As production is moved to ever more distant locales, with ever lower labor and environmental standards, the corporations behind these moves want all barriers to the movement of raw materials and finished products removed. Thus the era of so-called “free trade” agreements. These agreements, which are written to elevate corporations to the level of national governments (and in practice, actually above governments), have become so unpopular thanks to the efforts of grassroots activists to expose them to public scrutiny that governments have become cautious about embracing new ones.
How to get around this impasse? The U.S. government has evidently believed it has found a solution: Claim a “free trade” agreement is not a “free trade” agreement. Not only as an attempt to avoid public scrutiny but to totally bypass Congress.
This latest offensive on behalf of multi-national corporations is the Indo-Pacific Economic Framework. Haven’t heard of it? That’s because the Biden administration, which has cooked up this scheme, would much prefer you didn’t. So far, the 13 other governments that have entered negotiations, including Australia, India, Japan and New Zealand, aren’t eager for their own citizens to know about it, either, and have agreed, whether explicitly or tacitly, to keeping quiet.
The countries negotiating the Indo-Pacific Economic Framework (graphic by JohnEditor132)
Make no mistake, however. The Indo-Pacific Economic Framework (IPEF) is a straightforward initiative to deepen U.S. domination in the Asia-Pacific and Indian Ocean regions. Activists across those regions have taken notice and have already spoken out against the IPEF. Interestingly, some of the governments of those countries, in particular Australia and New Zealand, are quite open in acknowledging the IPEF is a U.S. initiative designed to keep them firmly under the U.S. umbrella and away from China — and are supporting this in their limited public statements. So those social-movement groups sounding alarms are on firm ground, to which we will return below.
So what is this “free trade” deal that is allegedly not a “free trade” deal? A White House “fact sheet” issued by the Biden administration in May 2022, upon the announcement of the IPEF at the Quadrilateral Security Dialogue meeting in Tokyo, declared that the “IPEF will enable the United States and our allies to decide on rules of the road that ensure American workers, small businesses, and ranchers can compete in the Indo-Pacific.” And how might this stated goal be achieved? Negotiations are to focus on “four key pillars to establish high-standard commitments that will deepen our economic engagement in the region.”
Those four pillars announced by the Biden administration are a “connected economy” that will harmonize standards on cross-border data flows and data localization; a “resilient economy” that seeks to “better anticipate and prevent disruptions in supply chains … [and] guard against price spikes that increase costs for American families”; a “clean economy” that “will seek first-of-their-kind commitments on clean energy, decarbonization, and infrastructure that promote good-paying jobs”; and a “fair economy” under which “tax, anti-money laundering, and anti-bribery” standards are used “to promote a fair economy. “
The same lies packaged for new consumption
Does this list sound familiar? Perhaps it does, as these are the sort of goals repeatedly promised in “free trade” agreements of the past, goals that never materialize because the draconian rules designed to unilaterally overturn health, safety, labor and environmental regulations always have words like “must” and “shall” attached to them in trade agreement texts, but any language purporting to safeguard such standards use words like “may” and “can.” And as disputes are settled in secret tribunals in which the lawyers who represent corporations against governments in these tribunals on one day switch hats and sit as judges on another day, the interpretation of what appears to be dry, technical, neutral-sounding language almost invariably is adjudicated in favor of the complaining corporation, without any appeal being possible.
Attempting to sidestep this history, the U.S. government is trying to claim the IPEF is not a trade deal at all, and thus can be approved by the White House unilaterally with no input by Congress. The Biden administration asserts that IPEF talks do not cover tariff liberalization or provisions that would require changes to key U.S. laws that Congress would have to approve and therefore has no intention of submitting the agreement for approval. Senators disagree, with 21 members of the Senate’s Finance Committee, including its Democratic (Ron Wyden of Oregon) and Republican (Mike Crapo of Idaho) leaders, sending the White House a letter telling the administration it must submit IPEF to Congress for approval.
Discussions during Indo-Pacific Economic Framework negotiations (photo via Prime Minister’s Office of Japan)
Washington is far from the only seat of government slapping happy faces on this subterfuge. Let’s start our survey with Australia and New Zealand, where the governments seem quite pleased at this opportunity to be sidekicks to U.S. imperial designs. And perhaps believe a sub-imperialist slice of the action could come their way given there are several developing countries taking part in negotiations. The full list of countries taking part in IPEF talks are Australia, Brunei, India, Indonesia, Japan, Republic of Korea, Malaysia, New Zealand, the Philippines, Singapore, Thailand, the United States and Vietnam, although India is taking part in only some of the “pillars.”
The Australia Department of Foreign Affairs and Trade claims that the IPEF “Supports the promotion of clean energy technologies and renewables to help address climate change impacts and the region’s energy transition” and will “accelerate growth in the digital economy, unlock green trade and investment opportunities, and improve labour and environment standards across the region.” The department also said the IPEF “Improves regional trade and investment conditions.” Unfortunately, Canberra does not specify how the IPEF will miraculously bring about those results, and any text circulating or positions taken in negotiations are unknown because the entire process is being kept secret from the public and legislators.
That the IPEF is a back-door attempt to resurrect the Trans-Pacific Partnership was broadly hinted in December 2022, when Foreign Minister Penny Wong “praised Washington’s commitment to Indo-Pacific security but said its departure from a regional trade pact was still being felt and that enhanced U.S. economic engagement with the region should be a priority,” according to a Reuters report.
Corporate interests already lining up in support
A clue to who will benefit comes courtesy of the Australian Strategic Policy Institute, which claims to be an “independent, non-partisan think tank” despite being established by the government, receiving some of its funding from the Australian military and says it reflects the opinions of Australian government officials and industry leaders. A report the Institute published is, like corporate interests in general, favorable toward the proposed pact. “The IPEF is viewed as a potentially innovative way to boost regional investment rather than as a mechanism to strengthen the usual substance of trade agreements, such as market access into the US,” the report said. This corporate vision appears to be to position Australia as a regional assistant to U.S. corporations. The report’s first recommendation: “The US, as the convener of the IPEF, should lean into Australia’s capacity-building expertise in the region” because “Australia has a long history of organising capacity building and training exercises in Southeast Asia and the South Pacific.” In other words, Australia should position itself firmer as a junior imperialist country.
Canberra has been a good pupil, if you want to look at it that way, as symbolized in its decision earlier this year to spend up to $368 billion to buy nuclear submarines from the United States after the U.S. strong-armed the Australian government to cancel a previous cheaper deal to buy conventional submarines from France. The deal also will have U.S. and British submarines stationed on Australia’s Indian Ocean coast.
Much the same comes from Wellington. The New Zealand Foreign Affairs & Trade Ministry has declared, “The Indo-Pacific Economic Framework for Prosperity is an opportunity to strengthen economic cooperation with the United States and across our wider home region. The IPEF will provide an open and inclusive platform for the US to engage more deeply in the economic architecture of the Indo-Pacific, which we think is valuable for both New Zealand and the wider region.” Considering that when the Trans-Pacific Partnership was being negotiated, a key initiative for the United States was to weaken New Zealand’s health care system, it is reasonable to wonder why again negotiating a surrender to U.S. corporate interests would be a good idea.
The architecture of Melbourne (photo by Diliff)
U.S. government negotiators, on behalf of the pharmaceutical industry and its obscene profits, took direct aim at New Zealand’s Pharmaceutical Management Agency program that makes thousands of medicines, medical devices and related products available at subsidized costs in Trans-Pacific talks. The agency’s cutting down the industry’s exorbitant profit-gouging was openly called by the U.S. corporate lobby group Pharmaceutical Research and Manufacturers of America an “egregious example” to be eliminated because of its “focus on driving down costs.” Can New Zealand expect anything better this time?
Other participating governments have issued similar statements, with South Korea Trade Minister Ahn Duk-geun stating that “creating practical outcomes in areas like supply chain and clean energy is imperative.” Malaysian Trade Minister Mohamed Azmin Ali, discussing the supply chain talks, said “Malaysia believes that it is crucial to outline the tangible benefits of this trade and multilateral economic framework.”
With eyes open, grassroots opposition has already begun
Activist groups across the region and around the Pacific Ocean have already begun organizing opposition. This is a drill, after all, that groups organizing in opposition to always one-sided “free trade” agreements have had to repeatedly conduct.
A strong voice of opposition is that of Jane Kelsey, the University of Auckland law professor who long sounded the alarm on the Trans-Pacific Partnership from New Zealand.
Once again taking up the challenge, Professor Kelsey, in a May 2022 article in The Conversation, wrote, “[D]espite the high-profile launch, the IPEF remains an enigma, a high-level idea in search of substance.” She questions why the Australia and New Zealand governments are in these talks at all. “Realistically, the IPEF is a ‘pig in a poke’. Aotearoa New Zealand and Australia need to take a deep breath and realistically assess the opportunities and threats from such an arrangement. … Then they must weigh up the options: stand aside from the negotiations, pursue alternative arrangements, or establish a clear, public negotiating mandate that would truly maximise the nations’ interests for the century ahead.”
That commentary was written at the time of the IPEF’s creation. More recently, in December 2022, Professor Kelsey wrote more forcefully on the imperial nature of this trade deal, intended to reinforce U.S. dominance. Note that, in the U.S. government’s “fact sheet” quoted above that the purpose is to “ensure American workers, small businesses, and ranchers can compete in the Indo-Pacific.” Not even a pretense that working people in the other 13 negotiating countries might benefit. Writing in Bilaterals.org, Professor Kelsey said:
Lupin field, New Zealand (photo by Michael Button)
“It is extraordinary how quickly states across ‘the region’ (whatever we name it) have fallen into line. Old imperial powers have embraced the US’s re-assertion of its regional presence: Australia, with its increasingly strident anti-China stance; Canada, welcoming a new hybridised North-South version of the old Western hegemony; France, wary of its remaining colonies being seduced by China. … Predictably, New Zealand has also fallen into line.”
What we have here is a replay of the Trans-Pacific Partnership, and the TPP agenda of dismantling national protections against the depredations of U.S. multi-national capital. Professor Kelsey wrote:
“Barack Obama famously and unsuccessfully tried to sell the TPPA to the American people, and the US Congress, as the vehicle for America to write the rules and call the shots in the 21st century, not China. Those power politics remain the same. As with the TPPA, the US initiated the negotiation and will set the agenda, dictate the script and approve the outcome, with other states attempting to influence at margins. Even when Trump withdrew the US from the TPPA, many of the US-driven texts were retained by the remaining eleven countries. We also expect parts of the TPPA to form the starting point for US demands. …
‘The prosperity’ promised by IPEF is principally for the US on terms it can manage politically. The Biden administration is determined to bypass the messy problem of securing approval in the Congress. An ‘executive agreement’ that does not contain market access commitments and does not require the US to change any of its laws avoids that problem. So, unlike the TPPA, IPEF will not include negotiations for other parties to access the US market, removing the most obvious means for other countries to point to any commercial gains. The pro-corporate regulatory settings will reflect the status quo in the US. Add to that the penchant for the US to invoke ‘national security’ exceptions to justify breaching its trade obligations, which makes a mockery of an ‘open rules-based system’ and any pretence that IPEF will be a reciprocal exchange of benefits by all the participating countries.”
Opposing a policy of total subservience
Such goals have not gone unnoticed in Australia. Writing in Green Left Weekly, William Briggs noted how fast the new Labor government of Anthony Albanese fell in line. “The first action of a new government is always steeped in symbolism,” he wrote. “The Anthony Albanese Labor government’s reaffirmation of Australia’s unswerving loyalty to the United States at the Quadrilateral Security Dialogue (Quad) meeting was just so. … The new Labor government is facing almost impossible tasks. No capitalist economy can hope to overcome global crises. Any reform, any tinkering at the edges, is to be supported and welcomed, but a policy of total subservience to the interests of the US is hardly the way forward.”
The Indo-Pacific Economic Framework will be detrimental to the developing countries as well. The president of the Malaysian civil society organization Consumers’ Association of Penang, Mohideen Abdul Kader, said:
“US multinational companies are openly pushing for provisions that would prevent the Malaysian government from preferentially purchasing from our local companies. This undermines domestic manufacturing especially in current times. It also adversely affects the need for small and medium sized firms to recover from the effects of Covid-19. The US industry is also demanding stronger intellectual property protection that would, among others, make medicines, textbooks, agricultural and manufacturing inputs and climate change technology more expensive. The digital economy provisions sought by US big tech companies would undermine Malaysia’s privacy, consumer protection, health, environmental, financial, tax and other crucial regulations, while the privately held global food company Cargill wants provisions that allow foreign investors to sue the government in international tribunals.”
Tokyo at night (photo by Basile Morin)
And from the Philippines, Joms Salvador of Gabriela Philippines, in a statement issued through the Asia Pacific Forum on Women, Law and Development, a network of feminist organizations, sees through the attempt to promote the IPEF as benefiting women:
“The IPEF is not, and never will be, just about economic trade, but a link in the chain of US hegemonic dominance in Asia-Pacific, where it has maintained strategic military presence and client relations with its neocolonies in the region, often to the detriment of national sovereignty and the human rights of Asian women and peoples. Women must resist the IPEF and stand our ground in the face of intensifying US-China rivalry and its encroachment on our lives as sovereign peoples.”
Helping women? No, women have seen this movie before
Filipino women are far from alone in rejecting an attempt at whitewashing the corporate-oriented nature of the IPEF. In a statement titled “Statement Rejecting Pinkwashing in the Indo-Pacific Economic Framework,” more than 60 women’s rights organizations, labor unions and civil society organizations firmly rejected an “upskilling” program that is promoted as a way for young women to gain employment in technical fields but it seen as another initiative actually designed to deepen the dominance of U.S.-based Big Tech companies. The coalition of groups, in their statement, said:
“The Upskilling Initiative for Women and Girls promises training by fourteen US Big Tech companies to women in IPEF countries. However, it appears that much of the promise is simply re-packaged training that is already available, and primarily designed as a tool to increase market presence and profits. The initiative is designed to encourage developing countries to agree to ‘high-standard commitments’ on the ‘promotion of cross-border data flows’ which translates to the adoption of rules that have been included in other trade agreements at the behest of Big Tech. Rules that a) restrict governments being able to effectively regulate Big Tech, b) inhibit governments from implementing rights-enhancing data policies for political sovereignty and economic self-determination, c) enable algorithms to be kept secret, d) constrain governments from requiring tech companies to have a local presence, and e) stop governments from pro-actively developing digital industrial policies, including autonomous digital public infrastructure. All of these can be extremely harmful to women’s human rights.
The initiative involves companies that have undermined labour rights, refused to recognise workers as employees, have used tax havens to avoid making tax contributions to public services essential for gender equality. Previous trade agreements have included commitments to gender equality, but those agreements have instead harmed women’s human rights by liberalising services, promoting the privatisation of public services essential in addressing discrimination and exclusion, deregulating the labour market, and promoting a race to the bottom in wages and conditions, and denying governments the policy space required for people to progressively realise their economic rights.”
