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New OECD Study Ignores Evidence That Trade and Investment Liberalization Policies Have Hurt Workers and the Environment

Mark Weisbrot, Robert Naiman, and Neil Watkins(1)

The Organization for Economic Cooperation and Development [OECD] has released a report, "Open Markets Matter," which aims to show the benefits of trade and investment liberalization. Traditionally, OECD publications -- at least, on issues not concerning the impact of trade and investment liberalization policies -- have been viewed as a reliable source of information. Unfortunately, the current study sharply deviates from this history. Its conclusion -- that societies have gained from trade and investment liberalization -- was determined in advance,(2) and significant evidence to the contrary was completely ignored, as we document below. Remarkably, the OECD study ignores the consensus which has emerged in the economics profession that trade and investment liberalization has contributed significantly to increasing wage inequality and has negatively impacted low-wage and low-skill workers. This consensus is supported by such prominent and respected pro-globalization institutions as the Institute for International Economics. Moreover, the OECD study ignores the well-publicized impact of trade liberalization agreements such as the GATT/WTO in undermining national environmental regulations, and the corresponding threat which even more far-reaching agreements such as the proposed investment-liberalizing Multilateral Agreement on Investment [MAI] can be expected to pose to environmental regulation in the future.

"Market Openness, Earnings, and Employment"

The OECD study concedes that increased trade and investment liberalization has the potential for a "modest" negative impact on employment and wages. The study argues, however, that technological change, changes in the organizational structure of firms, and business cycle downturns have a much more profound negative effect on employment and wages than do liberalized trade and investment.

However, even if we were to accept the argument that other factors were having a greater impact in terms of causing job loss, declining real wages or increases in inequality, this would be no reason to dismiss the impact of increased trade and investment liberalization. What is principally at issue is whether trade and investment liberalization agreements such as NAFTA and the MAI, or institutions such as the WTO or the IMF are making things better or worse for the majority of people. Moreover, while it is not obvious what public policies should be adopted to address the impact of technological change or the business cycle on employment and wages, in the case of trade and investment liberalization, it is quite obvious what public policy choices could be made. Countries and citizen's groups can oppose the proposed MAI. Countries and citizen's groups can oppose attempts by the IMF to increase its power, whether by amending its charter or by obtaining more money from member governments. Certainly these policy choices might not eliminate all the negative effects of trade and investment liberalization. However, as a matter of simple logic if trade and investment liberalization is having these effects then it would make sense to halt policies designed to promote trade and investment liberalization and consider reversing them. Indeed, prominent economists have begun to question the wisdom of further policies to promote headlong globalization at this time. For example, Nobel prize-winning economist Robert Solow has suggested that we should slow down the process of globalization "until we can be more vigilant in compensating the losers."(3)

Moreover, the claim that business cycle downturns leads to lost jobs ignores the fact that U.S. corporations lay off thousands of workers and relocate manufacturing jobs to countries with lower wages even at the top of the business cycle, and that workers laid off during downturns are not recovering their position at the next upturn. After 7 years of economic expansion in the United States, the majority of workers have not regained the real wages they had before the 1990 recession. Nor have they recovered from the overall decline in real wages since 1973. Real average hourly earnings(4) in the United States fell from $12.72 an hour in 1973 to $11.46 an hour in 1995.(5) After two more years of economic expansion, hourly wages had only risen to $11.64, still 8.5% below their 1973 level and 1.9% below their 1989 level.(6) Trade and investment liberalization have contributed to the loss of living wage jobs in the United States.

Throughout the study, the OECD repeats the claim that the negative effects of trade and investment liberalization on employment and wages are modest. The OECD concedes that so-called low-skilled workers stand to lose the most. Low-skilled workers are typically defined by economists as those without a college education. In the United States, for example, this includes about 70% of the labor force. Increasing rather than decreasing the wages of low-skill workers should be a central concern of public policy, particularly at a time when governments are making a concerted effort to reduce the social safety net for these employees.

Citing an IMF staff report, the OECD claims that "Studies using various economic models suggest that increased trade with developing countries accounts for only about 10 to 20 per cent of the changes observed in wages and income distribution in the advanced economies"(7). This is surely a deliberately misleading statement, since, in the study cited by the OECD in the preceding footnote, prominent international economist William Cline of the Institute of International Economics estimates that 39% of the increase in inequality over the last 20 years has resulted from trade.(8) And this is only from trade; it does not measure the impact of increased capital mobility.

