Jagdish Bhagwati on Trade Deals and Labor Standards

Jagdish Bhagwati argues against the inclusion of labor standards in the recent free trade agreement:

Free trade’s foes get a foot in the door, by Jagdish Bhagwati, Commentary, Financial Times: The agreement on trade between the Bush administration and the Democrats ... takes the demand for the integration of labour standards in trade treaties up a further notch. The display of bipartisanship, with Nancy Pelosi, Democratic Speaker, appearing with Hank Paulson, Treasury secretary, and Susan Schwab, US trade representative, has been the cause of widespread celebration. Yet the compromise consensus ... has dangerous implications for the world trading system.

Bipartisanship is no guarantor of virtue. The proponents of the compromise also make a serious mistake when they assume that domestic consensus ... is a sufficient condition for further trade liberalisation. Trade needs at least two parties. Unless your trading partners agree with what you propose, your own consensus is ... useless. The problem is that, except for bilateral agreements with small countries ... with little political power or with over­riding security interests, the developing-country trading partners of the US are generally opposed to the inclusion of labour (and other non-trade-related) requirements in trade treaties, agreements and institutions. ...

Many Democrats believe that the developing countries and the Republicans are morally wrong to voice objections to the labour requirements. Thus, I recently heard my congressman, Charles Rangel, Democratic chairman of the House Ways and Means Committee, argue that US trade policy had been run by the Republicans for corporate interests and that under the Democrats it would be run for the people.

The fact is that huge numbers of economists who belong to the Democratic party also oppose the inclusion of labour standards in trade treaties. So do distinguished Democratic politicians. ...

While this position follows from the principles of efficient policy design, it is also reinforced by the fact that the pursuit of labour standards in the American political landscape today reflects not altruism and empathy, but fear and self-interest. The Democrats who swept into Congress on anti-trade platforms typically fought their campaigns by arguing that competition with countries with lower standards was harmful to the working and middle classes in the US.

But this fear is not justified by facts. Most empirical studies of the effect on US wages of trade with poor countries have found little impact. My distinguished student, Paul Krugman, recently admitted in his New York Times column that he was among those who did this research. He then, unconvincingly, retreated into the assertion that “that may have changed” because the US is importing more from the poor countries now. However, increased imports need not have any effect on wages.

Those who are complacent and think ... this ... a minor concession in order to get on with trade forget that the strategy followed by labour lobbies has been to get a toe in the door, then another and another. ... The ploy is clever: it is an indirect way for some unions to try to get the US itself to be pressured to make concessions to labour at home, on the backs of foreign nations.

Was this compromise necessary for the renewal of the president’s fast-track trade authority? I doubt it. Think hard: if fast-track were not renewed by Congress, the US would find it impossible to pursue even bilateral agreements... But every other nation would be free to pursue these bilateral deals. So, the US would be increasingly handicapped in world trade. But if the administration stood firm, rejecting the compromise over labour standards, it is surely possible that a few responsible Democrats could be found who would vote for new fast-track authority, purely in America’s interest. Surely, it is not beyond the capacity of Mr Paulson to play this card with success?

Comments

[ljm]

It's about giving Bush fast track authority. Clinton didn't have fast track and we managed to have trade with the rest of the world, so I'm not buying the writers argument.

[save_the_rustbelt]

I don't there is any intent to enforce these standards, this is a dog-and-pony show to mollify the progressive left and the Dobbsian (Lou) right.

Given our blazing enforcement of intellectual property standards I don't think our trading partners have much to worry about.

All show, no go. Not to worry.

[save_the_rustbelt]

"...and self-interest...."

So it is wrong for Americans to have self-interest? It that what the man is saying?

[bakho]

I agree it is labor getting a foot in the door, but that is a good thing.

[Noni Mausa]

I have always wanted to ask -- in what sense do countries have a "level playing field" of competition when one of them has pensions, civil rights, social security, health care and other social supports, and the other has no such thing? I've long thought we could benefit from a social supports tariff of some sort -- although I have no idea how it would be measured.

