestic courts in Costa Rica, but had CAFTA's investor rules been in place, Harken could have bypassed the domestic court system and taken the case straight to a NAFTA-style tribunal."

(2) Pharmaceuticals (von?): An article in the Boston Globe argues that CAFTA's provisions on pharmaceutical patents would needlessly harm Central Americans with HIV:

"The agreement, which may be ratified by the end of the month, will force its signatories to strengthen protections on patents owned by multinational pharmaceutical companies, thus preventing the manufacture and importation of many cheap generic drugs.

In the countries bound by the agreement -- Costa Rica, the Dominican Republic, Guatemala, Honduras, Nicaragua, and El Salvador -- generic competition has allowed for widespread access to life-saving medicines. In Guatemala, some AIDS drugs are as much as 98 percent cheaper than their name-brand alternatives. The antiretroviral cocktail that costs $4,818 per year when marketed by GlaxoSmithKline as Combivir can be purchased by Guatemalans for $216 in generic form.

Given the financial strain many Americans experience when purchasing drugs like Combivir, it's not difficult to imagine how devastating similarly elevated prices would be for the farmers and impoverished city dwellers who make up the bulk of AIDS cases in Central America.

In addition to increases in patent protection, CAFTA mandates that these governments protect regulatory data on medicines -- an unprecedented step that could effectively extend patents by a decade without any form of reprieve, even in a public health emergency. Data protection for medicines means that if a drug is not patented, or if a country can somehow maneuver around the patent, generic manufacturers would still be prohibited from selling the medicine unless they repeat costly clinical trials. Since few generic manufacturers in Central America have the resources to conduct clinical trials, data protection will function as another obstacle to generic competition. (...)

The nations of the World Trade Organization recognized this dilemma, when, as part of the 2001 Doha Declaration, they unanimously resolved that public health emergencies like HIV/AIDS may require circumventing patent rules. CAFTA flouts this global consensus and is widely understood to be part of the Bush administration's larger systematic effort to undermine the WTO process -- that is, to use bilateral trade agreements to bully small developing countries into waiving their rights under the WTO's intellectual property rules. The WTO's rules allow developing countries to implement patent laws that meet their individual needs."

I do not have a problem with protecting pharmaceutical patents. I do, however, think that the exception for public health emergencies, especially in poor countries, is extremely important. If CAFTA does not include it, then that's a serious problem.

(3) The Environment: The Sierra Club's briefing on CAFTA describes its environmental provisions as follows:

"Article 17.1 of CAFTA states that each country has the right "to establish its own levels of domestic environmental protection...encourage high levels of environmental protection, and ... strive to continue to improve those laws and policies." While a country "shall not fail to effectively enforce its environmental laws" this only applies if the lack of enforcement has been a "sustained or recurring course of action or inaction," i.e. a one-time violation may not be enough. CAFTA also allows countries "the right to exercise discretion with respect to investigatory, prosecutorial, regulatory, and compliance matters," contradicting the previous article and telling the countries that 'you are supposed to enforce your environmental laws, but only if you want to.'

Countries are asked to "strive to ensure" that they don't lower or weaken their environmental laws in order to attract investment, but again, there is nothing here clearly making this a requirement, and if a country violates even this loosely worded article, there is no way to take advantage of even the limited options provided through the Dispute Settlement chapter.

However, even if there was strong enforcement language in CAFTA, the more fundamental question is about what exactly is to be enforced. Even the USTR acknowledges that the CAFTA countries' environmental laws are weak (and even in countries with relatively good laws on the books often do not fully implement or enforce these laws). So far, there is almost no funding set aside to assist the CAFTA countries in helping to develop and strengthen their environmental programs.

If a CAFTA country fails to enforce its environmental laws and regulations, a long and cumbersome process would have to be launched -- with no clear enforceable outcome should the country be found guilty. CAFTA limits any fines for failures to enforce environmental laws to a max $15 million annually, while sanctions for breaches of commercial provisions are unlimited. Fines for failure to enforce a nation's environmental laws are supposed to be spent in the violating country towards "appropriate environmental initiatives, including efforts to improve or enhance... environmental law enforcement."19 Yet CAFTA does not prohibit a violating country from redirecting its existing funds away from the area where funds are being directed, thus potentially resulting in no net increase in enforcement funding."