Wages have also been held down by the increased bargaining power of employers who can easily move production to any country with lower labor costs. In a study commissioned by the labor secretariat of NAFTA, Kate Bronfenbrenner surveyed firms who faced union organizing drives since the agreement was passed. She found that the majority of them threatened to shut down operations if the union won. And 15% of the firms actually did close all or part of a plant when they had to bargain with a union-- which is three times the rate that existed before NAFTA.(9) This accords with a Wall Street Journal survey prior to NAFTA in which executives of major US corporations were polled as to what they would do if NAFTA were to pass. Some 40% said it was likely that they would move at least some production to Mexico, and 24% said they would use the threat of moving as a bargaining chip with which to keep US wages.(10)

The report also assumes that the arguments for free trade, based on the theory of comparative advantage, apply to liberalization of capital movements as well. But some of the most prominent international economists in the world, for example Columbia University's Jagdish Bhagwati, have argued very compellingly against this notion. In fact, the recent Asian financial crisis has opened up a very serious debate within the economics profession, and even within very pro-globalization institutions such as the IMF and the World Bank, on the need for capital controls. It is universally acknowledged by economists that the sharp rise in short-term lending over the last few years was a major cause, if not the major cause of the crisis.

Moreover, the Economic Policy Institute has found that trade has played a particularly significant role in contributing to job loss in the U.S. manufacturing sector. An EPI study found that trade accounted for 83% of the total 2.7 million job decline in manufacturing that occurred between 1979 and 1994.(11)

Of course it is true that the overall level of employment is determined by the rate of growth of aggregate demand, and therefore primarily by monetary policy. But the gross job loss in manufacturing due to globalization still causes a great deal of hardship in particular sectors and localities. Those who lose manufacturing jobs do not, on average, find jobs that pay as well. Furthermore, manufacturing wages are higher than in the rest of the economy, so the loss of these jobs drives down wages generally.

The authors claim that "careful empirical studies show that increased capital mobility, including the 'outsourcing' of production to low-wage countries...exert only modest effects on OECD labor markets".(12) The sole "empirical study" referenced is the 1995 World Development Report, published by the World Bank. The section on capital mobility and labor in this report offers a similar analysis of the phenomenon-- but, unfortunately, no "careful empirical study" on the links between capital mobility and labor. And certainly no mention of the destructive potential of unrestricted capital flows on economies and workers ­ the effects on workers which have now been seen in Thailand and elsewhere in Asia.

The OECD study claims that since less than one-third of the 155,000 workers who filed claims with the Department of Labor to indicate that they had lost jobs due to NAFTA had actually drawn benefits, "up to two-thirds of NAFTA-certified job losses were quickly reabsorbed by a buoyant domestic labor market."

This is a highly misleading claim. First, it assumes that NAFTA-TAA certifications capture all of the job loss due to NAFTA in the United States, and then assumes that workers who did not actually draw benefits failed to do because they quickly found other jobs, and so were essentially unharmed.

On the first point, even pro-NAFTA analysts in the United States admit that NAFTA-TAA undercounts job losses due to NAFTA. For example, Raúl Hinojosa Ojeda, in his study of the labor impacts of NAFTA, argues that NAFTA-TAA undercounts job loss among in smaller firms and non-unionized firms and among workers who lose their jobs due to imports.(13)

A September 1997 EPI study documented a much higher net job loss and wage decline as a result of NAFTA; it found a net loss of 394,835 jobs due to NAFTA. In other words, NAFTA caused the loss of some 400,000 more jobs than it created, a far higher figure than the absolute loss of 150,000 jobs captured by NAFTA TAA.(14)

Moreover, it is likely that even workers who found other jobs suffered significant costs due to their job loss, especially in the areas of wages and benefits. A 1997 EPI study showed that jobs in sectors of the economy where imports are growing pay better than both the average for the economy overall and the average for sectors where exports are growing.(15) According to the Department of Labor, the occupations projected to grow the most in the next decade which do not require a college degree include cashiers, retail salespersons, home health aides, teacher aides, nursing aides and orderlies, and receptionists and information clerks -- hardly a replacement for high-paying manufacturing jobs.(16)

The OECD study concedes that "distribution matters," that is, it matters whether the gains or losses from trade liberalization accrue to those in society who already have plenty of resources or to those who are barely surviving. However, the OECD's preferred approaches to deal with "rising public concerns ... over high and persistent unemployment, widening earnings and income disparities" are sharply restricted.

