Risks for Free Trade

Weller and Hersh (2002) perceive deregulation as a negative force for trade markets as well as for capital markets. They argue that deregulated trade flows would result to into having more inequality in terms of income distribution, and more unregulated capital flows. Macro economically, these incidents will lead into economic stabilities and will affect the poor negatively. Based from their data gathered from the World Bank, the International Monetary Fund (IMF), and the United Nations, they find out that: “income share of the poor is generally lower in deregulated and macro economically less stable environments trade flows in more regulated environments may be good for growth and, by extension, for the poor in the long run”. (Weller and Hersh, 2002, p. 1) The reason for the unequal income share for the poor is the capital flows’ faster mobility in deregulated environments. “Faster capital mobility in a more deregulated environment can lead to rising inequality in the short and medium term, both within countries and between countries, and to less poverty reduction or even increasing poverty. ” (Weller and Hersh, 2002, p.

They conclude based from the results of their study that trade, as well as capital flows, can be significant for economic growth and have no negative effects on the income shares of the poor in the long-run as long as the environment is regulated. (Weller and Hersh, 2002) Trade liberalization or what Weller and Hersh describe as the “complement to deregulated capital markets” was criticized by a number of authors (Bannister and Thugge 2001; Mishel, et. al. 2001; Ocampo and Taylor 1998; Taylor 1996) in relation to the rising inequality.

They argue that: “by inducing rapid structural change and shifting employment within industrializing countries that liberalize, trade leads to falling real wages and declining working conditions and living standards. ” On the other hand some authors blame the ‘skill-biased technological change” as the main cause of inequality. (Weller and Hersh, 2002, p. 5) Feenstra and Hanson (2001) support the argument by saying that skill-biased change is a possible effect of trade liberalization.

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Another issue that Weller and Hersh see on the removal of the barriers of trade is that it contributes to lower tariff revenues for developing countries. They use India as an example where in 40 percent of its tax revenues come from tariffs in the 1980’s. Removing the barriers for trade will lower or remove the tariffs and thus, changes will occur in the structure of tax in order to fill up the shoes left by the tariff fees. “Restructuring tax regimes to offset lost tariff revenues takes time and introduces administrative costs.

Even if trade liberalization were growth enhancing in the long-run, in the short-run revenue shortfalls may seriously constrain a government’s ability to maintain spending on social services that benefit low-income households. ” (Weller and Hersh, 2002, p. 5) Bronfenbrenner (1997, 2000) sees free trade as advantageous for employers in response for the workers’ pleads for their rights like higher wages and improved working conditions. The author argues that companies and factories are encouraged to either shut down their own workplaces and/or locate to other states wherein they will benefit the most.

These benefits may be in the form of less strict labor regulations or lower taxes and wages. The negative implications will be felt by the workers because they cannot pressure strongly these companies for an increase in wages. As Weller and Hersh concludes in their article: “this trend fuels a race to the bottom in which national governments vie for needed investment by bidding down the cost to employers (and livings standards) of working people. ” (Weller and Hersh, 2002, p.

Examples of these companies are the multinational companies which have Business Process Outsourcing (BPO) Industries that are located in many developing countries. The United Nations Conference on Trade Development (UNCTAD) (1997) reports that the liberalization of trade in many parts of Latin America resulted to widening wage gap, falling real wages for unskilled workers and rising unemployment. Perry and Olarreaga (2006) identify four (4) main reasons why in Latin America and in several countries, trade liberalization resulted to increases in skill premiums and wage inequality:

