Reports from the Economic Front

Corporate power has steadily grown over the last three decades.  And corporations have aggressively used their growing power to boost profits and the well-being of those at the top of the income pyramid at the expense of majority living and working conditions.

This development has often been presented as a force of nature.  The implied takeaway is that there really isn’t much we can do about it.  In reality, this development is the outcome of carefully devised policy.

A case in point: the two major free trade agreements that our government is currently negotiating, the Trans-Pacific Partnership Free Trade Agreement (TPPFTA) and the Trans-Atlantic Free Trade Agreement (TAFTA).

These agreements are being negotiated largely in secret.  For example,  President Obama has repeatedly rejected requests by members of congress to see drafts of the U.S. position in TPPFTA negotiations.  At the same time, more than 600 transnational corporations know everything about these negotiations because they are involved in shaping our government’s position thanks to their membership on official advisory boards.

Investment Chapters

Free trade agreements have many chapters.  While the specific terms may vary, all free trade agreements include an investment chapter.  One can see the terms of the Korea-U.S. FTA investment chapter here.  And thanks to a leak we can see the general make-up of the likely TPPFTA investment chapter here.

The draft TPPFTA chapter includes, as is typical, “minimum standard of treatment” protections for investors. More specifically:

Each Party shall accord to covered investments treatment in accordance with customary international law, including fair and equitable treatment and full protection and security.

The TPPFTA investment chapter also includes an investor state dispute settlement mechanism (ISDSM) which allows a transnational corporation to sue a host government in an international tribunal if it believes that any of the rights granted to it under the terms of the chapter have been abridged.

Most investment chapters have ISDSMs.  When corporations use them to sue a government, the case is usually heard by a three person panel that is not bound by national law.  Each party chooses an arbitrator and the two select the third.  Most cases are heard by arbitrators registered with the International Center for Settlement of Investor Disputes (ICSID), the World Bank’s body for administrating disputes.  These arbitrators are overwhelmingly corporate lawyers.  In fact, according to a study of the workings of the system by Corporate Europe Observatory and the Transnational Institute:

Just 15 arbitrators, nearly all from Europe, the US or Canada, have decided 55% of all known investment-treaty disputes. This small group of lawyers, referred to by some as an ‘inner mafia’, sit on the same arbitration panels, act as both arbitrators and counsels and even call on each other as witnesses in arbitration cases. This has led to growing concerns, including within the broader legal community, over conflicts of interest.

International trade lawyers make a great deal of money when a corporation sues a government regardless of whether they serve as council to one side or the other or sit in judgement as arbitrators.  Not surprisingly, then, they actively support the inclusion of ISDSMs in agreements and their use by corporations.

A recent study by UNCTAD highlights the rapid growth in cases brought by transnational corporations (see the two charts below):

• In 2012, 58 new cases were initiated, which constitutes the highest number of known treaty-based disputes ever filed in one year and confirms that foreign investors are increasingly resorting to investor-State arbitration.

• In 66% of the new cases, respondents are developing or transition economies. While the number of cases initiated by developing country investors has increased, the majority of new cases (64%) still originate from developed countries.

• Claimants have challenged a broad range of government measures, including those related to revocations of licenses, breaches of investment contracts, irregularities in public tenders, changes to domestic regulatory frameworks, withdrawal of previously granted subsidies, direct expropriations of investments, tax measures and others.

• At least 42 arbitral decisions were issued in 2012, including decisions on objections to tribunal’s jurisdiction, merits of the dispute, compensation and applications for annulment of an arbitral award. 31 of these decisions are in the public domain.

• In 70% of the public decisions addressing the merits of the dispute, investors’ claims were accepted, at least in part. Nine public decisions rendered in 2012 awarded damages to the claimant, including the highest award in the history of ISDS (US$ 1.77 billion) in Occidental v. Ecuador, a case arising out of a unilateral termination by the State of an oil contract.

As UNCTAD notes, “Since most arbitration forums do not maintain a public registry of claims, the total number of cases is likely to be higher.”

A Problematic System: The Case of Ecuador

The Occidental v. Ecuador case referred to above provides a powerful example of what is wrong with investment chapters and their associated ISDSM.  The tribunal hearing the case decided that Ecuador had violated Occidental’s right to “fair and equitable treatment.”  In addition to the $1.77 billion judgment, the tribunal also ordered Ecuador to pay $589 million in backdated compound interest, plus post-award interest and half of the costs of the hearing for a total of $2.4 billion.

Public Citizen offers the following summary of the events that led Occidental to sue Ecuador using the ISDSM contained in the U.S.-Ecuador Bilateral Investment Treaty, with the paragraphs cited below referring to the tribunal’s ruling:

In May 1999, Oxy signed a 20-year contract with Ecuador and the state oil company to explore for oil in Block 15, a segment of Ecuador’s Amazon, and extract from any discovered reserves (paras. 112, 115).  In exchange for taking on all expenses, Oxy was contractually entitled to 70% of the oil produced, with Ecuador maintaining a right to the rest (para. 117).  The contract also stipulated that while Oxy could sell the oil, it could not sell off any portion of its rights to produce and profit from the oil without government authorization.  The contract stated that transferring the rights to the oil production without authorization “shall terminate” the contract, meaning legal annulment and forfeiture of investments (para. 119).  This provision explicitly enforced Ecuador’s hydrocarbons law, which protected the government’s ability to vet companies seeking to gain control over oil production in its territory, a particular concern in the Chevron-ravaged Amazon region (para. 121).