For example, in its section on labour standards, the OECD study claims that an "international consensus" is emerging that discussions of "core labour standards" does not belong in the "core" institutions of trade and investment liberalization such as the WTO the IMF, but should instead be dealt with in forums such as the ILO, and that such standards should not be enforced by trade sanctions.

The key issue here is that, unlike the IMF and the WTO, the ILO has no enforcement power. That is why there is "consensus" among the powerful actors in the global economy that labor standards should not be in trade agreements. The most powerful actors in the global economy -- transnational corporations and the governments that support them -- are opposed to enforceable labor standards.

"Trade, Investment and Environmental Integrity"

The OECD study argues that trade and investment can have a positive impact on the environment, provided that effective and efficient environmental policies are in place. However, this ignores the actual track record. Many environmental laws and regulations have been struck down by trade agreements; not a single law or environmental regulation has been put in place by such agreements.

For example, in May 1997 the WTO ruled that a European Union ban on hormone-treated beef was illegal under the Uruguay round of the GATT.(17) The WTO acknowledged that the EU restriction was not discriminatory, and applied equally to European and non-European producers. Nonetheless, the WTO ruled it illegal on the grounds that the EU policy was not "justified by science."(18) Thus, the WTO substituted its judgement for that of the elected governments of Europe.

Similarly, in March 1998 the WTO ruled against the turtle-shrimp provision of the U.S. Endangered Species Act, which requires all nations which export shrimp to the United States to use "turtle excluder devices."(19)

The repeated claims of the OECD study that investment in developing countries will eventually encourage better environmental policies ignores the fact that much of the foreign direct investment [FDI] to developing countries is in environmentally sensitive sectors, especially energy production and use; infrastructure; mining; oil and gas exploration; chemicals; tourism; agriculture; forestry and fishing. As the World Wildlife Fund documents, "Past experience has shown that the economic benefits of foreign investment have often been outweighed by lack of national reinvestment of profits from resource use, ...increased air and water pollution and related environmental problems caused by associated industrial development, migration, and urbanisation."(20)

Recent actions of the OECD through its development and promotion of the MAI offer insight into the potential implications of the trade and investment liberalization agenda for the environment. Numerous provisions of the MAI are greatly feared by environmentalists -- from the investor-to-state dispute mechanism to the agreement's expropriation and general treatment clauses. The dispute resolution mechanism could be used by investors to challenge environmental regulations in an international court controlled by corporate interests. Indeed, a similar provision in NAFTA has been used by the Ethyl Corporation to sue the Canadian government for banning a dangerous fuel additive and by the Metalclad Corporation to sue the Mexican government for creating an ecological zone in an area containing a Metalclad waste disposal facility.(21) Environmentalists point out that the MAI's expropriation and general treatment clauses could enable powerful multinational investors to further their "takings" agenda at the expense of the public's right to a clean and safe environment.(22)

"Market Openness and National Sovereignty"

The OECD study claims that liberalization strategies can "enhance sovereignty and policy flexibility," while providing no evidence for this claim.

In contrast, consider how the MAI would be detrimental to American sovereignty. First, in order to comply with the MAI, the U.S. would have to forgo laws and policies in a number of areas -- including environmental protection, local economic development, and human rights. Policies that would be threatened by the MAI include laws which explicitly favor local, state, or national investors over foreigners; laws that require a certain number of employees to be recruited or hired because they are residents of the area or laws that favor minorities in employment; "performance requirements" such as environmental regulations like tax breaks for companies which use a certain percentage of recycled materials, among others. The OECD's claim that sovereignty will be "enhanced" under trade and investment liberalization does not take into account the myriad potential state, local, and municipal impacts of the centerpiece of the investment liberalization agenda -- the MAI.

There is even greater concern that foreign investors could use the investor-to-state dispute resolution mechanism embodied in the MAI to sue supposedly sovereign governments for damages. The beef hormone case is an example of the WTO -- unelected and closed to public scrutiny-- infringing upon the sovereign rights of European governments to legislate in the public interest on food safety issues. The dispute resolution mechanism embodied in the MAI would allow for even broader challenges and raise even more concerns about national sovereignty in the face of ever-expansive trade and investment liberalization agreements.

Not only will foreign investors be allowed to sue sovereign governments, but they will be able to issue threats to do so, which may have the effect of discouraging regulation in the public interest, especially at the state, local, and municipal levels. This will elevate "SLAPPs" -- Strategic Lawsuits Against Public Participation -- to a new, international, level.

