free trade

NAFTA with a New Name

The Trump administration successfully negotiated an updated North American Free Trade Agreement with modernized provisions, concessions of value to farmers and automakers and, of course, a new name. However, politics could still undermine the deal when it goes to Congress and consternation remains among trading partners with continuing Trump tariffs on steel and aluminum.

The Trump administration successfully negotiated an updated North American Free Trade Agreement with modernized provisions, concessions of value to farmers and automakers and, of course, a new name. However, politics could still undermine the deal when it goes to Congress and consternation remains among trading partners with continuing Trump tariffs on steel and aluminum.

The Canadians agreed to final terms for a $1.2 trillion North American free trade agreement that gave President Trump a political triumph and NAFTA a new name. However, the deal doesn’t end a simmering trade war sparked by US tariffs on steel and aluminum and still faces a treacherous political road to passage.

Trade experts gave credit to the Trump administration for completing a three-way deal to update the 25-year-old trade that candidate Trump derided as terrible. Trump critics note the new trade pact is largely the same car with a rebranded nameplate to appease Trump. Peter Navarro, Trump’s trade adviser, said the foundation remains, but the superstructure is superior. 

The United States-Mexico-Canada Agreement (USMCA) still must be approved by Congress, which seems more likely after cliffhanger negotiations with Canada prevented Trump from submitting just a bilateral agreement with Mexico. The agreement also must be ratified by the respective legislative bodies in Canada and Mexico.

Most everybody agreed NAFTA needed a refresher, if for no other reason to account for a phalanx of digital industries and e-commerce that didn’t exist when it was signed. There also was a push to strengthen intellectual property protections, the underlying issue that has sparked a Trump-inspired trade war with China. There are reportedly 63 pages worth of provisions that address patents and trademarks, including two additional years of protection for biologic drugs, which Trump hailed as a key to US medical innovation.

A major sticking point was Canada’s barrier that prevents US dairy farmers from penetrating their market. The Canadians traded some of that protection to retain a trade dispute resolution provision that Trump wanted to scrap. Somewhat ironically, Canadians had agreed to a similar sized dairy concession in the Trans-Pacific Partnership, which Trump abandoned when he took office.

Domestic car manufacturing was a core reason why Trump pushed for a better North American trade agreement. The agreement reached earlier with Mexico increases the North American auto content requirements and requires more content from higher paid autoworkers to qualify for duty-free treatment. AFL-CIO leaders withheld their support for the change, saying they doubted the higher wages and better working conditions in Mexico can be enforced. The USMCA effectively requires unionization of Mexican autoworkers, which runs counter to state-level right-to-work laws, which political conservatives have pushed for in the United States.

Economists fret that higher wages will make North American vehicles more expensive and less competitive against vehicles imported from overseas, which face a nominal tariff. Trump is pledging to address the import tariff and potentially replace it with quotas. There also is a side letter to the agreement that preserves Trump’s ability to impose tariffs on automobiles assembled in Mexico or Canada. 

Trump sought a 5-year sunset clause on the deal. In the final agreement, the USMCA has a 16-year life span, with a review after six years.

A key element of the deal for the incoming Mexican president is a clause that restates Mexico’s claim of ownership of all hydrocarbons in its subsoil. The provision doesn’t prevent foreign companies from producing oil in Mexico.

While agreement on NAFTA modernization brought sighs of relief, there is still consternation over steel and aluminum tariffs – and their rationale: protecting US national security. The pretense for the tariffs has irked Canadians who don’t view themselves as security risks to the United States.

Looming elections that could flip control of the House to Democrats might complicate approval of the USMCA. Democrats may not want to bless a Trump achievement before the 2020 presidential election and Republicans may decide to poke the eye of unions, which have been a major force behind revamping NAFTA. That could leave the USMCA an agreement without a country and further muddy the waters on US trade policy.

 

Restricting Free Trade to Save Free Trade

Globalization has come under sharp scrutiny in the 2016 presidential election, exposing deepening political fault lines. Harvard professor and author Dani Rodrik offers ideas for how to save international trade by giving individual nations a license to restrict trade to protect domestic economic and political institutions. (Illustration by Andrew Holder/New York Times)

Globalization has come under sharp scrutiny in the 2016 presidential election, exposing deepening political fault lines. Harvard professor and author Dani Rodrik offers ideas for how to save international trade by giving individual nations a license to restrict trade to protect domestic economic and political institutions. (Illustration by Andrew Holder/New York Times)

Globalization has gotten a black eye in the 2016 presidential election and in the Brexit vote in the United Kingdom, but populist opponents have offered few tangible alternatives other than a trade war, rejecting the Trans Pacific Partnership or trying to renegotiate existing trade deals.

Dani Rodrik, a Harvard professor and author, offers suggestions in a New York Times op-ed that will annoy populists, labor unions and globalization cheerleaders. He says to preserve free-flowing trade – and the democracies the engage in it – will require giving individual nations the autonomy to protect their own interests. 

