By Mike Koetting September 25, 2018
I am still no expert on trade policy, but I have found the spinning out of the recent NAFTA discussions fascinating. You may have already forgotten about them because issues with China have taken center-stage in anything about trade that could be heard over the Kavanaugh furor. But, as will be discussed below, expect NAFTA to return.
First, repeating a mantra from earlier posts on the topic, there is simply no such thing as completely free trade. All trade happens under some rules. So simply incanting “free trade” doesn’t really shed much light on the full range of discussion. This is important because the stickiest points in the current NAFTA discussion are not around tariffs per se, but around the rules under which tariffs stay low—not that you could tell that from most of the media coverage, which continues to portray this as a cartoon contest between free trade and protectionism, with little coverage of the actual issues at stake.
To review the bidding on NAFTA: As it now stands, the United States and Mexico have reached a tentative bi-lateral trade agreement. Canada has participated in talks about some of the provisions, but is not part of the Mexico-America agreement. There is a wide range of opinion as to what happens with NAFTA if Canada does not come to an agreement with the other two parties. But the procedural rules governing Fast-Track approval require the publication of actual text by October 1 if an agreement is to be signed with Mexico before its new president comes to office. So the next week will be telling.
It is worth setting aside speculation on Canada and focusing on the Mexico-America proposed agreement because it provides an illuminating case study. As it now stands there are five major elements of the deal. The agreement would:
- Raise the percent of parts in imported cars that must be made in North America from 62.5% to 75%. While this sounds good, in fact, due to the arcane way in which these calculations are performed, experts are divided as to whether this will make much difference. But no one suggests it is a step in the wrong direction.
- Requires that a portion of any automobile or automotive parts must be made by workers who make at least $16/hour for the car to qualify for NAFTA’s duty free status. This, or a similar provision, would decrease the incentive to move jobs to Mexico and force manufacturers to pay better wages if they do. This is should help US workers but also help Mexican workers. Wages in Mexico have not risen at all proportional to the amount of work that has been moved there as a result of NAFTA.
- Remove from NAFTA the Investor-State Dispute Settlement panels (ISDS). ISDS are extra-governmental panels created by the treaty and staffed by corporate lawyers who decide, in relative secrecy, on complaints brought by corporations that governments under the agreement have “infringed” their rights by enacting unfavorable legislation or enforcing unfavorable regulations. If the panel finds against the government, it can levy fines. (The US government has transferred almost $400M to corporations for various “infringements”.) It is widely argued these tribunals limit nations’ ability to make laws for the conduct of business in their own nations.
- Guarantee union members secret votes on unionization and contracts, something woefully lacking in Mexico.
- Create a 16 year sunset provision, with a review at 6 years.
While I am sure I don’t understand all the fine print in this agreement, what is striking to me is that none of these provisions seem to fit into the narrative structure, advanced by the business community, that dismisses any attempt to modify trade rules as anti ”free-trade.” The Business Roundtable complained “that today’s announcement might signal not an improvement, but rather a step backward by requiring a sunset provision, weakening investment protections and constraining access to dispute settlement procedures.”
Rather, it seems to me, these provisions could best be characterized as an attempt to better balance the benefits from trade between the people of the two countries and the corporation owners, whom the previous provisions favored.
Not surprisingly, unions tend to support the new provisions. Unions do, however, caution that the agreement continues to lack sufficient teeth around enforcement, and, in general, there are plenty of things progressives would want from a trade deal that are not contained here. But there is general sentiment this a step in the right direction.
In any event, the opposition of the business community and the absence of Canada in the agreement make it unlikely that Congress will move quickly on this issue, which would probably push any ratification past the midterm and past the installation of Andres Manuel Lopez Obrador as the new president of Mexico. Thus, adoption of these provisions, indeed the entire future of NAFTA, remains uncertain.
Still, this proposed agreement is interesting because support does not fall along party lines. While Trump’s base, like Trump, is instinctively protectionist, this is totally divergent from the Republican party’s established position, which has been strongly “free trade” for the last 30 years. (Historically, Republicans were the party of trade protection. But starting in the 80’s they realized the world had changed such that it was more beneficial for the elite to have “free trade” than “protectionism”.)
Democrats are also split. The big-money portion of the party supports existing and proposed deals (like the Trans Pacific Partnership). But the base is sufficiently hostile to all trade deals that no Democratic candidate with an expansive notion of trade deals will be viable in the near future. In the moment, the Democrats are attacking the threat of a Trump tariff war. But this is more schadenfreude at Trump’s problems with his own constituencies than any coherent policy position. In fact, as one hopes party leadership realizes, thoughtful trade pacts are an important way to prevent trade wars—so they will need to have a more proactive position when they regain a majority.