Opposition also arises in the imperial center
Opposition has begun to be organized across the Pacific, in the United States itself. A letter initiated by Citizens Trade Campaign, a national coalition including unions, community groups and other organizations, released on March 2023 a petition signed by more than 400 labor, environmental, community and religious groups calling for the Biden administration to include strong labor rights based on International Labour Organization standards, binding commitments to combat global warming and digital standards to protect consumer rights and privacy while reining in Big Tech abuses. The letter also asks for transparency during IPEF negotiations: “A more transparent and participatory negotiating process for IPEF would allow for a wider set of interests to provide informed input and ensure equitable treatment of communities which are not part of the official U.S. trade advisor system most representing corporations who now have access to U.S. proposals and other confidential IPEF texts.”
A separate U.S. effort, by a group of consumer advocates, calls on the Biden administration to eliminate IPEF language that they say could undermine efforts to hold Big Tech accountable for their privacy practices. The consumer advocates have not seen any IPEF text because it remains secret from the public, but in their letter they said they “understand from policymakers and others who have reviewed the draft” that its digital trade section could help let U.S. tech companies off the hook when it comes to privacy safeguards, The Washington Post reports. The letter adds that the IPEF contains “problematic terms” giving “Big Tech firms control of our personal data” while limiting other countries from applying regulations.
A third negotiating round is scheduled for May in Singapore. The first round of talks, in Brisbane in December 2022, ended without a status report by participants but reportedly negotiators set aside more challenging issues. The second round, in Bali, Indonesia, ended with a commitment “to an aggressive negotiating schedule throughout 2023,” with nothing of substance revealed.
Activists on both sides of the Pacific had to organize a years-long campaign to defeat the Trans-Pacific Partnership, an effort that can only be said, at best, to be partially successful because most of the countries involved did eventually sign it, albeit with somewhat less draconian rules because the most hard-line government, that of the United States, dropped out due to intense domestic pressure. As with the TPP, and the many other “free trade” agreements that have been implemented, the purported benefits for working people are illusions. Fanaticism and fantasy have long driven government propaganda in promoting these deals. Once the TPP text was released, it could readily be seen why it had been secret throughout the negotiations.
“Free trade” agreements — even when falsely advertised as something else — have very little to do with trade and much to do with imposing corporate wish lists, including sweeping away health, safety, labor and environmental standards that can’t be eliminated through democratic means. As with all “free trade” agreements, the fault lines are along class, not national, interests. Industrialists and financiers around the world understand their class interests and are united to promote their interests. Working people uniting across borders, in a broad movement, is the only path toward reversing corporate agendas that accelerate races to the bottom.
If there is one message that seemed to surface through last month’s crucial meetings of the Communist Party of China it is continuity. The inference that might best be taken is no significant change from the path on which the party has led China in recent years should be expected.
That path, despite the oft-used slogan “Socialism with Chinese Characteristics for a New Era,” has been a restructuring of the economy toward capitalism, albeit a gradual entry on Chinese terms and keeping the “commanding heights” of the economy in state hands. If we attempt to grasp the meaning of the communiqués and reports issued surrounding the party’s 20th National Congress, it would be better to observe through a holistic lens rather than fixating on personalities.
The Western corporate media obsessively dwelled on President Xi Jinping’s third term, as if nothing else was of note or as if President Xi is an all-powerful sole dictator single-handedly deciding the fate of 1.4 billion Chinese. To be sure, communiqués, internal press reports and speeches repeatedly stressed the party leader’s “core position” and urged all Chinese to fully study and implement “Xi Jinping Thought” along with the ritualistic panegyrics to the party. There appears to be no doubt as to his leadership, both through the extravagant praises for him and that the top leadership body, the Politburo Standing Committee, appears to consist solely of those aligned with him.
Mount Emei/Emei Shan in Sichuan province. (Photo by McKay Savage, London.)
But nobody in a country ruled by a communist party is a sole dictator, excepting the unique circumstances of the Josef Stalin dictatorship and Enver Hoxha in Albania. Given the opaqueness of the Communist Party of China (CPC) it is impossible for us to say with any certainty what is going on behind closed doors. Is President Xi truly all-powerful, or does he lead a faction that has gained majority backing among party leaders? Does his third term, breaking two decades of precedent, represent not a grab for power but rather a reflection of opinion alignment behind closed doors and a desire for continuity in a time when more difficulties are almost assuredly coming? Certainly this is possible.
Let’s turn away from parsing personalities and instead examine key communiqués and reports, and how we might reasonably interpret them.
Prominently continuing to honor all past leaders
The most important document to read is arguably the Resolution of the 20th National Congress of the CPC on the Report of the 19th Central Committee adopted at the closing session of the Congress on Oct. 22. The very first paragraph reads:
“The Congress has held high the great banner of socialism with Chinese characteristics; adhered to Marxism-Leninism, Mao Zedong Thought, Deng Xiaoping Theory, the Theory of Three Represents, and the Scientific Outlook on Development; and fully applied Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era.”
This list is repeated five paragraphs later. Why would this be significant? That it is the opening of the resolution is significant because it is nearly identical to the equivalent statement issued in 2017 when the 19th Communist Party Congress adopted the report of the then outgoing Central Committee. Then, as now, every Chinese leader is mentioned. The “Scientific Outlook on Development” is the product of President Xi’s predecessor, Hu Jintao, who declared that China must end its reliance on cheap labor and invest more in science and technology. The “Theory of Three Represents” was laid down by former President Hu’s predecessor, Jiang Jemin. (Incidentally, this tends to throw cold water on the idea that former President Hu was “ejected” from the Congress; if the current leaders were intent on “humiliating” him as corporate media commentaries assert, why would the party enshrine his policy in their most important communiqués?)
That October 2017 party Congress confirmed that the role of the market would be “decisive” rather than “basic,” consistent with the CPC leadership switching the role of the market from “basic” to “decisive” in 2013 at a key Central Committee plenum. That would certainly seem to contradict the stress on Mao Zedong Thought, a major pillar that the party consistently upholds as a source of authority. That pillar is in contradiction with the era of Deng, who inaugurated China’s move from its Maoist path and toward the introduction of capitalism. It is in particular a contradiction with former President Jiang’s “Theory of Three Represents,” a declaration that the party should represent the most advanced productive forces, the most advanced culture and the broadest layers of the people. That is an assertion that the interests of different classes are not in conflict and that the party can harmoniously represent all classes simultaneously.
The skyline of Beijing (photo by Picrazy2)
Because there is no way to reconcile these divergent programs, the consistent listing of all party leaders since the 1949 revolution can reasonably be read as a statement of continuity with the decades of China’s current capitalist path, stretching back to the early Deng years. Yet the Resolution of the 20th Congress, in apparent contradiction to China’s growing private sector, the stress on the “decisive” nature of markets and China’s integration into the world capitalist system, declared that Marxism remains central to the party’s work. The resolution states:
“The Congress stresses that Marxism is the fundamental guiding ideology upon which our Party and our country are founded and thrive. Our experience has taught us that, at the fundamental level, we owe the success of our Party and socialism with Chinese characteristics to the fact that Marxism works, particularly when it is adapted to the Chinese context and the needs of our times. [The party] has achieved major theoretical innovations, which are encapsulated in Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era. … Only by integrating the basic tenets of Marxism with China’s specific realities and fine traditional culture and only by applying dialectical and historical materialism can we provide correct answers to the major questions presented by the times and discovered through practice and can we ensure that Marxism always retains its vigor and vitality.”
“The sound theoretical guidance of Marxism is the source from which our Party draws its firm belief and conviction and which enables our Party to seize the historical initiative. … Taking Marxism as our guide means applying its worldview and methodology to solving problems in China; it does not mean memorizing and reciting its specific conclusions and lines, and still less does it mean treating it as a rigid dogma.”
Drawing on past triumphs to justify present policies
Understood properly, Marxism is a living body of work and not a catechism, and can only be applied with creativity and analysis of concrete conditions. Nobody can rebuke the Chinese for adapting it to their particular circumstances and need to develop rapidly. But at what point does a “socialist market” economy tip over to a capitalist-oriented economy? There is no bright line that can be drawn but at some point, the rubicon has been crossed. Then there is the matter of what lessons might be drawn. Another clue as to what might be expected from the party in the near future might be derived from a visit by the Politburo Standing Committee to Yan’an, the old revolutionary base in northwest China. A report by Xinhua, China’s news service, quoted President Xi as stating that “the firm and correct political direction was the essence of the Yan’an Spirit.”
The lesson to derive from that spirit, according to President Xi, is that progress depends on the party and that party leadership is unquestionable. Xinhua summarized his interpretation of that spirit as follows:
“All Party members must adhere to the correct political direction, resolutely implement the Party’s basic theory, line, and policy, thoroughly implement the Party Central Committee’s decisions and plans, so as to further advance the great cause pioneered by revolutionaries of the older generation. … All Party members must stand firmly with the people, act on the Party’s purpose, put into practice the mass line, maintain close ties with the people, take the initiative to apply the people-centered development philosophy to all work, and achieve solid progress in promoting common prosperity, so that the people share more fully and fairly in the gains of modernization.”
Shanghai (photo by dawvon)
So there won’t be any slackening of party discipline, nor of any loosening of authoritarian party control over society. Nor will there be any swerving from the long-standing goal of achieving “common prosperity.” To return to the Resolution of the 20th Congress, the party states its goal as:
“[F]irst, basically realizing socialist modernization from 2020 through 2035; second, building China into a great modern socialist country that is prosperous, strong, democratic, culturally advanced, harmonious, and beautiful from 2035 through the middle of this century. [One of the main objectives in the next five years is to] Make new strides in reform and opening up; make further progress in modernizing China’s system and capacity for governance; further improve the socialist market economy; put in place new systems for a higher-standard open economy. We should continue reforms to develop the socialist market economy, promote high-standard opening up, and accelerate efforts to foster a new pattern of development that is focused on the domestic economy and features positive interplay between domestic and international economic flows.”
The reference to “positive interplay between domestic and international economic flows” is another signal of continuity. In May 2020, the Politburo announced a policy of “dual circulation” development. This policy represents lessening China’s reliance on exports and imports — “international circulation” — and rebalancing with production for the domestic market. This is intended to lessen China’s reliance on imports for its production and become more self-reliant in the wake of U.S.-led Western hostility to Chinese technological development. Just last month, the Biden administration announced sweeping prohibitions on the sale of semiconductors, advanced computing chips, chip-making equipment and other high-technology products to curb China’s ability to indigenously develop these technologies.
“The plan places a greater focus on the domestic market, or internal circulation, and is China’s strategic approach to adapting to an increasingly unstable and hostile outside world,” according to an explanatory article in the South China Morning Post. “Officially, China will look inward to tap the potential of its huge domestic market and rely on indigenous innovation to fuel growth. But despite the increased emphasis on the domestic market and on self-reliance in some sectors, President Xi has said repeatedly that China will not completely close itself off from the outside world, and will instead open up more.”
The dual-circulation policy is also a response to an expected reduction in reliance on exports on the part of China’s export destinations in the wake of economic disruptions caused by the Covid-19 pandemic. The Morning Post writes, “It is essentially a defensive approach by Beijing to prepare for the worst-case scenario as the world undergoes significant geopolitical and economic changes. The coronavirus exposed how dependent the world was on China for critical supplies of medical equipment, with nations around the world vow[ing] to be more self reliant on such products, amid a push by the US for a sharp decoupling of the world’s two largest economies.”
Investment, not consumer consumption, continues to drive economy
The dual-circulation policy has been integrated into China’s 14th five-year plan, covering 2021 to 2025. But this policy doesn’t represent any jarring change from past policy, as China has long sought to re-balance its economy to improve consumer consumption. Progress here has been slow — household consumption there was reported at only 40% in 2021, little improved from 36% in 2007. (Household consumption is all the things that people buy for personal use from toothbrushes to automobiles.) By comparison, advanced capitalist economies tend to have household consumption account for 60% to 70% of their economies. China will remain an investment-dependent economy for some time to come.
The funds necessary for China’s massive domestic investments don’t come simply from trade surpluses; they also come from depressed living standards. That means low wages for most Chinese and increased inequality.
“[T]he vast majority of China’s citizens still have a disposable income of less than 5,000 yuan per month, and over two-thirds of the population make substantially less,” according to the China Labor Bulletin, a a non-governmental organization based in Hong Kong that “supports and actively engages with the workers’ movement in China.” For comparison, 5,000 yuan equals US$686. And even that paltry amount is well above the minimum wage. The Bulletin report says, “The highest monthly minimum wage as of July 2020 was in Shanghai (2,480 yuan), which was roughly double the minimum wage in smaller cities in provinces such as Hunan, Hubei, Liaoning and Heilongjiang. In setting this wage, local governments are focused on industry concerns and local investment rather than on ensuring a liveable wage for workers, and employers likewise still find ways to avoid paying the minimum wage.” For comparison, 2,480 yuan equals US$340.
Chinese regulations mandate that each region should set its minimum wage at between 40 and 60 percent of the local average wage, but very few cities have ever reached that target, the Bulletin report says. “Moreover, the discrepancy between the average and the minimum wage has actually increased over the last decade as higher wages for the privileged few has pushed the average wage up and wages for the lowest-paid have stagnated. In many cities such as Guangzhou and Chongqing, the minimum wage is now less than 24 percent of the average wage, while in Beijing, which has some of the highest-paid employees in the country, it is just under 20 percent.”
People’s Grand Hall in Chongqing (photo by Chen Hualin)
Similar to advanced capitalist countries, inequality is worsening in China. “The annual average per capita disposable income of the richest 20 percent in China’s cities increased by nearly 34,000 yuan in the seven years from 2013 to 2019, while the disposable income of the poorest 20 percent in urban areas grew by just over 5,500 yuan during the same period,” the Bulletin report says. The report makes a damning conclusion familiar to those living in places with harsh inequality like the United States:
“A superficial glance at China’s major cities seems to show a reasonably affluent society: young, hard-working, middle-class families, determined to make a better life for themselves. This illusion was shattered however in late 2017 when the municipal government of Beijing embarked on a 40-day high-profile campaign to clean out the city’s shanty towns and evict the so-called ‘low-end population’ who produce, market, and deliver the goods, services and lifestyle products that Beijing’s middle class families aspire to have. The evictions revealed the harsh truth that the affluence of China’s cities depends almost entirely on the impoverishment of the underclass.”
There is no independent organization pushing against inequality. The All-China Federation of Trade Unions is the sole legal union confederation in China; independent unions are not tolerated. Although the ACFTU is tasked with protecting workers and sometimes stands up for them, overall it “has rarely been a staunch advocate for workers” and is “dedicated to ensuring ‘harmonious labour relations’ and smooth economic development for the nation.” Strikes are often carried out in defiance of the ACFTU but as a consequence tend to be localized and uncoordinated. The Bulletin has recorded 666 strikes thus far in 2022, roughly on pace with 2020 although down from 1,095 in 2021.
Development, but who is benefiting?
Who is enjoying the fruits of “smooth economic development”? China has 1,133 billionaires in 2022, up 75 from previous year, the most in the world and ahead of the U.S., according to the party newspaper Global Times. The paper celebrated this in its report, saying the high number of billionaires “underlined robust growth in various industries in China.”
