Much Ado about NAFTA
by Robert Z. Lawrence, Peterson Institute for International Economics
Op-ed in the Guardian
March 7, 2008
© The Guardian
It's the politics, stupid. When it comes to the US economy, trade has replaced the devil as the reason things go bad. A Fortune magazine poll conducted this January asked Americans what the most important reason for the recent economic slowdown was. The largest number—28 percent—answered "losing jobs to economies where labor is cheaper" and an additional 7 percent mentioned "foreign competition." Fully 78 percent of the respondents said that trade has made things worse for American workers.
Given these perceptions, the Democratic candidates seeking votes in Ohio found it impossible to resist joining those who blame trade agreements such as the North America Free Trade Agreement (NAFTA) for the traumatic loss of manufacturing jobs in the United States over the past six years. In the primary campaign, Hillary Clinton and Barack Obama competed vociferously for the title of champion NAFTA-hater. Both said they would withdraw from NAFTA unless Canada and Mexico came back to the negotiating table. Both insisted that the labor and environmental provisions, currently in side agreements, should be strengthened, included in the agreement itself and enforced in the same way as the agreement's other provisions. Clinton went even further in expressing her skepticism about US trade agreements generally and called for a time-out so they can all be reviewed.
In fact, trade's role in America's current economic difficulties is deeply misunderstood. While the candidates keep talking about jobs going overseas, the irony is that over the past year, trade is helping to stave off the recession. Since early 2007, the US trade deficit has actually narrowed by $50 billion as exports have increased more rapidly than imports.
NAFTA remains a curse word for much of the US labor movement. Undoubtedly jobs were lost when some US firms relocated to Mexico when it was implemented in 1995. But other jobs were created because of increased exports. After all, trade's benefits come from increased specialization. Despite the dire predictions that were made when NAFTA was implemented, in its first five years, US manufacturing employment actually increased by 250,000—not all because of NAFTA—and overall US employment rose by 17.5 million. US manufacturing payrolls did fall by 2.7 million between 2000 and 2003, mainly because spending on computers and other equipment plummeted when the dotcom boom burst while labor productivity growth was brisk. But this happened far too late to be ascribed to NAFTA. Moreover, over those three years, imports from Mexico barely grew, and imports from all countries did not increase their share in the US market.
What would be the consequences if NAFTA were to be renegotiated? On the plus side, the recent passage of the US-Peru free trade agreement with bipartisan support makes it clear that including strong environmental and labor provisions can help mobilize Democratic political support for trade. Aside from the indignity of being pressured, Canada and Mexico would probably agree to the language with respect to labor and environment that the United States would be able to demand without alienating the Republicans who are the mainstay of support for trade agreements. After all, because of opposition from states that are tough on trade unions, the United States has ratified only two of the eight core conventions of the International Labor Organization while Canada has ratified five conventions and Mexico six. And unlike the United States, the other members of NAFTA still participate in the Kyoto protocols on climate change. Moreover NAFTA is popular in Mexico and Canada, and both countries might see new negotiations as a way to promote their ideas for deepening economic integration in North America. Mexico, for example, would surely like an improved treatment for the movement of labor, while Canada would like to replace US antidumping provisions with antitrust rules.
Of course, no country should continue to adhere to agreements that are fundamentally broken, but the circumstances should be truly exceptional. But there's a big difference between including provisions in new agreements and trying to reopen old ones. The renegotiation proposals create uncertainty about US commitments to its existing trade agreements and raise the risk that the renegotiated agreements could be rejected. The full benefits from trade agreements are only realized when they are credible and provide a permanent and reliable set of rules of the game that private decision makers can count on.
If NAFTA is renegotiated, it will immediately call other US agreements into question. Why shouldn't the Central American agreement (CAFTA) be reopened on similar grounds? What about the US-Israel agreement, which was negotiated so long ago that it doesn't have any labor or environmental provisions at all?
The candidates may say they only want a "time-out," but they will end up with a rematch. Each renegotiated agreement will need congressional approval and each will be a battle. Hillary Clinton disliked NAFTA when it was first signed, because it took attention away from healthcare reform. Would the next US administration really spend the political capital necessary to have these new (old) agreements ratified?
George Bush began his disastrous unilateralist foreign policy when he withdrew from the Kyoto protocols. It would be truly unfortunate if the next administration emulates him by sending a message to the rest of the world that US trade agreements and negotiations are no longer dependable.