Donald Trump represents a bucking of tradition for the Republican Party in many ways. Perhaps one of the foremost issues on which Trump has led an about-face for the party is trade. As a candidate, Trump capitalised on populist fury toward international trade and channelled that fury into his stunning victories throughout the country— particularly in the ‘Rust Belt’ states, which have been most affected by free trade agreements and the loss of manufacturing jobs. The hill upon which Trump has seemingly chosen to make his first stand against international trade is the North American Free Trade Agreement (NAFTA). The trade debate is emerging amidst a looming political crisis between the two neighbours.
In a recent spat with Mexican President Peña Nieto on Twitter, Trump made it clear that if he were not able to renegotiate NAFTA on his terms, he’d ‘tear it up.’ President Nieto, facing domestic pressure to stand up to what many Mexicans consider bullying, retorted that Mexico would be more than willing to walk away from NAFTA altogether. This political posturing is worrisome for proponents of free trade on both sides of the Rio Grande.
Canada and the United States began negotiating with Mexico for a comprehensive free trade agreement in 1990 shortly after the two states had signed their own bilateral trade agreement. The endeavour was to create an economic zone to rival other developing trade zones around the world. This was to be done by eliminating tariffs on goods and services crossing the three countries’ borders. The intention of NAFTA was to increase cross-border trade and investment, its architects gambling that this would create jobs and shared prosperity. The deal was a spectacular display of bipartisanship, negotiated by the Bush Administration and ushered through Congress by the Clinton Administration, with a Republican majority voting for its enactment. The agreement is now over 20 years old, and it is still controversial. Many of its impacts are multidimensional which makes it difficult to either condemn or laud the deal in absolute terms.
One of Trump’s most damning attacks on Hillary Clinton during the 2016 campaign was her connection to NAFTA—what he called the ‘worst deal in US history.’ In streams of tweets throughout his candidacy and now his presidency, Trump has associated NAFTA with the loss of thousands of jobs across America, the nation’s growing national debt, and an increase in illegal immigration. In many ways, Trump is not wrong. Most economists would agree that with every international trade deal, there are ‘winners’ and ‘losers.’ And NAFTA is no exception.
NAFTA’s Collateral Damage
Upon signing NAFTA, President Clinton estimated that the agreement would facilitate the creation of more than 200,000 jobs in its first two years of effect. This was not to be the case. In fact, the left-leaning Economic Policy Institute (EPI) estimated in a 2011 paper by Robert Scott that job loss to Mexico between 1993 to 2010 totalled around 700,000 jobs. The EPI blames the loss of jobs to the US trade deficit with Mexico, which totalled $97.2 billion in the same period.
In another report released in 2013, EPI Fellow Jeff Faux writes that NAFTA was not only to blame for direct job losses, but also for deteriorating working conditions and wages by enabling American corporations to use off-shoring as a threat to unions in negotiations. Meanwhile, Mexican workers continue to only earn 30 per cent of wages of American workers. While NAFTA was meant to ‘expand trade,’ according to Faux, it only had the effect of empowering corporations to leverage North American workers against one other. Faux determines that NAFTA is emblematic of globalisation’s ‘race to the bottom.’
It is indisputable that American manufacturing has contracted significantly—resulting in factory closures and job losses. In pursuit of low production costs, American corporations have indeed moved operations abroad. NAFTA’s detractors implicate the North American deal as an enabling factor for outsourcing and off shoring. Indeed, Trump is not alone in his demonization of NAFTA. Prominent Democrats have long opposed NAFTA and the neoliberal economic theories it represents. President Obama’s struggles within his own party over the Trans-Pacific Partnership proved that beyond a partisan division within Congress lies an equally strong division between globalists and would-be protectionists. Unfortunately, opponents to NAFTA are employing a one-dimensional understanding of international trade, and indeed offer no viable alternative.
As with most trade deals, there are ripple effects of NAFTA that are not only hard to quantify but also hard to contextualise. As discussed above, the US trade deficit with Mexico is a reality, but it remains unclear how damaging this situation actually is for the American economy.
