Canadian Centre for Policy Alternatives Monitor, November 1995
GLOBALIZATION AND DEMOCRACY:
"Free trade" gives freedom only to capital
by Ian Robinson
Supporters of the Canada-U.S. Free Trade Agreement
(FTA), the North American Free Trade Agreement (NAFTA), and
the Uruguay Round of the General Agreement on Trade and
Tariffs (GATT) portray them as mere extensions of the trade-
liberalizing trend that followed the Great Depression.
They insist on calling them "free trade agreements"
when in fact they go far beyond the traditional purpose of
such agreements: reducing quotas and tariff barriers to
international trade in non-agricultural goods. The new
agreements (1) created new international property rights for
foreign investors and intellectual innovators; (2) created
new legal restrictions on government regulations; and (3)
applied traditional GATT principles (i.e., "national
treatment" and "most favoured national") to trade in
agricultural goods and all categories of services.
These innovations substantially increase capital
mobility. It is now easier and more attractive to shift
investment from domestic to foreign sites. This "exit"
option gives corporations more leverage to demand reductions
in taxes, regulations and wages that are said to curb
profitability and competitiveness.
Because their most important impact is the promotion of
capital mobility -- and with it freedom from the constraints
of democratic governments and unions -- these deals are more
appropriately called "free capital agreements."
These agreements embody a laissez-faire approach to the
regulation of the global market economy. However, like
national market economies, a global marker economy could
also be governed by social democratic principles.
A social democratic form of globalization would not aim
to increase capital mobility and corporate property rights.
Corporate capital was already highly mobile, by historical
standards, before the FTA, NAFTA, and the Uruguay Round of
GATT. From a social democratic perspective, the social
dimension of international economic integration lags far
behind existing levels of capital mobility.
Two things are required to overcome this lag:
* First, the regulation of international competition
among states and firms so as to yield socially and
environmentally desirable outcomes.
* Second, the redistribution of a substantial part of
the economic gains from globalization to those who are
most in need and most vulnerable to the massive
restructuring that globalization brings in its wake.
These objectives should be the principal focus of
binding, enforceable international agreements for the next
10 or 20 years.
DEMOCRATIC SCOPE
Why should we prefer a social democratic to a neo-
liberal (or laissez-faire) form of globalization? One
important reason is that the latter substantially reduces
the degree to which citizens are able to exercise democratic
control over their society and its economy.
Free capital agreements reduce the scope of democracy
by transferring the power to make decisions on important
social and economic issues to unaccountable supranational
public and private bureaucracies.
A lot of criticism of NAFTA and the WTO focused on the
lack of accountability of the tribunals that would
administer these rules. While not without merit, this is
not the most fundamental problem with these trade deals.
Even the fairest, most open and transparent process,
administered with perfect impartiality, will not generate
good outcomes if the rules that these supranational
tribunals are required to interpret and enforce are
inappropriate.
Conversely, if these international agreements reflected
a social democratic vision of globalization, rather than a
neo-liberal one, questions of process and accountability
would be less pressing, though still important.
The free capital agreements do this in two basic ways:
first, through the legal restrictions they impose on the
policies that governments may adopt; and second, through the
market pressures that intensifying competition for scarce
private investment imposes on national and provincial
governments.
The most important new legal restrictions on
democratic states have to do with investment, intellectual
property rights, and technical standards. NAFTA's investment
chapter, for example, prohibits a wide variety of
"performance requirements" -- that is, conditions that
governments might require foreign investors to meet in
return for the right to invest in a country.
Among other things, states are barred from requiring
foreign investors to transfer technologies, and from
mandating that a share of the materials used in production
be locally purchased, or that raw materials be processed to
a certain level before export, or that a certain share of
profits be locally invested. (Such conditions have been
used by many countries in the past to diversity their
economies and to increase the value-added manufacturing
potential of their resources.)
Nor can government create public corporations, embark
upon new programs, or introduce new regulations that might
reduce the "reasonably expected" value of foreign
investments without paying compensation, or else they run
the risk of trade sanctions.
For example, if a province that doesn't already have
public auto insurance wanted to introduce such a plan, it
would have to pay compensation to any American Insurance
companies that would lose business as a result. If Canada
didn't already have a national health insurance program, its
implementation today would require the same compensation to
be paid to American health insurance companies operating in
Canada. The necessity of paying such compensation could make
new policies and programs prohibitively expensive, whatever
the public interest.
U.S. insurance companies do not occupy a large place in
the Canadian auto or health insurance markets at present,
but the free capital agreements could change that as well.
For example, the investment chapter of NAFTA limits
restrictions on foreign ownership, even in such sensitive
areas as financial services. It thus paves the way for
mergers and takeovers that could make these new property
rights much more important over time.
