Renegotiating NAFTA Is Putting Lipstick on a Pig

Robert E. Scott August 22, 2017

People hold a banner during a protest against the North American Free Trade Agreement (NAFTA) negotiations at Reforma Avenue in Mexico City, Mexico on August 16, 2017. (Photo by Manuel Velasquez/Anadolu Agency/Getty Images)

The first round of the Trump administration’s NAF­TA rene­go­ti­a­tions began in Wash­ing­ton wrapped up on Sat­ur­day. The nego­tia­tors will meet again in Sep­tem­ber in Mex­i­co City and then again in Octo­ber in Cana­da. The Unit­ed States has not yet pro­posed any spe­cif­ic mea­sures on impor­tant issues such as labor rights, cur­ren­cy manip­u­la­tion, or rules of ori­gin. By all accounts, these nego­ti­a­tions are more like­ly to hurt than help most work­ing Amer­i­cans, who would be bet­ter served by efforts to tar­get coun­tries with large, glob­al trade sur­plus­es such as Chi­na, the Euro­pean Union (EU) and Japan. Rather than tin­ker­ing around the edges of NAF­TA, the Unit­ed States should begin a cam­paign to realign the U.S. dol­lar and rebal­ance glob­al trade.

Over its first 20 years, grow­ing trade deficits with Mex­i­co and Cana­da from the North Amer­i­can Free Trade Agree­ment (NAF­TA) elim­i­nat­ed 850,000 U.S. jobs, most of them in man­u­fac­tur­ing. (Amer­i­can work­ers suf­fered far more after Chi­na entered the World Trade Orga­ni­za­tion in 2001, includ­ing 3.4 mil­lion jobs lost through 2015 alone, due to grow­ing trade deficits with that coun­try.) And trade deficits and job loss­es are just the tip of the ice­berg of the dev­as­ta­tion wreaked by bad trade deals, which have also dri­ven down the wages of all 100 mil­lion Amer­i­can work­ers with­out a col­lege degree, who have suf­fered loss­es of just under $2,000 per year for each medi­an wage, full-time work­er. Rough­ly $200 bil­lion per year is being tak­en from the pock­ets of work­ing peo­ple and mid­dle class fam­i­lies, because the super-rich and huge cor­po­ra­tions have been able to game the sys­tem at their expense.

NAF­TA has cre­at­ed the eco­nom­ic equiv­a­lent of a 14-lane free­way to Mex­i­co, paving the way for the out­sourc­ing of jobs and fac­to­ries to Mex­i­co. In the past twen­ty years, the U.S. has lost more than 87,000 fac­to­ries (man­u­fac­tur­ing estab­lish­ments), wip­ing out near­ly one-third of U.S. man­u­fac­tur­ing pro­duc­tion capac­i­ty. Tweak­ing NAF­TA around the edges is not going to change those dynam­ics. As EPI founder Jeff Faux recent­ly explained, NAF­TA cre­at­ed rad­i­cal new rules for trade…that shift­ed the ben­e­fits of expand­ing trade to investors and the costs to work­ers.” The sys­tem that cre­at­ed this deal to ben­e­fit rich exec­u­tives and multi­na­tion­al com­pa­nies is still in place and if any­thing, tilts even fur­ther in their inter­est in an admin­is­tra­tion lead by for­mer Gold­man Sachs exec­u­tives Gary Cohn (Trump’s chief eco­nom­ic advi­sor) and Trea­sury Sec­re­tary Steve Mnuchin.

Trade and invest­ment deals like NAF­TA pro­vide U.S. cor­po­ra­tions with priv­i­leged access to the labor mar­kets of poor coun­tries like Mex­i­co and Chi­na, with spe­cial rules pro­vid­ing extend­ed intel­lec­tu­al prop­er­ty rights — open­ing mar­kets to pri­vate investors in ser­vice activ­i­ties rang­ing from bank­ing and telecom­mu­ni­ca­tions to water and pub­lic edu­ca­tion, enforced by investor-state dis­pute res­o­lu­tion pan­els that oper­ate entire­ly out­side of nation­al court systems.