Sensible policy should start with the position recognized by virtually all experts on the topic that, on balance, increasing the amount of trade leaves America better off than restricting trade. Some of the benefits are reflected in the increased production of exports and some are reflected in lower consumer prices for some products. But it is also demonstrably the case that some people get banged up pretty badly when “free trade” proceeds willy-nilly and that a very disproportionate amount of the returns go to the investor class. Addressing these issues will difficult. For instance, if one wants to oppose tariffs because they may raise consumer prices, one also needs to keep in mind not only the costs to other Americans of keeping those prices low, but also the warping effect the mechanisms used to keep those prices low has on the distribution of American wealth. And that is before considering the impact on other countries, which sooner or later will return to haunt us. Conversely, a more protectionist policy also creates winners and losers, as well as the threat of tariff wars, which would probably have a worse impact on general welfare than the current policies.
It seems the best approach would be policy that embraces trade, but uses trade agreements in ways that achieve a better balance of the benefits. Perversely, it seems the Trump administration has somehow stumbled into an agreement that could actually have some modest benefit for both American and Mexican workers without obviously undoing whatever positives there are to a trade agreement with Mexico. However, since Trump doesn’t seem to operate from any fixed principles, it’s not clear whether he has any capability to steer this agreement through a Republican Congress—let alone whether he could ever repeat it.
But this seems exactly like the direction Democrats should be exploring—not getting rid of trade agreements, but using them to balance the benefits. In addition to real benefits, this approach touches on an area of common interest with the Trump base at a time when those are very hard to find.
Between Hell and High Water 
Mike – I, also, have limited knowledge of trade but it seems to me that an important moral dimension of trade does not get adequate attention. That is, the fact that hundreds of millions of people (mainly in Asia and Africa) have been lifted out of dire poverty because of global trade. The discussion of trade cannot be limited to the impact within our borders. The fact that trade eliminates jobs in the U.S. is never a rationale for trade barriers, even when an underdeveloped country is unfair in its state support of an industry. When many millions of people are in poverty, we have a moral obligation to promote trade. “America First” is not justified economically most of the time but it is never justified morally.
Economically, I believe there is are only two legitimate reasons for trade barriers:
> genuine issues of national security
> environmental protection issues — taxing companies that are creating environmental damage in an amount equal to the excess damage over that created by domestic producers.
I see no productive use of barriers because of “dumping” or other state-supported subsidies unless it would clearly lead to a monopoly situation where prices could be increased later and production by other countries would not be possible — a rare situation at best.
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Agree the moral dimension of trade is important. Likewise, it would be both wrong and foolish to forget that there is no moral imperative for developed countries to have a standard of living enormously higher than everyone else. But this must also be viewed through the pragmatic lens of what are the actual outcomes of any specific set of trade rules…and make clear-eyed assessments of the trade-offs involved. It is hard to avoid the fact that freeing up global trade has, in addition to lifting millions of people out of the worse poverty in many undeveloped countries, increased inequality in developed and undeveloped countries alike. It will take a lot titration to get this balance right, and I think we’re a little off. But the whole idea of my blog is that there are no easy answers and we’re all stuck between hell and high water.
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Mike — thank you for those comments. I think it important to emphasize that we are between hell and high water on political solutions but not on the moral and economic imperatives of free trade. While economic analysis of many issues is fuzzy, that is not the case with trade. I would challenge your assertion that global trade has increased economic inequality in the developed countries. It has done the opposite by giving the non-wealthy access to much higher quality and lower cost consumer goods. That has, in fact, increased their wealth — the problem being that their wealth has increased more slowly that the top 5%. I would argue that economic inequality in developed countries would be worse in the absence of global trade. For the undeveloped countries, it is true that global trade increases inequality but that is an unavoidable consequence of establishing market-based economies. And, while inequality is increasing, the bottom economic classes are being lifted out of poverty. It is comparable to the situation in the developed countries where most people are better off but the degree of inequality is increasing (though not due to trade for the developed countries). As a middle class develops in the underdeveloped countries, economic inequality should be reduced unless the wealth class gains significant political control, as it has in the U.S. over the past 30 years.
I believe that economic inequality is the most dangerous threat to our democracy. However, global trade has nothing to do with the inequality gap that has been growing in all Western economies.
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