This does not sound good at all.

(4) Debt Relief: Here is a very interesting article about CAFTA's implications for any of its signatories who get into a debt crisis.

"Buried in the technical language of the investment chapter of the agreement are rules that would make it more difficult for the six nations that have signed the trade deal with the United States to escape heavy debt burdens or to prevent or recover from debt crises. The investment provisions of CAFTA, like other deals such as the 1994 North American Free Trade Agreement, are based on the argument that strong protections for private foreign investors will help encourage investments needed for economic growth. To this end, they require governments to comply with a long list of investor protections and grant private foreign investors the right to sue governments for damages if these obligations are violated.

For example, governments are required to treat foreign investors at least as favorably as domestic ones. This principle is known as "national treatment." They must also ensure what is called "most favored nation" treatment, meaning that they cannot discriminate against (or give special preferences to) the investors of one country that is a party to the agreement without granting the same treatment to investors of other parties to the agreement. These rules mean that governments cannot favor domestic interests (or investors from a particular country) even if doing so would support social goals or other national interests."

The author then goes on to explain why there are sometimes quite good reasons for treating foreign and domestic investors differently. (Update: not in general, but during debt crises. One example from the article: "the debtor might also need to accord priority to domestic debt in order to protect the financial system. In this sense, it has been pointed out that sovereign debt restructuring has a double impact on the financial system. On the one hand, the impact on assets of the reduction in the value of bonds held as part of their capital by financial entities. On the other, the general increase in uncertainty, which could affect the overall credibility of the system. The IMF has also stated that in these cases special treatment to domestic debt might enable the debtor to protect "a core of the banking system by ensuring the availability of assets required for banks to manage capital, liquidity and exposure to market risks." ") Having recently read quite a bit on debt crises, what he says seems plausible to me, but I would welcome expert opinions. He concludes:

"CAFTA's application of controversial investor protections to sovereign debt would suppress the few options available to countries trying to prevent or exit from debt crises. As shown by the experience of countries undergoing such crises, inability to exit a crisis situation might cause economic losses that far outweigh any commercial gains achieved through signing a treaty. Debt campaigners are urged to join forces with trade campaigners to raise public attention to this issue and ensure it remains front and center in the debate. "

Preserving ways for developing countries to extricate themselves from debt crises is a very big deal. If this article is on target, this consideration alone would probably lead me to oppose CAFTA.

(5) Labor: I am less clear on this aspect of CAFTA, since I have not found many sources that I trust. However, Human Rights Watch writes as follows:

"The substantially finalized version of CAFTA, made public on January 28, 2004, does not include adequate workers’ rights protections. It fails to require compliance with even the most basic internationally recognized labor rights norms and specifically fails to protect women workers against discrimination. While the accord calls on countries to uphold their own labor laws, which may or may not be consistent with international standards, it provides a weak enforcement mechanism for that limited commitment. It also fails to require that parties’ enforcement of their labor laws include procedural guarantees and provide for adequate remedies to redress any violations. Finally, while CAFTA creates a labor cooperation and capacity building mechanism, which some government officials have touted as a key tool to promote labor rights, there is no guarantee of funding and thus no guarantee that the mechanism will operate, much less perform this function."

Harold Meyerson:

"Now comes CAFTA, which promises Central American workers the same kind of raw deal. CAFTA would actually weaken the not very formidable labor standards that currently exist in the Central American nations. Under the current Generalized System of Preferences, those nations are required to take steps "to afford internationally recognized worker rights." Should CAFTA pass, the nations will be required only to enforce their own worker-protection laws, which they'd be perfectly free to repeal. That's the primary reason why the major union federations in Central America have joined the AFL-CIO in opposing CAFTA's ratification."

In this context, it's also worth noting that the Bush administration is refusing to release a report on Central American countries' labor laws, the laws CAFTA would require them to enforce.