“Globalization has deepened the economic and cultural divisions between those who can take advantage of the global economy and those who don’t have the resources and skills to do so” Rodrik wrote. “Nativist politicians like Donald J. Trump have channeled the resulting discontent as hostility to outsiders: Mexican or Polish immigrants, Chinese exporters, minorities.” 

Rodrik’s solution is to cap “hyper-globalization” and replace it with a form of globalization with increased national autonomy. For example, he says nations should be able to place restrictions on cross-border transactions that involve worker or environmental rights violations.

That sounds eerily similar to the kind of trade restrictions that globalization and free-trade agreements have sought to eliminate. Rodrik claims some trade trimming will be necessary to salvage the basic idea of free trade, which he notes has “pulled 700 million people out of poverty." “Globalization,within limitations,” he says, “has been good economics. Globalization, within limits, can be good for our democracies, too.”

In his op-ed, Rodrik offers four specific suggestions:

  • Give individual nations the autonomy to choose trade-related institutions that best represent their interests and reflect their risk-tolerance.
  • Countries should be able to prevent “regulatory arbitrage” whereby corporations circumvent national labor or environmental laws by moving operations to offshore locations.
  • International economic negotiations should pivot on domestic policy autonomy combined with increased trade transparency to ensure both sides keep their commitments.
  • Global governance should focus on enhancing democracy, not globalization.

“Global governance cannot overcome major problems like inequality, social exclusion or low growth,” Rodrik says. “But it can help by devising norms that improve domestic policy transparency, public deliberations, broad representation, accountability and use of economic evidence in domestic proceedings.”

Interesting by its omission is mention of reforms to trade adjustment assistance, which has drawn criticism for being inadequate and training dislocated workers for jobs that don’t exist in their community – or at all.

The fundamental question raised by Rodrik’s call for a “little-less-free trade” is whether a little would turn into a lot. Nations already file actions alleging unfair trade practices that range from “dumping” products at low costs to self-serving tariffs that make imported products noncompetitive. The license to protect domestic economic interests could embolden industry, labor and environmental advocates to push for greater protections, which could trigger what amounts to trade wars between nations or international regions.

Rodrik also doesn’t address the issue of globalization of financial markets, which dwarf the movement of goods and services across national boundaries. Restricting the flow of money is considerably more complex and can be tied up with another international bugaboo – concessionary tax policies and tax havens.

None of this discounts the value of the conversation Rodrik’s op-ed started, which highlights the many moving pieces that must be addressed to find a balance that benefits consumers without unduly exposing workers to economic discoloration and ultimately posing a challenge to democratic governance.

Taking the Political Bite Out of Trade

Opposition to international trade deals has welled up in both presidential primaries, but few realistic proposals have surfaced to address worker security in the face of unstoppable globalization and technological change.

Opposition to international trade deals has welled up in both presidential primaries, but few realistic proposals have surfaced to address worker security in the face of unstoppable globalization and technological change.

International trade deals have been trashed by presidential candidates in both parties, but realistic alternatives that would do more good than harm have been scarce.

Economists admit globalization of manufacturing and distribution, huge cross-border capital flows and accelerating technology changes have taken their toll on jobs and job security. However, they warn scrapping trade deals and trying to erect trade barriers will create worse economic problems without protecting workers they seek to shield.

A better approach, according to economists, is to increase support, especially in terms of job training for workers who lose their jobs because of globalization or trade deals that favor some sectors at the expense of others.

The Trade Adjustment Assistance program exists to provide that support, but is woefully funded compared to dislocated worker programs in other industrialized nations. It also isn’t very practical. The program pays for job training, but unemployed workers still need to earn money to pay a mortgage and put food on their family table.

Increasing funding for Trade Adjustment Assistance hasn’t been a political priority, but the deep discontent that has welled up by working class families all across the nation, as reflected by their votes for “outsider” presidential candidates strongly opposing trade deals, may change that.

Another idea kicking around in economist circles is called wage insurance. This involves wage subsidies to workers who lose their jobs so they can afford to take lower-paying jobs while obtaining job training. President Obama mentioned wage insurance in his final State of the Union address earlier this year.

Bolstering the Trade Adjustment Assistance program or enacting some type of wage subsidy doesn’t have the same raw appeal on the political stump as GOP frontrunner Donald Trump saying he will cut better trade deals with China, Japan and others. But his promise, based largely on his negotiating skill as a hotel developer, may not be worth the risk of a costly trade war that triggers a global recession.

Democratic contender Bernie Sanders has criticized former President Bill Clinton for pushing through the North American Free Trade Agreement, which has resulted in the transfer of U.S. manufacturing jobs to Mexico. Both he and Democratic frontrunner Hillary Clinton have expressed opposition to the Trans-Pacific Partnership, a key Obama priority. But neither Sanders nor Clinton have articulated a clear alternative to the TPP, which Obama defends as a roadmap for economic development in the Pacific Rim written by the United States, not China.

