HR Administration

Made to Trade

By Max Mihelich

Nov. 3, 2014

Photo illustration by Katie Slovick.

The North American Free Trade Agreement, better known as NAFTA, turned 20 in January 2014. The landmark trade deal between the United States, Canada and Mexico led to stronger economic ties for the three countries — not to mention a North American economy that looks drastically different now than it did two decades ago.

“Trade and investments have increased exponentially. That’s one of the biggest differences from 20 years ago,” said David Biette, director of the Canada Institute at the Woodrow Wilson International Center for Scholars, an academic society and think tank located in Washington, D.C. “Trade among the U.S., Canada and Mexico is four times greater than it was pre-NAFTA, and foreign investment in North America is five time greater than it was two decades ago. That’s pretty amazing.”

When NAFTA went into effect Jan. 1, 1994, the agreement created a juggernaut $6 trillion economy with 360 million people. Twenty years later, the deal links 450 million people producing $17 trillion worth of goods and services, according to the Office of the United States Trade Representative.

While NAFTA has been successful doing what it was intended to do — increase trade and investments — it has also become the target of heavy criticism by both economists and the North American population at large.

Not only has NAFTA led to an increase in trade and investment, but also the deal has played a role in changing the landscape of labor in North America. For example, Biette said NAFTA came about during a shift from manufacturing to services in the United States, and played a role in advancing that change. Likewise, Mexico’s agricultural and manufacturing industries look completely different today than during the mid-’90s.

That shift sparked an ongoing debate about the consequences of the agreement, and foreshadowed recent arguments about the merits of two proposed trade deals between the U.S., the European Union and numerous Asia-Pacific countries. If agreed to, the Transatlantic Trade and Investment Partnership, or TTIP, would further liberalize trade policies between the U.S. and the EU, while the Trans-Pacific Partnership, or TPP, would do the same for the U.S. and Asia-Pacific countries. Both deals could prove to be as contentious and controversial as NAFTA.

 And while NAFTA has been successful doing what it was intended to do — increase trade and investments — it has also become the target of heavy criticism by both economists and the North American population at large. In fact, 46 percent of Canadians and 40 percent of Americans said they would like their respective countries to do whatever is necessary to renegotiate the terms of NAFTA, and a smaller proportion (8 percent in Canada and 13 percent in the U.S.) would like for their respective countries to leave the trade deal, according to a 2012 poll published by Canadian research firm Angus Reid Global.

“The benefits of NAFTA were distributed unevenly, that I will admit,” Biette said. “There were winners and losers, some sectors did better than others, some parts of the U.S. did better than others.”

Support and Opposition

Ever since NAFTA went into effect in 1994, Mexico has become something of a double-edged sword in the debate on the trade agreement. Both sides have used the consequences of the deal to argue its merits and downsides.

 In the early 1990s, the Mexican economy seemed to be putting a disastrous previous decade behind it. Economists refer to the 1980s as Mexico’s “lost decade” because a debt crisis in 1982 and a 1986 collapse in oil prices wreaked havoc on the country’s economy. But by the end of the decade, Mexico’s economy had turned the corner.

“Inflation was being reduced substantially, foreign investors were pumping money into the country, and the central bank had accumulated billions of dollars in reserves. Capping the favorable developments was the proposal to reduce trade barriers with Mexico’s largest trade partner, the United States, through NAFTA,” according to a report published by the Federal Reserve Bank of Atlanta.

However, in December 1994, the Mexican government devalued the peso, and the ensuing financial crisis cut the peso’s value in half, which sent inflation soaring and ultimately triggered a severe recession.

“I don’t know whether you can attribute that event to NAFTA, because Mexico did a lot of things wrong then,” Biette said. “But one of the benefits of NAFTA was that the United States and Canada were there to help Mexico out. That would not have been the case before. Mexico considers itself a middle- to upper-class country now.”

Mexico was able to benefit from the removal of trade tariffs with the U.S. and Canada, which helped some Mexican businesses remain productive and sell their goods. Additionally, supporters of the deal argue NAFTA expedited the Mexican economy’s transformation to a modern economy, which was already underway by the time the trade agreement went into effect.

