Tuesday, February 26, 2008

What’s Wrong With NAFTA?

Several weeks ago, I noted presidential elections seldom turned on a candidate's trade policy (post). But this campaign is shaping up to be all about trade! One newspaper recently claimed “If there is a sleeper issue with the potential to catapult Barack Obama past Hillary Rodham Clinton in the remaining delegate-rich Rust Belt states, it is the North American Free Trade Agreement . . . ” I wish I could say the debate between Obama and Clinton was a substantive one, but sadly I cannot. In a campaign where the candidates’ policies admittedly are more similar than different, they seem to be drawing distinctions based on who dislikes NAFTA more. Clinton’s now infamous “shame on you, Barack Obama” speech was in response to Obama mailers claiming she once touted NAFTA as “a boon for the U.S. economy.” Despite the fact the agreement was implemented under her husband’s watch (though partly negotiated by the first Pres. Bush), Clinton now questions NAFTA’s benefits and has called for a "time out" on future trade agreements. Obama too has adopted an anti-NAFTA stance; he claims the regional trade agreement was oversold to the American people and that his administration would fix NAFTA. So, how did NAFTA become the political hot potato for the Democratic party? What’s so wrong with NAFTA?
First off, I must admit I generally prefer multilateral arrangements like the WTO Agreement to bilateral or even regional trade agreements (“RTAs”) like NAFTA. RTAs create trade diversion. An example will help illustrate the point: Imagine Belgium is the most efficient producer of chocolate bars, and it has traditionally been the top supplier to the U.S. market. The United States subsequently enters into a trade agreement with Canada, who also produces chocolate bars. Canadian bars are less efficiently produced and therefore more expensive, but under the new trade pact Canada receives a tariff preference not granted to Belgium (as would be required under a multilateral agreement). Once the pact is signed, the lower tariff means Canadian chocolates become cheaper in the U.S. market—not because of increased efficiencies on the part of Canadian producers, but exclusively because of the negotiated preference. So now, U.S. imports of chocolate bars are diverted from Belgium, the efficient producer, to Canada.
The WTO does recognize RTAs, but GATT Article XXIV calls for these regional arrangements to liberalize substantially all trade among members, a requirement that is rarely satisfied in practice; RTA members invariably set up “carve-outs,” or specific goods and services that will not be liberalized (or that will be liberalized very slooow-ly). Moreover, there is a great imbalance in bargaining power when smaller economies negotiate individual agreements with powerful trade players like the United States or the European Union. In my view, the best trade deals—best for the United States, the world economy, and developing countries—are those that arise from the give-and-take of multilateral negotiations. Indeed, U.S. trade policy for a long time disfavored these regional arrangements. When NAFTA was signed in 1994, the United States had only two other bilateral arrangements—with Israel and Canada, neither one of which caused the firestorm of protest NAFTA did. (U.S. policy has now taken a drastic turn in favor of these RTAS, and a confusing array of regional arrangements are concluded seemingly every other day. But I save that discussion for another day.)
Alas, the strong criticism and opposition leveled at NAFTA has little to do with a philosophical debate between multilateral vs. regional trade liberalization. In a word, opponents of NAFTA are primarily concerned with jobs—or job losses to be more precise. Ross Perot once promised NAFTA’s implementation would bring “the giant sucking sound” of good manufacturing jobs leaving the United States in pursuit of lower wages in Mexico. Opposition to NAFTA plays well in states like Ohio that have lost a significant number of such jobs in recent years. But is NAFTA’s reputation as a stinker among Democrats well-deserved? Are Obama and Clinton’s efforts to distance themselves from NAFTA—and to one-up each other on the anti-NAFTA rhetoric—justified?
Understanding that statistics are “lies, lies and damn lies,” it is hard to look exclusively to empirical evidence for an answer. It is a first step, however. The studies I have seen show that NAFTA’s impact on U.S. jobs has been relatively small. One study looked at 10 years of data and concluded NAFTA-related job losses in the United States amounted to an average of 37,000 per year; during the same period, the U.S. economy was creating over 200,000 jobs per month. Another concluded “NAFTA has had relatively small positive effects on the
U.S. economy
” (though it has had relatively large positive effects on Mexico). But NAFTA has created adjustment costs—and some argue those costs are disproportionately borne by certain industries and certain groups of Americans.
A report by the well-known Public Citizen (who is unabashedly anti-NAFTA) concluded that NAFTA-related job losses disproportionately affected Latinos. Citing U.S. government statistics, Public Citizen asserts “In 1999, an astounding 47 percent of the total number of workers who received federal assistance under a program for workers certified as having lost jobs as a direct result of NAFTA were Latino.” Apparently, Latinos are disproportionately represented in some of the industries most affected by NAFTA, such as textiles and apparel. But it has proved difficult to measure the specific effects of NAFTA on specific industries. There seems to be some general agreement that in addition to textiles and apparel, the automotive industry has experienced the greatest change in trade flows, which presumably has affected employment in those sectors. Some of those changes are due to events other than NAFTA, however—such as the Mexican devaluation of the peso. Undoubtedly, NAFTA has had both good and bad affects on the U.S. economy (and on Mexico’s economy, for that matter). But the mainstream studies indicate NAFTA’s impact in the United States has been relatively minor because trade with Mexico represents a small portion of U.S. GDP—less than 3 %. While some workers in some sectors have seen significant job losses, NAFTA contains two employment adjustment assistance programs meant to provide retraining to such workers. Of course no politician wants to tell her constituents that their good paying jobs are being exchanged for a social welfare program, but the long-feared “giant sucking sound” of massive job losses has yet to materialize.
What’s wrong with NAFTA? If we are expecting benefits without any burdens, then NAFTA—and the plethora of regional and bilateral agreements we have negotiated since—will prove a disappointment. There are costs to trade. We must determine whether those costs outweigh the benefits. It is too easy to set up NAFTA and free trade as the straw man upon which we heap all of our fears and anxieties, but trade has proved beneficial to the United States time and again. If the Democratic Presidential candidates are truly arguing that NAFTA’s costs outweigh its benefits, they would do well to provide substance and context to their arguments. The chest-thumping I-dislike-NAFTA-more approach does not serve the American people well.