"Rep. Sander Levin (D-MI) yesterday (April 21) announced he will introduce a House resolution to force the Labor Department to release a controversial report that assesses the labor laws of Central American countries and the enforcement of those laws in an attempt to end a fight that has lasted longer than a year. The labor rights practices of Central American countries have come into focus as Congress is debating a free trade package the Bush Administration has negotiated with Central America and the Dominican Republic. (...)

At the hearing, Levin released the paperwork that the Labor Department presented to ILRF in its effort to suppress the report. Levin said he knows very little about the ILRF report except that it reveals how much the labor laws of the Central American region deviate from the core standards of the International Labor Organization and how poor the enforcement is, a point confirmed by Athreya.

She said that the organization has posted on its website a report by the Costa Rican labor rights organization, ASEPROLA, which largely mirrors the reports the ILRF conducted for the Labor Department. That report shows that some Central American countries deny workers the right of association, for example.

These findings contradict Bush Administration arguments in the debate over the DR-CAFTA that these countries’ laws largely reflect ILO standards and that the only problem is enforcement. Levin and other opponents of the DR-CAFTA charged in a letter to USTR that these statements are a misrepresentation since the State Department and an ILO analysis have identified 20 specific areas where DR-CAFTA countries’ labor laws fall short of ILO standards."

As I said, though, I'm open to persuasion.

I'd really appreciate it if anyone who understands any of the issues raised by CAFTA would comment. I'm way out of my depth, and the econ blogs, newspapers, etc. that I normally read have not done a good job of explaining the issues in any kind of depth. Thanks.

Comments

[Slartibartfast]

Holy crap. Lawsuits are being pressed for "unfair competition"? Three thousand lashes with al dente linguine, and read Atlas Shrugged five times, and then slap yourself repeatedly in the face for being an idiot.

That last, directed toward the perpetrators, and not toward hilzoy.

[Phil]

Heh. ISTR some suits filed by US companies doing business in Canada under NAFTA's aegis, contending that Canada's provincial health care systems, which freed Canadian employers from offering their employees health insurance, placed an unfair competitive burden on the US companies. Don't know whatever became of those.

Good post, hilzoy. Lots to absorb.

[Gary Farber]

Re your comments on free trade agreements in general, "above the fold," Hilzoy, as usual: yeah, me, too! (Which is to say that, yes, seriously, that's my stance as well.)

As regards below the fold comments and questions on CAFTA specifically: good questions, and I otherwise decline to offer comment on the grounds that, as I've said here before, I feel I have insufficient competence and knowledge to address the topic.

[dmbeaster]

The Chapter 11 provisions are pure insanity. Thanks for pointing it out -- it as new to me.

Regarding the general thesis of markes and regulation, it is funny how people seem to think that the free market somehow represents the absence of regulation. By definition, unregulated capitalism always destroys free markets (and that's also the lesson of history). The two are incompatible, and free markets can exist only if there is government regulation.

[hilzoy]

When I think of markets that are really free of regulation, I think of Russia during the Yeltsin years, and draw the obvious conclusions.

[Dantheman]

"When I think of markets that are really free of regulation, I think of Russia during the Yeltsin years, and draw the obvious conclusions."

My thoughts run to the US in the 1870's and 1880's, but the essential differences are small.

[Gary Farber]

"When I think of markets that are really free of regulation, I think of Russia during the Yeltsin years, and draw the obvious conclusions."

I prefer to point to Somalia. Less opportunity to argue that what was wrong in Russia was the use of government revision of regulation to enforce crony capitalism. Somalia has simply been far more, you know, free. Although the Congo is another place where regulation is limited. (Of course, the only real problem is that rational people haven't worked out agreements on fair markets; if only everyone were rational and well-informed, laissez-faire could work fine. Just like communism.)

[Gary Farber]

"My thoughts run to the US in the 1870's and 1880's, but the essential differences are small."

Ah, but if you read the right texts, you can learn that these were, in fact, golden years for the growth of wealth and the country, and the primary problems were ruthless and violent and out-of-control labor mobs.

I've read a fair amount about this, and they couldn't write it if it weren't true, you know. Freedom finally perished in 1933.

[Dantheman]

"I've read a fair amount about this, and they couldn't write it if it weren't true, you know. Freedom finally perished in 1933."