Somehow that is not consistent with the construction of a socialist, egalitarian economy. Nor does it meet with disapproval from “think tanks” in the West that are dedicated to upholding and strengthening corporate domination.
Interestingly, separate papers recently issued by the Peterson Institute for International Economics and Citibank both predict further privatization in China, which, naturally, they approve. It’s good to remember here that although the corporate mass media routinely lies and passes off propaganda as news for popular audiences, those sources are truthful when the audience is big business; the bourgeoisie wants accurate information. (A nice example illustrating this is a general strike in Copenhagen in the late 1990s in which a key demand was a sixth week of mandatory paid vacation for Danish workers. I read not a word about it in general newspapers but there was daily coverage in the Dow Jones Newswire, an expensive service used by financiers, where I worked at the time.)
Although the state sector of the Chinese economy slightly increased this year, reversing a long trend of shrinkage, there seems little concern from capitalist boosters. The Peterson Institute, which has never seen a corporate-promoting so-called “free trade” agreement it didn’t like, declared that global commodity price increases and China’s property crisis were behind the “pause in the rise of the private sector.” It would be “simplistic and premature” to conclude 2022’s reverse is permanent, assuring its wealthy readers that “the drop in the previous private-sector advance should not be viewed as the start of a new trend of continuous decline, at least not yet.”
Nor are Citibank economists worried. A Citibank report similarly called the idea of a reversal of privatization “superficially attractive.” Rather, “support for private sector development is evident in a number of ways in recent years, from the effort to simplify the process of registering businesses to a new bankruptcy law and greater reliance on the court system to successfully adjudicate commercial disputes.” As to the “dual circulation” strategy, the bank notes that a fear that the U.S. might impose sanctions on China similar to those on Russia are driving China’s move toward self-reliance, and that reliance in turn will lead to reduced export opportunities for U.S., Germany, Japan, South Korea and Taiwan. That trend nonetheless dates back to the Trump administration’s moves against Beijing.
In contrast to continual forecasts in the corporate mass media predicting collapse for the Chinese economy, Citibank economists seem to believe China will be fine, in part due to the big trade agreement it signed in November 2020 with Asia-Pacific countries while subtly acknowledging growing critiques of runaway neoliberalism. “China’s engagement with the Regional Comprehensive Economic Partnership is a sign that even if the world is experiencing deglobalization, a growing regionalization might end up being the most likely replacement for the kind of globalization that now seems anachronistic,” the Citibank report says.
More state-owned enterprises would help Chinese workers
Corporate interests across the West would of course like more and faster privatization, as would the governments, especially the White House, that cater to those interests. But would that be a good idea? In contrast to standard discourse that mindlessly intones “private good, government bad,” when actual studies are conducted — naturally, only done by heterodox economists not interested in parroting propaganda for public consumption — a much different picture arises.
A study published in the March 2022 issue of Review of Radical Political Economics concludes that “a higher share of state-owned enterprises is favorable to long-run growth and tends to offset the adverse effect of economic downturns on the regional level.” The paper’s authors, Hao Qi and David M. Kotz, found that China’s state-owned enterprises (SOEs) in 2015 had average wages 65% higher than private enterprises; most SOE employees have access to social security, while only a few private-enterprise employees have access to it; and SOE working hours are less than in the private sector. (These findings should be no surprise to anybody familiar with conditions in China’s many sweatshops.)
SOEs are not just good for employees; they are better for the economy as well. The authors write:
“SOEs have played a pro-growth role in the Chinese economy in several ways: first, SOEs play the role of an economic stabilizer, offsetting the adverse effect of economic downturns; second, SOEs promote technical progress by carrying out investments in riskier technical areas. In addition, SOEs have established a high-road approach to treating workers by providing workers with a living wage, which is crucial for the reproduction of labor power. We suggest that this high-road approach has a potential pro-growth role, which is favorable for the transition of the Chinese economy to a more sustainable growth model in the near future. SOEs appear to be less profitable than private enterprises; however, the higher profitability of private enterprises to a large extent results from the intense exploitation of their workers. If the profits of private enterprises are invested, the result is growth—but profits of private enterprises also go to dividends and non-productive uses such as speculative purchase of existing assets.”
Three Gorges Dam, a project funded by the World Bank that displaced 1.3 million people (photo by Christoph Filnkössl)
The low wages paid by the private sector — which gives the appearance of those enterprises being more efficient — weakens the Chinese economy. An over-reliance on investment and exports are also de-stabilizing factors, the authors write.
“With low wages, the consumption demand of the economy has been insufficient, making the economy vulnerable to overinvestment, trade conflicts, and external shocks from the global economy. Thus, moving to a more sustainable growth model requires steadily increasing wages and consumption in aggregate demand and moving away from reliance on investments and exports. It is easier for SOEs to accept higher wages given their high-road approach to treating workers. Thus, SOEs can be the bridge that connects the old and a more sustainable new economic model.”
Noting that most economic literature “fails to consider that private enterprises treat their workers badly,” the role of SOEs in stabilizing economic growth is ignored. The study by Dr. Qi and Dr. Kotz concludes that “privatization would be harmful to economic growth in the long run. In our view, privatization would destroy a central pillar for China to be able to achieve sound economic growth under unfavorable conditions.”
Too much reliance on private sector counter-productive
Another heterodox economist, Michael Roberts, also argues that privatization would be counter-productive. “[I]t is China’s large capitalist sector that threatens China’s future prosperity,” he writes. Debt and rising housing prices are products of a reliance on the private sector:
“The real problem is that in the last ten years (and even before) the Chinese leaders have allowed a massive expansion of unproductive and speculative investment by the capitalist sector of the economy. In the drive to build enough houses and infrastructure for the sharply rising urban population, central and local governments left the job to private developers. Instead of building houses for rent, they opted for the ‘free market’ solution of private developers building for sale. Beijing wanted houses and local officials wanted revenue. The capitalist housing projects helped deliver both. But the result was a huge rise in house prices in the major cities and a massive expansion of debt. Indeed, the real estate sector has now reached over 20% of China’s GDP.”
There will not be a financial crash in China, Mr. Roberts writes, because the country’s big banks are in state hands and the government can order them to take whatever measures are necessary to stabilize the financial system, tools not available elsewhere. Nonetheless, the CPC’s “common prosperity” project has been launched due to the pandemic exposing “huge inequalities to the general public,” with China’s billionaires reaping benefits while ordinary people suffer lockdowns. The share of personal wealth for China’s billionaires doubled from 7% in 2019 to 15% of GDP in 2021, Mr. Roberts reports. What China needs, he writes, is more planning and accountability:
“These zig zags are wasteful and inefficient. They happen because China’s leadership is not accountable to its working people; there are no organs of worker democracy. There is no democratic planning. Only the 100 million CP members have a say in China’s economic future, and that is really only among the top. Far from the answer to China’s mini-crisis requiring more ‘liberalising’ reforms towards capitalism, China needs to reverse the expansion of the private sector and introduce more effective plans for state investment, but this time with the democratic participation of the Chinese people in the process. Otherwise, the aims of the leadership for ‘common prosperity’ will be just talk.”
Before and during President Xi’s reign, privatization and reliance on exports have increased. The reforms inaugurated in the Deng era and continuing into the 2000s brought forth special economic zones to draw in foreign direct investment (FDI), job security guarantees replaced with contracts, welfare provisions scrapped, privatizations, state-run companies converted to state-owned enterprises expected to maximize profits, 50 million laid off and an intensification of work. Fifty millions layoffs! The government has sought to retain the “commanding heights” of the economy while divesting itself of smaller and medium-sized enterprises through closings and bankruptcies, a policy begun in the late 1990s of “grasping the large and letting the small go.”
Privatization and layoffs on China’s path toward capitalism
A couple of numbers illustrate how far-reaching China’s move toward capitalism has been. As late as the end of 2010, among China’s 100 largest corporations, 78% of aggregate market value was held by SOEs vs. 8% for the private sector. By June 30, 2022, it was 42% for SOEs and 45% for the private sector. That’s just the largest enterprises. When we look at the Chinese economy as a whole, SOEs accounted for about 25% of the economy in 2021, according to a source that wishes that total to be far lower. Finally, China’s debt is estimated at 350% of its gross domestic product, an extraordinarily high sum even if that is not an immediate problem given the country’s large trade surpluses.
China’s winding road toward capitalism needn’t be seen as intentional or the product of any cabal. A strong critic of China from a Left perspective, Ralf Ruckus, who is highly critical of what he calls China’s definitive return to capitalism, nonetheless offers this explanation: “This transition was not the result of a detailed master plan or blueprint but of a series of — often experimental — reform steps taken to improve the country’s economic performance, save the socialist system, and stabilize CCP rule. This is the meaning of the phrase ‘crossing the river by feeling the stones’ that Deng Xiaoping allegedly used to describe his understanding of the course of reform.”
Of course, none of us outside the party leadership, and certainly those of us outside the country, can know for sure what the long-term intentions might be. Our guides are the communiqués following important party meetings, the speeches of party leaders and, most importantly, the policies carried out and the concrete results of those policies.
President Xi had begun taking steps to reign in certain Chinese capitalists and has more frequently talked about Marxism, even before last month’s party gatherings. Whether these are the opening moves of a future reversal back toward socialism or simply an assertion of party rule will not be known for some time. Even if it were true that the moves toward capitalism since the 1990s are intended to be a temporary expedient, as some pro-China Leftists in the West like to argue, becoming more deeply entangled in markets and the world capitalist system carries its own momentum, a drift not at all easy to check. There are industrial and party interests that favor the path China has been on since the 1990s, and those interests represent a significant social force that would resist structural moves toward socialism.
Whatever long-term intentions the party leadership may have, its short-term tactical policies are likely to be driven by a need to counteract U.S.-led aggression against it, which implies a high likelihood of increased diversion of internal resources toward a continuing military buildup. Increased tensions between Beijing and Washington are not in the interests of working people on either side of the Pacific. The U.S. maintains its global hegemony through its stranglehold on the global financial system even more than through military strength, and that domination, while eroding, remains far from any danger of being toppled. China, then, will surely be focused on internal development for some time to come. That development is increasingly capitalist-based, a direction that is fraught with contradictions and dangers.
In the former Soviet bloc, socialism came to be seen as simply expropriation and building industry. But placing production in public or state hands is merely a pre-condition, not the actual content, of socialism. Moreover, China is moving toward, not away, from privatization. A fuller definition of socialism mandates that democracy be extended to economic and political matters, beyond what is possible in capitalism. Socialism can be defined as a system in which production is geared toward human need rather than private profit for a few; where everybody is entitled to have a say in what is produced, how it is produced and how it is distributed; that these collective decisions are made in the context of the broader community and in quantities planned to meet needs; political decision-making is the hands of the communities affected; and quality health care, food, shelter and education are human rights. There is no class, vanguard or other group that stands above society, arrogating decision-making, wealth and/or privileges to itself.
It is easy enough to point out that such conditions are far from reality in any capitalist country. But such conditions are far from reality in China as well. The Chinese nation must develop within a world capitalist system deeply hostile to any attempt at building an alternative, has its own strong cultural traditions, and must find its own path toward development while navigating a complex set of economic pressures. Nor can any expectation that any socialist path can be easy or short be realistic, as history as amply proven. At the same time we shouldn’t mechanically make assumptions because of the label a country’s ruling party uses to name itself. Better to analyze with a clear eye.
The United States government is able to impose its will on all the world’s countries. The rest of the world, even some of the strongest imperialist countries of the Global North, lie prostrate at the feet of the U.S. What is the source of this seemingly impregnable power? Which of course leads to the next question: How long can it last?
The U.S. moves against any country that dares to act on a belief that its resources should be for its own people’s benefits rather than maximizing profits of multinational corporations or prioritizes the welfare of its citizens over corporate profit or simply refuses to accept dictation in how it should organize its economy. The military is frequently put to use, as are manipulation of the United Nations and the strong arms of the World Bank and International Monetary Fund (IMF). But sanctions are a frequently used tool, enforced on countries, banks and corporations that have no presence in the U.S. and conduct business entirely outside the United States. The U.S. can impose its will on national governments around the world, using multilateral institutions to force governments to act in the interest of multinational capital, even when that is opposite the interests of the country itself or that country’s peoples. And when a country persists in refusing to bend to U.S. demands, sanctions imposing misery on the general population are unilaterally imposed and the rest of the world is forced to observe them.
In short, the U.S. government possesses a power that no country has ever held, not even Britain at the height of its empire. And that government, regardless of which party or what personality is in the White House or in control of Congress, is ruthless in using this power to impose its will.
This power is most often wielded within an enveloping shell of propaganda that claims the U.S. is acting in the interest of “democracy” and maintaining the “rule of law” so that business can be conducted in the interest of a common good. So successful has this propaganda been that this domination is called the “Washington Consensus.” Just who agreed to this “consensus” other than Washington political elites and the corporate executives and financial speculators those elites represent has never been clear. “Washington diktat” would be a more accurate name.
Much speculation among Left circles exists as to when this domination will be brought to an end, with many commentators believing that the fall of the U.S. dollar is not far off and perhaps China will become the new center of a system less imperialistic. On the Right, particularly in the financial industry, such speculation is far from unknown, although there of course the downfall of the dollar is feared. In financial circles, however, there is no illusion that the end of dollar supremacy in world economics is imminent.
There are only two possible challengers to U.S. dollar hegemony: The European Union’s euro and China’s renminbi. But the EU and China are very much subordinated to the dollar, and thus not in a position to counter U.S. dictates. Let’s start here, and then we’ll move on to the mechanics of U.S. economic hegemony over the world, which rests on the dollar being the global reserve currency and the leveraging of that status to control the world’s multilateral institutions and forcing global compliance with its sanctions.
Europe “helpless” in the face of U.S. sanctions
A February 2019 paper published by the German Institute for International and Security Affairs, discussing the inability of EU countries to counteract the Trump administration’s pullout from the Joint Comprehensive Plan of Action, the multilateral nuclear deal with Iran, flatly declared the EU “helpless”: “In trying to shield EU-based individuals and entities with commercial interests from its adverse impact, European policy-makers have recently been exposed as more or less helpless.”
The legislative arm of the EU, the European Parliament, was no more bullish. In a paper published in November 2020, the Parliament wrote this about U.S. extraterritorial sanctions: “[T]his bold attempt to prescribe the conduct of EU companies and nationals without even asking for consent challenges the EU and its Member States as well as the functioning and development of transatlantic relations. The extraterritorial reach of sanctions does not only affect EU businesses but also puts into question the political independence and ultimately the sovereignty of the EU and its Member States.”
