Outsourcing and the World Trade Organization*BackgroundWorld Trade OrganizationOutsourcing ControversyBenefit of Free TradeCompensating LosersMarket Imperfections and the Desirability of Free TradeTaskAnalysisOutsourcing and the World Trade Organization* With the possible exception of the gay marriage debate, there is probably no more hotly argued issue during the U.S. presidential primaries than free trade. For years, protesters had made it very difficult for countries to hold meetings of the Word Trade Organization. Protestors complained that this international organization was contributing to world poverty and pollution. Events during the election year galvanized opinions about free trade across a broader cross-section of the populace. President Bush’s chief economic advisor lit a fire by making what he thought was an innocuous statement about outsourcing. (A firm is said to outsource if it retains others to provide services that the firm had previous performed itself.) Background The U.S. Constitution guarantees free trade among the 50 states of the union. However, free trade between the United States and other countries can only occur if the countries agree to it. International trade has become increasingly important for the U.S. economy. Today, a quarter of the U.S. gross domestic product comes from international trade, up from 10% in 1970—the largest such increase of any major developed country over this period. Moreover, U.S. trade is increasingly global: 37% is with Canada and Mexico, 23% with Europe, and 27% with Asia. The United States has free trade agreements (which eliminate tariffs and quotas—see Chapters 2 and 9) and liberalize rules on foreign investment to increase trade. The North American Free Trade Agreement with Canada and Mexico has been in effect for a decade. U.S. trade with these partners is $621 billion per year. The United States also has pacts with Singapore, Israel, Jordan, and Chile. Pending agreements that await a Congressional vote include the Central American Free Trade Agreement (with Nicaragua, El Salvador, Honduras, Costa Rica, and Guatemala) and a pact with Australia. The United States is currently engaged in talks on free trade with Morocco, Botswana, Lesotho, Namibia, South Africa, and Swaziland, and is considering talks with Bahrain and Thailand. World Trade Organization The year before the United Nations Charter was signed, over 700 delegates from 44 countries met to develop a new system of international trade for the post-World War II era. The Monetary and Financial (“Bretton Woods”) Conference attempted to reduce obstacles to international trade and harmonization national policies of member states. Periodically thereafter, increasingly more countries met to discuss trade issues. Eventually, these negotiations led to the formation of the World Trade Organization (WTO) on January 1, 1995. Its objective is to promote free trade among the 146 member countries. As part of this agreement, member countries are suppose to eliminate many domestic distortions, such as eliminating subsidies to domestic groups such as farmers. * © Jeffrey M. Perloff, 2004. All rights reserved.2 Both conservatives and liberals have objected to the WTO. Much of the objections by parties within the United States to the WTO concern this elimination of support to whomever the home country chooses. Many people complain because the WTO, a foreign body, is empowered to enforce global commerce rules with the imposition of economic sanctions on member countries (though a country can withdraw from the agreement). Mass demonstrations halted a WTO meeting in Seattle in 1999 (though were less successful in disrupting subsequent meetings). WTO protesters primarily raise two economic objections. First, they note that free trade leads to losers, such as poor farmers in developing countries who suffer when world agricultural prices fall due to international trade. Second, they argue that the WTO weakens environmental, health, and other protections. As part of the WTO agreement, countries are not supposed to establish domestic policies that unreasonably block trade, including food safety laws and environmental policies. A country must show that its food safety law is really intended to protect the health of the populace rather than merely to serve as a backdoor method of excluding imports. A very large percentages of all food trade (by one estimate, 92% in 1986), was affected by nontariff barriers prior to the WTO. For example in 1997, a WTO panel declared that the European Union's public health ban on imports of beef produced with artificial growth hormones violated international trade rules. An article in The Ecologist stated that 80% of U.S. environmental standards and legislation were threatened by the WTO. In 1996 in response to complaints raised by Venezuela and Brazil, the World Trade Organization ruled against one aspect of the U.S. Clean Air Act rules concerning mandatory gasoline cleanliness standard for conventional and reformulated gasoline. Venezuela and Brazil complained that the baseline used to set the emissions requirements unjustifiably discriminated against imported gasoline. The WTO concluded that these particular Environmental Protection Agency rules were inconsistent with U.S. obligations under its trade agreements. U.S. environmentalists also contend that maquiladoras, Mexican industrial parks near the U.S.-Mexican border, often release heavy metals, acids, solvents, and other industrial poisons into the air and water. Although the popular image is that Republican favor free trade and Democrats oppose it, the reality is less clear. As the textbook notes (p. 35), President Bill Clinton opposed limiting steel imports unlike Presidents Ronald Reagan (who also imposed voluntary export restraints, p. 437) and George W. Bush. During his 1996 re-election campaign, President Clinton said that there was no easy escape from global competition: Protectionism would only hurt American workers in the long run. He said that the answer to trade related problems was education and job training that would give American workers the skills to compete. On the other hand, 2004 Democratic presidential candidates Dick Gephart and John Edwards ran on protectionist platforms. According to Paul Krugman (economist and New York Times columnist), the U.S. presidents who, in the last 70 years, did the most to promote
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