I thought it perished in 1937, at the time of our "Socialist Revolution", according to the newly confirmed judge on the DC circuit.

[Barry]

"My thoughts run to the US in the 1870's and 1880's, but the essential differences are small."

Posted by: Dantheman

Come on now, don't you have *any* aesthetic judgment?

Single-action revolvers vs Glock 19's.
Lever-action rifles vs AK-47's.
Shotguns vs MP5 SMG's.
Horses vs Mercedes Benz', BMW's, and SUV's.
Cowboy hats, dusters, chaps, jeanse, and red long johns
vs Armani suits, silk shirts.
All-covering dresses for the womenfolk vs form-fitting silk dresses slit up the side.
Whiskey vs vodka and imported liquor.
Player piano vs CD's.

The west was weak - Russia was lots cooler.

[bob mcmanus]

I am reflexively free-trade, but that means in part that I really haven't ever given it much thought. Besides the many specific issues hilzot illuminates, the post also suddenly raised within me some vague disquiet and some abstract questions.

In Adam Smith's era, comparative advantage...which if I have confused with "competitive advantage", correct me...was largely based on natural resources, since much trade was agricultural(bananas grow better in some places, wheat in others), or commodities/raw materials in exchange for finished products. If now comparative advantage is based on differing labor costs or development or governmental regulation and infrastructure or head starts in capital formation or educational establishments...well these "comparative advantages" seem artificial, temporary, and fragile.

In other words, if our level of social and technological development is our main comparative advantage, the US must somehow restrain Mexico's development.

Globalization as neo-imperialism.

I am gonna have go surfing. The only Marxists I know on the web are social and moral thinkers...Catholics, actually. This has to be old and well-argued issue, just new to me. Like I said, I always assumed the opponents of globalization were simply seeking to retain sinecure legacy jobs, or simply environmental nutcases.

[hilzoy]

Bob M: in the post I was talking about competitive advantage, which just means: whatever gives one firm an advantage over another in competing for consumers. Comparative advantage is one of the main ideas behind the thought that free trade across borders is, on balance, good for everyone, IF it's done right. I don't think it depends on the fact that one thing can be grown in one place but not another; a country's comparative advantage in producing something could come from its educated workforce, for instance.

The principle of comparative advantage, if true, implies that trade is good for everyone, but it has also always seemed to me to imply that it would be a very, very good idea to try to get the most advantageous niche possible -- e.g., to be the country with a comparative advantage in writing software, not mining coal.

[Anarch]

I prefer to point to Somalia.

Let me put in a good word for Renaissance Italy here. de Medici, Borgia... they just don't make them like that any more.

[Bernard Yomtov]

Bob,

The important thing to understand about comparative advantage is that it is just that - comparative, and that it is a matter of relative costs of different kinds of production. That's sentence is clear as mud, so let me back up.

Forget about dollar costs of production and think about opportunity costs - the alternative goods the resources used could produce. Agriculture leads to good examples. If an acre of land in country A can produce 100 bushels of wheat or 80 bushels of corn (farmers please forgive the likely stupidity of these numbers) then we can say that a bushel of wheat costs .8 bushels of corn, or if A grows corn that a bushel of corn costs 1.25 bushels of wheat.

Now imagine country B (or state B if you prefer - it's all the same) where the land can produce 50 bushels of either wheat or corn. Here the cost of one bushel of wheat is one bushel of corn, and vice versa. What does this mean? It means that it's cheaper to grow corn in B, and cheaper to grow wheat in A. Country B has a comparative advantage in corn, A in wheat.

Some important things to note:

1. Country A is richer than country B, but that is a consequence of its greater productivity, not of exploiting B. Countries become wealthier by becoming more productive. A gains nothing by restraining B's development. Despite its relative poverty B has a comparative advantage in the production of corn.

2. Whatever numbers you use for relative production possibilities (unless they are identical) one country has a comparative advantage in wheat and the other in corn. It is not possible, as a matter of arithmetic, for one country to have the comparative advantage in everything.

This is the basic case for trade. It goes back to Ricardo. It's far from perfect and unassailable, but it's an important argument to understand.