One year after signing the contract, Oxy sought to sell off a portion of its investment in Block 15 oil production so as to gain capital and reduce expenditure risks.  In October of 2000, it signed with the Alberta Energy Company (AEC, a Canadian firm) a contract in which Oxy kept “nominal legal title” to the oil production contract with the government, but AEC purchased 40% of Oxy’s oil rights and agreed to foot 40% of ongoing costs (paras. 128, 129).   The two companies formed a “Management Committee” comprised of one AEC representative and one Oxy representative with the “power and duty to authorize and supervise Joint Operations” (para 136).  Oxy mentioned the deal to the government, but neither presented the contract nor sought government authorization for AEC’s acquisition of a significant economic and operational stake in the Amazonian oil project (paras. 147-160).

After an audit of Oxy in 2004, Ecuador’s Attorney General determined that the confidential Oxy-AEC contract in 2000 had bypassed necessary government authorization and thus violated Oxy’s contract with the government, prompting him to initiate a process to annul it (para. 177).  In May 2006, after a long delay filled with a presidential ouster and political tumult, the government terminated the contract with Oxy and repossessed the land and oil equipment of Block 15 (paras. 199, 200).

Strikingly, despite finding that Occidental did indeed violate its contract, and that the government’s decision to cancel it was consistent with the terms of the contract, the tribunal ruled that Ecuador did not provide the company “fair and equitable treatment.”  Since, in its opinion, Ecuador did not suffer materially from Occidental’s violation, it concluded that canceling the contract was too great a penalty.

The tribunal then estimated the loss of revenue suffered by Occidental assuming that its 20 year contract had not been prematurely canceled and it did not sell 40% of its oil production rights to AEC.  Finally, the tribunal concluded that Ecuador bore 75% of the responsibility for the loss and the company only 25%, which was the basis for the final monetary award to Occidental.

Public Citizen concluded its discussion of the case as follows:

In the end, the tribunal’s runaway interpretation of FET [fair and equitable treatment], disregard for the rule of law, defiance of basic English, selective weighing of evidence, and arbitrary blame game have not only saddled Ecuador with a cost tantamount to health care for half the country.  They have saddled all Parties to NAFTA-style treaties with a precedent of twisted reason.  Let’s hope it isn’t followed.

Not surprisingly, Ecuador is refusing to pay and its national assembly is considering a bill to terminate its bilateral investment agreement with the United States.  In addition, the country recently hosted a “Ministerial Conference of Latin American States Affected by Transnational Interests” with the aim of sharing information about the workings of investor-state tribunals and developing an alternative investment framework.  Twelve governments attended.

The Corporate Agenda

Investment chapters advance the corporate agenda in many other ways.  For example, all contain, including the draft TPPFTA, restrictions on performance requirements which make it illegal for governments to set export or import requirements or require foreign investors to use local parts or components, hire local labor, or transfer technology to domestic enterprises.  These restrictions effectively undermine any meaningful government attempt at industrial policy.

Perhaps most damaging to the public interest is another provision found in all free trade agreements, one designed to protect corporations from direct and indirect expropriation.  Indirect expropriation refers to a government action that “unfairly” limits the profit-making potential of a foreign investment.

According to the draft chapter of the TPPFTA,

(a) The determination of whether an action or series of actions by a Party, in a specific fact situation, constitutes an indirect expropriation, requires a case-by-case, fact-based inquiry that considers, among other factors:

(i) the economic impact of the government action, although the fact that an action or series of actions by a Party has an adverse effect on the economic value of an investment, standing alone, does not establish that an indirect expropriation has occurred;

(ii) the extent to which the government action interferes with distinct, reasonable investment-backed expectations; and

(iii) the character of the government action.

(b) Except in rare circumstances, non-discriminatory regulatory actions by a Party that are designed and applied to protect the legitimate public welfare objectives, such as public health, safety, and the environment, do not constitute indirect expropriations.

In other words, a transnational corporation can sue a host government in response to any perceived violation of any provision in the investment chapter.  Thus any government action that a foreign corporation believes “interferes with [its] distinct, reasonable investment-backed expectations” could trigger a suit.  As the Ecuador case shows, even corporations that are themselves in violation of their contracts can sue and win large judgments.  Given the track record of tribunal decisions, it should not be surprising that governments have become reluctant to pursue any regulations that might challenge corporate prerogatives.

Bloomberg News recently published an article discussing some of most serious ongoing disputes between transnational corporations and governments.  Among other things, it point out that:

Arbitration clauses were originally included in treaties to deal with the nationalization of a company’s assets. Now arbitrators hear claims for lost business or costs stemming from public-health laws and environmental regulation and financial policies, with billions of dollars at stake.

