By Carolyn Davidson
Adam Smith is often credited for prescribing unrestricted trade as an economic policy to improve societal welfare. Such ideas now dominate economic policy as over one hundred regional free trade agreements exist. However, the modern day neo-liberal manifestation of free trade would have surprised Smith; as such capitalist ideas have no ethical foundation, the base of Smith’s theory. With an ethical desire to improve societal welfare via economic success, Smith claimed that “no society can surely be flourishing and happy, of which by far the greater part of the numbers are poor and miserable” (Todaro, 1995, p. 151). However, in the two centuries since the application Smith’s economic policies, income inequality has drastically increased. In the last 45 years, the global ratio of income from the richest to the poorest increased from 30 to 1, to 61 to 1 indicating the trend of more people living in increasing poverty (Todaro, 1995, p. 48). Modern day free trade increases wealth disparity and in fact imposes restrictions on individual and societal self-determination, a consequence that opposes the utilitarian founding principles of free trade. Having witnessed the human consequence of such wealth disparity in Latin America, and this piece is primarily based on the Latin American struggle with free trade and how the belief that the region could benefit from a renovated approach. The argument is not against free trade, as Smith’s ideas represent common sense, and free trade, potentially could reduce such global inequality. The argument is however, that our society should take an ethical turn and reapply an ethical lens to current free trade; one based on societal welfare to develop future trade policies that we can proudly claim benefit the global community over individual profit.
Ethical action requires that one views societal welfare as necessary for individual welfare, because individuals are fundamentally members of a larger, interconnected community. It is within this lens that society needs to scrutinize current free trade. As society is dynamic and inextricably interconnected spanning generations and distance, when one pursues ethical action, they must constantly evaluate societal welfare before and during, the implementation of any such economic or political policy. Ethical action fails when the interests of a more powerful group threaten the freedom of any community or social group, whether defined culturally, economically, racially or sexually.
Ethical economists and thinkers provide insight into the real life applicability of ethical theory. Adam Smith bases his views on principles of welfare economics, which state that an ethical decision would choose that action which maximizes the outcome for the most number of people; a cost-benefit analysis of ethics. Robert Bellah in The Good Society recognizes that our culture tends to make decisions based on a cost-benefit analysis. However, Bellah calls for public discussion to harmonize societal interests with personal interests. According to Bellah, institutions based on ethical norms presently exist, but a lack of societal dialogue committed to maintaining these ethical norms results in their erosion (1991, p.17). The ethical norms of free trade, outlined by Smith, similarly eroded due to a lack of societal analysis and dialogue committed to maintaining societal welfare.
Current free trade is characterized by partnerships between highly unequal trading partners via the creation of regional trading blocs, usually between the U.S and a varying number of developing countries which unethically disadvantage the less powerful. Traditionally, the governments of disadvantaged domestic economies promote their economic interests by utilizing state market intervention tactics such as tariffs, import quotas and export subsidies in order to compensate for their disadvantaged market position (Todaro, 1999, p. 484). As free trade reduces governmental trade adjustment measures, foreign market competition, which has no stake in the societal welfare, is entrusted to equalize market inequalities. By involving such economically polarized countries, present free trade agreements are not, by definition, free trade, as the weaker country is required to concede more internal and external economic controls, while the more powerful country does not. For, example, under the provisions of the Central American Free Trade Agreement, the countries of Central America are required to lower barriers to United States agriculture imports, while the United States continues to heavily subsidize US agricultural products, preventing the competitiveness of Central American agricultural goods. After negotiation, “free trade” does not exist, but trading partners with different levels of restrictions do. In the developing world, the negative consequences of these concessions mostly impact the individuals with the least political power.
“Created jobs within export industries specifically attract socially marginalized employees who are vulnerable to human rights abuses.”
The employment situation created by free trade threatens the freedom of the individual, society, and state by leaving all vulnerable to the plans of the investor. Free trade creates export revenues for developing countries through creating industries that take advantage of local resources and unskilled labor to create an export commodity. Such foreign investment does not strengthen the economic situation of the country nor the individual workers in the long term. Primarily, the majority of the income generated by such foreign owned sectors is exported, preventing the host country from increasing their Gross National Product (Todaro, 1999, p. 487). Recognizing that foreign investment does not largely nor directly increase the Gross National Product, supporters argue that the mere creation of jobs significantly justifies foreign investment.
However, the created jobs within export industries specifically attract socially marginalized employees who are vulnerable to human rights abuses, as their social status denies them political and economic influence. Facing market competition and continually striving to increase profits, multinational corporations notoriously decrease costs by providing subsistence wages and minimal working conditions. Desperate for an income to support themselves and their family, workers do not have other viable job options thus can neither leave their job, nor protest their labor conditions and risk losing their job. While studying in Nicaragua last semester, I spoke to several women who labored by assembling clothing in order to support their children. They work from 7 am until 7pm yet continue to struggle to support themselves, while suffering the degradation of working in a disrespectful, sexist environment, the clearly unethical manifestation of a policy that has diverged from its ethical roots. Some would argue that free trade, through such export-oriented factories provides job opportunities where there were none before. Clearly, the potential for job creation is one of the greatest incentives for adopting a free trade policy. However, it is not unreasonable to expect that human rights be respected. Furthermore, denying human rights, beyond being inherently unethical, lowers moral, self-confidence and productivity, thus continuing the cycle of poverty
Additionally, the job instability characteristic of current free trade contrasts with the utilitarian ideals proposed by Smith regarding free trade, as far more society members suffer from job instability than those who benefit. For example, Javier Morales, Nicaraguan Vice Minister of Industry and Commerce (personal communication, November 13, 2003) stated that under the provisions of the Central American Free Trade Agreement, recently signed by most of the countries of Central America, the government of Nicaragua exempts foreign investors from all taxes for the first ten years of operation. Although a valuable incentive to initially attract foreign investment, the tax break terminates after ten years, allowing the company to search for a cheaper location. As international governments continue to support the creation of free trade agreements, in ten years, other countries will likely offer more valuable incentives. Thus, if the company chooses to relocate, the high-ranked employees of the corporation will profit, while far more workers and their families become vulnerable to the hardships caused by joblessness.