Noni
retired
pensioned
and has health care (yayyy!)

[unlawflcombatnt]

Bhagwati omits the part where Krugman said that globalization and outsourcing do reduce wages in the United States. Always interesting to see how a Right-Wing Globalist omits everything that doesn't agree with his view.

[dale]

So he is on the side of altruism and empathy. Not on the side of self-interest and fear. I thought modern economics was born from the notions of self interest and the sort of fear the sense of scarcity tends to promote.

We progressives want- all decent people really want this- to promote not just industrial society and the division of labor- but a decent social democratic way of life for all people. So when we export the ideals of capitalism we, at the same time, wish to export and extol the ideals of democracy, worker dignity, our growing understanding of the need for environmental sustainability.

The people of the developing world, the people of the developed world- the earth as a community of beings- human and non-human- we no longer have time to not set about with our best intention to build a just world. I say its time for Jagdish Bhagwati to shut up, retire and let the work of building a world wide network of prosperous, egalitarian and sustainable communities procede.

[anne]

Well, since we have no decent standards for American workers, I suppose we need no standards for any workers. We have a disgraceful $5.15 an hour minimum weage; we have no health insurance for 47 million Americans and increasingly costly insurance for many other; we have no vacation or sick days for millions of Americans; we turn from work-place safety standaqrds; we turn from union protections; we turn from increasingly costly public colleges and universities.

What is Jagdish Bhagwati babbling about?

[anne]

Now, I am for all sorts of trade in all sorts of ways but I am astonished at the arrogance of Jagdish Bhagwati and the like who can rail at Paul Krugman or Alan Blinder for the slightest mention of a need for trade to be linked as Franklin Roosevelt understood to worker protection. When we cannot even have a minimum wage above $5.15 an hour, I have no sympathy at all for the free traders who care nothing for American workers.

[anne]

When Jagdish Bhagwati shows a hint of concern for 47 million Americans, most adult and most working, who have no health insurance, then I will be all for every possible trade.

Ah, and as for intellectual property, we are nowhere more zealous than in protecting intellectual property. So, enough with the nonsense that we do not.

[Lafayette]

Bhagwati: However, increased imports need not have any effect on wages.

On what planet does this distinguished Professor Bhagwati teach? I suspect it is not the Earth.

The evidence is conclusive that in un- and semi-skilled jobs, work is being displaced from Europe to Eastern Europe and from America to the Far East.

Perhaps the Professor means the consequence of this transiting has no incidence on general wage levels, but when one's particular wages go from something to nothing that is quite another matter. The pain is real.

So, for the sake of his good name, let us presume that the Professor means wage levels. Well, that too is a bit hard to believe and if he has "empirical evidence" than we should like to see it.

Wages are the price of labor, and when the demand diminishes, because the jobs are exported, it is difficult to conclude that the market mechanism does not depress wages. Thereby justifying the need of a minimum wage, without which there is no floor and without a floor, you are in free-fall. Furthermore, I can assure the professor that the young today are taking entry-level jobs in Europe that are, considering inflation, at a lower level than ten years ago. The only jobs that show wage progression are those of the highly-skilled, diploma bearing, young executives.

Perhaps empirical evidence shows no impact on general wage levels in the US, because the size of the dislocation is, in fact, fairly moderate. With employment at 4.5%, job dislocation cannot be all that important (except to those who suffer from it).

But, in Europe, where wage levels are not only higher but unemployment higher (between 7 and 10%) then if wages (the price of labor) does not diminish, or is not enhanced by productivity, the consequence is a stagnation of job creation. Who cares about the wage level when no jobs are being created?

It is entirely possible, therefore, that empirical evidence shows that wage levels remain the same or increase less than inflation - after all, these are calculated upon the observed wages of the employed. But, the common complaint here are the consequences of job dislocation. That is, (1) no net jobs are created since hirings typically replace only retirements, (2) unskilled workers go into long term unemployment.