In some instances, investors are even demanding that national laws or court judgments be overturned.

Once a “shield of last resort,” arbitration has become a “sword of first resort,” according to a paper by Howard Mann, a senior law adviser at the International Institute for Sustainable Development, a Winnipeg-based nonprofit.

Free trade agreements include many other chapters that help transnational corporations to pursue profits at the public expense.   U.S. financial service firms, for example, have become quite aggressive in promoting the use of financial service chapters to avoid domestic regulation of their activities.

As Bloomberg News explains:

U.S. bankers and insurers are trying to use trade deals, which can trump existing legislation, to weaken parts of the Dodd-Frank Act designed to prevent a repeat of the 2008 financial crisis.

While the companies say they are seeking agreements that preserve strong regulations and encourage economic growth, their effort is drawing fire from groups who argue that Wall Street wants to make the trade negotiations a new front in its three-year campaign to stop or alter the law.

The Korea-U.S. FTA included a strongly pro-business financial service agreement. We have no idea whether the U.S. government seeks to include a similar chapter in the TPPFTA, although it is likely.

Final Thoughts

Corporate power is buttressed and promoted by many policies, including free trade agreements.  These agreements have one major goal: restricting our ability to use public power to defend majority living and working conditions.  And, as we can see, the U.S. government is hard at work securing U.S. participation in such agreements.  Reversing negative social and environmental trends requires recognizing this reality and building a movement powerful enough to challenge and transform government policy.

Mainstream economics is largely built on theories that assume that people are best understood as highly competitive and individualistic maximizing agents. In fact, capitalism is said to be the most desirable economic system ever constructed precisely because its laws of motion are in sync with these traits.  Capitalism’s desirability is easily called into question, however, if people highly value fairness, cooperation, and relations of solidarity.  After all, capitalist imperatives tend to work against the development of social conditions and institutions that promote these values.

Many supporters of capitalism draw upon studies of non-human animal behavior to defend their assumptions about human nature.  But, as the Ted Talk by Frans de Waal found here (and below) demonstrates, non-human animals also greatly value fairness, cooperation, and relations of solidarity.

After watching the video take a few moments to imagine an economic system that builds upon these attractive values, then compare the policies that would be helpful to create it with the policies we currently promote to strengthen our existing economic system.  For example, how would this foundational shift influence our thinking about how best to organize production, relate production decisions to social and community needs, structure the ownership of society’s productive assets, and so on.

I was recently interviewed by David Delk on his Populist Dialogue cable TV program.  I shared my criticism of free trade as a corporate project, looking in particular at the Transpacific Partnership Free Trade Agreement (which the president is aggressively promoting) and the U.S.-Korea Free Trade Agreement (which was recently passed).

The 30 minute program can be watched here or below.

For more on the Transpacific Partnernership Free Trade Agreement see here and here.

For more on the U.S.-Korea Free Trade Agreement see here, here,  and here.

The Obama administration continues to push new free trade agreements, arguing that they are needed to boost job creation.  The latest attempt is the Trans-Pacific Partnership (TPP).    So far nine countries are engaged in negotiating this free trade agreement: Australia, Brunei Darussalam, Chile, Malaysia, New Zealand, Peru, Singapore, Vietnam, and the United States.  The United States in particular is thinking big; it insisted that the agreement also have a “docking clause,” which means that it is structured to make it easy for other Pacific Rim countries to join.  Canada, Japan and Mexico have already expressed interest.

Following standard procedures, the U.S. trade representative is negotiating the terms of the agreement with other trade representatives with the support and active involvement of some 600 multinational corporations.  Unfortunately, they are the only ones who know what is being negotiated.  As the Eyes on Trade Blog writes:  

Not only is the text secret during the negotiations, but all TPP countries signed a secret agreement to classify the negotiating texts for at least four years after the TPP goes into effect. After taking heat for this secret agreement that keeps everything secret, New Zealand was forced to release the text of the secrecy pact. Though neither the public nor members of Congress are permitted to view the negotiating texts, over 600 representatives from corporations have access to the texts, allowing them to steer the negotiations in their favor.

In brief—this is another terrible free trade agreement.  Beyond reducing tariffs what little we do know of the treaty suggests it will also include 26 chapters designed to enhance the freedom and profits of multinational corporations at majority expense.  There is nothing about this agreement that will promote jobs or a higher quality of life for workers in any of the participating countries.

One way to appreciate just how damaging capitalist structured globalization has been to the health of the U.S. economy is to read Michael Spence and Sandile Hlatshwayo’s study of trends in U.S. employment and value added in both tradeable and nontradeble sectors over the period 1990 to 2008.    

Starting with employment, the authors found that almost all job growth from 1990 to 2008 occurred in the nontradeable sector.  Specifically, there was a 27.3 million increase in jobs between 1990 and 2008, from a starting a base of 121.9 million.  Approximately 98 percent of that increase, 26.7 million jobs, was generated in the nontradeable sector.  Job creation in the tradeable sector was basically nonexistent in the aggregate. 