[Gary Farber]

As I keep saying, I'm extremely hesitant to comment at all on this topic, but I will note that while I believe that the freer the trade, the greater the increase to GDP, and the more restrictive the trade, the more that likely shaves GDP, another question is where do the benefits of increasing GDP go, exactly? I rather doubt that they're simply evenly distributed throughout society, and while I don't find that inherently at all objectionable, either, neither do I assume that the distribution, whatever it is, is inherently significantly good for all, as is commonly asserted.

"The rising tide lifts all boats" is a lovely thought, but a lot of small and poor boats seem to be quite leaky, although relatively few yachts are apt to be unfixable and sink.

[bob mcmanus]

Is Innovation Doomed?

Bradford Plumer on the slowing rate of innovation, based on a linked study. Discusses the ever-increasing amount of knowledge required to be up-to-date in fields, and current methods of overcoming the difficulty. Speculates on possible future solutions, including 2nd & 3rd head-grafts.

Speculates on thie inescapable loss of any comparative advantage based on technology.

[Bernard Yomtov]

neither do I assume that the distribution, whatever it is, is inherently significantly good for all, as is commonly asserted.

This is not commonly asserted. In fact, just the opposite is commonly asserted - that freer trade harms some people and benefits others. The argument is that the overall effect is positive.

[Gary Farber]

"The argument is that the overall effect is positive."

May I rephrase? What is asserted -- one among many things, of course -- is that the overall positive effect makes it worthwhile, ultimately, to the majority of people, is it not? Presumably no one is saying that only a minority of people in society benefit from the overall net positive effect, right? Or do I have that wrong?

[Frank]

Gary Farber- I'm sure there are people saying that. Heck I'm one of them.

[Slartibartfast]

Is Innovation Doomed?

Ah, shades of Knowledge Crash. Not a new idea, by any means.

Knowledge Crash, as an idea advanced by Roger MacBride Allen in his novel The Ring of Charon, is what happens when the cost of education required to make oneself employable exceeds the sum total of (disposable?) income one obtains from employment. There's other things wrapped up in there, too, such as the impossibility of keeping current; the net effect was KC. Those who were convinced KC had already occurred offered as evidence that no one was really sure if it had or not. Not exactly logical, but that's part of the charm of the Naked Purples. Pretty good book; followed up by a better sequel (The Shattered Sphere).

[aaron]

That Chapter 11 MBTE case got me thinking -- if the company wins its suit, is there a limit to the decision's reach? For example, if a country legalized cocaine, could a company legally manufacturing it in that country stop U.S. drug laws that would impede its business? Short of a provision in the agreement that excludes drugs from the terms of Chapter 11, I'm not sure why such a result wouldn't be consistent.

[hilzoy]

Aaron: ianal, etc., but I would think that the answer is 'no'. In most of the cases cited in the post, what's at issue is a (supposed) 'expropriation' of property, interpreted as a change in existing law whose effect is to reduce the value of someone's property, or deprive them of business. Cocaine laws are already on the books, so there would be no such change.

The UPS suit is different, but I think that in that case the argument is not that, by having a public delivery service, Canada is expropriating UPS' potential future profits, but that it is essentially subsidizing a competitor in a way that NAFTA forbids. (And, normally, for good reason: free trade agreements are supposed to allow everyone to compete fairly, and that doesn't happen when one government shovels cash at its firms to allow them to undercut their competitors' prices.)

Since, as far as cocaine goes, we are neither changing the law to "expropriate" property nor subsidizing a competitor to the Cali cartel, I don't think Chapter 11 would apply. But it's still completely vile, since it implies that whenever any town, state, or country acts to ban some substance on the grounds that it is (say) a public health hazard or an environmental toxin, or bans or restricts some type of activity on the grounds that it is dangerous or destructive, it can be sued for the amount of lost profits, and that suit will be decided by an unaccountable and secret tribunal.

One other point I forgot to mention in the original post: as I understand it, in the Methanex suit (over the MTBE ban), the Federal government was sued over California's law, and thus California had no legal standing to defend or explain its own law.