I prefer - the Professor will forgive my ignorance, I am sure - to believe that we accept facts for what they are. There is no sense in lamenting that un- and semi-skilled jobs in manufacturing are leaving developed countries for warmer wage climates. We need to retrain the resulting unemployed into skills for which there is a demand, whether they be in the trades, or service sector professions.

Anyone who leaves a dislocated unskilled or semi-skilled job should be given the opportunity to use their unemployed period to pick up new skills in another domain. Why waste that time looking at the four walls?

[real person from the real world]

Everyone looks for what they think should be obvious. Somehow, cheap Visa labor will lower the high salaries of people in IT. Not so. The employer/vendors and layers who hold these poor guys' visas squeeze from the bottom to keep their cut high, companies try to squeeze from the top, and try low ball tricks, but then the midlevel vendors complain, "look what I have to pay the visa guy, I can make a buck!" and, since these guys are real wheeler-dealers with all sorts of non-compete contracts and what not, no matter how poorly worded some of them are, they can keep the salaries at the low end of the market curve. Companies never save much on Visa labor, the only advantage is that it is disposable, and they didn't have to train it. Meanwhile, for every visa guy that we import, an American IT grad finds it harder to get a toe hold. Visa slaves are just that slaves, but often slaves for their own fellow countrymen, who make money as brokers. If you believe what PK says, that the insurance middle men are the reason Health Care is so expensive in the US, what do you think happens withe the middlemen brokers of IT labor in the US? I know you all think I am an idiot to be posting to you bigshot econ guys, but you really live in Ivory Towers, and do not see half of what goes on.

[Lafayette]

Bhagwati: Bipartisanship is no guarantor of virtue.

Bilateralism was not an intent of the document.

Only a signatory state can bring another signatory state to judgment for "unfair" work conditions that do not coincide. Trade unions remain toothless unless laws within their own countries give them teeth.

The intent was to get signatory countries to recognize the existence of trade unions that bargain for fair wages in a country. Yes, one cannot legislate neither virtue nor love. But, the measures do allow for the US, for instance, to sue China if it can prove that unions are not being allowed to form. (A case in point is Columbia, where over 200 union activists have been killed over the past years. And, China has been known to jail labor activists as well.)

It is better to light one candle than curse the darkness - is it not?

[me]

"Jagdish Bhagwati"

This guy keeps repeating the same phrases over and over like a broken record, even when he has been wrong (IE wages not going down).

He is clearly from the Milton Friedman school that Krugman talked about "trust" big business. I trusteed IBM with a pension and lost it.

They guys that refuse to acknowledge any problems with "free" trade are increasingly irrelevant. I hope his 15 minutes are up.

[Lafayette]

rp: I know you all think I am an idiot to be posting to you bigshot econ guys, but you really live in Ivory Towers, and do not see half of what goes on.

No one (here) is a "big shot econ guy" and no one thinks you're an idiot. At least I don't. We are all small-shots commenting. The Big Shots keep themselves above the fray. (God knows why ... maybe they don't want to dirty their hands?)

You keep harping about the same thing. It's all getting a bit boring. Sorry, but macroeconomics looks at a bit bigger picture than what is happening to American jobs by letting in visa-entry IT workers.

This is just a forum where we are discussing economic matters, not all the work unfairness that happens in this world.

Besides, the US has an unemployment rate at 4.5%, which can be envy of the world. We've had close to twice that in Europe for the past fifteen years.

Give us a break.

[Per Kurowski]

Jagdish Bhagwati lashes out against labour standards as a tool of protectionism. Be that as it may, and I tend to agree with him on the risks of an improper use of the standards, we must still know that in order for the world to become a better place we cannot really think of splitting it up into highly-regulated-consumer-societies and free-to-do-whatever-they-want -producers. So, if you don’t want to mix trade and labour standards in the World Trade Organization, then as Bhagwati mentions you can always go to the International Labour Organization… but do it!

