Trump is right to criticize NAFTA—but he’s totally wrong about why it’s bad for America
Founder, EPI
Donald Trump’s promise to renegotiate or tear-up the 1994 North American Free Trade Agreement was a major reason why he won the support of working class voters in the Midwestern states that were crucial to his election. It’s also a trap.
As US president-elect, Trump quickly scored some points with his Rust Belt constituency after claiming to get the Carrier and Ford corporations to reduce the number of jobs they are sending to Mexico. He also clearly exaggerated the effect of his personal persuasiveness: Carrier was moved by a $7 million tax break from the state of Indiana and Ford might well have made its decision before Trump intervened. In any event, as the Wall Street Journal reports, other companies, such as Rexnord, Caterpillar, and Nucor continue to send jobs south of the border. Renegotiating NAFTA is therefore the first real test of Trump’s pledge to create good new jobs by negotiating better trade deals.
Will he deliver on this pledge? No. But the reason is not, as the conventional economic wisdom has it, because outsourcing work to low-wage countries is the inevitable result of immutable global forces that no president can reverse. The problem for American workers is not international trade, per se. America has been a trading nation since its beginning. The problem is, rather, the radical new rules for trade imposed by NAFTA—and copied in the myriad trade deals signed by the US ever since—that shifted the benefits of expanding trade to investors and the costs to workers.
A dramatic realignment of economic class interests
Trump is right that the 1994 agreement with Mexico and Canada displaced US jobs—some 850,000, most of which were in manufacturing. But he is wrong in his claim that American workers lost out to Mexican workers because US negotiators were outsmarted. The interests of workers were never a priority for either American or Mexican negotiators.
NAFTA was the first important trade agreement that reflected the dramatic realignment of economic class interests across national borders. The globalization of corporate finance, production, and marketing has disconnected the interests of investors and workers throughout the world. As Jorge Castañeda, who later became Mexico’s foreign minister, observed in his book The Mexican Shock, NAFTA was not a deal between competing national interests. It was “an agreement for the rich and powerful in the United States, Mexico and Canada, an agreement effectively excluding ordinary people in all three societies.”
If NAFTA had been just a “free-trade” accord, it could have been written on a few pages. Instead, it was more than a thousand pages of complex rules that gave corporate investors—who dominated all sides of the bargaining table—privileged access to the US market for goods produced in Mexico where wages are low and regulations weak. The agreement also contained an array of extraordinary protections for investors, including secret dispute settlement panels with the power to override national labor and environmental regulations deemed to threaten profits. US employers’ ability to shift, and threaten to shift, production to Mexico severely undercut the bargaining power of their American workers.
As a result of NAFTA, Mexican workers gained industrial jobs. In the auto industry, for example, employment in Mexico grew 620,000 between 1999 and 2016, while the US lost 360,000 jobs. Yet Mexican wages and working conditions remained suppressed. Although they produce for the same market, workers in the Mexican auto parts industry make 12% of the wages of US auto parts workers. Mexico’s labor costs, meanwhile, are now 40% below China’s, and its 2014 poverty rate was higher than it was when NAFTA began 20 years earlier. The massive surge in illegal immigration from Mexico to the US in the two decades after NAFTA was evidence of the failure of NAFTA to bring its promised prosperity and opportunity to the majority of that country’s workers.
In both the US and Mexico, the gap between worker productivity and worker compensation widened relentlessly. Mexican manufacturing workers productivity rose 80% between 1994 and 2011, while their real wages actually fell about 20%—pulling down US wages, which rose less than half of the gain in worker productivity. The result was an upward redistribution of income from labor to capital in both countries.
Trade agreements are a major cause of this widening gap, although other factors, such as the decline of labor unions and labor market de-regulation, have also played a role. But the currently fashionable idea that US workers are losing ground because they are not educating themselves to keep up with new technology is wrong. This idea is inconsistent with the continuous rise in their productivity, as well as the stagnation in the real wages of young college graduates, whose real wages have not risen since 2000.