Perhaps most troubling in the OECD's presentation of the sovereignty is its summary conclusion about transparency and openness of the multilateral institutions working to implement the trade and investment liberalization agenda at hand. For example, in its section describing the MAI, the study brags that "there has been extensive dialogue with non-Member countries, with business and labour, and with non-governmental organisations" on the agreement's implications(23) . This description is disturbing and perhaps telling. In fact, consultation with NGOs did not begin until the text was nearly 80% complete. The draft text was kept secret until after it was leaked by NGOs and posted on the Public Citizen web page. Non-OECD countries are not allowed to negotiate aspects of an agreement to which the OECD hopes they will accede; there will be enormous pressure on these countries to do so.

Conclusion

Many critics of the process of globalization which has taken place in recent years have expressed the hope that globalization can be reformed to incorporate concerns about labor standards and the environment. In this regard, the fact that the OECD would produce such a one-sided study, dismissing real concerns about the impact of trade and investment liberalization on wages, employment, living standards, and the environment, is not very encouraging. The complete disregard of a large body of empirical and economic research which contradicts their predetermined conclusion is also disturbing. Surely the citizens of the OECD's member countries have a right to expect a more balanced presentation of these critical issues.

For more information, please contact:

Robert Naiman, Preamble, 202-265-3263,
naimanr@rtk.net

  1. Mark Weisbrot is Research Director, and Robert Naiman and Neil Watkins are Research Associates at the Preamble Center for Public Policy.
  2. "When they met last May, Ministers of our Member governments asked the OECD Secretariat to prepare a study of the benefits of trade and investment liberalization. We have done so, and this book is the outcome of our work." From the preface to the present study, p. 3.
  3. Cited in Pearlstine, Steven, "On Trade, U.S. Retreating Into Globalphobia," Washington Post, December 8, 1997, p. A1.
  4. Real average hourly earnings for production workers and non-supervisory employees. This group constitutes about 80% of the workforce.
  5. In 1995 dollars. Mishel, Lawrence, Jared Bernstein, and John Schmidt, The State of Working America 1996-1997, Economic Policy Institute, 1997.
  6. Ibid. In 1995 dollars. 1997 figure computed from the BLS (http://www.bls.gov) hourly wage series and consumer price index.
  7. "Open Markets Matter," p. 67.
  8. Cline, William R. Trade and Income Distribution. Washington, D.C.: Institute for International Economics, November 1997, p. 234.
  9. Bronfenbrenner, Kate, "The Effects of Plant Closing or the Threat of Plant Closing on the Right of Workers to Organize," Cornell University, September 1996.
  10. Wall Street Journal, September 24, 1992.
  11. Scott, Robert E., Thea Lee, and John Schmitt. "Trading Away Good Jobs: An Examination of Employment and Wages in the U.S., 1979-1994." Washington: Economic Policy Institute, October 1997.
  12. "Open Markets Matter," p. 74.
  13. "North American Integration Three Years After NAFTA: A Framework for Tracking, Modeling and Internet Accessing the National and Regional Labor Market Impacts," Raúl Hinojosa Ojeda, The North American Integration and Development (NAID) Center at UCLA, December 1996. Hinojosa was a key advocate of NAFTA in 1993. This paper was funded by the U.S. Departments of Labor and Commerce.
  14. Rothstein, Jesse and Robert E. Scott. "NAFTA and the States: Job Destruction is Widespread." EPI Issue Brief #119. Washington, EPI, September 1997.
  15. Scott, Robert E., Thea Lee, and John Schmitt. "Trading Away Good Jobs: An Examination of Employment and Wages in the U.S., 1979-1994." Washington: Economic Policy Institute, October 1997.
  16. "Employment Projections: The 10 occupations with the largest job growth, 1996-2006," Bureau of Labor Statistics, http://www.bls.gov/news.release/ecopro.table7.htm.
  17. "Europe's Banning of Treated Beef is Ruled Illegal," New York Times, May 9,1997.
  18. Ibid.
  19. "Environmentalists Blast International Trade Panel Decision," News Release, Earth Island Institute, March 16, 1998. For more examples of WTO decisions against environmental laws and regulations, see "The World Trade Organization at 39 Months," Public Citizen's Global Trade Watch, March 1998.
  20. Mabey, Nick. "WWF Response to the Environmental Component of the UK Department for International Development Commissioned Paper." WWF-UK, April 1998.
  21. Sforza, Michelle, "The MAI and the Environment," Preamble Briefing Paper, Preamble Center for Public Policy, Washington DC, February 1998.
  22. Ibid.
  23. "Open Markets Matter," p. 121.

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