Please leave this field empty
Institute for Policy Studies

Report Info

  • Released October 4, 2007
Foreign Policy In Focus » Report

Globalization: What Is To Be Done?

The race for the presidency has crystallized the debate about what to do about "globalization," a short-hand way of describing the increasing tendency of firms to locate production abroad, often for the purpose of exporting goods back to the United States rather than producing for the local market.

The race for the presidency has crystallized the debate about what to do about "globalization," a short-hand way of describing the increasing tendency of firms to locate production abroad, often for the purpose of exporting goods back to the United States rather than producing for the local market. Firms not only have moved production abroad but also in collective bargaining negotiations often use the threat of moving as leverage to obtain concessions from workers. While not a complete explanation for the relative stagnation in industrial wages and growing income inequality in the United States (and elsewhere in the world), it is perhaps the most visible, easily understandable, and therefore the most inflammable aspect of globalization for American workers.

The political debate on globalization has focused primarily on "free trade" agreements that have given corporations additional incentives to move, or at least threaten to move jobs abroad. The leading Republican candidates all support an expansion of these policies. The Democrats each have mixed voting records on free trade—with two exceptions. Only Rep. Dennis Kucinich has consistently voted "no," while former Congressman Bill Richardson was a steadfast supporter of such deals during his time on Capitol Hill. In 1993, Richardson even stepped forward to whip the vote in favor of the North American Free Trade Agreement (NAFTA). Both Senators Hillary Clinton and Barack Obama have voted in favor of some bilateral free trade deals.

On the campaign trail, however, all of the Democratic contenders are promising to ensure that new trade pacts will have stronger labor and environmental protections. Most of them also propose cutting subsidies to companies that move jobs overseas, eliminating tax loopholes that encourage offshoring, and increasing training and research to keep the U.S. economy globally competitive.

While there has clearly been a positive shift in the debate, the candidates' proposals are still generally thin on substance. Aside from Edwards and Kucinich, none of the Democratic candidates have committed to making changes in existing trade agreements, such as the World Trade Organization (WTO) and NAFTA. Moreover, none of them have challenged the international financial institutions and other investment policies that also undermine workers at home and abroad. The candidates should learn from the lessons of the past 15 years and offer a bolder and broader agenda on globalization.

NAFTA: The Model for Undermining Worker Rights

NAFTA is a three-party agreement among the United States, Canada, and Mexico. When George H. W. Bush originally proposed the idea, Mexican President Carlos Salinas de Gortari unexpectedly reversed traditional Mexican opposition to a free trade agreement with the United States. Mexico already had preferential cross border trade arrangements with the United States, but Salinas saw NAFTA as a way to attract much-needed foreign direct investment (FDI). That need was accentuated by Mexico's adoption of the free market reforms advocated by the World Bank and IMF which called for a diminished role for the state in economic policy and investment. FDI was supposed to substitute for the state as a stimulus to investment and job creation, but FDI had not been forthcoming in the amounts hoped for by the Mexicans.

As finally negotiated, NAFTA was as much about increasing FDI as trade. The investment chapter barred the signatory governments from adopting policies which discouraged FDI, such as maximizing local content in manufacturing or restrictions on the percentage of ownership of local firms by foreign nationals, conditions which had been a traditional part of Mexican policy with respect to FDI. Those policies had historically been determined by administrative actions, which tended to change with a change in administration, but were now barred by international agreement.

The investment chapter also created an unprecedented expansive definition of expropriation. Bill Greider, in an article which appeared in The Nation magazine, convincingly demonstrated that this was no accident; it represented the ambitions of American conservatives to enshrine in American law, through an international agreement, a definition of property rights they had not been able to achieve in the domestic American political context. Drafted by attorneys in the office of Republican U.S. Trade Representative Carla Hills, it was uncritically accepted by the Clinton administration.

The chapter also created a dispute settlement regime, separate and apart from local courts and national laws governing expropriation of property; it gave investors a direct right of action against an offending government. In all previous trade agreements, disputes were settled among the parties, i.e., the signatory governments. A private party had to convince its own government of the merits of its claim. Under NAFTA, however, the corporation alleging a violation of the agreement by one of the parties to the agreement could proceed directly under the dispute settlement provisions against that government. Hence, NAFTA should more accurately be renamed the North American Free Trade and Investment Agreement.

