Understanding the WTO Ruckus

Last week's World Trade Organization's meetings in Seattle, Washington drew howls of protest and riots against free trade. To figure out what some of the ruckus is about, let's consider a few economic principles. Imagine 10 sweaters a day could be produced using one machine and one high-skilled worker who's paid $40. Or, 10 sweaters a day might be produced, maybe in another country, using one machine and four low-skilled workers who're each paid $11 a day. An employer would use the high-skilled worker production technique. Doing so would mean labor costs of $40 rather than $44, using the four low-skilled workers, and would mean higher profits.

If you were the employer, and the high-skilled worker demanded $50 a day, what would you do? You'd probably tell him to go play in the traffic and use the low-skilled worker production technique. After all paying a labor cost of $44 would leave you with more profit. But the high-skilled worker is not stupid. So before demanding higher wages, he'd attempt to eliminate his cheaper priced competition, but he'll conceal his agenda. He'd make a pretense of humanitarian concerns such as the need to end "sweat shops", stamp out slave labor, pay "living wages" and above all save the world's children by ending child labor. If he's successful, say forcing U.S. companies to pay poor workers in poor country $15 a day, it makes it more likely he can get away with his $50 wage demand. Why? The labor costs of using the low-skilled production technique is now $60.

Have I correctly identified the intentions of labor unions, who are the major proponents of higher wages for foreign workers? In terms of effects, it makes no difference whether the intention is a sincere concern for foreign workers or a cynical monopolistic ploy to benefit union workers. In either case, low-skilled foreign workers have reduced opportunities. After all the reason a person works for a wage that we might consider sub-standard is because he doesn't have a higher wage alternative. In other words, it's the best he can do. How compassionate is it for us to destroy that poor person's best alternative?

Labor unions aren't by themselves seeking collusive measures against poor countries and their people. U.S. corporations that face a bevy of costly environmental and workplace regulations emanating from the Environmental Protection Agency (EPA), Occupational Safety & Health Administration (OSHA) and other agencies want these costs exported to other countries. EPA and OSHA have no jurisdiction in Africa, Asia and Latin America. As such companies that locate in those countries don't bear all production costs borne by American firms. That gives them a competitive edge.

Whether our business and labor regulations are good or bad for us is one question and their cost is another. One benefit of free trade is that regulatory costs are revealed. Trade restrictions kill the messenger. If the production cost of a pair of sneaks is $15 in one country and $30 in another, we could chalk the difference up to "slave" labor if we want but surely some of the cost differential has to do with regulations.

By the way, neither the agreements associated with the World Trade Organization (WTO) nor those associated with the North America Free Trade Agreement (NAFTA) is truly free trade. These agreements contain thousands of pages of specifications. You don't need thousands of pages to tell people they can trade freely. Here's a free trade agreement I like. It's from Article I, Section 9 of our Constitution: "No Tax or Duty shall be laid on Articles exported from any State." That's an agreement that helped make us a rich nation and, if applied to the world, we and everybody else would be richer.

Walter E. Williams

c54-99

December 3, 1999