Renegotiating NAFTA Would Be a Lot Easier, If We Knew What We Wanted

The Trump administration just started the process of renegotiating NAFTA, the trade deal between the US, Canada, and Mexico that became the template for globalization in the 21st Century.

This would make more sense if we knew what we want to renegotiate.

In 2016, voters answered two simple questions,

• “Who gets the gains from trade?” Not us.
• “Who do you trust?” Not any politician who told us what a great idea NAFTA would be.

In the period following World War II, gains from productivity were shared broadly and our communities prospered. Not anymore. Since the mid-70’s gains from productivity and trade have gone almost entirely to the top 1%, while many communities declined dramatically.

NAFTA went into effect in 1994. It embodies our failed neoliberal approach to globalization. [“Neo” means new. In the language of economics, “liberal” means free-market.]

In the neoliberal vision, our economy is merged or integrated into the global economy. National identities are blurred, shareholder interests have top priority, legitimate public interests are devalued, and gains go almost entirely to investors. Boon will trickle down, as markets solve all our problems. Government is bad. Power and influence favor those who already have plenty of both.

Trade, more than most policies, picks winners and losers. Trade disrupts industries, reshapes economies, and dislocates communities. American workers lost jobs in steel, autos, textiles, home appliances, electronics and many other industries. Over a million Mexican farmers were displaced by our highly efficient subsidized corn and wheat. Trade deals disrupted communities in Central America, as well.

Mistrust is growing in our political institutions, and establishment leaders. Resentment and feelings of grievance are rising, eclipsing hope and common purpose.

A growing number of economists and policy-makers recognize that our free trade neoliberal approach is exhausted, politically unstable, and increasingly reckless.

David Brooks says Donald Trump is the wrong answer to the right question. The right question is, “When millions of people feel they have been left behind, how should we rethink our policies, including our approach to globalization?”

The Trump administration’s most coherent guidance on trade came from US Trade Representative Robert Lighthizer, who opened the NAFTA renegotiations with this message.

“We must balance the legitimate interests of literally millions of people in our countries — those of farmers, and businesses, and workers and yes, families. … [F]or countless Americans, [NAFTA] has failed.”

How would we rewrite NAFTA to do as much for workers and the environment as it does for investors?

Manufacturing strategy and a new approach to globalization

President Trump endorses industrial policy – an approach where we explicitly take public interest and national interests into account. A manufacturing strategy is the conceptual opposite of neoliberal free-market-free-trade orthodoxy.

Every country in the world has a manufacturing strategy. China, Japan, Korea, Germany, and Denmark have been very successful with theirs. Ours is notably bad. Outcomes from NAFTA-style deals are, by design, disconnected from our national interests.

Most people would happily consider national strategies to rebuild manufacturing.

• We invest billions of tax dollars in R&D. Publicly funded R&D brought us global communications, the internet, and medical treatments unknown a generation ago. Too often publicly funded R&D is commercialized offshore, creating many jobs elsewhere and only a few in our domestic economy. We could write incentives into our R&D programs that favor domestic production when publicly funded inventions are commercialized. In neoliberal free trade orthodoxy, this is heresy. To most people, it’s common sense.

• Our infrastructure is a legacy of decades of worthwhile national investments. We have roads, airports, waterways, public universities, national parks, and research labs – created and sustained by public investments. The Bonneville and Tennessee Valley systems brought electric power to large regions of the country. Public investment plays a legitimate role in industrial strategies.

• Government procurement of goods and services involves many billions of dollars. We could require a certain domestic content when spending tax dollars, which would tip the balance in favor of domestic production. NAFTA and other neoliberal trade deals discourage or forbid such policies. In rethinking our approach to globalization, we would rehabilitate those strategies.

• We run trade deficits around $500 billion per year, or about $10 trillion cumulatively since NAFTA. That is, each year our spending nets out at about $500 billion for items made by workers elsewhere in the world. Balanced trade would mean about 5 million more good jobs to make those items here. One way to balance trade is to realign the US dollar with other currencies. A “Market Access Charge” or MAC, would tax foreign holdings of US government bonds. If the deficit goes up, the Market Access Charge does, too. When the deficit goes down, the MAC scales back proportionately. This would push the dollar back into alignment with other currencies.

• Every trade deal promises gains in labor and environmental protections. Each new promise is betrayed before the ink is dry. Canada may propose that Mexico and the US both raise their labor standards. A new approach would prioritize workers’ interests, by suspending new trade provisions under NAFTA 2.0 until each country implements and meets stronger standards for labor and environment.

• The Sierra Club proposed a border adjustment mechanism based on commitments countries have made to protect the environment. Countries who fail to meet their obligations will see a border adjustment (penalty) on all their products. This gives them a market incentive to meet their commitments.

• That idea could just as well apply to labor rights, and human trafficking. A country falling short of its commitments for labor rights and human trafficking would see a proportionate border adjustment.

• We could also give worker organizations standing to file complaints. Under NAFTA, we rely on our trade officials, who have never enforced violations of environmental protections, and have a miserable track record for fighting human trafficking, and enforcing labor rights and human rights.

• Since NAFTA, foreign investors have had a special dispute settlement system, with very favorable legal standards, sympathetic venues to hear their grievances. In the neoliberal free trade approach, investor rights take priority over public interest. Governments can act in the public interest, but they must pay corporations for damage to their investments. For instance, inequality and climate change are classic market failures. We will need public policies to deal with them. Investors could then demand compensation for their lost opportunity. We should reverse that power relationship, saying that public interest takes top priority. Reversing the NAFTA approach to globalization, we would say that companies bear an investment risk, within legitimate rules established by democratic institutions of government. Top priority would go to public interests, and policies that raise living standards. That has been our legal tradition. We should keep it.

We negotiate trade deals in secret. That is exactly the wrong approach. We should stop and publicly discuss basic questions.

• Who gets the gains from trade?
• How can we manage globalization in a way that does as much for workers and the environment it does for global investors?
• How do we rebuild trust in the way we manage globalization?

Then we will be ready to renegotiate NAFTA.

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Reposted from The Huffington Post