The agreement, however, contained no provisions which assured the rights of workers. The disparity in NAFTA between the protection of foreign investor rights and the absence of protection of worker rights catapulted the worker rights issue into the 1992 presidential campaign. First as presidential candidate and then as president, Bill Clinton sought to allay the concern of American unions that production facilities and jobs would gravitate to low-wage Mexico from the United States. He did not propose to renegotiate NAFTA but rather to negotiate a supplemental agreement to NAFTA concerning worker rights, which became the North American Agreement on Labor Cooperation (NAALC).

There was no legal bridge between the NAALC and NAFTA. The dispute settlement provisions of NAFTA, with the possibility of trade sanctions or financial penalties, were inapplicable to the NAALC. For violation of the key rights of freedom of association and collective bargaining, there were no sanctions in the NAALC; only "consultation" between the parties. (There were possible penalties for violation of child labor and health and safety provisions but the procedures were so complicated that cases invoking these provisions of the NAALC have been rare).

The Clinton administration, with the support of virtually the entire Republican delegation in the Congress and a minority of free trade Democrats, won congressional approval of the NAFTA in 1993. (Technically, as an Executive Agreement, Congress did not approve NAFTA; it approved a package of amendments of domestic law to avoid potential conflict with NAFTA). One cannot overstate organized labor's bitterness and sense of betrayal over the Clinton administration's refusal to include effective labor enforcement in the deal.

Evolution of the Trade-Labor Debate

Disappointed with NAFTA, the great majority of Democrats, particularly in the House of Representatives, committed to opposing further trade agreements that did not incorporate core worker rights in the main body of the agreement, subject to the same dispute settlement provisions as commercial or investment disputes. "Core worker rights" is a term of art that was adopted by the International Labor Organization (ILO) in 1998, to highlight the most essential worker rights: freedom of association, the right to bargain collectively, no forced labor or discrimination in the workplace, and limitations on the use of child labor. It represents an international, not a U.S. standard; it was approved by all of the member states of the ILO, including the United States, despite the fact that the United States has not approved the individual ILO conventions on freedom of association and collective bargaining.

Republicans and many academic trade economists argued that including labor rights in trade agreements would be a disguised form of protectionism. Disagreement over this issue contributed to an impasse in 1997 over re-authorization of fast track legislation, which allows the president to negotiate international trade agreements that are voted up or down by Congress, without amendments and limited time for debate.

Another sign of change is that one of the last trade agreements negotiated by the Clinton administration—the U.S.-Jordan agreement—incorporated worker rights provisions in the main body of the agreement subject to the same dispute settlement provisions as commercial disputes. The Bush administration backtracked in subsequent trade agreements but did accept changes in fast track legislation (renamed Trade Promotion Authority, TPA) to include negotiating instructions to the Trade Representative elevating worker rights provisions to the same plane of importance as commercial disputes.

The TPA included the NAALC standard requiring countries to enforce their own laws. The problem in Mexico was enforcement of the law and constitution which nominally assure worker rights and in many respects were far more generous to workers than anything in U.S. labor laws; for example, guaranteed paid maternity leave and compulsory profit sharing with workers. But that standard left a gap where the labor code was weak, as in Chile. Developed under the dictatorship of General Augusto Pinochet, Chilean law denied large segments of the Chilean work force the rights of freedom of association and collective bargaining. The post-Pinochet democratically elected governments were unable, over the objections of the Chilean business community, to obtain parliamentary modification of these provisions. Only when the Clinton administration, as a precondition to a free trade agreement with Chile, insisted upon modification of the labor code to restore those rights, were such changes enacted into law by the Chilean legislature.

The recently negotiated free trade agreement between the United States and Peru presented the same problem. The Fujimori government early in the decade of the 90s adopted a labor code modeled on the Pinochet precedent. Changes were agreed to in 2007 only after the U.S. Congress, now controlled by Democrats, insisted upon modifications in the Peruvian labor code to eliminate the most egregious provisions denying core worker rights.