NAFTA's intellectual property provisions are similarly
restrictive. When Canada's minister of health, Diane
Marleau, announced that she would introduce legislation
requiring that all cigarettes be sold in plain packages,
U.S. free trade negotiator Carla Hills (in her new
incarnation as an international trade lawyer) appeared on
behalf of American cigarette manufacturers to warn the
Canadian government that such a policy would constitute a
"taking" of their intellectual property (specifically, their
trademarks). Unless they were fully compensated for the
resulting loss of sales, such a "taking" would violate NAFTA
and open Canada to retaliation by the United States. The
Canadian government quickly abandoned the plain packaging
proposal.
Finally, the technical standards provisions of the free
capital agreements make it significantly more difficult for
governments to defend regulations that are more stringent
than an international minimum, requiring them to demonstrate
that a challenged regulation is the "least trade restrictive
necessary" to achieve a "legitimate" public objective.
Tax policies are also highly vulnerable to capital
mobility. The United States has a long experience of
municipalities and states bidding down their property and
corporate taxes in the competition for private investment.
The same thing happened to death duties in Canada when they
were decentralized from the federal government to the
provinces. In a few years, they had been dramatically
reduced by inter-provincial competition for investment.
International competition has intensified in recent years,
and, by increasing capital mobility, the free capital deals
will intensify this problem in all countries.
The impact of increased capital mobility on corporate
taxation is exactly paralleled by its impact on corporate
regulation. Any regulation can become the target of
downward market pressures simply by virtue of the fact that
transnational corporations regard it as a cost.
SOCIAL DUMPING
In the jargon of the European Union, this competitive
bidding down of taxes and standards is called "social
dumping." The ban on performance requirements protects
corporations from competing against one another to give
governments concessions in return for the right to invest.
There is nothing, however, to prevent governments from
competing to offer corporations concessions in return for
their investment, and much that encourages it.
The capacity of unions to reduce or stabilize income
inequality through collective bargaining is also weakened.
Unions face transnational corporations from a much weaker
bargaining position than they do national or provincial or
municipal employers. Any good or service that is
domestically produced but might be produced elsewhere is
vulnerable to corporate pressure to cut wages and benefits
in order to reduce the attraction of shifting production
overseas.
We can therefore expect substantial increases in income
inequality under the free capital agreements. The
experience of the last 15 years supports this expectation.
In this period, income inequality in the four countries that
pursued neoliberal policies most rigorously -- in the U.S.,
Britain, New Zealand and Canada -- increased more rapidly
than in the other OECD countries.
SOCIAL DEMOCRATIC GLOBALIZATION
A pro-democratic form of globalization would have to
achieve three things:
1. reduce the legal restrictions on democratic
governments associated with the investor, intellectual
property, and technical standards provisions briefly
discussed above;
2. neutralize the social dumping pressures associated
with the high levels of capital mobility that will
exist in any global market economy; and
3. create new mechanisms for redistributing a
substantial portion of the economic gains from
globalization to those individuals and nations most in
need.
The last two elements, taken together, are what the
Europeans call "the social dimension" of international
economic integration.
A global social dimension, on the European model, would
have two basic components: (1) a social and environmental
charter and (2) structural funds.
The charter would set out basic worker rights and
labour and environmental standards that all members of the
GATT, IMF, and other international organizations would have
to meet.
The structural funds would transfer resources from
those who gain from market restructuring to those who lose.
They would also help pay for the upgrading and
infrastructure, and the promotion of economic development in
depressed regions.
In the short run, any such international social
dimension would be very limited. However, it could be large
enough to make a difference and it could be expanded over
time. The European Union's social dimension -- except for
its agricultural priced support system -- started out very
small. But as the integration accelerated in the latter
half of the 1980s, its structural funds twice doubled in
size. By 1997, these funds will transfer about US$68
billion a year to poorer parts of the Union.
I propose a very simple global social charter to begin
with. It would protect just four basic worker rights:
* the right to organize unions that members control
democratically;
* the right to engage in collective bargaining and to
strike when such bargaining does not resolve the
issues in dispute;
* freedom from forced labour for children and
prisoners; and
* freedom from discrimination in hiring, promotion, and
remuneration.
This list is hardly adequate, even on the labour side
of the social charter. It says nothing about what minimum
standards should be included on the environmental side.
However, if unions were strong and democratic, their members
would be able to mobilize in pursuit of stronger standards,
as in the early industrializing countries.
Conversely, one can have the best labour standards in
the world on paper, but if unions are not free and
democratic, standards will not be effectively monitored and
enforced. Further progress will be possible internationally
as the domestic balance of political power is altered in the
less developed countries, increasing the receptiveness of
their governments to a more comprehensive international
social charter.