A Brief History of U.S. Trade Deals

1934: The Reciprocal Trade Agreement Act of 1934:This act granted President Franklin D. Roosevelt the power to levy tariffs, adjust tariff rates and negotiate bilateral trade agreements without receiving prior congressional approval.Supporters believed giving the president these powers would help the White House quickly conclude agricultural trade agreements to aid recovery of the Depression-era economy. Critics said Congress had abdicated a key oversight power.

1947: The General Agreement on Tariffs and Trade:Signed in 1947, GATT is an agreement that regulated trade between 153 countries in the post-World War II global economy. The agreement was aimed at “reduction of tariffs and other trade barriers and the elimination of preferences, on a reciprocal and mutually advantageous basis.” The deal created the World Trade Organization, which came into being Jan. 1, 1995.

1974: Trade Promotion Authority: The Reciprocal Trade Agreement Act of 1934 set the framework for today’s Trade Promotion Authority, or “fast-track.” Unlike the 1934 deal, TPA does not give power to the executive branch. “Since 1974, Congress has enacted TPA legislation that defines U.S. negotiating objectives and priorities for trade agreements and establishes consultation and notification requirements for the president to follow throughout the negotiation process,” according to the Office of the United States Trade Representative.

1994: North American Free Trade Agreement: After going into effect on Jan. 1, 1994, the deal strengthened the already strong trade partnerships between Mexico, Canada and the United States. The agreement created a $6 trillion economy with 360 million people. Twenty years later, the deal links 450 million people producing $17 trillion worth of goods and services, according to the Office of the United States Trade Representative. NAFTA continues to be the target of criticism regarding its effect on American jobs, North American wage rates and the Mexican economy at-large.

Proposed Deals:

Trans-Pacific Partnership: Negotiations for the deal have been ongoing since 2005. According to the Brookings Institution, a Washington, D.C.-based think tank, the proposed agreement is the cornerstone of the Obama administration’s economic policy in the Asia-Pacific region. If the deal were ratified today, the U.S. would enter into a trade agreement with Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam.

Transatlantic Trade and Investment Partnership: An inconclusive eighth round of negotiations took place in October 2014 for the TTIP. The U.S. Trade Representative Office claims the deal “will be a cutting-edge agreement aimed at providing greater compatibility and transparency in trade and investment regulation, while maintaining high levels of health, safety and environmental protection.” Similar to NAFTA, TTIP has attracted resistance and criticism in Europe for its expected effects on labor, agriculture and even the democratic process.

—Max Mihelich

Still it’s hard to ignore the influence subsidized U.S. corn had on the Mexican agriculture industry after protective tariffs were removed. According to one study, 2 million Mexican farmers have been displaced as a result of NAFTA. Many ex-farmers ended up taking jobs in the energy or manufacturing industries, Biette said.

Another common criticism of NAFTA is that it displaces jobs. The Economic Policy Institute estimates that about 566,000 jobs have been displaced in the U.S. since 1994 as a result of NAFTA, about 60 percent of which were in the manufacturing industry. Further, opponents of the agreement claim the deal favors big corporations, places downward pressure on wages and puts workers at a disadvantage in labor negotiations. The theory goes that workers are more likely to concede certain demands during negotiations, or vote not to organize a union, if their employer threatens to move to Mexico, experts explained.

“The people that the deal hurt most were low-skilledlaborers and those in manufacturing,” Biette said, lending credibility to the position that NAFTA favors bigger corporations.

Biette pointed to macroeconomic conditions to explain why low-skilled workers and wages in the U.S. have largely been negatively affected over the past 20 years. He cited the rise of China as a major economic power and its ability to manufacture goods at a cheaper price than its North American counterparts, which led to many manufacturing jobs being sent to China. Similarly, technological advances and the shift within the U.S. to a services-based economy have played a significant role in the loss of manufacturing jobs.