Organized labor and the Democrats in the Congress have achieved a near miracle: they have reversed the almost universally held bias in the trade establishment in Washington and American academia against including core worker rights in trade and investment agreements; politically, it is now accepted that no such agreements can be enacted without core worker rights. Countries whose labor laws do not conform to the standard of assuring core worker rights must change such laws if they hope to have an agreement with the United States.

However, core worker rights are not a panacea. In many countries there will continue to be downward pressure on wages independent of government repression of free trade unions. The continued migration from desolate underdeveloped rural areas ensures a steady stream of migrants willing to work for subsistence wages. Even so, in countries like Brazil, where migration continues from a near feudal rural structure in parts of the northeast of the country, independent trade unions flourish and have an important impact upon government policies. Indeed, the president of that country comes out of an urban trade union. A commitment to core worker rights by governments would eliminate one of the most egregious abuses in the international economic system: the temptation of countries to attract FDI by denying workers the most basic worker rights of freedom of association and the right to bargain collectively.

The WTO and China

While there is a near political consensus that future trade deals must include worker rights, the two Democratic candidates leading in the polls, Clinton and Obama, have not committed to pushing for changes in NAFTA or the WTO. Currently, the WTO prohibits prison labor but there are no other provisions dealing with worker rights. In WTO negotiations, the WTO Board of Governors has refused to authorize a working group to discuss incorporating core worker rights into future trade agreements. The governments of China, Brazil, and India, among others, remain adamantly opposed to beginning such discussions, allegedly because they fear that core worker rights is a code phrase for protectionism.

Paradoxically, internal events in countries which have been among the worst abusers of worker rights, notably, China may be forcing changes which enhance worker rights. No country has more enthusiastically embraced the export-led economic growth model than Communist China. Negotiations with the United States preliminary to China becoming a member of the WTO concerned as much the terms on which subsidiaries of American based multinational corporations would be enabled to operate in China as more traditional cross-border trade issues.

China has recently become concerned about the widening income gap and threats of social unrest that have accompanied the economic model. It would be naive to believe that China will permit a Solidarity-like trade union movement to emerge that could provide a focus for political change, as in Cold War-era Poland. What is significant is that the Chinese, of their own volition, without foreign pressure, concluded that growing income inequality constituted a threat to political and social stability. They determined to do something about it, and the something they decided upon, among other measures, was strengthening the role of unions in collective bargaining negotiations with employers.

China, however, had to overcome a powerful lobbying effort against the reforms by foreign investors, led by the U.S. Chamber of Commerce in China. The New York Times reports that "China's legislature passed a sweeping new labor law that strengthens protections for workers across its booming economy, rejecting the pleas from foreign investors who argued that the measure would reduce China's appeal as a low-wage, business-friendly industrial base." The Bush administration failed to speak out against this corporate lobbying. Nor were there any congressional hearings, editorials in major media, or television reporting.

The Bush administration has also rejected, without explanation, two AFL - CIO petitions to the Trade Representative under section 3.01 of the Omnibus Trade Act of 1974, as amended, alleging China's repressive labor practices constitute "unreasonable trade practices." There is an initial jurisdictional question whether by adhering to the WTO, the United States accepted the WTO dispute settlement processes as an exclusive forum and is, consequently, barred from invoking 3.01 of the Omnibus Trade Act. There is a further issue of whether such labor practices violate WTO rules by providing unfair subsidies to Chinese industries, but that issue has not yet been tested.

One way or another, the issue of China's labor practices, even with the new legislation, must be addressed. We need a multidimensional approach to China. We should be demonstrating our support for constructive reform and challenging the narrow interests of American firms with investments in China. Public support for Chinese labor reform, however modest, would demonstrate that U.S. policy is not merely a captive of the corporations.

Clearing Away the Debris of Cold War Policies

Post World War II U.S. international economic policy initially was motivated by the belief that it was the collapse of the liberal world economic order that led to the Great Depression, the rise of fascism, and, ultimately, the war itself. With the advent of the Cold War, the American attitude toward the construction of a more open, liberal economic order gave way to the imperative of accelerating the economic recovery of Western Europe and integrating Germany into a multilateral framework that would reassure wartime allies against a dominating German economic resurgence. American authorities accepted discrimination by the Europeans against American goods through the creation of the European Coal and Steel Community, and, subsequently, the European Economic Community.