In 2008, the nontradeable sector had 114.9 million jobs and the tradeable sector 34.3 million jobs. Government at all levels was the largest employer in the nontradable sector, accounting for 22.5 million jobs in 2008.  Health care was second, with a total of 16.3 million.  In terms of job growth over the period, health care generated the most new jobs, followed by government, with a growth of 6.3 million and 4.1 million respectively.  These two sectors together combined for approximately 40 percent of total net employment gains.  The other large job creating sectors were retail, accommodation and food service and construction.  In 2008, these five accounted for 73.5 million jobs or approximately 50 percent of total employment.

Significantly, employment in both government and health care depends heavily on public spending.  Current austerity trends threaten to limit future employment gains in these sectors, foreshadowing future difficulties for U.S. workers.  Retail, accommodation and food service, and construction employment growth was largely supported by debt-financed consumption.  The end of the housing bubble will likely limit future employment growth in those sectors as well. 

As noted above, trends in employment creation in the tradeable sector have been dismal, strongly suggesting that workers have good reason to fear the ongoing restructuring of the U.S. economy in line with capitalist globalization plans.  Growing numbers of workers will be forced to compete for jobs in the nontradeable sector at a time when employment opportunities in that sector will also be limited. 

Of course, the lack of aggregate job growth in the tradeable sector masks the existence of divergent trends within the sector.  In particular, globalization did produce employment increases in industries that service transnational corporations and their international operations.  As Spence and Hlatshwayo noted:

The tradable sector experienced job growth in high-end services including management and consulting services, computer systems design, finance, and insurance. These increases were roughly matched by declines in employment in most areas of manufacturing.

The loss of employment in the manufacturing sector was caused by the out-migration of functions in global supply chains associated with lower valued added per job. But as the emerging markets grow, they will compete for more sophisticated functions. This does not mean that the United States will lose all the sectors in which it has developed a comparative advantage—just that more potential competition is on the horizon.

Despite past growth, largely made possible by the rapid run-up in consumer debt, private sector employment gains in the nontradeable sector were not large enough to compensate for the lack of job creation in the tradeable sector.  Michael Mandel summed up the situation as follows:

Between May 1999 and May 2009, employment in the private sector only rose by 1.1 percent, by far the lowest 10-year increase in the post-depression period. It’s impossible to overstate how bad this is. Basically speaking, the private sector job machine has almost completely stalled over the past ten years.

Over the past 10 years, the private sector has generated roughly 1.1 million additional jobs, or about 100K per year. The public sector created about 2.4 million jobs.

But even that gives the private sector too much credit. Remember that the private sector includes health care, social assistance, and education, all areas which receive a lot of government support.

Without a decade of growing government support from rising health and education spending and soaring budget deficits, the labor market would have been flat on its back.

Total private sector wage growth, critical to any sustainable consumption driven expansion, has also stagnated.  As Jed Graham noted:

The increase in total real private-sector wages over the period 2001-11 was smaller than in any other 10 year period since World War II.  In fact its 4 percent growth rate was even lower than the 5 percent increase from 1929 to 1939.  To put that in perspective, since the Great Depression, 10-year gains in real private wages had always exceeded 25 percent with one exception: the period ending in 1982-83, when the jobless rate spiked above 10 percent and wage gains briefly decelerated to 16 percent.

Spence and Hlatshwayo also examined trends in value added in both nontradeable and tradeable sectors.  Significantly, the lack of net job creation in the tradeable sector, especially in manufacturing, did not translate into a decline in value added.  According to the authors, “Valued added in the tradable and nontradable parts of the economy grew at similar rates [over the years 1990 to 2008]. In fact, the tradable sector, though smaller than the nontradable, grew slightly faster and hence marginally increased its share of total value added, in marked contrast to the employment trends.”

Ironically, the cause of both the loss in employment and rise in value added in tradeable sectors like manufacturing was the same: the internationalization of production.  For example, the decline in manufacturing production was encouraged by multinational corporations shifting production to other lower labor cost locations. The rise in manufacturing value added was due in large part to the fact that, by cheapening the cost of production, such activity not only expanded the market for many manufactures (such as consumer electronics), it also widened the gap between final sales price and production cost, thereby raising both profit and value added.  Not surprisingly, then, according to Spence and Hlatshwayo, tradeable value added over the period 1990 to 2008 rose by 363 percent in electronics.

This outcome makes clear why U.S. multinational corporations, especially those involved in the tradeable sector, have embraced the internationalization of production and the free trade agreements that encourage it.  Of course transnational retailers have also benefited.  In fact, retailers like Walmart have aggressively pushed manufacturers to move their production offshore in order to lower production costs.  Finally, the new international division of labor has also created profitable opportunities for business and financial service companies.