U.S. Trade Rep­re­sen­ta­tive Robert E. Lighthiz­er has put forth nego­ti­at­ing objec­tives that are designed to expand ben­e­fits of trade for for­eign investors, strenght­en intel­lec­tu­al prop­er­ty rights, and update NAF­TA rules to facil­i­tate dig­i­tal trade in goods and ser­vices, small busi­ness access, and gov­ern­ment pro­cure­ment. Far from the administration’s stat­ed goal of bring­ing jobs back to the Unit­ed States, these moves will, if any­thing, make it eas­i­er for com­pa­nies to send jobs abroad. The admin­is­tra­tion also seeks to incor­po­rate labor and envi­ron­men­tal stan­dards in the core of the agree­ment. But NAF­TA is and will remain an agree­ment designed to encour­age firms to out­source pro­duc­tion to Mex­i­co, and to shift income from wages to profits.

Improv­ing labor and envi­ron­men­tal stan­dards in Mex­i­co is not like­ly to shrink the gap between wages in the Unit­ed States and Mex­i­co to any appre­cia­ble extent, nor will it elim­i­nate the U.S. trade deficit with Mex­i­co or Cana­da. Accord­ing to The Con­fer­ence Board, hourly man­u­fac­tur­ing com­pen­sa­tion costs in the Unit­ed States exceed­ed those in Mex­i­co by more than 6‑to‑1 in 1997, and by rough­ly the same mar­gin in 2015 — there has been no sig­nif­i­cant change in the wage gap in the NAF­TA era. Even if wages in Mex­i­co were dou­bled through imple­men­ta­tion of more effec­tive labor stan­dards (and assum­ing U.S. wages were unchanged), there would still be a wage gap of more than 3‑to‑1 — pro­vid­ing huge incen­tives for firms to main­tain and increase out­sourc­ing of U.S. man­u­fac­tur­ing to Mex­i­co. The only pub­lic pol­i­cy that could sup­port bal­anced trade with Mex­i­co is a Euro­pean-style, Euro­pean Com­mu­ni­ty expan­sion pol­i­cy mix (employed when Greece, Spain, and Por­tu­gal entered the EC in the 1980s) which pro­vid­ed great­ly increased devel­op­ment funds designed to bring about a fun­da­men­tal increase in wages and incomes in those coun­tries pri­or to their join­ing the EC (which sub­se­quent­ly became the Euro­pean Union). The Unit­ed States can and should invest heav­i­ly in eco­nom­ic devel­op­ment in Mex­i­co, which would be good for work­ers in both coun­tries, but that is a devel­op­ment pol­i­cy pro­pos­al designed to nar­row incen­tives to off­shore pro­duc­tion to Mex­i­co while rais­ing demand in Mex­i­co for exports of U.S. con­sumer goods. Trade pol­i­cy alone can­not achieve these goals.

For these rea­sons, the costs of rene­go­ti­at­ing NAF­TA are like­ly to exceed its ben­e­fits. If patents and copy­rights are more tight­ly enforced, for exam­ple, then the prof­its of big-phar­ma, soft­ware giants, and Hol­ly­wood will rise, but this will leave work­ers in Mex­i­co poor­er and will like­ly result in a decline in U.S. exports of man­u­fac­tured goods to Mex­i­co. So, even if the trade bal­ance with NAF­TA improves, these poli­cies will like­ly harm U.S. man­u­fac­tur­ing, cost­ing more jobs and putting more pres­sure on work­ers’ wages.

On the oth­er hand, NAF­TA has fun­da­men­tal­ly changed the struc­ture of the North Amer­i­can econ­o­my. Multi­na­tion­al com­pa­nies have built com­plex, inte­grat­ed sup­ply chains in sec­tors like auto­mo­tive pro­duc­tion. Parts often cross bor­ders between the Unit­ed States, Mex­i­co, and Cana­da mul­ti­ple times before a final prod­uct rolls off the assem­bly line. Pres­i­dent Trump threat­ened to tear up the agree­ment in April, but was con­vinced by his own cab­i­net mem­bers that end­ing NAF­TA would be too cost­ly to the econ­o­my. Hence, nego­tia­tors are more like­ly to end up tweak­ing a few pro­vi­sions and … chap­ters” of the agree­ment, pre­cise­ly what Lighthiz­er said he is not inter­est­ed in” doing [empha­sis added].