A major condition for American support for the Rome Treaty creating the EEC was a European guarantee of "national treatment" for the European subsidiaries of American multinational corporations—that is, an assurance that an American-owned subsidiary would be treated equally with national firms of European countries. Robert Gilpin, the distinguished Princeton political scientist, perhaps the leading authority on American post-war foreign policy with respect to the expansion of the multinational corporation, writes that "[t]he importance of this policy ... for the European expansion of American corporations cannot be overemphasized." Implicit in the insistence by the United States upon national treatment for U.S. corporate investments was the conviction that in any dispute with governments, multinational corporate investments would be accorded fair treatment in the courts of the individual European countries.

The expropriation in Chile in 1971 during the Socialist government of Salvador Allende Gossens of the subsidiaries of American-owned copper companies and the ITT Corporation, led to a restatement by President Richard Nixon of U.S. policy with respect to the expropriation abroad of the property of American companies. That expropriation had been approved by the Chilean legislature by a unanimous vote in accordance with the Chilean Constitution. The amount of compensation, as determined by the Comptroller General, an independent body under Chilean law, in accordance with Chilean law, had been reduced by a calculation of alleged "excess profits" earned by the companies.

Nixon issued a statement on January 19, 1972 which declared that the United States expected compensation to be "prompt, adequate, and effective." Reducing the compensation by alleged "excess profits" did not meet that standard. The international rule enunciated by Nixon superseded Chilean national law. There were now two standards for expropriated property in Chile : Chilean law which governed Chilean companies and an international standard that applied to American FDI. The principle of "national treatment" had been breached. National legal systems outside of the EEC could not be relied upon for fair treatment of U.S. company investments. The United States would insist on an international standard to govern compensation for such expropriations.

NAFTA carried the logic of that breach to its ultimate conclusion. It allows private foreign investors to sue governments directly through an international tribunal made up of trade experts for compensation over investment disputes. The governing law is the NAFTA and applicable principles of international law. The limited protection negotiated in Europe by the American government, intended to prevent discrimination against United States FDI, has evolved into a far more ambitious effort to create a separate legal regime that would assure preferential treatment for FDI in dispute settlement controversies. That effort has borne fruit not only in the NAFTA, but as well in subsequent regional and bilateral trade and investment agreements.

That same preference for FDI is reflected in the tax code. Under laws adopted in the 1950s, the earnings of foreign subsidiaries of American corporations are subject to tax only when they are distributed back to the United States, which may be never. If a company invests abroad, it, in effect, has a tax-free loan from the U.S. Treasury so long as it invests that overseas income in the country in which the income is earned. If, however, it invests in the United States, the income is taxed in the year in which it is earned.

Other provisions achieve the same effect. A dollar-for-dollar tax credit is allowed for taxes paid to foreign governments. Originally, this foreign tax credit served a foreign policy purpose. American multinational oil companies were enabled to treat payments to foreign governments as foreign income tax payments fully creditable against foreign source earnings rather than as royalties, merely deductible against income and therefore less valuable to the corporation. Such tax treatment enabled the companies to finance the revenue needs of the oil-producing governments without the need for the U.S. government to appropriate foreign aid funds with all of the attendant complications of the Arab-Israeli dispute.

Those same foreign tax credit provisions were not limited to multinational oil companies; they were available to manufacturing companies operating abroad. FDI, it was thought, would promote faster economic growth, reducing the temptation of countries to adopt the Soviet model of development.

The foreign tax credit and deferral provisions were made all the more valuable by transfer pricing, the price one part of the corporation charges another part of the same corporation for goods and services. With modern computer programming, the corporation, through transfer pricing, can arrange its internal pricing to minimize its tax liability worldwide by locating profits in low-tax jurisdictions. As the New York Times put it, "Congress gives companies a dollar-for-dollar credit on taxes paid to foreign countries, which in practice is a subsidy for offshore investment"; the deferral provisions encourage "job creation overseas to the detriment of American workers." Long after the foreign policy rationale for such provisions has expired, the tax code continues to favor foreign over domestic source income.