[Bernard Yomtov]

Presumably no one is saying that only a minority of people in society benefit from the overall net positive effect, right? Or do I have that wrong?

As Frank points out, there are people saying that, though I think they tend to be opponents of free trade. As for supporters, The general tone is that the majority do benefit, but this is not really explicit. The costs are thought to be borne by more or less identifiable groups, while the benefits are diffuse, so on that premise it is a reasonable supposition that there are more beneficiaries than victims.

[Gary Farber]

"The costs are thought to be borne by more or less identifiable groups, while the benefits are diffuse, so on that premise it is a reasonable supposition that there are more beneficiaries than victims."

And since it probably isn't obvious, I'd find it invaluable to see the best possible data on how the benefits are distributed, in the relevant countries, each time a new trade agreement is brought forward.

Can anyone give a justification for why the tribunals that hear free trade suits shouldn't be fairly completely open and transparent (usual exemptions for trade secrets and the like applying)?

[Gary Farber]

I learn from National Review this:

Also striving mightily to scuttle CAFTA is the domestic sugar industry, which employs only about 52,000 people and accounts for roughly one percent of U.S. farm revenue, but wields political influence grossly disproportionate to its size. For years, it has won federal price supports from Congress, with the result that sugar in the U.S. is three times the average world price. The burden of such dirigisme is borne not only by consumers, but also by the sugar-refining and candy industries, which have lost thousands of jobs over the past decade as a result of the high prices they must pay for production inputs.

CAFTA is, in fact, embarrassingly deferential to the sugar lobby. It would increase sugar imports by only one percent in its first year. After 15 years, that number would rise to a staggering 1.4 percent.

Well. That certainly would be a radical improvement. But just to be clear on the crucial arguments:

For the U.S. to reject CAFTA would only strengthen the hand of would-be despots.

If NR says it, it must be true!

Yglesias suggests these radical anti-free-trade ideas.

[Slartibartfast]

Hmmm...the latter of those two appears to want to attack all manner of irrelevancies to their discussion of CAFTA. Not irrelevant in general, but certainly irrelevant to CAFTA.

[Slartibartfast]

Hmmm...the latter of those two appears to want to attach all manner of irrelevancies to their discussion of CAFTA. Not irrelevant in general, but certainly irrelevant to CAFTA.

[Slartibartfast]

Dang.

[Bernard Yomtov]

Can anyone give a justification for why the tribunals that hear free trade suits shouldn't be fairly completely open and transparent (usual exemptions for trade secrets and the like applying)?

The only thing I can think of is that lots of the evidence presented, while not trade secrets per se, would nonetheless be something the company regards as confidential: sales breakdowns, production methods and costs, etc. Maybe someone could build a case around that.

Of course, even that wouldn't justify keeping decisions secret, or not explaining the basis on which the tribunal made its finding. You could do that without revealing specific confidential matters.

[Charles Bird]

On principle, trying to get the other countries to adopt American-style labor and environmental standards is a classic labor union excuse for opposing free trade agreements, hilzoy. You may likely dismiss Gary's link upthread, but here you go anyway:

Sweeney and the sugar industry are joined by the Left’s usual sentimentalists, who denounce trade agreements with any nation where labor and environmental standards differ from those found in Ann Arbor, Mich. That group includes even the supposedly pro-trade New Democrats, who, when it comes down to it, would support CAFTA only if it were tied to regulations that would put large numbers of Central Americans out of work. As always, these critics betray themselves as both arrogant and ignorant. Arrogant because they are unsatisfied with CAFTA’s requirement that participating states enforce internal labor and environmental laws, and would instead hold sovereign nations accountable to their own unrealistic standards. Ignorant because they fail to grasp the simple truth that trade and foreign investment are among the surest ways of raising environmental and labor standards. This has been empirically proven across the globe, in such places as — Central America. Since the beginning of U.S. trade liberalization with Central America in the 1980s, literacy rates have risen and the incidence of child labor has fallen.