Supporters of free trade would oppose viewing free trade through an ethical lens, arguing that free trade is not a direct social policy, but an economic policy which de facto improves the greater welfare of society. As an economic policy, free trade allows products to come into all member countries more cheaply, improving company productivity. Increasing company productivity thus leads to increased private employment, reducing the number of people dependant on government employment and assistance. Additionally, lower interest rates as a result of free trade would leave more money in the pockets of people whose spending would further stimulate the economy (McDonald, 1999, p.68).
Claiming that the economic success of free trade agreements promotes social benefit for developing countries is flawed in that it assumes that the economy will benefit in a manner which distributes the gains equally throughout society.
“Striving to increase profits, multinational corporations notoriously decrease costs by providing subsistence wages and minimal working conditions.”
The experience of Mexico, the most economically disadvantaged country belonging to the North American Free Trade Agreement, signed in 1994, indicates that free trade did not ameliorate social problems, but rather increased economic polarization within the country. While the GDP did rise, the GNP (which more accurately measures actual profit within the country) did not rise. Real wages fell by 40%, unemployment and underemployment increased, while at the same time the number of Mexican multimillionaires dramatically increased (McDonald, 1999, p. 161). Considering these figures, utilitarian welfare economists could not support current free trade policy as it does not maximizes the benefits for the most number of people, but rather, indicates it is a tool that primarily benefits a capitalist minority.
However, other supporters of free trade would argue against the proposed ethical turn as they would claim that free trade never ceased to be viewed through an ethical lens, though it may be an ethical lens different than that presently proposed. They would define the ethical lense as individual rights, as free trade removes trade restrictions, allowing maximum self-determination. Such thinkers would agree with John Stuart Mill’s argument that individuals have the unalienable right to self-determination, with society having the right to intervene only when one’s actions negatively affect others. Mill, in On Liberty claims that a man accused of public drunkenness shall not be punished by society as his damage is limited to himself (1978, p. 77). However, Mill’s definition, which essentially denies a greater social responsibility to the individual beyond avoiding direct harm, defines causality too vaguely to apply to real situations. Even by not acting to improve society, the drunk’s inaction carries repercussions on other individuals as he is not actively working to improve the society of which he integrally belongs.
In fact, every individual, has an unquantifiable influence beyond their personal self through their every decision, action, or lack of thereof. Each of us, inextricably affected by others decisions, must recognize the degree of our impact on the larger society. Assuming one expects their personal rights to be respected, they must recognize and take responsibility for the totality of the consequences of their actions. Free trade in itself is not bad, but its potential for creating unintended, unethical consequences must be emphasized. Free trade provides the perfect example of the danger of Mill’s limited definition of causality. Without reapplying an ethical lens to free trade, the individual right of a wealthy, male politician to sign a free trade agreement will not be causally analyzed in relation to it’s impact on the individual right of a Mexican woman. Such a signing will result in the proliferation of maquilladoras , sometimes referred to as “sweatshops”. Maquilladoras employers frequently disrespect the situation of females by firing pregnant employees or refusing to hire them, because of this, women often make the personal choice to refuse taking a pregnancy test, so as to avoid being determined ineligible to work. Both represent personal choices, but the freedom of choice of the maquilladora worker unequally and unethically depend on the choices made by forces too distant to recognize or value her welfare. The geographical, political, and economic distance of free trade policy makers from the effects previously mentioned allows free trade to ignore its eventual human consequences.
A more broadly inclusive plan of ethical actions, such as that suggested by Bellah, which includes institutions, and all effected members, must be desired, pursued and continuously adjusted through an ethical lens, considering the complicated global impact of current free trade. As trade liberalization further reduces boundaries between economies we must recognize our increasing interconnectedness, and thus, verify that our policies really do benefit the welfare of society, rather than the individual. Furthermore, free trade will not reverse itself, nor will agreements feasibly be revoked. Free trade has potential, and Adam Smith founded his concepts, in part, on the economic possibilities free trade presented to the developing world. Thus, these concepts must be re-analyzed, not just in terms of GNP and financial flows, but in terms of the consequences on the people most disadvantaged by such decisions.
About the Author
Carolyn Davidson is a senior majoring in International Relations and minoring in Spanish. This summer, her piece on Sustainable Development received the runner-up prize in the Barcelona Forum 2004 Essay Contest. Carolyn enjoys traveling and rock climbing and hopes to pursue a career in or involved with Latin America after graduation.
Bellah,R., Madsen,R., Sullivan,W., Swidler,A., &Tipton,S. (1991).The good society. New York: Random House.
Mill,J.S. (1978). On liberty . Indianapolis: Hackett. (Original work published 1869)
Stanley, G., Economic arguments versus ideological ones. In Ian MacDonald (Ed.), Free trade: risks and rewards (pp. 166-168). Montreal: McGill University Press.
Todaro,M. P. (1999). Economic development. New York: Addison-Wesley.