What should be done on trade?

The most press­ing trade prob­lem fac­ing the Unit­ed States today is cur­ren­cy mis­align­ment and dol­lar over­val­u­a­tion. Rather than rene­go­ti­at­ing NAF­TA, the Unit­ed States should imple­ment poli­cies that are designed to rebal­ance trade with Chi­na, the EU, Japan and oth­er cur­ren­cy manip­u­la­tors, which have the largest glob­al trade sur­plus­es in the world, as shown in the fig­ure below. It is impor­tant to note that both Mex­i­co and Cana­da have glob­al trade deficits, and are not con­tribut­ing to glob­al trade imbal­ances. Cur­ren­cy mis­align­ment is a mea­sure of how much the dol­lar must adjust in order to rebal­ance U.S. trade. The best esti­mates are that the val­ue of the dol­lar must fall at least 25 to 30 per­cent. This must include a sub­stan­tial reval­u­a­tion in the val­ue of the cur­ren­cies of lead­ing sur­plus coun­tries of 28.6 per­cent to 47.5 per­cent (based on Berg­sten, C. Fred (2016), Tables 14.4 and 14.5, adjust­ed for recent dol­lar appreciation).

There are sev­er­al broad, pow­er­ful tools that could be used to realign the U.S. dol­lar and rebal­ance glob­al trade includ­ing Coun­ter­vail­ing Cur­ren­cy Inter­ven­tion (CCI), where the Unit­ed States pur­chas­es for­eign assets to off­set any for­eign gov­ern­ment pur­chas­es of U.S. assets, and Mar­ket Access Charges (MAC), which would tax inflows of for­eign cap­i­tal that bid up the val­ue of the U.S. dollar.

The threat of large tar­iff increas­es can also be used to encour­age coun­tries to par­tic­i­pate in major cur­ren­cy realign­ments. The Unit­ed States has engaged in two major cur­ren­cy realign­ments with­in the past fifty years, and in both cas­es, realign­ment was achieved when large tar­iffs were threat­ened or actu­al­ly imposed (tem­porar­i­ly). In August 1971, Pres­i­dent Nixon aban­doned the gold stan­dard and imposed a 10 per­cent across the board import sur­charge. His admin­is­tra­tion sub­se­quent­ly con­vinced major trade part­ners to reval­ue their cur­ren­cies and remove trade bar­ri­ers, and the import sur­charge was removed four months later.

In 1985, in response to a major surge in imports and wide­spread man­u­fac­tur­ing job loss­es, the House of Rep­re­sen­ta­tives on two occa­sions passed a bill that would have imposed a 25 per­cent sur­charge on imports from coun­tries such as Japan, Brazil, Korea, and Tai­wan that main­tained large trade sur­plus­es with the Unit­ed States. The Gephardt-Ros­tenkows­ki Trade Emer­gency and Export Pro­mo­tion Act” (H.R. 3035) passed the House twice in late sum­mer and fall of 1985. On Sep­tem­ber 22, 1985, Trea­sury Sec­re­tary James Bak­er announced that the Unit­ed States had reached a Plaza Accord” with oth­er mem­bers of the G‑5 finance min­is­ters, which result­ed in a 29 per­cent decline in the val­ue of the U.S. dol­lar between 1985 and 1991.

Con­gress and the pres­i­dent should strong­ly con­sid­er adopt­ing (or threat­en­ing to adopt) large, across the board tar­iffs on coun­tries with large glob­al trade sur­plus­es in order to per­suade them to engage in a coor­di­nat­ed effort to reduce the val­ue of dol­lar by revalu­ing their cur­ren­cies, in order to rebal­ance glob­al trade. The admin­is­tra­tion should also imple­ment oth­er poli­cies, includ­ing CCI and MAC, to main­tain the dol­lar at a lev­el that is con­sis­tent with bal­anced glob­al trade. These poli­cies are need­ed to make good on the president’s com­mit­ments to rebal­ance trade and rebuild manufacturing.

This arti­cle was orig­i­nal­ly pub­lished the Eco­nom­ic Pol­i­cy Insti­tute’s Work­ing Eco­nom­ics Blog.

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