In short, it is perfectly understandable why most major corporations happily support U.S. government efforts to enhance corporate mobility through new international agreements.  And given the negative consequences of these agreements for most working people, it is also perfectly understandable why they want the terms of negotiation kept secret.  At issue is whether we will find a way to deny them what they want.    

China is widely celebrated as an economic success story.  And it is as far as GDP, investment, and export growth is concerned.   However, as we know well from our experience in the United States, such economic indicators often reveal little about the reality of people’s lives.  In China workers are subject to intense working conditions with a disproportionate share of the benefits of production going to a top few.   For example, as Bloomberg News notes:  

The richest 70 members of China’s legislature added more to their wealth last year than the combined net worth of all 535 members of the U.S. Congress, the president and his Cabinet, and the nine Supreme Court justices.

The net worth of the 70 richest delegates in China’s National People’s Congress, which opens its annual session on March 5, rose to 565.8 billion yuan ($89.8 billion) in 2011, a gain of $11.5 billion from 2010, according to figures from the Hurun Report, which tracks the country’s wealthy. That compares to the $7.5 billion net worth of all 660 top officials in the three branches of the U.S. government.

The income gain by NPC members reflects the imbalances in economic growth in China, where per capita annual income in 2010 was $2,425, less than in Belarus and a fraction of the $37,527 in the U.S. The disparity points to the challenges that China’s new generation of leaders, to be named this year, faces in countering a rise in social unrest fueled by illegal land grabs and corruption.

“It is extraordinary to see this degree of a marriage of wealth and politics,” said Kenneth Liberthal, director of the John L. Thornton China Center at Washtington’s Brookings Institution.  “It certainly lends vivid texture to the widespread complaints in China about an extreme inequality of wealth in the country now.”  

Growing numbers of Chinese workers and farmers have been engaged in workplace and community struggles in opposition to corporate and government policies, especially those designed to intensify the privatization, deregulation, and liberalization of the Chinese economy.  The number and determination of participants in these struggles has forced business and government leaders on the defensive.  

Recently, the People’s Daily ran an editorial calling for renewed commitment to “reform” in an attempt to shore up support for the government’s neoliberal policies.  The editorial appears to have triggered growing discussions and debates on and off the internet among academics and activists about alternatives. 

One concrete outcome from these discussions and debates is a 16 point proposal which was developed collectively and recently published on the Red China website; it has gained significant support.  The following is an English translation of the proposal by the China Study Club at University of Massachusetts, Amherst.   Reading it provides a window into political developments in China and also highlights the similarity of struggles in China and the United States.  

A SIXTEEN-POINT PROPOSAL ON CHINA’S REFORM  

1. That the personal and family wealth of all officials be publicized and their source clarified, and all “naked bureaucrats” be expelled from the Party and the government. (“Naked bureaucrats” refer to those officials whose family lives in developed countries and whose assets have been transferred abroad, leaving nothing but him/herself in China.)  

2. That the National Congress concretely exercises its legislative and monitory function, comprehensively review the economic policies implemented by the state council, and defend our national economic security.   

3. That the existing pension plans be consolidated and retirees be treated equally regardless of sector and rank.  

4. That elementary and secondary education be provided free of charge throughout the country; compensation for rural teachers be substantially raised and educational resources be allocated on equal terms across urban and rural areas; and the state assume the responsibility of raising and educating vagrant youth.  

5. That the charges of higher education be lowered, and public higher education gradually become fully public-funded and free of charge.   

6. That the proportion of state expenditure on education be increased to and beyond international average level.   

7. That the price and charge of basic and critical medicines and medical services be managed by the state in an open and planned manner; the price of all medical services and medicines should be determined and enforced by the state in view of social demand and actual cost of production.   

8. That heavy progressive real estate taxes be levied on owners of two or more residential housings, so as to alleviate severe financial inequality and improve housing availability.

9. That a nation-wide anti-corruption online platform be established, where all PRC citizens may file report or grievance on corruption or abuse instances; the state should investigate in openly accountable manner and promptly publicized the result.   

10. That the state of national resources and environmental security be comprehensively assessed, exports of rare, strategic minerals be immediately cut down and soon stopped, and reserve of various strategic materials be established.  

11. That we pursue a self-reliant approach to economic development; any policy that serves foreign capitalists at the cost of the interest of Chinese working class should be abolished.  

12. That labor laws be concretely implemented, sweatshops be thoroughly investigated; enterprises with arrears of wage, illegal use of labor, or detrimental working condition should be closed down if they fail to meet legal requirements even after lawfully limited term for self-correction.   

13. That the coal industry be nationalized across the board, all coal mine workers receive the same level of compensation as state-owned enterprise mine workers do, and enjoy paid vacation and state-funded medical service.  

14. That the personal and family wealth of managerial personnel in state-owned enterprises be publicized; the compensation of such personnel should be determined by the corresponding level of people’s congress.   

15. That all governmental overhead expenses be restricted; purchase of automobile with state funds be restricted; all unnecessary traveling in the name of “research abroad” be suspended.   

16. That the losses of public assets during the “reforms” be thoroughly traced, responsible personnel be investigated, and those guilty of stealing public properties be apprehended and openly tried.    