Bhagwati also points out as a special circumstance “that the pursuit of labour standards today reflects not altruism and empathy but fear and self interest”. I am not that sure it ever was about anything else but fear and self interest, but if we really want it to be about altruism and empathy let us then make certain we discuss the labour standards from that point of view, as ignoring them completely do not seem that compatible with altruism and empathy either.

[cm]

Lafayette: The efficiency of IT tools makes scrolling past somebody's comment that you wish to disregard the easiest exercise. No need to remind the "bores" of the discussion agenda.

says...

"Bhagwati also points out as a special circumstance “that the pursuit of labour standards today reflects not altruism and empathy but fear and self interest”."

Except if you want to brush your teeth, or feed your pet, or eat salmon.

Mark why do you continue to post the meaningless ramblings of that asshole?

[suresh]

It is useful to remember that Bhagwati is an immigrant to the US from India - he is a contemporary of the current Indian Prime Minister Manmohan Singh. (They were both students at Oxford at about the same time.) I mention this only because I think Bhagwati has a somewhat different perspective on the effects of labor standards. I think he views - with some justification - such standards as acting against the interests of workers from developing countries and it is partly for this reason that he opposes such standards. I am not suggesting that Bhagwati does not care about American workers but as an immigrant he does have a different perspective on this issue and it may be useful to remember this.

says...

Dr. Suresh,

I suggest you stick with fighting Syler, or discovering new powers among genetic code sequences. My parents are LEGAL immigrants.

Not having labor standards is a terrible thing.

[suresh]

Anon@5/24/2007:5.08pm,

Do you have anything at all to say about mixing trade and labor standards which is what the discussion is about? The issue is *not* whether labor standards are good or bad as such...

Looking forward to more stupid, irrelevant and personal remarks from you.

[anne]

There can be many different perspectives on how far fair labor and environmental practices extend, but I can imagine no reason for the sake of American or international workers not to increasingly push for obviously fair labor and environment protection practices as the price for trade. Trading in a product when the production is environmentally destructive or harmful to workers must be continually challenged.

[suresh]

Anne,

My last word on the subject. You say there is "no reason ...not to increasingly push for obviously fair labor and environment protection practices as the price for trade." So, who pays this "price" if there is no or limited trade? Don't workers themselves bear part of this "price" either because they can't find employment (in an autarky) or in terms of higher product prices? (I do recognize that some workers in some countries may also benefit from limiting trade.) It might still be worthwhile enacting the fair labor and environment protection practices you suggest but the case is hardly that obvious.

Secondly, how does one decide what labor practices are "obviously fair"? Is it the current practice in the US and/or Europe? Should one adopt the French practice of a 35 hour week? Why? This is not going to be easy to be work out and including such standards in trade negotiations is only going to complicate an already complex negotiation.

My feeling: Notwithstanding the arguments you make in favor of including labor/environment standards in trade negotiations, I feel that those issues are better tackled elsewhere, e.g., ILO and things like the Kyoto round. Perhaps, that's just a reflection of my being from a developing country - India - where indeed, a substantial number (not necessarily the majority) do oppose linking trade and labor standards.

[anne]

Thsnk you, Suresh. I understand the problem in defining what worker and enviornmental trade protections are which is why I did not set out terms. But, that is for negotiation, repeated negotiation since trade conditions change repeatedly. The idea though of trade with no ethical constraints is to me impossible, and the need for a trade ethics must be made clear in trade agreements.

[anne]

Again, I am completely in favor of trade and as free trade as can be managed given mutually acceptable ethical standards between countries which will protect the environment and workers. Mexican farmers needed and need to be protected against subsidized American corn imports, but protection of Mexican farmers does not mean and should not mean limiting trade with Mexico.

says...

Dr. Suresh, you may have saved that little girl who can find "special" people, but I do look forward to more of your invective ad hominem.

Anne = Suresh = donna = maria = Lafayette = Mark.

Now I'm bored.