The World Bank and IMF

Beginning with the Alliance for Progress program in Latin America, initiated by President Kennedy in the early 1960s, the International Financial Institutions (IFIs), including the World Bank and International Monetary Fund (IMF) and regional development banks, became more tolerant of different country strategies for development. Often, these strategies involved a significant role for government in investment and job creation. This tolerance changed in the decade of the 1980s. Latin American governments in particular in that decade had become increasingly dependent upon the IFIs in the aftermath of their inability to make payments on the huge amount of foreign commercial debt they had incurred in the decade of the 1970s. In a speech in October 1985, in Seoul, South Korea, to the joint annual meeting of the IMF and World Bank, then-Secretary of the Treasury James Baker III, articulated the U.S. position: U.S. support for IFI funding of borrowing member governments would depend upon their willingness to change their reliance upon the public sector for investment and job creation to encouraging private enterprise, foreign and domestic, as the engines of growth in the economy.

There was no mention in Baker's speech of income inequality, poverty, investment in health and education, agrarian reform, all topics which in previous decades to a greater or lesser degree, had informed government policies. In the late 1980s, Baker's priorities were codified by John Williamson, a conservative Washington-based economist. The paper, which became known as the "Washington Consensus," was originally intended by Williamson to demonstrate the convergence of views among officials of the IFIs, the U.S. Treasury, and a new generation of technocrats in the hemisphere, reversing discordant visions that had prevailed in previous decades. Williamson later noted that he had excluded "anything which was primarily redistributive ... because I felt the Washington of the 1980s to be a city that was essentially contemptuous of equity concerns." Adopting measures that reflected the Washington Consensus became conditions for governments that sought financing from the IFIs.

The adoption of this economic model was accompanied by sharp increases in unemployment. Both the IMF and World Bank responded by blaming alleged rigidities in the labor market. Joseph Stiglitz, former chief economist at the World Bank, described the prevailing economic philosophy: "[l]abor market issues did arise, but all too frequently, mainly from a narrow economic focus, and even then, looked at even more narrowly through the lens of neo-classical economics. Wage rigidities—often the fruits of hard fought bargaining—were thought to be part of the problem facing many of the countries, contributing to their high unemployment; a standard message was to increase labor market flexibility—the not so subtle subtext was to lower wages and lay off unneeded workers."

The World Bank's World Development Report 2000/2001 expressed the Bank thinking: "Implementation of the standards on freedom of association and collective bargaining also raises complex issues for economic development." The report acknowledges that "enshrining such rights can help alleviate abusive workplace practices and ensure fair compensation. ... However, empirical evidence on the economic benefits of unionization and collective bargaining is generally quite mixed and suggests that costs and benefits are complex and context specific. Particularly important are the rules that govern collective bargaining and resolution of labor disputes. Some forms of collective bargaining rules may be better at producing efficient and equitable outcomes than others."

More recently, the Bank has shifted its position and begun supporting core worker rights through the contract clauses included in World Bank infrastructure financing. The International Finance Corporation, the affiliated organization of the World Bank for financing private enterprise, since 2006 has included core worker rights as a performance standard in all IFC financing. The change in World Bank thinking about core worker rights represents as big a change as the congressional acceptance of the legitimacy of including core worker rights as a negotiating objective in trade agreements. However, the World Bank and IMF continue to promote other "labor flexibility" policies that undermine workers around the world. In its annual Doing Business report, the World Bank gives positive rankings to countries that adopt anti-worker policies such as 66-hour workweeks, reducing minimum wages, abolishing workers' recourse against unjust dismissal, and eliminating requirement of advance notice for mass dismissals, claiming they are the best path for economic growth. According to the International Trade Union Confederation, the report's rankings are then used to compel countries to deregulate their labor markets.

The New International Economic Era

The international economic regime has evolved over the past 40 years in such a way that it disproportionately favors capital to the disadvantage of workers and unions. Yet, this regime is crumbling at its foundations. The WTO Doha round of trade negotiations is stymied. Most of the mainstream commentary has focused on the impasse over agricultural policy: industrialized nations' unwillingness to meet the demands of the other major agricultural producers to reduce subsidies and tariffs and the unwillingness of countries like Brazil and India to open their manufacturing goods markets to foreign competition. There has been virtually no discussion of labor rights, despite the TPA's directive to the U.S. Trade Representative to raise this issue to the same level of importance as commercial disputes.