Twenty years ago, China wasn’t nearly the international player that it is today. China “was not the manufacturing competitor that it is now, and many jobs that left in the United States for Mexico went to China,” Biette said. “But what’s actually happening now is that those jobs are coming back because of transportation costs, efficiency improvements in the U.S. and wage-rate increases in China.”

NAFTA’s Legacy and Future Deals

NAFTA built on existing international trade deals between the three North American countries that went back nearly 30 years prior. However, experts explained that the deal was a first of its kind and laid the foundation for many trade deals that have followed. Its effect can still be felt in the ongoing negotiations of two proposed trade deals: the Trans-Pacific Partnership and Transatlantic Trade and Investment Partnership.

Similar to NAFTA, the U.S. goals in negotiating the TPP include the elimination of tariffs and the reduction of longstanding nontariff barriers. Furthermore, negotiators hope the proposed deal will include protections for investors, new rules to support the burgeoning digital economy and address emerging global challenges that affect trade, such as unfair competitive advantages of state-owned enterprises, inadequate labor-rights protections and poor environmental conservation policies.

If the deal is ratified, the U.S. would enter into a trade agreement with Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam.

“The TPP constitutes the cornerstone of the Obama administration’s economy policy in the Asia-Pacific region,” according to “Why Trade Matters,” a 2014 report published by the Brookings Institution.

A stronger trade partnership between the U.S. and EU is the ultimate goal of TTIP.While the two entities already enjoy the broadest economic partnership in the world with $6.5 trillion in shared commerce, the U.S. Chamber of Commerce predicts TTIP will lead to increases of $200 billion to the U.S. and EU’s respective gross domestic products through the reduction of “nonsafety-related regulatory divergences.”

The TTIP negotiations entered an eighth round back in October and ended without a full agreement. Experts at the Brookings Institution indicated that the goals of TTIP are similar to those of TPP. For example, both sides have already agreed to eliminate all tariffs on industrial and agricultural goods and liberalize policies concerning services, investments and government procurement of goods.

“Taken together, the countries participating in TPP and TTIP account for two-thirds of global GDP and half of global trade, and have a combined market of 1.3 billion consumers. Nearly 70 percent of U.S. exports already go to TPP or TTIP partners, and 84 percent of foreign direct investment comes from them,” according to the Brookings Institution. “By 2018, TPP and TTIP markets are estimated to grow by $6.7 trillion. At the conclusion of both negotiations, the United States would enjoy liberalized trade with almost two-thirds of the global economy.”

A successful outcome to both would reduce the cost of doing business with the U.S. for countries in Europe and Asia, experts explained. The best-case scenario would be the reduction of “duplicative costs” that arise from similar regulations and standards that two trading partners have.

Likewise, allowing goods and information to be exchanged easily across borders in all regions would benefit third parties that operate in both markets.

“Studies have indicated that TPP could grow the global economy by as much as $224 billion annually, equating to a 0.2 percent increase in global GDP, and TTIP could add an additional $133 billion to global GDP annually,” wrote Miriam Sapiro, former deputy U.S. trade representative and current visiting fellow at the Brookings Institution.

However, both proposed trade agreements have their critics.

As with NAFTA, there is strong resistance to the TTIP from some Europeans. An Internet search will turn up numerous protest group sites that oppose its ratification. Many claim the deal will threaten the democratic process by allowing international companies to sidestep individual country’s laws regarding food safety, transportation or labor rights.

“I do not see a threat to democratic processes,” Sapiro wrote. “Negotiating positions are developed on the basis of extensive public comment as well as consultations with a broad array of stakeholders, including, for the United States, extensive work with members of Congress. In addition, both the U.S. Congress and the European Parliament will have to sign off on any deal reached.”

Given the slow reshoring process in the U.S. manufacturing industry, it appears that some criticisms of NAFTA fall flat. More appropriately, the 20-year-old trade deal seems to share one important characteristic with many other international trade agreements: It has become the target of anti-globalization rhetoric.

“NAFTA is the boogeyman, or the symbol of people’s fears, about trade,” Biette said. “People tend to think of the bad things that we get out of trade, and not the good things we get out of trade.”

Max Mihelich is a writer in the Chicago area.

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