Basically, the wealthier a nation becomes, the more resources it has to address environmental issues. Same goes with labor standards. We have a case study: Mexico. Is their economy, environment and labor standards better or worse off because of NAFTA? Yes:

Mexico remains the United States’ second largest trade partner. Since the North American Free Trade Agreement took effect in 1994, Mexico has increased its total trade by more than 175 percent. With the exception of 2001, Mexico has been breaking export records every year.

I don't have time to fully check out the concerns you've outlined, hilzoy, but every trade agreement is going to have some costs to it. The quesion is whether you'll let the perfect be the enemy of the good. Personally, I think the Democrats are going the wrong way on CAFTA. You should be following the counsel of your most influential politician in a quarter centuryrather than standing on the side of the John Sweeneys of the world who never met a trade agreement they liked. Two Clinton administration officials had this to say:

First, the agreement is deeply in our national interest and will create, not destroy, jobs. Second, if the Democratic Party wants to regain the White House and control of Congress, it has to take pro-growth, pro-jobs positions on key issues, including trade agreements.

CAFTA follows the same template as the United States' free trade agreements with Australia, Singapore, Jordan, Chile, Morocco, Canada and Israel -- agreements which garnered substantial Democratic support. Cafta would also open markets to U.S. goods and services, lower tariffs, create transparent government procurement processes and adopt trade facilitation measures. In fact, exporters from Central America can already sell products in the United States at zero or low tariffs. CAFTA lowers tariffs on U.S. products exported to Central America...

...Critics of CAFTA are correct that the agreement's provisions on labor and the environment do not have as strong an enforcement mechanism as similar provisions in the U.S.-Jordan Free Trade Agreement and might have been improved if negotiated by a Democratic administration. These provisions, however, can help raise environmental and labor standards, which, too, will rise with the increased standard of living that Cafta will provide. Democrats can also use the legislative process to negotiate with the Bush administration for improvements in labor and environmental enforcement in Central America. But to maximize their negotiating leverage, Democrats will have to maximize the number of votes they can deliver in favor of Cafta.

Even the New York Times favors the agreement, hearkening us back to when a pro-NAFTA Al Gore was debating Ross Perot:

But globalization isn't going away whether CAFTA gets approved or not. Free-trade Democrats should be using their leverage to get more support for retraining assistance to displaced workers, not simply posturing with blanket opposition.

The Democrats also argue that the trade agreement's labor provisions don't go far enough to protect workers in the six other countries. But they are ignoring a provision that improves on existing rules by taking fines collected for violations of labor laws and using them to correct labor infractions. That's far better than the current system, in which penalties collected for labor violations end up in the United States Treasury.

The crux of the opposition seems to come from a general feeling of peevishness that the Bush administration didn't consult more with the pro-trade Democrats while negotiating the agreement. When you add that to the general anger over the Bush administration's failure to really negotiate with Democrats over issues from prescription drugs to education reform, it's understandable that they feel burned. But that doesn't make it right for them to take their marbles and go home. The Central American people deserve better.

Cafta would lower tariffs and help job growth in a needy region. It would encourage growth in the region's textile and apparel industries, a huge helping hand at a time when China is sucking up textile manufacturing jobs. The American Farm Bureau Federation estimates that Cafta would increase United States agricultural exports by $1.5 billion a year. The National Association of Manufacturers says the trade agreement would add $1 billion a year to United States exports of manufactured goods. And a study by the United States International Trade Commission estimates that Cafta, when fully implemented, would cut the trade deficit by $756 million.

Where'd those Clinton Democrats go?

[Phil]

Is their economy, environment and labor standards better or worse off because of NAFTA? Yes.

This is unequivocally the single funniest pair of sentences I have ever seen on Obsidian Wings. I'm not picking on you particularly, Charles, but it's a hilarious couplet.

[Gary Farber]

"Basically, the wealthier a nation becomes, the more resources it has to address environmental issues. Same goes with labor standards."

As I keep saying, economics isn't my strong suit, but my understanding is that it's a fairly basic principle that capital will go to where it will get maximum return. This would suggest that if, on the one hand, all the signatories to a treaty such as CAFTA had to meet the same environmental or labor requirements, whatever those might be, the field would be level in terms of attraction to the different markets, but if each country gets to set their own standards, all will have a major incentive to keep their regulations at the lowest possible level. This, of course, might suit you just fine, seeing regulation as inevitably bad, but it certainly is not an argument for having such individual and diverse standards as a means of any country's raising their standards.