No such open worries are going to be said in public by the Chinese government. But is China better prepared than the EU? Mary Hui, a Hong Kong-based business journalist, wrote in Quartz, “China is actually far more vulnerable to US sanctions than it will let on, even if the sanctions are aimed at individuals and not banks. That’s because the primary system powering the world’s cross-border financial transactions between banks, Swift, is dominated by the US dollar.” We’ll delve into this shortly. As a result of that domination, Ms. Hui wrote, “the US has outsize control over the machinery of international transactions—or, as the Economist put it, ‘America is uniquely well positioned to use financial warfare in the service of foreign policy.’ ”
Grand Place, Brussels (photo by Wouter Hagens)
In 2017, then U.S. Treasury Secretary Steven Mnuchin threatened China with sanctions that would cut it off from the U.S. financial system if it didn’t comply with fresh United Nations Security Council sanctions imposed on North Korea in 2007; he had already threatened unilateral sanctions on any country that trades with North Korea if the United Nations didn’t apply sanctions on Pyongyang.
So neither Brussels or Beijing are in a position, at this time, to meaningfully challenge U.S. hegemony. That hegemony rests on multiple legs.
The world financial platform that the U.S. ultimately controls
The use (or, actually, abuse) of the two biggest multilateral financial institutions, the World Bank and the IMF, are well known. The U.S., as the biggest vote holder and through the rules set up for decision-making, carries a veto and thus imposes its will on any country that falls into debt and must turn to the World Bank or IMF for a loan. There also are the U.S.-controlled regional banks, such as the Asian Development Bank and Inter-American Development Bank, that impose U.S. dictates through the terms of their loans.
Also important as an institution, however, is a multilateral financial institution most haven’t heard of: The Society for Worldwide Interbank Financial Telecommunication, known as SWIFT. Based in Brussels, SWIFT is the primary platform used by the world’s financial institutions “to securely exchange information about financial transactions, including payment instructions, among themselves.” SWIFT says it is officially a member-owned cooperative with more than 11,000 member financial institutions in more than 200 countries and territories.
That sounds like it is a truly global entity. Despite that description, the U.S. holds ultimate authority over it and what it does. U.S. government agencies, including the CIA, National Security Agency and Treasury Department, have access to the SWIFT transaction database. Payments in U.S. dollars can be seized by the U.S. government even when the transaction is between two entities outside the U.S. And here we have a key to understanding.
The skyline of Beijing (photo by Picrazy2)
Beyond the ability of U.S. intelligence agencies to acquire information is the status of the U.S. dollar as the world’s reserve currency, the foundation of the world capitalist system of which SWIFT is very much a component and thus subject to dictates the same as any other financial institution. What is a reserve currency? This succinct definition offered by the Council on Foreign Relations provides the picture:
“A reserve currency is a foreign currency that a central bank or treasury holds as part of its country’s formal foreign exchange reserves. Countries hold reserves for a number of reasons, including to weather economic shocks, pay for imports, service debts, and moderate the value of its own currency. Many countries cannot borrow money or pay for foreign goods in their own currencies—since much of international trade is done in dollars—and therefore need to hold reserves to ensure a steady supply of imports during a crisis and assure creditors that debt payments denominated in foreign currency can be made.”
The currency mostly used is the U.S. dollar, the Council explains:
“Most countries want to hold their reserves in a currency with large and open financial markets, since they want to be sure that they can access their reserves in a moment of need. Central banks often hold currency in the form of government bonds, such as U.S. Treasuries. The U.S. Treasury market remains by far the world’s largest and most liquid—the easiest to buy into and sell out of bond market[s].”
If you use dollars, the U.S. can go after you
Everybody uses the dollar because everybody else uses it. Almost two-thirds of foreign exchange reserves are held in U.S. dollars. Here’s the breakdown of the four most commonly held currencies, as of the first quarter of 2020:
U.S. dollar 62%
EU euro 20%
Japanese yen 4%
Chinese renminbi 2%
That 62 percent gives the U.S. government its power to not only impose sanctions unilaterally, but to force the rest of the world to observe them, in conjunction with the use of the dollar as the primary currency in international transactions. In some industries, it is almost the only currency used. To again turn to the Council on Foreign Relations explainer:
“In addition to accounting for the bulk of global reserves, the dollar is the currency of choice for international trade. Major commodities such as oil are primarily bought and sold using U.S. dollars. Some countries, including Saudi Arabia, still peg their currencies to the dollar. Factors that contribute to the dollar’s dominance include its stable value, the size of the U.S. economy, and the United States’ geopolitical heft. In addition, no other country has a market for its debt akin to the United States’, which totals roughly $18 trillion.
The dollar’s centrality to the system of global payments also increases the power of U.S. financial sanctions. Almost all trade done in U.S. dollars, even trade among other countries, can be subject to U.S. sanctions, because they are handled by so-called correspondent banks with accounts at the Federal Reserve. By cutting off the ability to transact in dollars, the United States can make it difficult for those it blacklists to do business.”
Sanctions imposed by the U.S. government are effectively extra-territorial because a non-U.S. bank that seeks to handle a transaction in U.S. dollars has to do so by clearing the transaction through a U.S. bank; a U.S. bank that cleared such a transaction would be in violation of the sanctions. The agency that monitors sanctions compliance, the Office of Foreign Assets Control (OFAC), insists that any transaction using the dollar comes under U.S. law and thus blocking funds “is a territorial exercise of jurisdiction” wherever it occurs, even if no U.S. entities are involved. Even offering software as a service (or for download) from United States servers is under OFAC jurisdiction.
Two further measures of dollar dominance are that about half of all cross-border bank loans and international debt securities are denominated in U.S. currency and that 88 percent of all foreign-exchange transactions in 2019 involved the dollar on one side. That forex domination has remained largely unchanged; the figure was 87 percent in April 2003.
Dollar dominance cemented at end of World War II
The roots of the dollar as the global reserve currency go back to the creation of the Bretton Woods system in 1944 (named for the New Hampshire town where representatives of Allied and other governments met to discuss the post-war monetary system as victory in World War II drew closer). The World Bank and IMF were created here. To stabilize currencies and make it more difficult for countries to reduce the value of their currencies for competitive reasons (to boost exports), all currencies were pegged to the dollar, and the dollar in turn was convertible into gold at $35 an ounce. Thus the dollar became the center of the world financial system, which cemented U.S. dominance.
By the early 1970s, the Nixon administration believed that the Bretton Woods monetary system no longer sufficiently advantaged the United States despite its currency’s centrality within the system cementing U.S. economic suzerainty. Because of the system of fixing the value of a U.S. dollar to the price of gold, any government could exchange the dollars it held in reserve for U.S. Treasury Department gold on demand.
Rising world supplies of dollars and domestic inflation depressed the value of the dollar, causing the Treasury price of gold to be artificially low and thereby making the exchange of dollars for gold at the fixed price an excellent deal for other governments. The Nixon administration refused to adjust the value of the dollar, instead in 1971 pulling the dollar from the gold standard by refusing to continue to exchange foreign-held dollars for gold on demand. Currencies would now float on markets against each other, their values set by speculators rather than by governments, making all but the strongest countries highly vulnerable to financial pressure.
“Imperialism is the real virus.” (photo by Paul Sableman from St. Louis)
The world’s oil-producing states dramatically raised oil prices in 1973. The Nixon administration eliminated U.S. capital controls a year later, encouraged oil producers to park their new glut of dollars in U.S. banks and adopted policies to encourage the banks to lend those deposited dollars to the South. But perhaps “encourage” is too mild a word. The economist and strong critic of imperialism Michael Hudson once wrote, “I was informed at a White House meeting that U.S. diplomats had let Saudi Arabia and other Arab countries know that they could charge as much as they wanted for their oil, but that the United States would treat it as an act of war not to keep their oil proceeds in U.S. dollar assets.”
Restrictions limiting cross-border movements of capital were opposed by multi-national corporations that had moved production overseas, by speculators in the new currency-exchange markets that blossomed with the breakdown of Bretton Woods and by neoliberal ideologues, creating decisive momentum within the U.S. for the elimination of capital controls. The ultimate result of these developments was to make the dollar even more central to world trade and thus further enhance U.S. control. Needless to say, bipartisan U.S. policy ever since has been to maintain this control.
U.S. sanctions in action: The cases of Cuba and Iran
Two examples of U.S. sanctions being applied extraterritorially are those imposed on Cuba and Iran. (There are many other examples, including that of Venezuela.) In the case of Cuba, any entity that conducts business with Cuba is barred from doing business in the U.S. or with any U.S. entity; foreign businesses that are owned by U.S. companies are strictly prohibited from doing any business with Cuba. Any company that had done business in Cuba must cease all activities there if acquired by a U.S. corporation. Several companies selling life-saving medical equipment and medicines to Cuba had to cease doing so when acquired by a U.S. corporation.
Meanwhile, U.S. embassy personnel have reportedly threatened firms in countries such as Switzerland, France, Mexico and the Dominican Republic with commercial reprisals unless they canceled sales of goods to Cuba such as soap and milk. Amazingly, an American Journal of Public Health report quoted a July 1995 written communication by the U.S. Department of Commerce in which the department said those types of sales contribute to “medical terrorism” on the part of Cubans! Well, many of us when we were, say, 5 years old might have regarded soap with terror, but presumably have long gotten over that. Perhaps Commerce employees haven’t.
The sanctions on Cuba have been repeatedly tightened over the years. Joy Gordon, writing in the Harvard International Law Journal in January 2016, provides a vivid picture of the difficulties thereby caused:
“The Torricelli Act [of 1992] provided that no ship could dock in the United States within 180 days of entering a Cuban port. This restriction made deliveries to Cuba commercially unfeasible for many European and Asian companies, as their vessels would normally deliver or take on shipments from the United States while they were in the Caribbean. The Torricelli Act also prohibited foreign subsidiaries of U.S. companies from trading with Cuba. … The Helms-Burton Act, enacted in 1996, permitted U.S. nationals to bring suit against foreign companies that were doing business in Cuba and that owned properties that had been abandoned or confiscated after the revolution. Additionally, the Helms-Burton Act prohibited third-party countries from selling goods in the United States that contained any components originating in Cuba. This significantly impacted Cuba’s major exports, particularly sugar and nickel.
[T]he shipping restrictions in the Torricelli Act have increased costs in several ways, such as Cuba sometimes having to pay for ships carrying imports from Europe or elsewhere to return empty because they cannot stop at U.S. ports to pick up goods. Shipping companies have partially responded by dedicating particular ships for Cuba deliveries; but in most cases, they tend to designate old ships in poor condition, which then leads to higher maritime insurance costs.”
However distasteful we find the religious fundamentalist government of Iran, U.S. sanctions, which are blunt weapons, have caused much hardship on Iranians. The same restrictions on Cuba apply to Iran. The Iranian government said in September 2020 that it has lost $150 billion since the Trump administration withdrew from the 2015 nuclear deal and that it is hampered from importing food and medicines.
The Trump administration’s renewed sanctions were imposed unilaterally and against the expressed policies of all other signatories — Britain, France, Germany, China and Russia. With those governments unable to restrain Washington, businesses from around the world pulled out to avoid getting sanctioned. EU countermeasures were ineffective — small fines didn’t outweigh far larger U.S. fines, European companies are subject to U.S. sanctions and favorable judgments in European courts are unenforceable in U.S. courts.
Sascha Lohmann, author of the German Institute for International and Security Affairs paper, wrote:
“Well ahead of the deadlines set by the Trump administration and absent any enforcement action, major European and Asian companies withdrew from the otherwise lucrative Iranian market. Most notably, this included [SWIFT,] which cut off most of the more than 50 Iranian banks in early November 2018, including the Central Bank of Iran, after they again became subject to U.S. financial sanctions. … [T]he exodus of EU-based companies has revealed an inconvenient truth to European policy-makers, namely that those companies are effectively regulated in Washington, D.C. … [T]he secretary of the Treasury can order U.S. banks to close or impose strict conditions on the opening or maintaining of correspondent or payable-through accounts on behalf of a foreign bank, thereby closing down access to dollarized transactions — the ‘Wall Street equivalent of the death penalty.’ ”
The long arm of U.S. sanctions stretches around the world
The idea that sanctions can be the “Wall Street equivalent of the death penalty” is not a figment of the imagination. Two examples of sanctions against European multinational enterprises demonstrate this.
In 2015, the French bank BNP Paribas was given a penalty of almost $9 billion for violating U.S. sanctions by processing dollar payments from Cuba, Iran and Sudan. The bank also pleaded guilty to two criminal charges. These penalties were handed down in U.S. courts and prosecuted by the U.S. Department of Justice. The chief executive officer of the bank told the court “we deeply regret the past misconduct.” The judge overseeing the case declared the bank “not only flouted U.S. foreign policy but also provided support to governments that threaten both our regional and national security,” a passage highlighted in the Department’s press release announcing the settlement.
Why would a French bank agree to these penalties and do so in such apologetic terms? And why would it accept the preposterous idea that Cuba represents any security threat to the U.S. or that a French bank is required to enforce U.S. foreign policy? As part of the settlement, Reuters reported, “regulators banned BNP for a year from conducting certain U.S. dollar transactions, a critical part of the bank’s global business.” And that gives us the clue. Had the bank not settled its case, it risked a permanent ban on access to the U.S. financial system, meaning it could not handle any deals denominated in dollars. Even the one-year ban could have triggered an exodus of clients in several major industries, including oil and gas.
Viñales Valley, Pinar del Rio province, Cuba (photo by Adam Jones adamjones.freeservers.com)
This was completely an extraterritorial application of U.S. law. An International Bar Association summary of the case noted, “the transactions in question were not illegal under French or EU law. Nor did they fall foul of France’s obligations under the World Trade Organization or the United Nations; no agreements between France and the US were violated. But as they were denominated in dollars, the deals ultimately had to pass through New York and thus came under its regulatory authority.”
It does not take direct involvement in financial transactions to run afoul of the long arm of U.S. sanctions. A Swiss company, Société Internationale de Télécommunications Aéronautiques (SITA), was forced to agree to pay $8 million to settle allegations that it provided blacklisted airlines with “software and/or services that were provided from, transited through, or originated in the United States.” Among the actions punished were that SITA used software originating in the U.S. to track lost baggage and used a global lost-baggage tracing system hosted on servers in the United States. Retrieving baggage is a service most people would not consider a high crime.
Can the EU or China create an alternative?
Dropping the widespread use of the dollar and substituting one or more other currencies, and setting up alternative financial systems, would be the logical short-term path toward ending U.S. financial hegemony. The German public broadcaster Deutsche Welle, in a 2018 report, quoted the German foreign minister, Heiko Maas, “We must increase Europe’s autonomy and sovereignty in trade, economic and financial policies. It will not be easy, but we have already begun to do it.” DW reported that the European Commission was developing a system parallel to SWIFT that would allow Iran to interface with European clearing systems with transactions based on the euro, but such a system never was put in place. In January 2021, as the new Biden administration took office, Iran dismissed it entirely, Bloomberg reported: “European governments have ‘no idea’ how to finance the conduit set up two years ago, known as Instex, and ‘have not had enough courage to maintain their economic sovereignty,’ the Central Bank of Iran said in comments on Twitter.”
It would seem that Teheran’s dismissal is warranted. The European Parliament, in its paper on U.S. sanctions being imposed extraterritorially, could only offer liberal weak-tea ideas, such as “Encourage and assist EU businesses in bringing claims in international investor-state arbitration and in US courts; Complaints against extraterritorial measures in the [World Trade Organization].” Such prescriptions are unlikely to have anyone in Washington losing sleep.
