By Jeffrey Tucker
Ludwig von Mises Institute
October 1996


One peculiar aspect of the 1993-95 trade debate was the
contradictory purposes--or so it seemed--of Nafta and Gatt. They
embrace different theories of how the U.S. should conduct trade
policy. The "bilateralistists" think that the U.S. should negotiate
trade with one country at a time. The "multilateralists" say that
leads to protectionist alliances; what we really need is one big
agreement with the world.

Nafta was a species of bilateralism: a deal first negotiated between
the U.S. and Canada and then extended southward. To be more
specific, Nafta was an instance of regional mercantilism. The U.S.
would be master of the North American continent, granting
preferential trade status ("regional content" laws) to any goods
produced in the signing countries, while penalizing goods from outside.

The treaty was as much about protection as trade. In the
imaginations of Nafta's Washington theorists, this would give "us"
(the U.S., Canada, and Mexico) a boost of market power over "them"
(Asia and Europe), which would allow "us" to compete and win in the
global competition for resources and markets. The point of Nafta was
to allow "us" (which really means the government and its most
closely connected banks and corporations) to throw "our" weight
around the rest of the world.

The Clinton administration and its Republican allies adopted this
rhetoric in the closing days of the debate. Even while denouncing
protectionists, they made an openly protectionist appeal that
presented the international trading arena as a battlefield, not a
setting for mutual economic advantage.

Indeed, the spirit and the letter of Nafta represented an egregious
violation of free trade. In real free trade, the government does not
establish "regional content" rules or browbeat foreign governments
into deals with approved U.S. corporations, for example. The
government's only role is to allow business and consumers to trade
with whom they choose.

The treaty imposed a restrictive legal superstructure on top of
already increasing trade flows between the three countries. It was
made worse by its overt attempt to "plan" the economies of Mexico
and Canada, determining continent-wide environmental and labor laws,
funneling foreign aid to Mexico, and implicitly guaranteeing to prop
up the peso through monetary manipulation.

As bad as it was for the consumer, the deal made sense from the
government's point of view. Nobody said mercantilism isn't good for
the king, even if it impoverishes his subjects. As Commerce
Secretary Mickey Kantor, who negotiated Nafta, said at a joint
U.S.-Mexico conference, "each of us knows that our nation's
prosperity rests on the fortunes of the other."

Thanks to Nafta--which linked the banking and industrial sectors of
the two countries--they really do. When the peso collapsed, for
example, the administration conspired with Congressional leaders in
a $40 billion bailout the Mexican banking system (and the New York
holders of Mexican government bonds).

Mexico is now paying the money back "on time"--by floating more
bonds purchased primarily by the same New York investment bankers
who were bailed out two years ago. Mexico's "credit rating" thrives,
thanks to payments made by you and me. Nafta benefitted
well-connected industries in both countries as well. They have used
Nafta's protectionist machinery as a weapon against competition from
abroad and padded their pockets at consumer expense.

The creation of Nafta was driven by the same goal that led to the
creation of the European Community--and every other trade bloc in
world history. Protectionism on a regional scale is as popular among
politicians and the special interests they represent as national protection.

But Nafta wasn't the only trade treaty backed by the U.S. between
1992-1994. There was also Gatt, and the World Trade Organization it
created to monitor and manage world trade. This treaty embodied
textbook "multilateralism." Its purpose (as advertised) was to
prevent precisely the protectionist activity that Nafta seemed
designed to encourage.

When confronted with the contradiction, trade officials make an
analogy to a wheel (Gatt) and its spokes (regions). But this is
merely another way of saying that the U.S. would have never
negotiated Gatt without first having entered into Nafta. To use the
wartime analogies of protectionists, you should have an expectation
of winning before entering battle.

How does the Clinton administration's support of one square with the
equally intense support of the other? Put another way, how can a
trade strategy be both regionalist and multilateralist at the same
time? This is the mystery that has baffled many economists and
political observers then and now.

The answer lies in the U.S.'s original pick to head Gatt's new World
Trade Organization: Roberto Salinas, then president of Mexico.
Working through his good offices, U.S. trade authorities hoped that
the Nafta trading bloc could accomplish two purposes at once:
protect its own sphere of influence from economic competition, and
throw its weight around the world by dominating the trade
adjudication mechanisms of the WTO.

It's sweet justice that it didn't turn out that way. After a
two-year inflationary run up, the peso collapsed and the Mexican
economy fell into a bottomless pit--only two months after the Gatt
treaty had been ratified by the Senate. The once-exalted
ex-President Salinas and his family were blamed for the catastrophe,
and for murders and drug dealing besides. He had the good sense to
skip town before his fortunes sunk as low as the peso itself.

Officials at the European Community suddenly had the political upper
hand, and installed trade official Renato Ruggiero of Italy as head
of the WTO. Dismayed, U.S. officials began subtly attempting to
discredit the new organization and what they had praised as its
authority over international trade.

In a conspicuous display of sour grapes, the Clinton administration
began to threaten a series of trade wars: against China, Singapore,
Japan, and, more recently, Iran and Iraq. In some cases, U.S.
officials threatened tariffs as high as 100 percent, in open attack
on the free trade doctrine the administration used as cover to pass
the treaties. The theory of the government is that if you can't rule it, discredit it.

Nobody should be surprised that the government's rhetoric on free
trade had no connection to its global designs. No honest free
traders backed the WTO, but plenty of phonies did. Keynesian trade
theorist Susan Ariel Aaronson--author of a new political history of
the WTO--finds it especially amusing that supposed free traders
"found themselves defending a Gatt/WTO that included a Committee on
Trade and the Environment" and a call for "a working party on labor
standards within the WTO."

This remarkable feat was made possible, says Professor Aaronson,
because articles by conservative judge Robert Bork and economist Joe
Cobb--with their exuberant praise of the treaty--gave it an
ideological "cover." Cobb even dismissed the prospect of a global
minimum wage on grounds that it would be too low to seriously affect U.S. industry.

For clues on how extreme the WTO's labor standards might eventually
become, no need to look further than the charter of the
International Labor Organization. It asserts more economic rights
than the old Soviet constitution, going well beyond labor to include
socialized medicine, guaranteed incomes, free recreational
facilities, and more. The ILO remains what the Chamber of Commerce
said it was in 1956: "a propaganda forum for statism and socialism."

The WTO may never become a full-blown vehicle for imposing the ILO
charter on the world economy, but plenty of powerful people would
like it to. "We must be more honest about the implications" of the
WTO, writes Professor Aaronson in the final flourish of Trade and
the American Dream. "To tame global problems," the WTO may "become a
true superstate" and "force Americans to rethink how we are governed."

As this perverse hope underscores, there's an unbridgeable gap
between authentic free trade and the global superstate of the
socialist pipe dream. But the dissembling of government officials,
Keynesian economists, and phony free traders has done much to blur
the lines. The job of honest free traders, then, is to clarify the
terms of debate, and resist every trade treaty and trade
interference, no matter how it is advertised.

As Mises said, free trade means nothing more than laissez-faire
economics applied across borders. The role of government is entirely
negative: do not stop goods from coming across borders; do not
prevent them from leaving. Neither regionalism nor multilateralism
is consistent with this ideal. Only a "passive unilateralism,"
meaning active free enterprise, avoids the twin dangers of
compromising sovereignty and illicitly projecting power on the rest
of the world.

Jeffrey Tucker edits The Free Market