Free trade policies have been problematic for labor-backed Democrats and now appear to be a challenge for big business friendly Republicans, too. Protectionism also faces headwinds because American consumers are savvy enough to know that would mean higher prices for goods. Businesses, farmers and workers in states like Oregon and Washington that have export-dependent economies realize protectionism would hurt them.

As a result politicians on both sides of the aisle may be forced to pursue policies that produce tangible improvements for middle-class workers who have been and likely will remain vulnerable to new economic realities.

It is one thing to rail about trade policy on the campaign stump (Obama certainly did in his 2008 campaign), but it is another to stare at the hard realities. The United States remains the dominant world economy, but it no longer commands a position where it can call all the shots. The global economy is more intertwined so a hiccup on the Chinese stock market or refugee flows into Europe can impact the U.S. economy.

Just about everyone has a stake in figuring out trade policy. It may be the most fundamental middle-class American issue. It matters to young people who must navigate careers that don’t have life-time job guarantees. Those at the top of the economic heap may face growing unrest and a sharper shift to the political left if more isn’t done to provide greater job security to a growing group of Americans.

Activist labor programs could be the best defense against worker frustration, the least statist policy and the most popular political talking point. There is a general election coming up this fall to try out this approach.

Opponents Line Up for Pacific Trade Pact

Negotiators wrapped up a framework for the 12-nation Trans-Pacific Partnership, but the trade deal may face substantial opposition in Congress in an election year from a loose coalition of labor, environmentalists and disgruntled industry. (Communication Workers Union)

Negotiators wrapped up a framework for the 12-nation Trans-Pacific Partnership, but the trade deal may face substantial opposition in Congress in an election year from a loose coalition of labor, environmentalists and disgruntled industry. (Communication Workers Union)


Negotiators have agreed on the framework of a 12-nation Trans-Pacific Partnership trade pact, which if approved could give President Obama a second major international achievement following the Iranian nuclear deal.

Obama touted the trade pact as a policy tool to strengthen U.S. influence in the high-growth Asia Pacific region, as well as a way to box in the rising economic ambitions of China. The TPP was a central element in Obama's pivot to the Pacific strategy, which has continually been interrupted by turmoil in the Middle East, Russian moves against Ukraine and the rise of ISIS.

Even though a GOP-led Congress gave Obama so-called fast track authority to negotiate the TPP and limit Congress to an up or down vote, the treaty's prospects appear uncertain. While there is a lot for various groups to like in the trade treaty, strong objections persist from labor, environmental and industry groups. Because the vote on TPP won't occur until next spring, opponents will have ample time to make their case.

The Washington Post provided a sampler of discontent. U.S. automakers, it reported, complain the TPP doesn't prevent currency manipulation by Japan that suppresses its car prices in the American market. Drug manufacturers wanted intellectual property protection for their biologic medicines to last for 12 years, but TPP only extends protection for eight years.

Environmentalists worry about investor-state dispute settlement (ISDS) provisions, which they say could "empower big polluters to challenge climate and environmental safeguards in private trade courts." On the flip side of that coin, tobacco companies are upset they are apparently excluded from the TPP settlement provisions, a similar form of which they used successfully to block anti-smoking rules in Australia.

The most fervent opposition to the trade deal comes from organized labor, which says prior trade deals have cost American jobs. Labor officials, who opposed fast-track negotiating authority, complain that TPP negotiators made "problematic concessions" to gain approval of the treaty.

The previous high-profile vote on fast track authority may or may not prove a reliable guide to how the up-or-down vote on the treaty will look. The shakeup in House GOP leadership, which could produce a rocky road in the next six weeks on major policy issues, could have undetermined impacts on the political alignment for the trade deal. Fast track authority prevents the Senate from filibustering the trade deal, which could force senators running for re-election against formidable opposition to pause on how they vote.

Glass-half-full observers say a potential defeat of the treaty in Congress could actually strengthen Obama's hand at the negotiating table, winning concessions he failed to get in the just concluded negotiations.

The lineup of issues this year in Congress, amid a still swirling presidential primary in both political parties, probably means the TPP won't attract much media attention. That's a plus for treaty detractors who can work in the shadows.

That could obscure a principled debate on key TPP provisions, such as ISDS. A separate Washington Post analysis offers useful background about prior investment treaties with settlement provisions similar to the one in the TPP. It notes, for example, that ISDS procedures allow corporations to sue governments in international courts, but governments aren't allowed to sue corporations, which some criticize as "one-way rights"  and a threat to the legal and regulatory sovereignty of nations.

Corporations have prevailed in some filings, though none have been upheld against the United States, but that political defense may not be enough to fend off arguments from Democrats such as Senator Elizabeth Warren. Labor officials say this will lead to increased "nationality shopping," with pressure on countries to weaken regulations to hold onto or recruit job-producing industry.

Another factor in the ISDS debate will be the sheer number of international investment treaties (3,200 at last count) with varying standards and rules that tend to favor corporations. 

Tags:    Trans-Pacific Partnership, fast track authority, ISDS, trade deal opposition, President Obama, second international achievement, nationality shopping, free trade, CFM Federal Affairs