As growing numbers of countries face renewed austerity pressures, there is a tendency to explain the trend by searching for specific policy failures in each country rather than considering broader structural dynamics.  Key to the credibility of those who argue for a focus on national decisions is the existence of countries that people believe are performing well.  Thus, the argument goes, if only policy makers followed best practices their people wouldn’t find themselves in such a bad place.  Recently, German has become one of these model countries.

 Here is a typical framing of the German experience:  

At a time when unemployment rates in France, Italy, the UK, and the US are stuck around 8%-9%, many are turning to the apparent miracle in the German labor market in search of lessons. In 2008–09, German GDP plummeted 6.6% from peak to trough, yet joblessness rose only 0.5 percentage points before resuming a downward trend, and employment fell only 0.5%. In August 2011, the standardized unemployment rate was about 6.5%, the lowest since the post-reunification boom of 20 years ago.

In other words, Germany seems to be doing things right. Despite suffering a deep decline it actually enjoyed a lower unemployment rate. So, how did it do it?  Often cited are recent German policies which have increased labor market flexibility. But are these the best practices that should be adopted elsewhere?  One way to answer that question is to look at what these changes have meant to German workers.  A Reuters report concluded: 

Job growth in Germany has been especially strong for low wage and temporary agency employment because of deregulation and the promotion of flexible, low-income, state-subsidised so-called “mini-jobs”.

The number of full-time workers on low wages – sometimes defined as less than two thirds of middle income – rose by 13.5 percent to 4.3 million between 2005 and 2010, three times faster than other employment, according to the Labor Office.

Jobs at temporary work agencies reached a record high in 2011 of 910,000 — triple the number from 2002 when Berlin started deregulating the temp sector. . . .

Data from the Organization for Economic Co-operation and Development shows low-wage employment accounts for 20 percent of full-time jobs in Germany compared to 8.0 percent in Italy and 13.5 percent in Greece.

New categories of low-income, government-subsidized jobs – a concept being considered in Spain – have proven especially problematic. Some economists say they have backfired.

They were created to help those with bad job prospects eventually become reintegrated into the regular labor market, but surveys show that for most people, they lead nowhere.

Employers have little incentive to create regular full-time jobs if they know they can hire workers on flexible contracts.

One out of five jobs is a now a “mini-job”, earning workers a maximum 400 euros a month tax-free. For nearly 5 million, this is their main job, requiring steep publicly-funded top-ups.

“Regular full-time jobs are being split up into mini-jobs,” said Holger Bonin of the Mannheim-based ZEW think tank.

And there is little to stop employers paying “mini-jobbers” low hourly wages given they know the government will top them up and there is no legal minimum wage.

This development was far from accidental.  It was the result of policy changes implemented in the early 2000s by then Chancellor Gerhard Schroder.  In 2005, Schroeder proudly announced at the World Economic Forum in Davos, Switzerland, that “We have built up one of the best low wage sectors in Europe.”

The New York Times described the German employment miracle as follows:  

But hidden behind the so-called German economic miracle is an underclass of low-paid employees whose incomes have benefited little from the country’s stability and in fact have shrunk in real terms over the last decade, according to recent data.

And because of government policies intended to keep wages low to discourage outsourcing and encourage skills training, the incomes of these workers are not likely to rise anytime soon.

That, in turn, means they are likely to continue to depend on government aid programs to make ends meet, costing taxpayers billions of euros a year.

The paradox of a rising tide that does not lift all boats stems in part from the fact that Germany has no federally set minimum wage. But it also has its roots in recent German politics, which have favored measures to keep unemployment low and win support from employers. . . .

The Confederation of German Employers’ Associations says the introduction of a minimum wage would push up labor costs and lead to more unemployment. Jobs would simply move out of Germany and to Eastern Europe or Asia. 

These new labor policies have not only taken a toll on German workers, they have also greatly contributed to the growing crisis in Europe.  The low wages and insecure employment conditions have both enabled German employers to boost exports and limited imports. Global Employment Trends 2012, an ILO report, highlights this connection.  According to an article summarizing its contents:

“The rising competitiveness of German exporters has increasingly been identified as the structural cause underlying the recent difficulties in the Euro area,” the report said. Crisis countries had not been able to export enough of their goods to Germany as domestic demand there was not strong enough because of low wages.

The ILO said German policies to keep down wages had created conditions for a prolonged slump in Europe as other nations on the continent increasingly saw only even harsher wage deflation as a solution to their lack of competitiveness.

The body called on Germany to enact swift changes. “An end to a low-wage policy would create positive spillover effects to the rest of Europe and restore a more equitable income distribution,” it said in the study.

   As the chart below shows, German wages have been stagnating for over a decade.  

