Economic Reporting Review | Week of Apr 21 - 27, 01

"Lifting the Curtain on the Real Costs of Making AIDS Drugs," by Melody Petersen in the New York Times, April 24, 2001, page C1.

This article examines evidence on the cost of producing AIDS drugs. It points out that the entrance of generic producers from developing nations has shown that many of these drugs can be profitably manufactured for 5 percent or less of their market price in the United States.
 

"Labor Standards Clash with Global Reality," by Leslie Kaufman and David Gonzalez in the New York Times, April 24, 2001, page A1.

This article purports to show the limited benefits of activists' efforts to restrict labor abuses in developing nations. The article examines the situation at a textile factory producing garments for the Gap in El Salvador, which has been subject to a monitoring agreement. The evidence presented in the article does not support the headline's assertion, nor many of the other claims made in the article.

For example, the article implies that demand for cheap clothes by U.S. consumers are forcing sweatshop conditions in El Salvador and other nations. Numbers presented in the article suggest otherwise. The article indicates that each worker faces a quota of more than 55 shirts or trousers a day. If the average worker puts in a 14-hour day, this implies just over 3 per hour. According to the article, the current wage rate is 60 cents per hour. If this were increased by 50 percent (a very large increase), it would imply an increase in labor costs of 10 cents for every shirt or pair of pants. It is questionable whether U.S. consumers would balk at this sort of price increase if they knew it was needed to guarantee minimum wage standards.

At one point the article also implies that the monitoring system that Gap has put in place at this factory is prohibitively expensive, noting that the cost of installing similar systems at all its factories would be equal to 4.5 percent of its annual profits. The profit share of corporate GDP has risen by approximately 20 percent compared to the profit peak of the last business cycle in 1988. If the Gap and other U.S. corporations were forced to see a cut in profits of this magnitude in order to prevent labor abuses, they would still be getting a far higher return on investment than in the 1980s or prior decades. Remarkably, in listing the parties with an interest in the battle over labor standards, this article does not include the company's shareholders.

While the article notes the possibility that the factory could be closed if wages are pushed too high, it never considers the situation that most anti-sweatshop activists would view as their ultimate goal -- that retailers would not be able to sell items in the United States if working conditions did not meet some minimal standard. If this were the case, any individual factory would not have to worry about being undercut if it paid workers a decent wage. This is always the point of establishing minimum wage and working standards, whether in the U.S. or in developing nations.

It is worth noting that this is the second front-page Times article in the last ten days implying that efforts to improve labor conditions in developing nations were likely to have little beneficial effect or could even hurt the people they were intended to help (see "Lives Held Cheap in Bangladesh," by Barry Bearak, New York Times, April 15, 2001, Section 1, page 1 and ERR 4-20-01).
 

"As World Tanks, Protests Lose Spotlight," by Steven Pearlstein and Manny Fernandez in the Washington Post, April 27, 2001, page E1.

This article discusses the agenda for the annual meeting of finance ministers and central bankers at the World Bank and International Monetary Fund (IMF) this weekend. The article notes that the world appears to be on the brink of a recession. It asserts that this has put protesters' concerns about poverty on the back burner.

Actually, many of the critics of the World Bank and IMF have pointed out that their policies have both had negative distributive consequences and slowed economic growth, thereby exacerbating poverty through both channels. The policies of these agencies have repeatedly failed in every corner of the world, as per capita GDP growth has slowed nearly everywhere over the last two decades.
 

""Bush Uses Quebec Forum to Push for Trade Powers," by Dana Milbank and Paul Blustein in the Washington Post, April 22, 2001, page A1.

"Bush Uses Quebec Forum to Push for Trade Powers," by Dana Milbank and Paul Blustein in the Washington Post, April 22, 2001, page A1.

"Bush Will Press Free-Trade Issue at Quebec Talks," by David E. Sanger in the New York Times, April 21, 2001, page A1.

"In the Streets, Fervor, Fears and a Gamut of Issues," by Anthony DePalma in the New York Times, April 22, 2001, Section 1, page 4.

"Bush Links Trade with Democracy at Quebec Talks," by David E. Sanger in the New York Times, April 22, 2001, Section 1, page 1.