China and India are buying up virtually all the commodities that can be produced, resulting in the highest international commodity prices in years. In Africa, Chinese investment is increasing at phenomenal rates in resource rich but poor states. Roads, railroads, ports, and mines are being built by the Chinese in previously remote locations which may have valuable minerals or oil. The humanitarian case for trade openings is less compelling. There is no sense of urgency pushing countries to make the hard compromises which would be required in any agreement.

A similar crisis of identity afflicts the IFIs. What is their purpose in the age of globalization? Secretary Baker's 1985 Seoul Korea speech stated a clear U.S. strategy: oversee the change in development strategy in the borrowing member countries of the IFIs toward a market liberalization U.S. capitalist model. The policy changes imposed by the IFIs as a condition for their lending were overwhelmingly designed to implement that change in strategy. These policy changes were not so much imposed upon the IFIs by the U.S. Treasury; they complemented, as Stiglitz noted, an already existing neo-classical economic philosophy that permeated the thinking of officials in these institutions.

That philosophy has now been largely discredited. Throughout Latin America, with the exception of Mexico and Colombia, governments of the left have come to power through elections, in large part by opposing the "Washington Consensus" policies. The "left" covers a spectrum of economic policies from the radical vision of Hugo Chavez in Venezuela to the more market-friendly strategy of Lula in Brazil and the post-Pinochet elected governments in Chile. Virtually every government in Latin America, whether "left" or "right," gives social reform and reducing income inequality a higher priority than the conservative governments of previous decades. They have not resorted to populist inflationary financing policies. Venezuela, with the highest inflation rate, has adopted imaginative financial policies designed to sop up excessive liquidity. There is a pragmatism previously lacking in the policies of left governments in past decades that gives credibility to their attempt to balance equity with economic efficiency considerations.

After the financial crises of the 1990s, the East Asian countries have accumulated huge amounts of foreign currency reserves, effectively making themselves self-insurers against possible future financial crises. With high commodity prices, the need to resort to financing from the IFIs has receded for many member countries that previously were heavily reliant upon such financing. And there are now alternative sources of financing: China is not only a purchaser of commodities but also an investor, particularly in Africa and, to a lesser degree, in Latin America. Venezuela spreads its oil based largesse in Bolivia and Nicaragua ; it lent Argentina the funds to pay off the IMF.

This financing, as in the case of China, comes without onerous "conditionality" that has accompanied IFI financing, but it may also undermine "governance" and anti-corruption initiatives by the IFIs. The assertion of government responsibility for management of natural resources goes against the privatization of state-owned enterprises which was such a strong part of the market liberalization strategies of the IFIs. It is inconceivable that the IFIs could today impose the type of deep intrusion into domestic policy-making that was so common in the decades of the 1980s and 1990s. There is no longer a single model of development along the lines of the Washington Consensus.

The attempt to redefine the World Bank's role as an anti-poverty fighter is also problematic. As a pre-condition for financing, the World Bank requires a poverty reduction strategy paper. Too often these papers appear to be little more than a repackaging of the market liberalization strategies of the past. Venezuela has directly financed ambitious programs of adult literacy, primary education expansion, health clinics manned by Cuban doctors and nurses in poor communities, obviating the need for long journeys to hospitals designed for the middle and upper classes. (In Bolivia, similar initiatives are financed by Venezuela.)

In Brazil, Mexico, and Chile, governments have designed and implemented a "bolsa familiar" subsidy program for poor families with the condition that they keep their children in school and are properly vaccinated. None of these programs have poverty reduction strategy papers required by the World Bank. Whether these initiatives could survive a downturn in the international economy and a consequent fall in commodity prices remains to be seen. And in the case of Venezuela, whether Chavez would accept an unfavorable outcome of an electoral contest has yet to be tested. What is certain is that priorities have changed from those set forth in the Washington Consensus. Equity is of far more concern. There is more than one source for development financing. The challenge for the IFIs is how they adapt to these changed circumstances.