No wonder that Germany has been exporting so successfully and that other economies in Europe have found it difficult to compete.  While German politicians blame these other economies for their problems, the fact is that German growth has depended on the high consumption and borrowing in these other countries.  As one analyst noted:

Germany, remember, accounts for 28% of the whole Eurozone economy.  It is not fanciful to imagine that imbalances in the German economy are capable of driving — or at least amplifying — imbalances within the entire region.  Indeed Germany’s capacity to buy from Europe is even more limited than its stagnating wages would suggest.  Because on top of this Germany has experienced a sharp increase in inequality.  This means wealth has been redistributed from poor, who tend to spend, to the rich, who tend to save.  

In short, if we are going to meaningfully address our economic problems we need to begin looking critically at how capitalist accumulation dynamics actually work.  Trying to emulate so-called success stories is not the way to go.

A January 22, 2012 New York Times story, The iEconomy: How U.S. Lost Out on iPhone Work, has been getting a lot of coverage.   The article makes clear that Apple and other major multinational corporations have moved production to China not only to take advantage of low wages but also to exploit a labor environment that gives them maximum flexibility. The following quote gives a flavor for what attracts Apple to China: 

One former executive described how the company relied upon a Chinese factory to revamp iPhone manufacturing just weeks before the device was due on shelves. Apple had redesigned the iPhone’s screen at the last minute, forcing an assembly line overhaul. New screens began arriving at the plant near midnight.

A foreman immediately roused 8,000 workers inside the company’s dormitories, according to the executive. Each employee was given a biscuit and a cup of tea, guided to a workstation and within half an hour started a 12-hour shift fitting glass screens into beveled frames. Within 96 hours, the plant was producing over 10,000 iPhones a day.

“The speed and flexibility is breathtaking,” the executive said. “There’s no American plant that can match that.”

The article highlights these conditions to make the point that manufacturing is not coming back to the United States because these conditions cannot be replicated in the United States. 

One aspect not stressed in the article is that many of the labor policies described are actually against the law in China and contrary to Apple’s own claims about its labor standards.  See William K. Black’s analysis here.

If you are interested in a more detailed picture of just what goes into making Apple products so profitable you should listen to or read the transcript of a This American Life radio segment which aired in January.  The segment is based on a Mike Daisey performance in front of a small audience.  Mike is a self proclaimed technology geek who just adores Apple products.  At least that was before he visited the Foxconn (Taiwanese multinational corporation owned) factory located in China in which many Apple products are assembled.  The program discusses the labor conditions at Foxconn and other similar multinational corporations operating in China.

These multinational corporations have helped make China the world’s top exporter of manufacturers, both overall and of high technology goods more specifically.  China’s share of world exports of information and communication technology products (such as computers and office machines; and telecom, audio and video equipment) has grown from 3 percent in 1992 to 24 percent 2006, and its share of electrical goods (such as semiconductors) from 4 percent to 21 percent over the same period.  Of course, while these exports are officially recorded as Chinese exports, approximately 60 percent of all Chinese exports and 85 percent of all Chinese high technology exports are produced by foreign companies operating in China.

The issue here isn’t one of China stealing manufacturing jobs from the United States or other developed countries.  According to the U.S. Bureau of Labor Statistics, total manufacturing employment in China actually fell by over 9 million over the period 1994-2006, from 120.8 million to 111.61 million.  Total urban manufacturing employment, which would include most foreign operations, declined sharply from 54.92 million to 33.52 million. 

In fact, China’s growth has generated few decent employment opportunities for urban workers, regardless of their employment sector.  The International Labor Organization did an extensive study of urban employment over the period 1990 to 2002.  Although total urban employment increased slightly, almost all the growth was in irregular employment, meaning casual-wage or self-employment—typically in construction, cleaning and maintenance of premises, retail trade, street vending, repair services, or domestic services.  More specifically, while total urban employment over this thirteen-year period grew by 81.7 million, 80 million of that growth was in irregular employment.  As a result, irregular workers in China now comprise the largest single urban employment category. 

The issue here isn’t even one of China versus the United States.  It also isn’t one of dictatorship versus democracy.  Rather it is one of capitalism’s logic.  Said simply, large multinational corporations and their allies in both the United States and China have successfully created a global system of production and consumption that gives them maximum freedom of operation.  It is this logic that keeps pushing more free trade agreements, attempts to create more flexible labor markets, and more attractive conditions for business investment, both here and in China.   And it is this logic that needs to be challenged on both sides of the Pacific. 

Although Republicans and President Obama are said to disagree about economic policies, there is one initiative that they both enthusiastically support: free trade agreements.  President Obama single-handily resurrected the free trade agreements with Korea, Panama, and Colombia from political oblivion; they were ratified by the U.S. Congress in October.   

Now, he is eagerly pursuing a new multilateral agreement known as the Trans-Pacific Free Trade Agreement (involving Australia, Brunei Darussalam, Chile, Malaysia, New Zealand, Peru, Singapore, Vietnam, and the United States).  Significantly, as Public Citizen reports, “a leaked document revealed that the Obama administration signed a special pact to keep all documents relating to the Trans-Pacific Free Trade Agreement negotiations secret.” 

