Why Free Trade Helps Social Welfare Programs

SAN FRANCISCO: Nowadays, most discussions about social policy are muddled by the notion that free trade hurts society. Everywhere you look, well-meaning groups see imports as a threat to their pet social programs, from welfare to environmental protection. The result? Strange alliances between the romantic and nationalist right, the green left, and self-interested parties such as trade unions appear to oppose free trade. In America, this new protectionist/social policy pact scored a big victory recently in derailing President Clinton’s request for so-called "fast-track" negotiating authority from Congress, which he intended to use in order to bring Chile into the North American Free Trade zone (NAFTA).

The furious opposition of social policy advocates to free trade, however, cannot stand scrutiny. Many U.S. environmentalists, for example, claimed that NAFTA would undermine American environmental standards. Four years later, that heavily prophesied "race to the bottom" is scarcely to be sniffed.

Look to America’s northern border and you see that free trade is indeed compatible with divergent national welfare objectives. The US/Canada trade agreement (a precursor to NAFTA) was once opposed by Canadians who worried that their country’s generous social welfare programs would be fatally undermined by it. "I have an immense fear," said Edward Broadbent, the leader of Canada’s Social Democrats back then, "that if the agreement is put in place, corporate pressures would mount to harmonize Canadian social policies, such as subsidized Medicare and pensions, with lower American standards.’"

But those fears proved groundless. The U.S./Canada free trade agreement has worked for a decade, yet Canadian welfare policy remains far more generous than America’s own. One reason for this is that, to adjust for the higher social charges which Canada imposes on its goods, the Canadian dollar fell relative to the U.S. dollar over the course of these years. Canada’s depreciated currency made American goods more expensive in Canada By doing so, a feared explosion of U.S. imports did not take place.