Ralf Grahn said...

Congratulations for good writing and sound reasoning.

Andrea Ewart said...

Marjorie, I'm really glad you decided to take this issue on, and in such a well-reasoned manner. I think it highly unfortunate, for the reasons you laid out so well, that the Democrats are engaging in this anti-trade rhetoric, and not just on NAFTA, though that's apparently the easiest one to get everybody's goat.

Let me add too, that in this regard the biggest failing of our political leaders has been their lack of willingness to provide for and encourage the investments in research & development and training that can help to keep the United States as an innovator of new technologies and new industries. More jobs for economies of the future would make us less likely to bemoan the loss of manufacturing jobs in sectors where our workers are no longer as competitive but whose higher wages can provide an opportunity to lift workers in less-developed economies out of poverty. This, in part, is what trade is about.

Marjorie Florestal said...

Grahn & Andrea

Thanks for your comments--there is much hyperbole written about NAFTA and other trade agreements. I appreciate the opportunity to explore these issues in a reasoned way. Speaking of reason, I am disappointed--to say the least--to see in the democratic debate tonight the continued batting at NAFTA. At one point, Tim Russert asked both candidates if they are willing to withdraw the U.S. from NAFTA (a 6 month process under the agreement). The two danced around the issue, but the party line is that they would hold out the "stick" of potentially withdrawing from NAFTA in order to force Canada and Mexico to renegotiate NAFTA. Withdraw from NAFTA? This article points out that Obama and Clinton are speaking out of both sides of their mouths (http://news.yahoo.com/s/ap/20080227/ap_on_el_pr/democrats_trade;_ylt=ArYOFAqHiNoglQsjHk6cp59h24cA)

redwood said...

"but trade has proved beneficial to the United States time and again"

so has not trading. in the late 1800’s, the US shut the door to hand-rolled Cuban cigars and in doing so touched-off a boom in the US tobacco industry that but for concerns about lung cancer would still be a one of the strongest growing industries in U.S. history.

(meanwhile, back in Cuba, our trade barrier reduced the exportations of the finished products to near insignificance. for the next century, tabacco was mostly shipped out as leaves, a raw material).

I don't know much beyond US-Cuba trade, but my that Japanese have a few stories to tell about their four wheel drives.

And I wonder how many artist are willing to give up the protections Ben Franklin secured for them.

I don't think you're giving people enough credit. sure, First World chocolate. Who cares whether poor people can afford to buy it. But run example with corn, and ask yourself Are you willing to risk the food supply of a regional population on your faith in efficiency?

what's happening with NAFTA is that people are getting a sense that maybe differing to cost/benefit analysis is not in our long term interest.

Marjorie Florestal said...

I'm a trade and development scholar--not an advocate of free trade at any costs. Actually, there are a few goods and services I do not believe should be subject to free trade principles. Water for example, and probably education and health care too (I'll write more on that in a future post). But I'm not persuaded by your example. Protection almost always works for the protected industry, but it brings great costs and inefficiencies to consumers, workers, the environment, etc. Japan, the U.S., China, Europe, they have all used protectionist devices. And my previous posts have stated, I think some of that is necessary. But we aren't talking about taking temporary measures--the two Democratic candidates are suggesting (at least in some instances) that free trade (and particularly NAFTA) on balance has not been good for America. Are you kidding me?

redwood said...

Hi Marjorie Florestal,

I look forward to reading your thoughts on the extent to which we should (or should not) trade health care services.

And I don’t mean to hijack the discussion on Candidates and what are saying about NAFTA. But I think that as federal candidates they’re caught between a rock and hard place. I see the Dems doing what they need to do by showing that they will not necessarily privilege technical notions of efficient markets over what Americans want to do for a living.

I offer the example of the U.S stopping the importation of Cuban cigars and the subsequent boon to the Southeastern economy not to argue against the benefits of free trade but to show that, depending on the product/service and the nation with whom we’re trading, protecting a fledgling domestic industry can very much be in a nation’s self-interest.

I guess (1) I’m at a loss to understand how the Least Developed Nations (or even low income nations) are suppose to develop their domestic industries when the chocolate bars they’re competing against control the market.

But (2) what concerns me is that in the case of corn, as impoverished populations join in the production of a “more efficient” product, people will be churning every inch of their lots for exportation, leaving nothing for themselves.

And then, they won’t be able to afford to buy the very corn they grow.

to me, that's off.