What Trump should do—but won’t
For Trump to live up to his promise, he would need to negotiate a rebalanced agreement—one with enforceable labor standards and protections equaling those given to investors—so that workers’ wages on both sides of the border could once again rise with their productivity.
Donald Trump will not do this. He and the Republican-led US Congress are dedicated to the de-regulation, not re-regulation, of labor markets. Trump’s economic advisers come from the same pool of financial interests that negotiated NAFTA for their own benefit 25 years ago. The current Mexican policy elite—whose own increased wealth also depends on low-wage labor—shares their perspective.
Neither will Trump tear up NAFTA. NAFTA was a flawed agreement, but after two decades there are simply too many cross-border business relationships at risk—especially in border states important to Republicans—for him to simply dissolve it. Moreover, pulling out of the agreement would end the cooperation Trump needs from Mexico to police the border, wall or no wall.
As he has on other issues, Trump has trapped himself with his own bombast. His administration’s chaos and confusion is already eroding his popular support. It will likely erode further as it becomes clear that his tax, budget, and health care proposals will redistribute income further up the economic ladder. Thus, it will become even more important for him to keep the loyalty of the Midwestern working class, for whom NAFTA became a major symbol for their populist rage. So, Trump will be forced to re-negotiate NAFTA in a way that appears to change the agreement without actually changing the way it undercuts his supporters’ wages and living standards.
This would be a delicate political task for any negotiator. But after over a year of relentless criticism of NAFTA, Trump appears to have no serious idea of how he would change it.
Mexico’s bargaining chip
Although unclear about his bargaining goals, Trump is clear about his bargaining strategy: bluster, insults, and threats. His style already scuttled a scheduled January meeting with Mexican president Peña Nieto, who would not—as no Mexican leader could—agree to discuss his country paying for Trump’s Wall.
On paper, Mexico’s bargaining position is weak. Because of NAFTA, 80% of its exports now go to the US. Pre-NAFTA Mexico was self-sufficient in essential staples like corn and gasoline; today it has become increasingly dependent on US suppliers. Moreover, time should be on Trump’s side. Uncertainty among investors about Mexico’s future access to the US market (link in Spanish) has already slowed growth to a crawl. A falling peso has raised the price of gasoline, setting off large anti-government demonstrations around the country. President Enrique Peña Nieto’s popularity has fallen to 12% and he has less than two years left in his term.
But Peña Nieto’s weakness also gives him a bargaining chip. The political assumption of the original NAFTA was that closer integration with the US would, as one American negotiator blurted out to me in 1993, would “keep the Mexican Left out of power.”
Today, Trump’s rhetoric has inflamed a Mexican electorate already alienated by increasing inequality, corruption, and the spread of criminal violence. The left nationalist, Manuel Lopez Obrador, a fierce critic of US influence in Mexico, is ahead in the polls for Mexico’s 2018 presidential election. Forcing onerous concessions on Mexico at this point could ignite a political explosion and result in a Mexican government that would be a nightmare for the business interests represented both Trump’s and Pena Nieto’s negotiators.
The erratic and belligerent Trump might, of course, drive US-Mexican relations over a cliff. But he prides himself as a deal-maker, not a deal-breaker. So the most likely outcome is a modestly revised NAFTA that: 1) Trump can boast fulfills his pledge 2) Peña Nieto can use to claim that he stood up to the bullying gringo 3) doesn’t threaten the low-wage strategy for both countries that NAFTA represents.
Revisions might include weakening NAFTA’s dispute settlement courts, raising the minimum required North American content for duty-free goods, and reducing the obstacles to cross-border trade for small businesses on both sides of the border.
Changes like this could marginally improve the agreement, and would be acceptable to the Canadians, who have been told by Trump that he is not going after them. But from the point of view of workers in the American industrial states who voted for Trump, the new NAFTA is likely to be little different from of the old one. The low-wage strategy underlying NAFTA that keeps their jobs drifting south and US and Mexican workers’ pay below their productivity will continue.
But you can bet that Trump will assure them that it is the greatest trade deal the world has ever seen.
