Politics & Policy

A Scalpel, Not a Chainsaw, for NAFTA

President Trump with Canadian prime minister Justin Trudeau at the White House in February. (Photo: Shealah Craighead/White House)

President Donald Trump has ordered his trade representative to renegotiate certain aspects of the North American Free Trade Agreement, which is a good idea. He also has threatened to pull out of the trade accord altogether, which is a terrible idea, a threat made in the service of unreasonable and unrealistic demands that have more to do with posturing than with seeing to the health of the U.S. economy.

There are a few aspects of NAFTA that are in need of revisiting: Internet commerce was nonexistent when the agreement was negotiated. NAFTA was signed in 1993, and Netscape released the first commercial web browser in 1994. In 2017, the most valuable U.S. companies are firms such as Apple, Alphabet, Microsoft, Amazon, and Facebook. There are intellectual-property issues that need to be sorted out, along with a few other issues related to digital commerce, telecom, and banking.

But the domestic dispute over NAFTA isn’t about America’s leading companies. It’s about the firms that used to be America’s leading companies. American manufacturing is doing just fine, despite constant reports of its death. U.S. manufacturing output has, in fact, nearly doubled since the 1990s, when NAFTA was being negotiated. NAFTA is part of the reason for that: Our biggest export markets are Canada and Mexico. What has declined is manufacturing’s share of the work force, and NAFTA is part of the reason for that, too, in ways that are obvious and ways that aren’t.

It is the case that a number of relatively low-wage and low-value manufacturing jobs have moved to Mexico since NAFTA was adopted, though it is likely that without NAFTA those jobs would have simply moved to places such as China and Vietnam; the work that is being done in maquiladoras is not going to Cleveland without NAFTA. That’s the obvious factor. The less obvious effect of NAFTA is that by eliminating barriers to trade in services, it contributed to the explosive growth of the services sector of the U.S. economy, which has grown much more rapidly than manufacturing has and which now employs many more people. For a sense of scale, consider that financial services alone is a $1.4 trillion industry that accounts for more than 7 percent of U.S. economic output. That’s about twice the size of the automobile industry. And NAFTA has been a boon for other service-sector industries, too, from engineering to product design.

The Trump administration’s complaints about NAFTA are in the main either antiquated or trivial. For example, the administration wants to increase the required percentage of North American–origin parts in cars made in the NAFTA zone, worried that those sneaky Koreans are providing General Motors with low-cost electronic components. (Consumers must be protected from low prices at any expense.) There is also a longstanding dispute over the way those nefarious Canadians price timber, which is mainly taken from public land in Canada but from private land in the United States. NAFTA has a dispute-resolution panel designed to handle just such developments, but the United States does not always get its way.

And so Trump proposes doing away with the dispute-resolution panel. Here’s where things start to get silly. Canada and Mexico probably will not agree to a NAFTA without a dispute-resolution mechanism, and nor should they. (And it wouldn’t serve our interests, either.) The Trump administration further complains that Mexico’s tax system gives its exporters an unfair advantage. Mexico, like many countries, imposes a value-added tax (VAT), but only on items destined for the domestic market. If a product is sold outside of Mexico, the VAT is rebated. This ends up getting complicated, because there are many products that are manufactured partly in more than one country; most economists believe the tax has a negligible impact on trade, being factored into the exchange rate. But like the Canadian timber situation, the Mexican VAT isn’t really a question of trade policy — it is merely a consequence of the fact that the United States, Mexico, and Canada are different countries, with different ways of doing things. The United States could replace its cumbrous corporate-income tax with a Mexican-style VAT if we wanted to, but we don’t. Unlike the European Union, NAFTA does not seek to turn a free-trade zone into a unitary transnational government. We challenged the Canadians on their timber policy and lost. Get over it.

The Trump administration wants to make it easier for U.S. companies to bid on Canadian and Mexican government contracts — while increasing the use of “Buy American” provisions to make it harder for Canadian and Mexican firms to win U.S. government contracts. The administration objects to the way Mexico runs PEMEX, the state-owned oil company. Wilbur Ross, the commerce secretary, has put forward a frankly preposterous proposal to sunset NAFTA every five years, which would in effect keep the accord in a constant state of renegotiation, depriving U.S. firms of the ability to make business decisions based on settled and predictable rules. It is a shockingly harebrained idea to be offered by the Commerce Department of the United States. Pulling out of NAFTA would have immediate effects ranging from the disruptive to the dire: Canada and Mexico are our largest and third-largest oil suppliers, respectively, and inhibiting the free flow of crude to U.S. refineries would surely send gasoline prices higher, with ripple effects throughout the economy. U.S. exports to our largest overseas markets would be inhibited, with disastrous results for American farmers. That means higher prices, fewer jobs, and less growth.

And we cannot afford to give up any growth just at the moment. Despite President Trump’s habitual boasting, U.S. GDP growth for 2017 is expected to come in at only 2.2 percent. Economists agree that NAFTA has contributed substantially to annual GDP growth, meaning that absent the effects of the free-trade regime, real GDP growth would be significantly lower. That’s what’s at stake here. Absent some compelling national interest, the government should not stand between Smith and Jones when they desire to transact business, and neither should it stand between Smith and Martinez or Smith and Cloutier. Free people do not have to ask the king’s permission to buy an avocado or sell an iPhone; like freedom of speech, the right to engage in exchange is not the government’s gift to give. We created government to enable commerce rather than to prohibit it — or suffocate it with ridiculous regulation and sops to well-connected corporate interests such as Boeing, which is what the Trump administration’s war on Bombardier is all about.

NAFTA has been an extraordinary success, raising U.S. economic growth, creating jobs, and lowering prices. The anti-trade disposition is based largely in nostalgia about 1950s factory towns and the familiar bias against economic interactions with foreigners. Trump fancies himself a master negotiator, but it is not entirely clear that he or his administration understands what actually is on the line when it comes to North American trade and its underappreciated contributions to U.S. prosperity. NAFTA may need some work, but it’s scalpel-work, not chainsaw-work.


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