What about China? Beijing has actually created a functioning alternative to the World Bank and IMF, the Asian Infrastructure Investment Bank. Just on the basis of the new bank representing a bad example (from Washington’s perspective), the U.S. government leaned heavily on Australia and other countries sufficiently firmly that Canberra initially declined to join the bank despite its initial interest, nor did Indonesia and South Korea, although all three did later join. There is a possibility of one-sidedness here, however, as China has by far the biggest share of the vote, 27 percent, dwarfing No. 2 India’s 7 percent, giving Beijing potential veto power. And with US$74 billion in capitalization (less than the goal of $100 billion set in 2014), it can’t realistically be a substitute for existing multilateral financial institutes.
China has also set up an alternative to SWIFT, the Cross-border Interbank Payment System (CIPS), a renminbi-denominated clearing and settlement system. CIPS says it has participants from 50 countries and regions, and processes US$19.4 billion per day. But that’s well less than one percent of the $6 trillion SWIFT handles daily. The Bank of China, the country’s central bank, is on the record of seeking an alternative to the dollar system so that it can evade any U.S. sanctions. “A good punch to the enemy will save yourself from hundreds of punches from your enemies,” a 2020 Bank of China report said. “We need to get prepared in advance, mentally and practically.” The report said if Chinese banks are deprived of access to dollar settlements, China should consider ceasing the use of the U.S. dollar as the anchor currency for its foreign exchange controls.
That is easier said than done — China holds $1.1 trillion in U.S. government debt issued by the U.S. Treasury Department. That total is second only to Japan, and Beijing’s holdings comprise 15 percent of all U.S. debt held by foreign governments. The South China Morning Post admits that China holds such large reserve assets of U.S. debt “largely due to its status as a ‘safe haven’ for investment during turbulent market conditions.” Although Beijing seeks an erosion of dollar dominance and fears that U.S. economic instability could result in another world economic downturn, its use of the safe haven is nowhere near at an end. “While it is clear that China is keen to lessen its dependence on US government debt, experts believe that Beijing is likely to continue buying US Treasuries, as there are few risk-free low cost substitutes,” the Morning Post wrote.
Coupled with the restrictions on renminbi conversion, Chinese institutions are today far from a position of challenging current global financial relations. The U.S. investment bank Morgan Stanley recently predicted that the renminbi could represent five to 10 percent of foreign-exchange reserves by 2030, up from the current two percent. Although that would mean central banks around the world would increase their holdings of the Chinese currency, it would not amount to any real threat to dollar dominance.
No empire, or system, lasts forever
The bottom line question from all of the above is this: Will this U.S. dominance come to an end? Stepping back and looking at this question in a historical way tells us that the answer can only be yes, given that there has been a sequence of cities that have been the financial center. Centuries ago, the seat of a small republic such as Venice could be the leading financial center on the strength of its trading networks. Once capitalism took hold, however, the financial center was successively located within a larger federation that possessed both a strong navy and a significant fleet of merchant ships (Amsterdam); then within a sizeable and unified country with a large enough population to maintain a powerful navy and a physical presence throughout an empire (London); and finally within a continent-spanning country that can project its economic and multi-dimensional military power around the world (New York).
No empire, whatever its form, lasts forever. But knowledge of the sequence of capitalist centers tells us nothing of timing. Each successive new financial locus was embedded in successively larger powers able to operate militarily over larger areas and with more force. What then could replace the U.S.? The European Union has its effectiveness diluted by the many nationalisms within its sphere (and thus nationalism acts as a weakening agent for the EU whereas it is a strengthening agent for the U.S. and China). China’s economy is yet too small and retains capital controls, and its currency, the renminbi, isn’t fully convertible. U.S. Treasury bills remain the ultimate safe haven, as shown when investors poured into U.S. debt during crises such as the 2008 collapse, even when events in the U.S. are the trigger.
There are no other possible other contenders, and both the EU and China, as already discussed, are in no position to seriously challenge U.S. hegemony.
Here we have a collision of possibilities: The transcending of capitalism and transition to a new economic system or the decreasing functionality of the world capitalist system should it persist for several more decades. Given the resiliency of capitalism, and the many tools available to it (not least military power), the latter scenario can’t be ruled out although it might be unlikely. Making any prediction on the lifespan of capitalism is fraught with difficulty, not least because of the many predictions of its collapse for well over a century. But capitalism as a system requires infinite growth, quite impossible on a finite planet and all the more dire given there is almost no place on Earth remaining into which it can expand.
Although we can’t know what the expiration date of capitalism will be, it will almost certainly be sometime in the current century. But it won’t be followed by something better without a global movement of movements working across borders with a conscious aim of bringing a better world into being. In the absence of such movements, capitalism is likely to hang on for decades to come. In that scenario, what country or bloc could replace the U.S. as the center? And would we want a new center to dictate to the rest of the world? In a world of economic democracy (what we can call socialism) where all nations and societies can develop in their own way, in harmony with the environment and without the need to expand, and with production done for human need rather than corporate profit, there would no global center or hegemon and no need for one. Capitalism, however, can’t function without a center that uses financial, military and all other means to keep itself in the saddle and the rest of the world in line.
Yes, the day of U.S. dethronement will come, as will the end of capitalism. But the former is not going to happen any time soon, however much millions around the world wish that to be so, and the latter is what we should be working toward. A better world is possible; a gentler and kinder capitalism with a different center is not.
The Regional Comprehensive Economic Partnership is being called a new model of trade agreements. Such paeans appear to be premature, and we might better hold off on uncorking the champagne.
It is best to remember that so-called “free trade” agreements are products of neoliberal assaults on any and all efforts to protect people and the environment from the rapacious effort of corporations to profit to the maximum extent and without regard to external cost. “Free trade” agreements are not the cause of neoliberalism; they are a product of neoliberalism.
It is true that the RCEP is less draconian than recent trade deals, and less one-sided in advancing corporate profiteering above all other human concerns than the Trans-Pacific Partnership was when the United States was involved and pushing for the harshest rules. But is that the standard we wish to uphold? “It’s not as bad as the worst agreements out there” really shouldn’t be a cause for celebration.
Much of the same language commonly found in “free trade” agreements is in the RCEP, and what appears to be the most promising development, the lack of the usual “investor-state dispute settlement” process that uses corporate-dominated tribunals that consistently overturn health, safety and environmental regulations, is much less than it appears once we look into the details. And there are no labor or environmental provisions. What we have here is more capitalism as usual, including a dispute process still weighted toward corporate interests.
Tokyo at night (photo by Basile Morin)
For readers not familiar with the RCEP, it is a trade deal reached by 15 countries across East Asia and Oceania. Although some commentators believe that China has been the impetus behind the RCEP, in fact it is the 10 countries of the Association of Southeast Asian Nations (ASEAN) that were the driving force. Australia, New Zealand, Japan and South Korea join China and the ASEAN countries — Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam — in a deal that encompasses nearly one-third of the world’s economy. India was originally a negotiating country, but dropped out, expressing concerns that the RCEP would be dominated by China.
As would be expected, mainstream economists, who as a group act as cheerleaders for capitalism rather than seriously analyze capitalist economies, are cheering the agreement. The Financial Times, for example, breathlessly reported that the RCEP “could add almost $200bn annually to the global economy by 2030,” a number repeated by signatory governments. That despite the fact that Australia, China, New Zealand, Japan and South Korea each already has a trade agreement in place with ASEAN.
Signatory countries were also enthusiastic. China’s prime minister, Li Keqiang, said the agreement is “a victory of multilateralism and free trade.” The New Zealand Ministry of Foreign Affairs and Trade said, “The agreement will help ensure New Zealand is in the best possible position to recover from the impacts of COVID-19 and seize new opportunities for exports and investment.” The Australia Department of Foreign Affairs and Trade said, “Australian farmers and businesses are set to benefit from better export opportunities.”
Unions fear working people face a race to the bottom
Once we turn our attention to those not highly placed, a rather different picture emerges. A bloc of seven trade union federations strongly condemned the RCEP after its signing. Those federations, covering workers in construction, manufacturing, agriculture, transportation, services and education, said, “Instead of furthering a free trade project, countries should be collaborating on reviving their economies and expanding public goods. … RCEP and other trade agreements that protect intellectual property rights threaten the ability to secure a globally accessible [Covid-19] vaccine. … [W]hile [corporate executives] traveling for business will benefit from facilitation of procedures for entry and temporary stay, workers face deteriorating working conditions in a race to the bottom under heightened competition in which migrant workers are facing the worse consequences. Regional cooperation based on a collective intent to promote decent work, quality public services and sustainable and inclusive development are a better solution.”
The seven trade union federations also pointed out that RCEP was shrouded in secrecy throughout its eight years of negotiations, with the text released to the public only after the agreement was signed. (All 15 countries must still formally ratify it.) The intellectual property chapter was leaked in 2015, prompting the Electronic Frontier Foundation to characterize the IP text as “a carbon copy” of the Trans-Pacific Partnership then also in negotiation. “South Korea is channeling the [U.S. trade representative] at its worst here,” the Foundation said in its commentary, speculating that Seoul was pushing draconian IP rules because accepting unfavorable rules in its bilateral trade agreement with the U.S. would put it at a disadvantage otherwise. We’ll return to the intellectual property text, always a key chapter in any trade pact, below.
There are also fears that trade deficits for less developed countries will increase and pressures for privatizations will increase.
The skyline of Bangkok (photo by kallerna)
A senior economist with the United Nations Conference on Trade and Development, Rashmi Banga, expects that, assuming tariffs are removed on all products trading among RCEP countries, most ASEAN countries will see their imports rise faster than their exports, believing that those countries won’t be able to compete with China.
Kate Lappin, the Asia Pacific regional secretary of Public Services International, a federation of more than 700 trade unions representing 30 million workers in 154 countries, said “free trade” deals such as RCEP “also increase the pressure on governments to privatise, as public services need to be traded and compete on the market. This will have negative impacts on equality, including corrosive impacts on gender equality.” Noting that some measures governments are taking to combat the Covid-19 pandemic would be in violation of the RCEP or other trade agreements, Ms. Lappin said “RCEP will bind the hands of governments in taking measures in the public interest in crises to come, be it health or environmental.”
There could also be problems for manufacturers in small countries because “rules of origin” rules mandate that parts from any signatory country must be treated the same as domestic production.
Bad news for farmers, good news for agricultural multi-nationals
The ability of farmers to maintain control of their seeds is in peril, according to GRAIN, which describes itself as an “international non-profit organisation that works to support small farmers and social movements in their struggles for community-controlled and biodiversity-based food systems.” GRAIN, in analyzing a separate leak of RCEP chapters, said the agreement was in danger of requiring all signatory governments to adopt a seed law designed to provide private property rights over new crop varieties, giving corporations like Monsanto or Syngenta a legal monopoly over seeds, including farm-saved seeds, for at least 20 years; require adherence to the Budapest Treaty, which enforces patents on microorganisms; and make violations of these corporate-friendly rules criminal violations. Australia, Japan and South Korea were described as the “hard-line camp” on these issues.
Those fears remain in place. Article 11.9 of the final text indeed mandates that RCEP governments not already signed onto the Budapest Treaty do so. Adherence to several other international treaties are also mandated. Language concerning adoption of the seed law described in the preceding paragraph (the Act of International Convention for the Protection of New Varieties of Plants, amended in Geneva in 1991) is at Article 11.9, but the language is ambiguous, encouraging governments to sign the Convention and “cooperate” with other signatory governments “to support its ratification.” Also worrisome is Article 11.36, which mandates patents on plants: “[E]ach Party shall provide for the protection of plant varieties either by patents or by an effective sui generis system or by any combination thereof.”
There is also concern about the availability of medicines. A key goal of the United States when it was negotiating the Trans-Pacific Partnership was to undermine government procurement of medicines that reduced the cost of health care and to extend patents and data exclusivity periods for brand-name drugs, impede trade in generic medicines, and place new limits on how drug prices are set or regulated, all in the service of pharmaceutical company profits.
Canberra at night (photo by Ryan Wick)
Croakey Health Media, an Australian “not-for-profit public interest journalism organisation,” in a commentary on the RCEP’s potential impact on medicines, feared some of those goals could find their way into the final text. “Early in the negotiations, leaked texts indicated that Japan and South Korea had proposed rules for the RCEP intellectual property chapter that would extend and expand monopolies on new medicines in countries like Cambodia, Indonesia and Thailand,” Croakey said. “These types of rules can delay the availability of generic medicines.”
It appears there is at least some backing off of the worst provisions that had been under discussion. Article 11.8 of the final RCEP text says “The Parties reaffirm the Doha Declaration on the TRIPS Agreement and Public Health” adopted in 2001. The Doha Declaration is an ambiguous document that “affirms” intellectual property rights but also “should not prevent members from taking measures to protect public health.” How the text will be interpreted will likely determine how far it will be possible to go in attacking government health care systems.
It should be stressed that grassroots organizations had no chance to affect any aspect of the RCEP text as the negotiations were secret throughout.
Lots of language customarily found in trade agreements
The text of “free trade” agreements is always dry and technical, even neutral-sounding. It is in the interpretation, and what certain phrases actually mean, that determine their outcome. So let’s take a very brief look at some of the text, and what it might mean.
Chapter 10, covering investments, is crucial to understanding the similarities to existing deals. Article 10.1 on “covered investments” contains the standard list of what is covered typically found in “free trade” agreements, including “claims to money or to any contractual performance related to a business and having financial value” and “intellectual property rights and goodwill.” There is an important exception, however — the chapter does not apply to government procurement, “subsidies or grants provided by a Party” or “services supplied in the exercise of governmental authority.” What that means is that the RCEP theoretically reduces the ability to attack or force privatization of government-owned enterprises, a consistent goal of U.S. trade negotiators in agreements the U.S. is involved in, and a goal generally shared by multi-national corporations seeking new markets. But this clause could potentially be negated by the heavier market pressures that could lead to privatizations, as discussed above, and once a government enterprise is privatized, the clause is no longer relevant.
The investment chapter contains the standard clause that “Each Party shall accord to investors of another Party treatment no less favourable than that it accords, in like circumstances, to investors of any other Party or non-Party.” Article 10.5 follows up with language that is also typical: “Each Party shall accord to covered investments fair and equitable treatment and full protection and security, in accordance with the customary international law minimum standard of treatment of aliens.” Although these passages are bland, neutral-sounding phrases, this language has often been used as key points of attack for multi-national corporations seeking to eliminate government health, safety, labor or environmental regulations. As always, “customary international law” has been established by a series of rulings by the corporate-dominated secret tribunals that hand down unappealable decisions, decisions that are used as precedent for further such decisions. The expectation of profits by a corporation as a “right” superseding health and environmental regulations has been repeatedly handed down.