While there are hard truths such as NAFTA being a contributing factor in the downsizing of automotive manufacturing in the US, there have also been similarly one-dimensional benefits that counteract those negative ones. In different ways, NAFTA has promoted a series of trade-offs between ‘winners’ and ‘losers.’ As an example, NAFTA has been a blessing to the American farming industry—with soybean farmers in particular benefiting hugely from tariff free trade with their neighbours. Since NAFTA was signed, agricultural exports to Mexico have increased to $18 billion in 2015 as compared to $4.2 billion in 1994. Consequently, the Mexican farming industry has severely downsized— driving widespread urbanisation movements, as many Mexicans are finding no alternative but to move from agriculture to manufacturing.
Undoubtedly, NAFTA has benefitted Mexico. Before 1993, the Mexican economy was heavily insulated and protectionist. There was a nationalistic undertone to all production in Mexico, even though prices were high and quality was sub-par. NAFTA marked one of the first times in history that a poor country did away with protectionist trade barriers hoping to expand its economy organically, rather than propping up local industry artificially with tariffs. As a result, NAFTA has lifted millions of Mexicans out of poverty and into higher paying factory jobs. Mexican enterprise has also flourished as firms like Grupo Bimbo, purveyors of classic American brands like Sara Lee and Entenmann’s, heavily invest in the US market.
The offshoots of a healthy Mexican economy include benefits for the United States that cannot be quantified. It has been argued that if Mexico’s economy expands, there is less incentive for illegal immigration northward. Further, an economically prosperous Mexican government can handle migration control more effectively with more resources to devote to operations along their northern and southern borders. With these goals being consistent with Trump’s rather devout opposition to migration, it is somewhat surprising that he does not look to NAFTA as a template for integrated cooperation with a stable Mexico.
One of the hardest truths in the haziness of NAFTA is that abruptly breaking it off could have disastrous effects for all parties. The political posturing between Trump and Nieto is all well and good as long as it doesn’t result in a complete scrapping of the trade pact.
A recent study by the Wilson Center has concluded that around 5 million jobs in America directly and tangentially depend on trade with Mexico. Any disruption in NAFTA could disrupt these jobs. Trump has hinted before that he will impose high tariffs on companies importing products from Mexico, but not only will these costs most likely be shouldered by American consumers, there is no guarantee that those companies will return jobs to the US.
Further, if Mexico and the US scrap their free trade agreement, trade between the two countries will revert to WTO rules. Optimistically, Trump would at least adhere to WTO rules as a bare minimum of international protocol. These rules, however, are much worse for American consumers and industry than NAFTA. WTO would allow Mexico, which retains poor country status, to levy high tariffs on certain goods. For example, some US agricultural exports to Mexico could carry tariffs as high as 100 per cent, such as Iowa’s high-fructose corn syrup exports. In this way, NAFTA is actually much more preferable to the alternative.
Moving forward, NAFTA should be upheld. Most economists are in general bipartisan consensus that free trade has positive impacts for all parties. Prices on goods go down and quality of life goes up for millions of people as economies expand.
There is no doubt that NAFTA has negatively impacted the US manufacturing industry but that should not be the end of the story. As American companies continue to do well in the recovering economy, the government should emphasise investment into new industries that promise stable and well paying jobs, such as the renewable energy sector. Consistent with Worstall’s conclusion that jobs ‘lost’ to trade are actually just jobs ‘changed,’ the onus is on the United States government to retrain workers who have lost jobs as America’s economy changes. The government, in its shift to embracing globalisation, should not forget the American manufacturing worker. Toward the end of his comments upon signing NAFTA, President Clinton observed that ‘we have an obligation to protect those workers who do bear the brunt of competition by giving them a chance to be retrained and to go on to a new and different and, ultimately, more secure and more rewarding way of work.’ This obligation was never fully met.
This should be the primary goal of Trump’s presidency— educating and empowering the American worker. Through investment in public educational and apprenticeship programs, the US government can significantly improve job prospects for those ‘losers’ of globalisation. NAFTA has not been perfect, but its positive impacts go hand in hand with its drawbacks. The United States should not retreat into self-harming protectionism as our judgment is clouded by populist anger. Instead, the US should honour its commitment, uttered by so many politicians through the ages, to the American worker. We should boldly continue the trend of trade liberalisation but do so armed with a (re)skilled workforce and successful corporations committed to innovation. This is how we restore American competitiveness. The way forward should include a strengthened NAFTA in pursuit of shared prosperity for as many North Americans as possible.