Do I have something wrong there?

I do look forward, by the way, Charles, to your returning, when you have a moment, to the discussion of whether or not uranium enrichment is "belligerent" or not, and your assertion that when countries are bombed, they've suffered no belligerency, but that it's simply "their problem." Your thoughts on Uzbekistan and the present Administration are also solicited (in that thread), if you feel so inclined.

[hilzoy]

Charles: I don't care whether or not my arguments are "a classic labor union excuse for opposing free trade agreements" -- if I cared who else made my arguments, the mere fact that I'm agreeing with the sugar lobby would make me change my mind. Nor do I care whether the New York Times and/or Clinton officials agree with me.

I certainly don't care either about arguments against views I don't hold -- e.g., against those who are "trying to get the other countries to adopt American-style labor and environmental standards", or who "who denounce trade agreements with any nation where labor and environmental standards differ from those found in Ann Arbor, Mich". (I didn't get more specific than saying: I think that asking these countries to enforce the laws they already have on the books is too weak. There's a lot of distance between that claim and Ann Arbor.) Nor am I concerned about the motives of other people who turn out to be on the same side as me: e.g., those who "a general feeling of peevishness that the Bush administration didn't consult more with the pro-trade Democrats while negotiating the agreement." I'm sure there are any number of Republicans with whom you share some position, but whose motives you dislike.

I am, as I said, in favor of free trade agreements in general. But I also think that a lot depends on the fine print. So I tried to read the treaty, and then to find out about it. I was just trying to make up my own mind. You haven't had time to address my concerns: fine. But I'm not sure I see the point of your post, then, unless you imagine that whatever can be said of "Democrats" can automatically be said of me.

[hilzoy]

That should be: those who are motivated by a general sense of peevishness...

[felixrayman]

Basically, the wealthier a nation becomes, the more resources it has to address environmental issues.

Externalities don't go away when you ignore them. A market with uncompensated externality costs is neither a free market, nor an optimal one. The only time it makes rational sense to ignore such externalities is when there is no efficient way to enforce that those responsible compensate the people they are imposing the costs on. This could be argued on a case by case basis, but to advocate it on a wide basis is an anti-free market position.

As for your heritage.org quote, it is simply a non-sequitur. Trade is a good thing you argue, and cite a reference that claims since NAFTA was enacted, the volume of trade between the two countries has risen. This is obviously an incoherent argument. Nobody is claiming that striking down barriers to trade will not result in an increase in trade. The question is who will benefit from striking down those barriers, and to what degree, and at what cost. What we do know is that real wages have fallen in Mexico since NAFTA was put into place, even as productivity has risen. Who does that make better off?

I do appreciate the irony of someone who seems, from past statements, to see poisoning the well as a valid tactic of debate quoting a heritage.org piece. A well-done bit of humor, that.

[Gary Farber]

"But I'm not sure I see the point of your post, then, unless you imagine that whatever can be said of 'Democrats' can automatically be said of me."

My reading of Charles' comment tends to be rather unkinder and harsher than I would prefer, but it tends to run alongside lines of translating it something to the effect of "I have read many bad arguments against free trade agreements, so all arguments against them must be bad," or even more unkindly, "you mentioned 'free trade agreements,' so here is my pre-recorded tape on the topic, without regard to anything you actually said." But, to be sure, this is only a purely subjective, and admittedly entirely harsh interpretation, and I in no way assert that it is either accurate (I'm sure Charles finds it otherwise), fair, or correct.

[bob mcmanus]

Primer on Comparative Advantage

[Gary Farber]

I see that Hilzoy already read this, but since she hasn't yet passed it along....

Why, no, nothing compulsive at all.

[hilzoy]

Gary: takes one to know one ;)

I had written to Brad DeLong a few days ago, when I was researching this and getting frustrated by not finding enough, to ask him to write something about CAFTA, since I couldn't find enough from economists I trust. He wrote back and said, basically: I don't know enough. So when I saw the post, of course I had to thank him.