The skyline of Beijing (photo by Picrazy2)
Further language routinely found in “free trade” agreements stipulate that capital controls are prohibited, and, in Article 10.13 of the RCEP, “No Party shall expropriate or nationalise a covered investment either directly or through measures equivalent to expropriation or nationalisation.” What will constitute an illegal “expropriation”? How this clause will be interpreted is crucial. In existing “free trade” agreements, government regulations protecting health or the environment are frequently overturned because complying with such regulations would reduce profits, and thus constitute “expropriation” because corporate profits are presumed to be an entitlement by the tribunals sitting in judgment. Will the repeated examples of such rulings in, inter alia, the North American Free Trade Agreement, be replicated here?
In Chapter 11, covering intellectual property rights, there is no mandatory schedule for when those rights expire; this constitutes a small victory. The chapter also states that signatory governments “may establish appropriate measures to protect genetic resources, traditional knowledge, and folklore,” a right not ordinarily granted in “free trade” agreements.
But in the Financial Services Annex of Chapter 8, language similar to that found in other trade pacts requires that foreign financial services firms be given free reign to operate, even to take over a country’s banking system. Specifically, “Each host Party shall endeavour to permit financial institutions of another Party established in the territory of the host Party to supply a new financial service in the territory of the host Party that the host Party would permit its own financial institutions, in like circumstances.” Again, what seems neutral-sounding on the surface has specific meanings when interpreted by a tribunal in the context of “customary international law.”
Corporations will continue to be elevated above governments
And that brings us to Chapter 19, covering dispute settlement. Article 19.4 leaves us little doubt, reiterating that “This Agreement shall be interpreted in accordance with the customary rules of interpretation of public international law” and that adjudicators “shall also consider relevant interpretations in reports of WTO [World Trade Organization] panels and the WTO Appellate Body, adopted by the WTO Dispute Settlement Body.” No specific tribunal for the settlement of disputes is mandated, and the intent appears to be to have ad hoc panels rather than panels seated by one of the tribunals ordinarily used in trade disputes in existing trade agreements. Nonetheless, Article 19.5 gives right of forum selection to the complaining party — i.e., the corporations that will be suing governments — so the use of the tribunals can’t necessarily be ruled out. When seating an ad hoc panel, the complaining corporation and the respondent government are supposed to mutually agree on the three members of a panel but if they can’t agree, the WTO director-general will complete the panel — given the role of the WTO in imposing draconian pro-corporate rules, this clause can hardly be considered neutral.
And so who will sit on the panel and adjudicate the case? Article 19.11 designates those who “have expertise or experience in law, international trade, other matters covered by this Agreement, or the resolution of disputes arising under international trade agreements.” In other words, the same corporate lawyers who sit as judges on the tribunals that adjudicate cases brought under existing “free trade” agreements. If the WTO director-general seats panelists, those must not only meet the requirements stated above but additionally “be a well-qualified governmental or non-governmental individual including an individual who has served on a WTO panel or the WTO Appellate Body or in the WTO Secretariat, taught or published on international trade law or policy, or served as a senior trade policy official of a WTO Member.”
Under most existing “free trade” agreements, one of three tribunals is used, most commonly the International Centre for Settlement of Investment Disputes (ICSID), an arm of the World Bank. ICSID is the forum that was used in NAFTA and is used to adjudicate disputes under dozens of bilateral trade agreements, and is responsible for a long list of outrages declaring environmental and health regulations illegal. Conflicts of interest are blatant in these tribunals — corporate lawyers who specialize in defending multinational corporations in trade disputes alternate between appearing as counsel for corporations and as judges handing down the decisions.
“In effect, ISDS creates a parallel business-friendly judicial system exclusively for transnational corporations. The power rests upon for-profit arbitrators who come from the corporate sector and face unverifiable conflicts of interest. They have no sovereign legitimacy and are not accountable to the public. The decisions they make can be inconsistent between one another and cannot be appealed. Plus, the arbitrators effectively serve as judge and party, because the same appointed arbitrators who plead the case for the parties make the decision. Imagine a football match where the referee plays for one of the teams! With ISDS, this becomes a possible scenario. So much for justice.”
RCEP rules not mandating ICSID or one of the other tribunals is a cosmetic change. Governments continue to tie themselves to rules and precedents that elevate multi-national corporations above national governments, and thus elevate corporate profiteering above all other human considerations. There will still be panels seated to adjudicate disputes, but instead of using ICSID or another permanent forum, there will be ad hoc panels, which will, as noted above, have the exact same criteria for seating judges. The Comprehensive Economic and Trade Agreement (CETA) between Canada and the European Union pioneered this cosmetic change, intended to make the one-sidedness of ISDS appear somewhat less blatant, and will also be used in some disputes covered by NAFTA 2, the U.S.-Mexico-Canada agreement.
Thus the “investor-state dispute settlement” (ISDS) process is very much in place in the RCEP. That should not come as a surprise. “Free trade” agreements arise because multi-national corporations scour the globe searching for the places with the lowest wages and least regulations in order to maximize their profits over all other considerations. As capitalist competition intensifies, corporations must match the moves their competitors make in order to remain in business, and adopt still more harsh policies to stay ahead. Once production is moved overseas, and supply chains are spread into ever more locales, tariffs and rules protecting domestic production are barriers to be removed. Trade deals at first mainly dealt with technical issues or tariffs, but as the relentless grasping for profits becomes ever more intense, regulations safeguarding health, labor, the environment or safety are seen as barriers to profit-making, and corporations seek to sweep them away, too.
Later trade agreements had much more to do with erasing regulations than with actual trade rules, which was reflected in the draconian rules the U.S., often assisted by Japan, sought to impose in the Trans-Pacific Partnership. That the RCEP has less draconian rules is not a cause for celebration — the rules are still plenty tilted in favor of multi-national capital and will inevitably be wielded as a cudgel by those beneficiaries. A rational trading system requires a rational, democratic economic system, not the dictatorship of capital.
Democratic Party House representatives have voted by a wide margin to approve version 2 of the North American Free Trade Agreement, known as the United States-Mexico-Canada Agreement. Even Rose DeLauro of Connecticut, in the past a strong leader within Congress in the fight against so-called “free trade” agreements, is on board with this one.
Representative DeLauro and other congressional Democrats claim they forced the Trump administration to strengthen the agreement by compelling the insertion of language that allegedly creates “effective and meaningful labor standards and protect[s] worker rights”; supports environmental standards; and “protect[s] access to affordable medicine.” Can this really be true? Or have congressional Democrats reverted to normal form, rolling in the dirt at the feet of Republicans yet again?
Although Democrats and public pressure forced through some improvements, the United States-Mexico-Canada Agreement (USMCA), or NAFTA 2, isn’t substantially different and remains a document of corporate domination. It would appear that appearances, not substance, drove Democrats in the House of Representatives to approve the deal. That was signaled by House Speaker Nancy Pelosi, who said she wanted to show United Statesians that her party can get things done and is not simply opposing President Donald Trump for the sake of opposing him. That was understood to be a gesture to buttress the re-election chances of Democrats who won seats in districts previously held by Republicans.
Factory farms won’t be going away under the USMCA (photo by Mercy for Animals)
So Democrats went along to get along, much as they did in approving the massive $738 billion Pentagon budget. In other words, they once again demonstrated that cringing and cowering is their default position. One can imagine the discussion behind closed doors: Yes, that will show Donald Trump we mean business — we’ll support his most desired policy initiative.
Unfortunately, the Mexican and Canadian governments have not shown much more resistance. Mexico President Andrés Manuel López Obrador, despite being elected on a Left wave and promising significant change, has so far tended to give in to President Trump’s demands. That tendency was underscored by the almost unanimous approval given the USMCA by the Mexican Senate. Meanwhile, Canada Prime Minister Justin Trudeau has been a willing participant in bringing NAFTA 2 to fruition, even going so far as to be a voice for retaining the ability of corporations to use unaccountable tribunals to sue governments, including his own and despite Canada’s regulations being the most frequent target.
What the document says isn’t what it means
So what is really in the USMCA text? Interpretation is what really matters here, as the text, like all “free trade” agreements, is written in dry, technical language that appears to be neutral at first glance. But what the words mean in practice, and how they will be interpreted by tribunals, is not necessarily the same as what the words might appear to say.
A key portion of the document is Chapter 14, the chapter on investment. The chapter’s first page, Article 14.1, defines an “investment” with the standard broad brush — not only is any capital outlay covered but so are all forms of financial speculation, including derivatives. Intellectual property rights and intangible property are explicitly named as well. So the expectation of a profit across the spectrum of business activities is well covered here, and of course the expectation of a profit — in actual practice, the demand for the biggest possible profit regardless of cost to others — is what the owners of capital expect these agreements to help deliver. The secret tribunals used to adjudicate disputes, frequently presided over by corporate lawyers who in their day job specialize in representing the corporations who sue in the tribunals, consistently interpret the language of “free trade” agreements to mean corporations are guaranteed maximum profits above all other considerations.
So is the language of Chapter 14 substantially different? Asking that question is important because Article 14.3 states that in the event of any inconsistency between Article 14 and any any other chapter, Article 14 prevails. The one exception is financial services, covered by Chapter 17, to which we will return. Article 14.4 begins with this passage: “Each Party shall accord to investors of another Party treatment no less favorable than that it accords, in like circumstances, to its own investors with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments in its territory.”
That dry language may sound neutral, but it is the exact language that is standard in “free trade” agreements. This is the language that is invoked by multi-national corporations to demand “damages” anytime any law or regulation that upholds health, safety, worker or environmental standards prevents them from extracting the biggest possible profit. This is the language invoked in the secret tribunals that adjudicate these cases to rule in favor of corporate plunder and against regulations.
When you hear “customary international law,” be afraid
That is followed up by Article 14.6, which states “Each Party shall accord to covered investments treatment in accordance with customary international law, including fair and equitable treatment and full protection and security.” On the surface, that passage seems neutral, even innocuous. But what is “customary international law”? It is whatever the tribunals that have adjudicated disputes between multi-national corporations and governments say it is. In practice, the many outrageous decisions overturning reasonable health, safety, worker or environmental standards and making corporate profit paramount establishes precedent and thus constitutes “customary” law.
The article goes on to state: “The concepts of ‘fair and equitable treatment’ and ‘full protection and security’ do not require treatment in addition to or beyond that which is required by that standard, and do not create additional substantive rights.” Again, what sounds neutral has to been read in context. What need for “additional rights” would be needed when the profits of multi-national corporations are elevated above all other considerations?
The vote in the Canadian Parliament will likely be the last chance to stop the USMCA (photo by Saffron Blaze)
We then come to Article 14.8, which states: “No Party shall expropriate or nationalize a covered investment either directly or indirectly through measures equivalent to expropriation or nationalization (expropriation).” The word “indirectly” is crucial here. Not a reference to a nationalization, which would be a verboten act, an “indirect expropriation” can be any government act that, regardless of intention or general applicability, has the effect of preventing a multi-national corporation from extracting the biggest possible profit. An environmental regulation or a regulation imposing standards protecting human health are two examples of “indirect expropriation,” and under the rules established here would mean that the government being sued would be obligated to strike such regulations from its law and pay “compensation” to the corporation. The article explicitly states that “compensation shall be paid without delay.” (A “Party” is a government that is a signatory to the agreement.)
And what of requiring corporations to act in a socially responsible manner? Here’s Article 14.17 in full: “The Parties reaffirm the importance of each Party encouraging enterprises operating within its territory or subject to its jurisdiction to voluntarily incorporate into their internal policies those internationally recognized standards, guidelines, and principles of corporate social responsibility that have been endorsed or are supported by that Party, which may include the OECD Guidelines for Multinational Enterprises. These standards, guidelines, and principles may address areas such as labor, environment, gender equality, human rights, indigenous and aboriginal peoples’ rights, and corruption” (emphasis added).
Note the provisional language, quite unlike the many articles addressing what governments must do for multi-national corporations. In the standard language of trade agreements, rules benefiting capital and erasing the ability of governments to regulate are implemented in trade-agreement texts with words like “shall” and “must” while the few rules that purport to protect labor, health, safety and environmental standards use words like “may” and “can.” The USMCA is no different. It’s the same sleight of hand.
Regulations on banks and Internet giants? Forget about it
Chapter 17, covering financial services, contains the same standard language requiring “treatment no less favorable than that it accords to its own financial institutions … with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of financial institutions and investments.” Again, what appears to be bland language actually means something stronger: In this case, a prohibition against restrictions on predatory banks. Article 17.5 explicitly bans any limitations on the activities of financial institutions and Article 17.6 prohibits any restrictions on taking capital out of a country.
Among other rules, Article 19.11 prohibits any restrictions on “cross-border transfer of information,” which effectively means, for example, that neither Canada or Mexico can protect personal information from U.S. internet companies, a cohort not known for responsible use of personal information. Similar language can be found in Chapter 15, covering cross-border trade in services. This section appears to be modeled on the Trade In Services Agreement (TISA), a notorious “free trade” agreement negotiated in secret among 50 countries, among them all three NAFTA countries, the European Union, Australia, New Zealand and Japan, and purporting to liberalize professional services.
The cover story for why TISA is being negotiated is that it would uphold the right to hire the accountant or engineer of your choice, but in reality is intended to enable the financial industry and Internet companies to run roughshod over countries around the world. The text of TISA expanded the definition of “services” to encompass manufacturing and could potentially encompass technology companies like Google and Facebook as providers of “communications services.” The text of USMCA’s Chapter 15 may not necessarily be stretched as far it is in TISA, but a reasonable reading is that this chapter will provide another weapon that predatory banks can leverage to take over financial systems and halt attempts at bringing them under meaningful regulatory control. Citigroup, Microsoft and Google are among the many corporate entities celebrating the USMCA.
Another area of concern is Chapter 11, covering “technical barriers to trade.” This chapter adopts numerous articles from the World Trade Organization’s Agreement on Technical Barriers to Trade, and makes WTO standards obligatory. There is also a clause in Article 11.7 that requires equal participation by citizens of other countries when technical regulations or standards are developed. Might this be an invitation for executives and lobbyists for multi-national corporations to demand the ability to shape new regulations? What might be ruled an “unnecessary technical barrier to trade”? Such “barriers” are intended to be eliminated as stated in Article 11.9.
Ending secret tribunals appears to be an empty promise
In “free trade” lingo, when a corporation sues a government, the dispute is to be adjudicated in a mechanism known as an “investor-state dispute settlement.” That bland-sounding bureaucratic phrase means that a tribunal decides the issue. Under NAFTA, and many other “free trade” agreements, the tribunal is the International Centre for Settlement of Investment Disputes (ICSID), an arm of the World Bank. One of President Trump’s empty promises was to put an end to the use of these tribunals. Surprise! It’s ain’t so. OK, it’s not a surprise that he lied.
In disputes between the U.S. and Mexico, Article 14.D.3 states that disputes will be settled in the ICSID, but the two sides can agree to have it heard in another forum. Given the one-sided rulings ICSID hands down, suing corporations have little incentive to use another forum. More generally, Chapter 31 sets the rules for settling disputes. There we find Article 31.3, which states, “If a dispute regarding a matter arises under this Agreement and under another international trade agreement to which the disputing Parties are party, including the WTO Agreement, the complaining Party may select the forum in which to settle the dispute.” Can a corporation suing a government dragoon the government into the ICSID or one of the other two similarly one-sided secret tribunals? The text later in the chapter is ambiguous on that, but does not preclude use of those fora.