These articles report on the progress of negotiations in Quebec for a hemispheric trade agreement, and the protests in the street against this process. All of these articles refer to the agreement being negotiated as a "free trade" agreement. (The April 21st article by Sanger uses the expression ten times, not including quotes or direct references to the name of the treaty.)

It is inaccurate to characterize the trade pact as a "free trade" agreement since it extends some protectionist measures, notably copyrights and patents. It is common for political leaders to use expressions that characterize their agenda in a favorable light. For example, President Reaganbriefly referred to the MX missile system as the "Peacekeeper." The media appropriately refused to accept this term in its reporting on the debate over the missile. Similarly, it should adopt a neutral stance on trade issues and refer to the pact simply as a "trade agreement" -- or more accurately, a commercial agreement, since its provisions dealing with investment, and effects on investment, will probably have more economic, environmental, and social impact than the trade provisions (as was the case with NAFTA).

The April 21st article by Sanger also comments that opposition to the inclusion of labor and environmental standards in the pact stems from countries like Brazil or Venezuela, who oppose letting other countries "dictate minimum wages, working conditions or the internal workings of their economies." An unwillingness to let other countries dictate internal working conditions of their economies could not possibly be the basis for the opposition to labor or environmental standards. These countries have already agreed to the TRIPS provisions of the WTO, which requires that these countries establish patent and copyright laws similar to those in the United States. These provisions are a far greater, and more costly, intrusion into the economies of other nations than the sort of labor or environmental standards being discussed. At most, the labor and environmental standards would be applied to goods exported to other signatories of the agreement. The TRIPS provisions apply to every item sold in these countries, and even items that may not be sold (e.g. songs played over the radio). This trade agreement, like the WTO, may actually restrict the ability of nations to implement their own environmental laws governing domestic consumption and production.

Both the April 22nd article by Sanger and the Milbank and Blustein article repeat implausible assertions from the Bush administration about the gains from the WTO and NAFTA. The Sanger article refers to a statement from Trade Representative Robert Zoellick that employment grew in Mexico by 22 percent in the five years after NAFTA passed. (Mexico's employment increased by approximately 15 percent from 1994 to 1999 [ Mexico Data ].) In the article by Milbank and Blustein, Zoellick is cited as claiming that the average family has gained between 00 and 00 from the NAFTA and the last WTO round.

Proponents of trade agreements have a history of making outlandish claims about their potential economic benefits in order to win political support. For example, the Clinton administration widely promoted a study predicting that the U.S. would gain 200,000 jobs from NAFTA (e.g. Economic Report of The President, 1994, page 230). Even the authors of this study (Gary Hufbauer and Jeffery Schott) now concede that this claim was used out of context. (Infact, instead of expanding, as predicted by the Hufbauer and Schott study, the U.S. trade surplus with Mexico turned into a large deficit after the passage of NAFTA, leading to a net loss of jobs.)

The Milbank and Blustein article concludes by noting two of President Bush's misstatements in his public comments at the negotiations. This has been a common topic in news articles. It would be more helpful to readers if news reporting focuses attention on the substantive inaccuracies issued by President Bush's Administration, rather than the president's verbal gaffes.
 

"Protests a Success of Sorts," by Paul Blustein in the Washington Post, April 23, 2001, page A11.

"Biggest Obstacle to Selling Trade Pact: Sovereignty," by David E. Sanger in the New York Times, April 22, 2001, page A6.

These articles assess the political prospects of the FTAA. Both of these articles inaccurately present standard economic views on the impact of trade. The Times article asserts that "among serious critics of free trade accords, the fundamental problem is that they have no control over the forces that set environmental or labor rules." The Post article claims that fears of a "race to the bottom ... are regarded as unfounded by many mainstream economists."

Standard trade theory predicts that one of the outcomes of expanding trade between the United States and developing nations will be a decline in the relative wages of less skilled workers. This is exactly what the U.S. has experienced over the last two decades, as non-college educated workers -- who comprise more than 70 percent of the labor force -- have seen their real wages stagnate even as the economy has continued to grow at a respectable pace. William Cline, an economist who strongly supports recent trade agreements, estimated that 39 percent of the decline in the relative wages of less skilled workers can be attributed to the impact of trade (Trade and Income Distribution, 1997, Institute for International Economics.)