One might ask why the leaders of so many countries are anxious to sign such agreements, agreements which not only lower tariffs but also strip away the powers of governments to regulate international investment, production, and capital flows.

One answer is the enormous economic power of transnational corporations (TNCs), the main beneficiaries of these agreements. According to the United Nations Conference on Trade and Development:

TNCs worldwide, in their operations both at home and abroad, generated value added of approximately $16 trillion in 2010, accounting for more than a quarter of global GDP. In 2010, foreign affiliates accounted for more than one-tenth of global GDP and one-third of world exports.  

The estimates of TNC production cited above, although impressive, actually understate transnational control over global economic activity.  At one time, TNCs only engaged in international production through establishment of foreign affiliates.  In some cases, the parent company and its foreign affiliates operated relatively independently, each serving a different market. 

Now, transnational corporations generally rely on complex cross border production networks that involve the linking of production across many countries, with final sales often taking place in still other countries. Most importantly, these networks often include “independent” partner firms that undertake various activities according to an overall transnational corporate strategy.  While some of the partner firms may themselves be transnational corporations, many are not, which means that TNC controlled activity is greater than the combined activities of parent and affiliate firms. 

Transnational corporations use a variety of so-called “non-equity modes” (NEMs) of control to direct the operations of their partner firms, with contract manufacturing and service outsourcing among the most important. Cross border activity involving NEM relationships is conservatively estimated to have generated over $2 trillion of sales in 2010.  The United Nations reports that some 18–21 million workers are directly employed in firms operating under NEM arrangements. Around 80 per cent of NEM-generated employment is in developing and transition economies.

As the following figure reveals, cross border production activity anchored by NEM relations now dominates a number of key export industries.  For example, NEM production now accounts for more than 50% of all toy, footwear, garment and electronics exports.

The production of the iPhone offers one of the best examples of the logic and operation of these transnational corporate controlled cross border production networks.  As the Asian Development Bank explains:

An April 2011 Gallup poll found that 29% of Americans thought that the U.S. economy was in a depression.  Another 26% thought it was only a recession.   This is scary since according to the National Bureau of Economic Research we have been in an economic expansion since June 2009.

Why would so many Americans feel this way you might ask.  Here is one reason.  According to recent Census Bureau data, during the recession, which lasted from December 2007 to June 2009, inflation-adjusted median household income fell by 3.2%.  Between June 2009 and June 2011, a period of economic expansion, inflation-adjusted median household income fell by 6.7%.   This decline is illustrated in the New York Times chart below.

. . .

I recently appeared on the Alliance for Democracy’s “Populist Dialogue” TV show to talk about our economic crisis and possible responses to it.  You can watch the show here or below.

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Agreement on Technical Barriers to Trade (TBT)—what could that be you ask?  It is one of the many agreements enforced by the World Trade Organization (WTO).    

The WTO is said to be concerned only with the promotion of free trade for our collective benefit.  And, according to the WTO, the TBT was negotiated to achieve that very aim. In the words of the WTO:

Technical regulations and product standards may vary from country to country. Having many different regulations and standards makes life difficult for producers and exporters. If regulations are set arbitrarily, they could be used as an excuse for protectionism. The Agreement on Technical Barriers to Trade tries to ensure that regulations, standards, testing and certification procedures do not create unnecessary obstacles, while also providing members with the right to implement measures to achieve legitimate policy objectives, such as the protection of human health and safety, or the environment.

Sounds reasonable—well, the United States just lost two cases this past September in which foreign governments charged the United States with violating that agreement.

First case: a WTO panel ruled in Mexico’s favor against U.S. measures designed to protect dolphins.  The United States allows tuna fishers that use dolphin-safe nets to label their tuna sold in the U.S with a dolphin-safe label.  According to Mexico, this unfairly discriminates against those fishers that want to use different methods of production.  The WTO agreed—the U.S. was being an unfair trader.  No more labels.  

Second case: a WTO panel ruled against U.S. measures designed to reduce teenage smoking.  Among other things, the U.S. measures banned the sale of many flavored cigarettes–in particular clove cigarettes–which were seen as likely to hook young smokers.  Indonesia is a major producer and exporter to the United States of clove cigarettes and it argued that the U.S. ban discriminated against its products.  The WTO agreed—the U.S. was being an unfair trader.   

It also looks likely that a WTO panel will find against U.S. consumer labeling laws that allow country of origin labeling for beef.  If consumers knew where their beef came from it might influence their purchasing decisions.  That could have a negative effect on sales of imported beef.  

Free trade in the eyes of the WTO means maximum freedom for corporations to produce and sell products as they want.  Said differently, it means a world in which governments are forbidden to take steps to protect the environment or the health of its citizens if doing so interferes with private profit making. 

This is just one agreement.  The WTO presides over many more that are equally, if not more, scandalous.  You will be hard pressed to read about these decisions in the press.  The reason: it might encourage people to question the free trade agreements with Korea, Colombia, and Panama that the U.S. government is promoting, since they also include TBTs.  My recently published analysis of the U.S.-Korea Free Trade Agreement can be read here.