Finance capital will be one of the winners from the USMCA (photo by Elisa Rolle)
Later in the chapter, the text speaks of “panels” without specifying a forum and also mandates, in Article 31.8, that a “roster of up to 30 individuals who are willing to serve as panelists” be created. The panelists are to “have expertise or experience in international law, international trade, other matters covered by this Agreement, or the resolution of disputes arising under international trade agreements.” The exact same “expertise” required under NAFTA and virtually all other “free trade” agreements! In other words, corporate lawyers who specialize in representing corporations in these kinds of disputes are those who have the “expertise” and “experience” to sit in judgment. The same hat-switching will be in force.
So even if ICSID, or the other two secret tribunals, are not used and instead a new panel specific to the USMCA becomes the new forum, the same conditions and same cast of characters, using the same precedents, will be in force. There is no reason to expect any effective difference from NAFTA.
Some better language but that is not necessarily meaningful
As to what potential improvements from NAFTA exist, there are three. One is that hearings will be conducted in public (Article 14.D.8) (although there does not appear to be a requirement that a public notice be made). The second is that a side agreement in force only between Mexico and the U.S. that purports to uphold workers’ rights by prohibiting denial of free association or the right to collective bargaining to the extent that doing so impacts the other country (Annex 31-A). A panel is supposed to adjudicate this issue should it arise, and apply International Labor Organization standards. The U.S. government can sue to enforce this annex, but can anybody imagine the Trump or any other Republican administration suing to enforce the right of workers? For that matter, would a Democratic administration seek to enforce collective-bargaining standards or the right to form a union if a Mexican government, acting on behalf of its industrialists, discourages it from filing?
Democratic supporters of USCMA are taking this provision on faith, but it remains to be seen if there will be any use of this annex or if it can be meaningfully enforced even if a future administration does seek to apply it.
The third improvement is that there is language on the environment that is stronger than in past agreements. Article 24.2 declares that “The Parties recognize that a healthy environment is an integral element of sustainable development” and are encouraged to “promote high levels of environmental protection and effective enforcement of environmental laws.” There are several articles in Chapter 24 discussing various specific environmental concerns. But seemingly pro-environment language has not been absent from existing “free trade” agreements and that language has proved to be meaningless window dressing.
Further, Article 24.2 also says “The Parties further recognize that it is inappropriate to establish or use their environmental laws or other measures in a manner which would constitute a disguised restriction on trade or investment between the Parties.” Here we find a potential giant loophole. Might environmental laws be interpreted to be such a restriction? Unfortunately, there is ample precedent here. A series of rulings culminated in the World Trade Organization ruling that U.S. dolphin-safe labeling is an unfair “technical barrier to trade,” even though the U.S. had weakened its laws in response to the earlier WTO rulings.
Among rulings handed down under NAFTA — rulings that are considered precedents when similar cases are heard — Canada had to reverse its ban on a gasoline additive known as MMT, a chemical long believed to be dangerous to health, because the tribunal ruled the ban a violation of the principal of “equal treatment” even though, had a Canadian producer of MMT existed, it would have had the same standard applied. Canada was also successfully sued over its ban on the transportation of PCBs that conformed with both a Canada-United States and a multi-lateral environmental treaty. The tribunal ruled that, when formulating an environmental rule, a government “is obliged to adopt the alternative that is most consistent with open trade.”
Not only are these types of rulings precedents, but recall, as noted above, that Article 14, which elevates expectations of profits above any conflicting consideration, supersedes all other articles. And to repeat a point made earlier, WTO standards are obligatory. “Technical barriers” to trade as the WTO defines them won’t be exceptions.
A billionaires’ club masquerading as a government
So what can we really expect if the USMCA goes into effect? Given not only the history of “free trade” agreements and the mendacity of the Trump administration, probably the same as experienced under NAFTA. Consider the evidence the Trump administration has offered. Its April 2018 “National Trade Estimate Report on Foreign Trade Barriers,” a document laying out its trade goals, no less than 137 countries were cited for raising alleged “trade barriers” to be attacked, barriers that include items like laws requiring food imported to be safe.
In July 2017, the Trump administration quietly published its “Summary of Objectives for the NAFTA Renegotiation,” which features boilerplate language that in some cases appears to be lifted word for word from the Trans-Pacific Partnership. And, not least, is the Trump gang’s infrastructure plan, a macabre joke that mostly consists of massive corporate subsidies and intends the creation of “public-private partnerships,” which are scams under which services are privatized for guaranteed corporate profit while becoming more expensive and less subject to public accountability.
We’re supposed to trust this government? NAFTA has been a “lose-lose-lose” proposition for working people and farmers in Canada, Mexico and the United States. That formula won’t be changing. The Council of Canadians has issued a strong warning about what can be expected:
“Regulatory cooperation in the new NAFTA takes away our ability to set standards and regulations to protect our health, safety and well-being. … [R]egulations cannot be prescribed for ethical or social reasons. The emphasis is on the regulator to prove that a regulation is backed by science, and not on the corporation to prove that their product does no harm. … Regulators have to vigorously defend proposed regulations and are even required to suggest alternatives that don’t involve regulating. They have to provide extensive analysis, including cost-benefits to industry. The new NAFTA encourages the three countries to harmonize, or have similar regulations. This is not about raising standards, but bringing standards down to the lowest common denominator.”
The National Family Farm Coalition, representing organizations in more than 40 U.S. states, said the USMCA “offers little” for family farmers. Coalition President Jim Goodman, a retired Wisconsin dairy farmer, said:
“Climate change is not mentioned and the new treaty does nothing to curb the environmental damage that was part of the original NAFTA. [Coalition] dairy producers do not support dumping excess US milk on the Canadian or Mexican markets, as that will force family dairy farmers out of business in those countries.”
The Sierra Club, League of Conservation Voters and National Resources Defense Council also recommended against the agreement being approved:
“The deal that the Trump administration produced … would encourage further outsourcing of pollution and jobs, offer handouts to notorious corporate polluters, and prolong Trump’s polluting legacy for years. The deal not only fails to mention, acknowledge, or address the climate crisis, but would actually contribute to it.”
“[The USMCA] locks in a system of agribusiness exploitation of farmers and workers in the three participating nations, while worsening the climate crisis. … Nothing in the New NAFTA addresses urgent issues plaguing our farm economy: low prices, rising debt and increased bankruptcy. … Measures in New NAFTA that open Canada’s dairy market to increased exports from the U.S. will not significantly reduce the vast oversupply of U.S. milk or raise prices paid to U.S. dairy farmers. Instead, the opening will weaken Canada’s successful supply management program, which has achieved market-based prosperity for its farmers. Added regulatory-focused sections will delay and impede the development, enactment and enforcement of protections for consumers, workers and the environment.”
Sadly, the main union federation in the U.S., the AFL-CIO, has chosen to endorse the USMCA despite its fatal flaws. The largest Canadian federation, the Canadian Labour Congress, does not seem to have taken a position, although it did issue an ambiguous statement in October 2018 saying the deal had “some points of progress.” The Congress specifically cited the eliminating of NAFTA’s notorious Chapter 11 that elevated “investor rights” above all other considerations, but that optimism proved erroneous as it is now clear that provision remains in less direct language.
The governments of Canada, Mexico and the United States have once again put a gun to their own heads. “Free trade” agreements continue to have little to do with trade and much to do with imposing a corporate dictatorship, a lesson once again being imposed.
The ongoing trade war between the United States and China, and the rhetoric surrounding it coming out of the White House, has served to reinforce the idea that China is “stealing” jobs from the United States. The reality, however, is that if we are seeking the responsible party, our attention should be directed toward U.S. corporate boardrooms.
The internal logic of capitalist development is driving the manic drive to move production to the locations with the most exploitable labor, not any single company, industry or country. For a long time, that location was China, although some production, particularly in textiles, is in the process of relocating to countries with still lower wages, such as Bangladesh, Cambodia and Vietnam. (The last of those is already a long-time source of highly exploited cheap labor for Nike.) It could be said that China is opportunistic in turning itself into the world’s sweatshop. And that it constitutes a colossal market is no small factor.
Beijing (photo by Picrazy2)
Low wages and the inability of Chinese workers to legally organize are crucial factors in the movement of production to China. The minimum wage in Shanghai is 2,420 renminbi per month, which equals US$349. Per month. And Shanghai’s minimum wage is the country’s highest rate and “roughly double the minimum wage in smaller cities” across China, reports the China Labour Bulletin. That does not translate into a living wage for Chinese workers. The Bulletin states:
“National government guidelines stipulate that the minimum wage should be at least 40 percent of the local average wage. In reality, the minimum wage is usually only between 20 and 35 percent of the average wage, barely enough to cover accommodation, transport and food costs. Workers on the minimum wage, including most production line workers, unskilled labourers, shop workers etc. have to rely on overtime, bonuses and subsidies in order to make a living wage. As a consequence, if the employer cancels or reduces overtime, bonuses and other benefits, low-paid workers will often demand immediate restoration.”
Even with such meager pay and the illegality of any unions other than the Communist Party-controlled and employer-friendly All-China Federation of Trade Unions, increasing numbers of employees are classified as “independent contractors,” making them even more precarious. Enforced overtime well in excess of the legal maximum, and employers demanding “flexible” working hours, are brutal on Chinese workers stuck in assembly jobs but lift corporate executives into ecstasy.
The leading culprit is headquartered in Arkansas
The single biggest culprit in the wholesale moving of jobs to China is to be found not in Beijing, but rather in Bentonville, Arkansas. Yep, Wal-Mart, the company that pays it employees so little that they skip meals and organize food drives; receives so many government subsidies that the public pays about $1 million per store in the United States; and is estimated to avoid $1 billion per year in U.S. taxes through its use of tax loopholes.
Other major United States retailers began procuring clothing items from Asian subcontractors before Wal-Mart, but the relentless drive to pay its suppliers as little as possible forced an acceleration in the shift of production to countries with the most exploitable populations. If a manufacturer wants to continue to have contracts to supply Wal-Mart, then it has no choice but to ship its operations overseas because it has no other way to meet Wal-Mart’s demands for ever lower prices.
By 2012, 80 percent of Wal-Mart’s suppliers were located in China. And because the company is so much bigger than any other retailer, it can dictate its terms. Gary Gereffi, a professor at Duke University, said in an interview broadcast on the PBS show Frontline that “No company has had the kind of economic power that Wal-Mart does, to be able to source products from around the world. … Wal-Mart is able to transfer whole U.S. industries to overseas economies.”
Beijing Opera House (photo by Petr Kraumann)
Because of its size and its innovation in computerizing its inventory and tightly managing its suppliers, coupled with its willingness to squeeze its suppliers to the exclusion of all other factors, Wal-Mart holds life or death power over manufacturers, Professor Gereffi said:
“Wal-Mart is telling its American suppliers that they have to meet lower price standards that Wal-Mart wants to impose. The implication of that in many cases is if you’re going to be able to supply Wal-Mart at the prices Wal-Mart wants, you have to go to China or other offshore locations that would permit you to produce at lower cost. … Wal-Mart’s giving them the clear signal that you can’t be a Wal-Mart supplier if you can’t produce at substantially lower prices. … You can go to China, or, in many cases, many U.S. suppliers can’t make that move, and they just go out of business, because Wal-Mart is the dominant company for many U.S. suppliers. If they can’t go offshore, those suppliers end up going out of business.”
Wal-Mart alone cost U.S. workers more than 400,000 jobs between 2001 and 2013, according to the Economic Policy Institute. That is a sizable fraction of the 3.2 million jobs that were lost in the U.S. due to trade relations with China.
To the best of my knowledge, however, no Chinese party or government official has ever walked into the headquarters of a U.S. corporation, pointed a gun at the CEO and demanded production be moved across the Pacific Ocean. Chinese business executives sometimes demand technology be shared in exchange for access to Chinese markets (a different matter), but executives from the U.S. or elsewhere do have the option of saying “no.” Even if we were to concede that there is some coercion in regards to technology transfers, there isn’t when it comes to moving production. That is a choice, a choice routinely made in executive suites.
It’s not a deficit for Apple
Competitors that wish to stay in business can be compelled by capitalist competition to make that choice, matching the “innovation” of the company that first finds moving production a way to cut costs and thus boost profitability. This applies to all industries, and not only low-tech ones. Apple, for example, accrues massive profits by contracting out its manufacturing to subcontractors. A 2010 paper by Yuqing Xing and Neal Detert found that Chinese workers are paid so little that they accounted for only $6.50 of the $168 total manufacturing cost of an iPhone. Of course iPhones cost a lot more than $168 — an extraordinary profit is generated for Apple executives and shareholders on the backs of Chinese workers.
A 2011 study led by Kenneth L. Kraemer calculated that $334 out of each iPhone sold at $549 went to the U.S. with almost the entire remainder distributed among component suppliers. Only $10 went to China as labor costs. Thus, despite the export of iPhones contributing heavily to the official U.S. trade deficit, the study said “the primary benefits go to the U.S. economy as Apple continues to keep most of its product design, software development, product management, marketing and other high-wage functions in the U.S.”
The profits flow to Apple headquarters (photo by Joe Ravi via license CC-BY-SA 3.0)
Chinese workers today likely account for somewhat more of the manufacturing cost as wages have risen in China over the past decade, but remain minuscule compared to wages in advanced capitalist countries. And the work endured is no vacation, as John Bellamy Foster and Robert W. McChesney noted in the February 2012 edition of Monthly Review:
“The eighty hour plus work weeks, the extreme pace of production, poor food and living conditions, etc., constitute working conditions and a level of compensation that cannot keep labor alive if continued for many years—it is therefore carried out by young workers who fall back on the land where they have use rights, the most important remaining legacy of the Chinese Revolution for the majority of the population. Yet, the sharp divergences between urban and rural incomes, the inability of most families to prosper simply by working the land, and the lack of sufficient commercial employment possibilities in the countryside all contribute to the constancy of the floating population, with the continual outflow of new migrants.”
The working conditions of China are not a secret; business-press commentaries can come close to celebrating such conditions. A 2018 commentary in Investopedia, for example, goes so far as to claim that manufacturing in the U.S. is “economically unfeasible” and then says this about Chinese conditions:
“Manufacturers in the West are expected to comply with certain basic guidelines with regards to child labor, involuntary labor, health and safety norms, wage and hour laws, and protection of the environment. Chinese factories are known for not following most of these laws and guidelines, even in a permissive regulatory environment. Chinese factories employ child labor, have long shift hours and the workers are not provided with compensation insurance. Some factories even have policies where the workers are paid once a year, a strategy to keep them from quitting before the year is out. Environmental protection laws are routinely ignored, thus Chinese factories cut down on waste management costs. According to a World Bank report in 2013, sixteen of the world’s top twenty most polluted cities are in China.”