Beyond these four basic worker rights, the social
charter would also follow the European example by protecting
basic democratic rights. Worker rights don't mean much
under authoritarian regimes, and neither do environmental
standards, as the record of environmental degradation in
Eastern Europe demonstrates. Environmental destruction is
first and foremost a problem of political failure -- the
failure to give the people most directly harmed by bad
environmental practices sufficient political power to alter
such practices. By expanding the scope of democratic
control over such matters, a social democratic charter would
be a substantial contribution to improving environmental
conditions.
The revenue source for the structural funds, and the
formula by which they would be allocated, could also be kept
very simple. One intriguing candidate for this role is the
tax on international currency transactions proposed by Yale
economist and Nobel Prize winner James Toxin. (See the
recent CCPA report, "The Tobin Tax," by James Tobin, an
excerpt from which appeared in the October 1995 issue of The
Monitor.) This tax would yield more than $1 trillion in
revenues every year. To qualify for their share,
governments would have to respect the four basic labour
rights, the environmental standards, and the requirement for
democratic government that constitute the social charter.
What can we do to promote such forms of social
democratic globalization? One of the first priorities is to
expose the coercive and anti-democratic character of neo-
liberalism. Challenging the three foundational myths of
globalization -- that its neo-liberal form is
technologically rather than politically determined,
inevitable and benign -- is an excellent place to begin.
The principal vehicle for getting a different message
to the public -- the message that there are realistic and
workable alternatives on the left -- must be the array of
social movements and non-profit organizations that
cooperated in the struggle against the FTA, NAFTA, and the
Uruguay GATT. This "common front" included the labour
movement, most of the environmental movement, women's and
students' organizations, family farm organizations, anti-
poverty coalitions, and religious groups promoting human
rights, peace and development.
Together, these movements and organizations represent a
substantial part of the populations of all the countries
whose governments signed the free capital agreements. These
movements were successful in convincing majorities of the
informed Canadian electorate (i.e., those who had any
opinion at all on the matter) that the FTA and NAFTA were
contrary to the public interest. Their U.S. counterparts
achieved the same success there in their fight against
NAFTA. They did this despite the extraordinary financial
and political resources ranged against them. Thus, a
coalition of these social movements -- both within and
across national boundaries -- has great political potential.
For many of the leaders and activists in these
organizations, their cooperation in the fights against the
FTA, NAFTA and the Uruguay GATT began as a marriage of
convenience. But by the end of the NAFTA struggle, a
consensus was emerging that the common enemy was corporate-
led neo-liberal globalization rather than any particular
trade deal. The international common front also began to
work on developing a common alternative to that vision.
The most detailed expression of this vision to date is
"A Just and Sustainable Trade and Development Initiative for
the Western Hemisphere," developed by American, Mexican and
Canadian opponents of free trade, including the Action
Canadian Network. (See The Monitor, October 1994.)
It is too early to know whether this vision can inspire
the sustained "common front" of social movements that will
be necessary if the social democratic vision of
globalization is to prevail. But many activists in these
movements are coming to the conclusion that they must now
dedicate themselves to this end. We must do everything we
can to strengthen the political tendency they represent.
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Ian Robinson is a professor of political science at Reed
College, Portland, Ore., and author of the 1993 CCPA study
"North American Trade As If Democracy Mattered." A longer
version of this article was published earlier in DISSENT
magazine.
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THE CHILEAN CONNECTION
Chile was selected as the first candidate for accession
to NAFTA because of the apparent success of the economic
reforms undertaken by the government that succeeded the
country's military dictatorship. A closer look at the
Chilean "miracle", however, shows that It has been achieved
at the price of continuing human and labour rights
violations.
The repression of unions In Chile has been so extreme
that the number of unionized workers has dropped from 33% of
the work force to just 13%. Wages have been depressed to
their average level of 25 years ago. The current minimum
wage in Chile is only US$15O a month.
The benefits of Chile's economic growth have been
distributed very unevenly. After Brazil, Chile has the most
unequal income distribution in Latin America: the richest
10% of the population receives 36 times more than the
poorest 10%. According to economist Jacobo Schatan, the
richest 100,000 Chileans control as much income as the
poorest 6,000,000.
Chilean unionists and social activists are convinced
that NAFTA will weaken rather than strengthen that country's
economy and do nothing to help establish real democracy
there. According to studies carried out by the Confederatlon
of Production and Trade and the National Agricultural
Society, the expansion of maquiladora industries spurred by
NAFTA will cause a loss of jobs in textiles, leather and
shoe production, and in some mining sectors. It will damage
the production of traditional crops such as wheat, corn and
food-oil products. It is also likely to further impoverish
Chile's indigenous peoples.