1. ” Relative factor endowments, as most Latin American countries are rich in natural resources (which, are in general complementary with capital and skills) and were more capital abundant than other developing countries with large pools of unskilled labor, such as China and India, that were already integrating into the world economy by the time of Latin American trade liberalization.
2. Dynamic effects of trade that led to an acceleration of skill-biased technical change and Schumpeterian creative destruction, which led to an increase in demand for skills in most industries.
3. Initial conditions and contemporary events that make predictions based on a simple factor abundance model difficult to generalize; for example the pre-reform structure of protection was biased towards unskilled intensive sectors in most LAC countries and tariff reductions naturally led to a relative increase in demand for skills, but differences in consumption bundles across income groups and exchange rate policies also complicate predictions.
4. The impact that trade reform had on imperfectly functioning labor markets, such as potential transitions in and out of unemployment, informality, as well as income volatility {which is] likely to affect and sometimes change the direction of the impact of trade reforms on income inequality and poverty. ” (Perry and Olarreaga, 2006, p. 1) Reveles and Rocha (2007) see the other dimension of the EU-Mexico Free Trade Agreement and the IPPA which made negative impacts on Mexico.

The agreements not only brought severe effects on the social and economic conditions of Mexico but also left the Mexican state incapable of encouraging local and small businesses and enterprises. These medium to scale businesses were the ones hit hard by the agreements because the large companies of the European Union dominated them. Mexico’s industry which is the essential part for economic development has been increasingly controlled by the European Union since the start of the Free Trade Agreement.

The financial sector of Mexico was also affected that it cannot provide credit for production and it only seeks assistance from the United States and EU. (Reveles and Rocha, 2007) Shafaedin (2005) mentions other setbacks of Mexico after the free trade agreements in relation to base industry: “In the important case of Mexico where exports grew extremely fast, acceleration of manufactured exports was not accompanied by an acceleration of MVA.

Much upgrading of the industrial base did not take place and the non-maquila [factory] industries which performed better than others were those which had enjoyed high investment during import substitution era. ’’ (Shafaedin, 2005, p. 20) Dennis Arnold (2004) identifies the drawbacks of Mexico during the North American Free Trade Agreement (NAFTA) which badly affects its workers particularly the rural poor. The NAFTA removed several agricultural sectors and pushed the wages and working conditions at the bottom on factories and non-factories.

Audley (2003) notes five (5) points that will conclude the impacts of NAFTA to the Mexican economy as a whole:

• “NAFTA has not helped the Mexican economy keep pace with the growing demand for jobs. Unprecedented growths in trade, increasing productivity, and a surge in both portfolio and foreign direct investment have led to an increase of 500,000 jobs in manufacturing from 1994 to 2002. [However, employment reduced in the manufacturing sector because of import competition and substitution of foreign input in assembly operations. (Arnold, 2004)] The agricultural sector, where almost a fifth of Mexicans still work, has lost 1. 3 million jobs since 1994.
• Real wages for most Mexicans today are lower than they were when NAFTA took effect. However, this setback in wages was caused by the peso crisis of 1994-1995—not by NAFTA. That said, the productivity growth that has occurred over the last decade has not translated into growth in wages. Despite predictions to the contrary, Mexican wages have not converged with U. S. wages.
• NAFTA has not stemmed the flow of poor Mexicans into the United States in search of jobs; in fact, there has been a dramatic rise in the number of migrants to the United States, despite an unprecedented increase in border control measures. Historical migration patterns, the peso crisis, and the pull of employment opportunities in the United States provide better explanations for the increase in migration than NAFTA itself.
• The fear of a “race to the bottom” in environmental regulation has proved unfounded. At this point some elements of Mexico’s economy are dirtier and some are cleaner. The Mexican government estimates that annual pollution damages over the past decade exceeded US $36 billion per year. This damage to the environment is greater than the economic gains from the growth of trade and of the economy as a whole. More specifically, enactment of NAFTA accelerated changes in commercial farming practices that have put Mexico’s diverse ecosystem at great risk of contamination from concentrations of nitrogen and other chemicals commonly used in modern farming.
• Mexico’s evolution toward a modern, export oriented agricultural sector has also failed to deliver the anticipated environmental benefits of reduced deforestation and tillage. Rural farmers have replaced lost income caused by the collapse in commodity prices by farming more marginal land, a practice that has resulted in an average deforestation rate of more than 630,000 hectares per year since 1993 in the biologically rich regions of southern Mexico. ” (Audley, 2003, p. 6-7)

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