The overall U.S.-China economic picture is more balanced
The components of the iPhone are sourced from several countries and are assembled in China. Because the final product is exported from China, Apple contributes to trade deficits, as conventionally calculated. But the lion’s share of the massive profits from this global supply chain are taken by Apple, a U.S.-based corporation. The profits from the actual assembly, outsourced to Foxconn, are accrued in Taiwan, Foxconn’s home. Apple’s arrangement is far from unique; the list of U.S. companies that manufacture in China is very long. If trade balances were calculated on the basis of where the profits are retained, the U.S. deficit with China would not be nearly so imposing.
As a commentary in the Financial Times points out, U.S. corporations sell far more goods and services in China than do Chinese companies in the U.S., but those sales are not counted toward trade balances. The commentary said:
“In 2015, the last year for which official US statistics were available, US multinational subsidiaries based in China made a total of $221.9bn in sales to domestic consumers. The goods and services sold were produced by an army of 1.7m people employed by US subsidiaries in the country. By contrast, China’s corporate presence in the US remains small. Official figures on Chinese companies’ US subsidiary sales to American consumers do not exist, but analysts estimate they are hardly material when compared with China’s exports to the US. Thus, the US-China ‘aggregate economic relationship’ appears a lot more balanced than the trade deficit makes it look.”
A separate report, by VoxChina (which calls itself an independent, nonpartisan platform initiated by economists), calculates that although the official U.S. trade deficit with China for 2015 was $243 billion, when foreign direct investment (FDI) and sales by both countries’ companies in the other are included, the deficit was only $30 billion, and a U.S. surplus was forecast for following years. The U.S., incidentally, remains the world’s second-biggest exporter according to the latest World Trade Organization statistics.
The Trump administration continues to make a big show of blaming China for jobs being moved across the Pacific and for trade deficits, but although China is opportunistic, those vanishing jobs (and resulting deficits) are squarely the responsibility of the corporate executives who make the decision to shut down domestic operations. This dynamic is part of the larger trend toward so-called “free trade” — as technology and faster transportation make moving production around the world more feasible, the corporations taking advantage of these trends seek to eliminate any barriers to cross-border commerce.
And as the race to the bottom continues —as relentless competition induces a never-ending search to find locations with ever lower wages and ever lower health, safety, labor and environmental standards — what regulations remain are targets to be eliminated. Thus we have the specter of “free trade” agreements that have little to do with trade and much to do with eliminating the ability of governments to regulate. And as the whip of financial markets demand ever bigger profits at any cost, no corporation, not even Wal-Mart, can go far enough.
Despite being a leader in cutting wages, ruthless behavior toward its employees and massive profitability, when Wal-Mart bowed to public pressure in 2015 and announced it would raise its minimum pay to $9 an hour, Wall Street financiers angrily drove down the stock price by a third. Wal-Mart reported net income of $61 billion over the past five years, so it does appear the retailer will remain a going concern. Apple reported net income of $246 billion over the past five years, so outsourcing production to China seems to have worked out for it as well.
The Trump administration’s trade wars are so much huffing and puffing. Empty public rhetoric aside, Trump administration policy on trade, consistent with its all-out war on working people, is to elevate corporate power. Nationalism is a convenient cover to obscure the most extreme anti-worker U.S. administration yet seen. Class war rages on, in the usual one-sided manner.
If the renegotiated North American Free Trade Agreement were good for working people, its content wouldn’t be hidden. Just what the Trump administration and the Mexican government of Enrique Peña Nieto have cooked up we do not know, but given the proclivities of both it is not likely to be good.
That the hurried-up deal appears to be intended to force Canada, which has the strongest regulations among the three NAFTA countries, into signing on disadvantageous terms, provides all the more reason to be skeptical. And, finally, a study of the United States Office of the Trade Representative’s “fact sheet” leaves no doubt that any new NAFTA will be a windfall for multi-national corporations, at our expense.
Let’s back up for a moment and remind ourselves that we should judge actions, not words. The contrast between Donald Trump’s empty campaign lies and his administration’s actual policies and actions are glaring, such as, for example, in infrastructure, where his plan is little more than a package of subsidies to connected corporations under the guise of “public-private partnerships,” which are scams to funnel public money into corporate pockets. So it is with so-called “free trade” agreements, especially NAFTA.
Jardin de la Conchita, Mexico City (photo by Percisco)
In July 2017, the Trump administration quietly published its “Summary of Objectives for the NAFTA Renegotiation.” The 18-page document contained almost nothing concrete but did feature boilerplate language that in some cases appears to be lifted word for word from the Trans-Pacific Partnership. The document purports to adopt standards for labor and for the environment, but the language used is very similar to the language proposed for the Trans-Pacific Partnership and in use in other “free trade” agreements. There is little at all in these stated goals that differs from the stated goals that Obama administration put forth for the Trans-Pacific Partnership. They are meaningless window dressing.
Lest we believe those objectives were some sort of aberration, the Trump administration followed up in April 2018 with its “National Trade Estimate Report on Foreign Trade Barriers,” in which it took direct aim at no less than 137 countries. In this document, “trade barriers” are defined as “government laws, regulations, policies, or practices that either protect domestic goods and services from foreign competition, artificially stimulate exports of particular domestic goods and services, or fail to provide adequate and effective protection of intellectual property rights.” Note the absence of labor, safety, health or environmental standards. Among the hundreds of pages of complaints, to provide one example, was that Norway expects food that it imports to be proven safe.
Quite clearly, the Trump administration, headed by a billionaire grifter who built his fortune on stiffing working people and stuffed with corporate raiders and Goldman Sachs executives, is wholly dedicated to furthering corporate plunder, as its tax “reform” amply demonstrates.
Corporate giveaways on financial services, IP
Although only corporate lobbyists have had access to the revised NAFTA text, the U.S. Office of the Trade Representative did provide some highlights of the agreement in its public “fact sheet.” These are not promising.
It appears that corporate wish lists for intellectual property, financial services and other areas were largely granted. New IP rules, if this agreement is passed into law, include stepped-up enforcement against “camcording of movies” and “cable signal theft,” as well as “Broad protection against trade secret theft.”
The IP rules would extend copyrights to 75 years, long a U.S. demand (and one opposed by the Canadian government); increase pressure on Internet service providers to take works alleged to infringe copyrights (in actuality a tool for censorship); and provide for “strong protection for pharmaceutical and agricultural innovators,” which can be presumed to be code for enabling further medicine price-gouging and crimping accessibility to generic and cheaper alternatives. The last of these was a prominent U.S. goal for the Trans-Pacific Partnership, which, inter alia, sought to eliminate the New Zealand government’s program to provide medicines in bulk at discounted prices at the behest of U.S. pharmaceutical companies. Related to this is a measure to include 10 years’ protection for biologic drugs and an expansion of products eligible for “protection.”
New York Stock Exchange (photo by Elisa Rolle)
Noting that the U.S. runs a surplus in financial services, the new NAFTA agreement would force Mexico wide open to U.S. financial companies. The agreement explicitly prohibits any regulations restricting foreign financial-services companies. This would be done under the guise of “national treatment,” and the Trade Office fact sheet flatly states that it is intended “to ensure that a Party does not discriminate against United States financial service suppliers.” That language is “trade speak” for allowing any predatory U.S. bank to run roughshod over other countries with no restrictions. And, as an added bonus, the IP rules also prohibit regulations against cross-border transfers of data. (Here U.S. negotiators likely have European Union privacy rules in their sights as this is a contentious point in the Transatlantic Trade and Partnership talks.)
There do appear, on paper, to be token gains for labor and the environment. But that assumes any such gains would be enforceable, which can not be taken for granted. A revised labor chapter calls on Mexico to commit to strengthening Mexican workers’ ability to collectively bargain, but this strongly clashes with the Trump administration’s unrelenting hostility to U.S. unions. In conjunction with raising the minimum North American content of automobiles, at least 40 percent of auto content must be made by workers earning at least US$16 per hour.
On the environment, the Trade Office claims there would be new protections for marine species including whales and sea turtles; “prohibitions on some of the most harmful fisheries subsidies”; and “articles to improve air quality.”
Don’t hold your breath for clean air
Unfortunately, such sentiments run 180 degrees opposite to the actual policies of the Trump administration. Nor is global warming even mentioned. Furthermore, it is necessary to pay close attention to the actual words used in various places of “free trade” agreements and, crucially, how those passages will be interpreted in the secret corporate tribunals that adjudicate disputes between governments and corporations. Those tribunals are held in secret, have no appeal process and hand down decisions by judges whose day jobs are as corporate lawyers for the corporations that bring these suits.
The U.S, Trade Office “fact sheet” makes no mention of the Investor-State Dispute Settlement (ISDS) provision. Inside US Trade reports that ISDS will remain intact for the oil and gas, infrastructure, energy generation and telecommunications industries, while for other industries, ISDS “will be limited to expropriation or failure to give national treatment or most-favored nation treatment.” Because suits by corporations against national governments seeking to eliminate regulations are almost always raised on just those issues, this “limitation” will likely prove to be of no consequence.
Spent shale from a Shale oil extraction process (photo by U.S. Argonne National Laboratory)
The announced tepid advances in labor and environmental rules aren’t likely to be enforceable. In the language of trade agreements, rules benefiting capital and erasing the ability of governments to regulate are implemented in trade-agreement texts with words like “shall” and “must” while the few rules that purport to protect labor, health, safety and environmental standards use words like “may” and “can.” It remains to be seen if there will be any change to that language, but it would be best not hold one’s breath. Promised breakthroughs in past “free trade” deals have consistently proven to be empty platitudes.
A Sierra Club analysis of the revised NAFTA text warns that environmental rules will be weakened. The analysis said:
“NAFTA negotiators have explicitly stated that they intend for NAFTA 2.0 to lock in the recent deregulation of oil and gas in Mexico, which has encouraged increased offshore drilling, fracking, and other fossil fuel extraction. A future Mexican government may want to restrict such activities to reduce climate, air, and water pollution. However, NAFTA 2.0 could bar such changes with a ‘standstill’ rule that requires the current oil and gas deregulation to persist indefinitely, even as the climate crisis worsens and demands for climate action crescendo.
NAFTA 2.0 includes expansive rules concerning ‘regulatory cooperation’ that could require Canada, the U.S., and Mexico to use burdensome and industry-dominated procedures for forming new regulations, which could delay, weaken, or halt new climate policies. These rules also could be used to pressure Canada and Mexico to adopt climate standards weakened by the Trump administration, making it harder to resume climate progress in the post-Trump era.”
Will the Canadian government allow itself to be bullied?
The Institute for Agriculture and Trade Policy, calling the rushed deal between Mexico and the U.S. a “transparent bullying tactic” intended to force Canada into a deal with unfavorable terms, also said that the deal would hurt family farmers in all three countries. The Institute said:
“Given the Trump administration’s lack of adherence to existing international agreements, a handshake deal can hardly be seen as credible. What little has been released on agriculture makes the dubious assertion that U.S. farmers have benefited from NAFTA and, even worse, promises new rules to lock in the spread of agricultural biotechnology, which would favor agribusiness interests over those of family farmers in each of the three countries.”
Food and Water Watch also threw cold water on the idea of an improved NAFTA, saying it had “no confidence” that the Trump administration would address NAFTA’s flaws. The group’s executive director, Wenonah Hauter, wrote:
“The devil resides in the details of these corporate-driven free trade deals, and we expect that the fine print will include the kind of pro-polluter, pro-fossil fuel industry, pro-Wall Street deregulation that has been a hallmark of Trump’s domestic agenda. These rumored trade provisions would codify the administration’s savage attacks on environmental protection, food safety and consumer rights into trade deals that enshrine and globalize deregulation, making it harder to restore U.S. environmental and consumer protections once this administration is shown the White House door.”
The Alberta tar sands (photo by Howl Arts Collective, Montréal)
The Canadian government has joined the NAFTA talks, although it is difficult to see how Canada can do other than concede, given that U.S. Treasury Secretary Steven Mnuchin has said that Canada has until August 31 — four days after the Mexico-U.S. agreement was announced — to come to terms or the White House will move to replace NAFTA with a Mexico-U.S. bilateral deal. On the other hand, President Trump does not have the authority to do that without congressional approval, and opinions expressed in the U.S. Senate have opposed a deal without Canada. And despite the many concessions made by Mexico, tariffs imposed on Mexico will remain in force until and unless further negotiations eliminate them.
The Council of Canadians, long a NAFTA critic, fears Canada will show weakness. The group’s honorary chair, Maude Barlow, wrote:
“Trump is threatening to push Canada out of the agreement, or making it a junior partner to the U.S. and Mexico. Our government must not give in to these tactics and hold the line on our public interest. When NAFTA was signed 30 years ago, we worried that Canada would be at the mercy of the U.S, and we were right. Now, Canada is going to have its auto workers and farmers pitted against each other.”
No reason for optimism in Mexico
There is no reason for optimism to the south, either. Mexican activist Manuel Pérez-Rocha, noting that it is “not surprising” that the NAFTA text is hidden from the public, wrote:
“Unfortunately, the public doesn’t have an idea of what the exact decisions on energy are, labor organizations have been kept completely aside from the negotiations and in terms of the settlement of disputes these mechanisms will only handcuff [President-elect Andrés Manuel López Obrador’s] government when it starts office on Dec. 1.”
Without question, NAFTA has been a disaster for working people in all three countries — a lose-lose-lose proposition that has gone on for more than two decades. Despite President Trump’s rhetoric, Mexican farmers have perhaps been hurt the most. Is an administration that is overturning every environmental regulation it can, that denies global warming, that puts industry executives in charge of regulatory agencies, that features cabinet officers such as Wilbur Ross, an investment banker who buys companies and then takes away pensions and medical benefits so he can flip his companies for a big short-term profit, really going to help working people?
Given the massive power imbalances of today, the policies of capitalist governments reflect the interests of the largest industrialists and financiers. The Trump administration is actually composed of large industrialists and financiers, to a degree perhaps unprecedented in modern times, so all the more are those interests promoted.
“Free trade” agreements are part of this process, which is why they have little to do with trade and much to do with bringing to life corporate wish lists. These agreements are an inevitable result of production being moved to places with the lowest wages and weakest regulation — with products assembled across oceans with parts delivered from yet more places, the multi-national corporations that benefit from these global production chains require ever more “free trade” deals to keep their cross-border profits coming and to maintain their sweatshop empires.
There remains no alternative to working people uniting across borders, in a broad movement, to reversing corporate agendas that accelerate races to the bottom. Opposing “free trade” deals on nationalist grounds is playing into the hands of corporate plunderers.
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Among rulings handed down under NAFTA — rulings that are considered precedents when similar cases are heard — Canada had to reverse its ban on a gasoline additive known as MMT, a chemical long believed to be dangerous to health, because the tribunal ruled the ban a violation of the principal of “equal treatment” even though, had a Canadian producer of MMT existed, it would have had the same standard applied. Canada was also successfully sued over its ban on the transportation of PCBs that conformed with both a Canada-United States and a multi-lateral environmental treaty. The tribunal ruled that, when formulating an environmental rule, a government “is obliged to adopt the alternative that is most consistent with open trade.”
Systemic Disorder 