It is not too much to say that both in the case of the WTO and IFIs there is a genuine crisis of identity. These two pillars of the American strategy of the previous decades are in disarray. We are going to see a much more diverse world of economic policies and development strategies. The true failure of Paul Wolfowitz as president of the World Bank not only was the scandal surrounding his personal life; it was his failure to articulate a convincing rationale for the future of the IFIs. That intellectual vacuum continues to this day. The one thing that is certain is that these institutions are no longer capable of implementing the Baker strategy of economic reform along American free-market lines.

What Is To Be Done?

What then is a realistic strategy for adapting to the changed circumstances discussed above? Making the inclusion of worker rights provisions a deal-breaker issue in future WTO agreements is critical to the consolidation of the gains reflected in the TPA and Peru agreement. It is certain to lead to accusations by other countries of protectionism and American unilateralism, but there is no need to be defensive. Core worker rights are an international, not an American, concept. Denying those rights to gain a competitive advantage in attracting FDI leads to the subverting of our domestic social compact through the backdoor of globalization. Such a result ought not to be acceptable.

Nor is the argument any more convincing that incorporating core worker rights into trade agreements would involve a rise in the price of goods, disadvantaging working class families that benefit from low prices. If that argument is valid, why not accept forced and prison labor, both of which would lower the cost of goods? Since the enactment of labor legislation in the 1930s in the United States and Europe, it has generally been accepted that the value of according workers basic rights to organize and negotiate collectively outweighs any price disadvantage inherent in such rights.

Similarly, dispute settlement arrangements should not be biased in favor of corporate interests. The governing principle ought to be national treatment. It was right for the U.S. government to try and assure, as it did in the EEC and European Coal and Steel community, that subsidiaries of American-based multinational corporations are not discriminated against by foreign governments. Creating a separate legal system for the adjudication of disputes between global firms and host governments goes far beyond that limited and fair objective. If a company investing abroad wants to be free of discrimination solely because of its nationality, that same company has an obligation to accept the logic of national treatment and subject itself, as any other national company, to the laws and courts of the country in which it is investing.

Ideally, the next American president would invoke the provisions of the NAFTA that permit a party, upon notification to the other parties to the agreement, to withdraw from the NAFTA. A notification of withdrawal would be accompanied by a stated willingness to negotiate a trade, investment, and development agreement that is more balanced than the NAFTA. It would include in the main body of the agreement core worker rights consistent with the admonition in the TPA to elevate those rights (and environmental protection provisions) to the same plane of importance as commercial disputes. It would assert the principle of national treatment as the governing law of the agreement, abandoning the NAFTA investment chapter's creation of a separate and preferential legal regime for FDI in disputes with host governments.

Finally, the next administration should confront the deferral and foreign tax credit provisions of the Internal Revenue Code which favor foreign over domestic source income. This is essential if we are serious about restoring some balance in the complex of American policies that have given such a strong impetus to FDI.

What complicates the issue of constructing an overall strategy for dealing with globalization is the fact that neither the executive nor the legislative branch of government is organized for this purpose. The issues cut across traditional lines. Individual committees have responsibility for different institutional components: the IFIs, trade and investment policy, tax, and labor questions. Who in the executive or legislative branches of government has the responsibility for devising an overall strategy that incorporates all of these elements? At this point, the answer is no one. The organization of the government to confront the challenges of globalization is as essential a reform as any individual policy change.

To sum up, a strategy for adapting to the exigencies of globalization should include (1) the consolidation of the labor and environmental gains reflected in the Peru agreement and the TPA in future trade and investment agreements; (2) the elimination of the investment protections in NAFTA and similar policies; (3) the reform of the tax code to eliminate the preferential treatment for foreign over domestic source income; and (4) acceptance that there is now no single road to development and that countries will design their own balance between equity and efficiency considerations.


Jerome Levinson is the distinguished lawyer in residence at the American University's Washington College of Law and is a contributor to Foreign Policy In Focus. He worked for the U.S. Agency for International Development in Latin America in the 1960s and was chief counsel to the Senate Foreign Relations Committee Sub-Committee on Multinational Corporations and U.S. Foreign Policy (the "Church Committee") from 1972 to 1977. From 1977 to 1989, he was general counsel to the Inter-American Development Bank.