Wanted – A NAFTA and Trade Policy That Help Unrig the Economy Against Working Families

The Lamb-Saccone race in Western Pennsylvania upped the pressure on policymakers of both major political parties on trade. It expands the opportunity for progressives and progressive lawmakers to articulate and advocate for a fundamental change in U.S. trade policy in NAFTA renegotiations.

For the Trump Administration, the special election suggested that some working families are no longer willing to take the President’s word for it that he’s in their corner. That’s hardly a surprise given that the President’s actions so far have rigged the economy further against working families, the opposite of what he promised to do. That’s why some Trump voters have “buyer’s remorse” already.For Democrats, candidate Lamb appears to have done a better job than presidential candidate Hilary Clinton in not being outflanked on trade. He joined Saccone in supporting President Trump’s steel tariffs, the current litmus test for whether politicians are tone deaf – or simply deaf – to the angst of working-class communities to the loss of manufacturing jobs that still pay non-college workers better than non-manufacturing jobs. But progressives need to do more than line up with the President behind a tactic still in search of a strategy.

What might an actual strategy on U.S. trade policy and the renegotiation of the North American Free Trade Agreement (NAFTA) look like?

Here are a couple of starting points.

First, renegotiating NAFTA should be a step towards more balanced and mutually beneficial trade – within North America and between North America and Asia. The gut recognition of the need for more “balance” is the part of Trump’s steel tariffs that is on target – for decades, the U.S. (and Canada) have had big trade deficits in steel that reflect the unwillingness of governments in other countries (and Chinese provinces) to shut steel plants despite global excess capacity. This excess capacity leads China and some other trading partners to dump their steel at below cost in the United States. The U.S. then closes plants that are more efficient and environmentally responsible than other countries’ capacity that remains in operation. Wilbur Ross, Trump’s Commerce Secretary, understands those dynamics and knows that they bear no relationship to the “just-so” stories about the gains to trade that conventional economists tell each other.

In the NAFTA context, the big industry impacted by unbalanced trade is not steel but one of the biggest industries downstream from steel – the auto sector. Under NAFTA, as predicted (including by me), production for the U.S. and Canadian auto markets continued to shift to Mexico. According to the head of Canada’s auto union, Mexico now has half the auto industry employment in North America and 8% of the market. As a consequence, the U.S.'s $74 billion trade deficit in auto with Mexico exceeds the total $63 billion U.S. trade deficit with Mexico. At the same time, both the United States and North America continue to have a large auto industry trade deficit with Asia: for example, auto and auto parts accounted for much of the U.S.'s $108 billion trade deficit with Japan, South Korea, and Taiwan in 2017.

NAFTA-related auto trade imbalances do not reflect the workings of perfect competition and free trade any more than do trade imbalances in the steel industry. They result from structural factors that hurt U.S. workers and the U.S. economy. Within North America, the movement of auto production to Mexico results partly from what Harley Shaiken calls the “broken link between wages and productivity growth” and "high-productivity poverty"  i.e., from the suppression of Mexican workers’ labor rights and of their wages. The North American auto trade deficit with Asia partly reflects the Japanese production system. That system achieves high productivity and quality through lifetime employment security for workers and long-term relations with suppliers, both of which are easier to maintain with large net exports to North America. These same net exports, however, make it harder to create productive labor-management and assembler-supplier relations within the North American auto industry. In auto, as more generally, Asian countries also tend to have non-tariff barriers that keep down U.S. exports.

A U.S. Congressional study in 1992, U.S.-Mexico Trade: Pulling Together or Pulling Apart? (we chose the latter!), recognized the structural roots of the North America-Asia trade deficit in auto. It outlined a “managed trade” approach to achieving more balanced intercontinental trade that drew from the success of the 1965 U.S.-Canada “Auto Pact.” That pact guaranteed Canada higher levels of auto production more commensurate with Canadian auto sales while ensuring the full integration of the U.S. and Canadian industries and high levels of efficiency.

Today, with a nod also to Ronald Reagan’s early 1980s voluntary restraint agreement in auto, one could call an intercontinental Asia-North American auto agreement that supplements NAFTA a “Voluntary Trade Readjustment Under Managed Production” (TRUMP) agreement – voluntary TRUMP agreement. Over time, such an agreement could force major auto assemblers – and some of their suppliers – to make their production (“content”) in North America more closely match their sales (just as the Auto PACT brought production and sales in Canada into closer harmony). An increase in total North American (U.S. plus Canadian plus Mexican) production, in turn, would make it easier for Mexico and Canada to agree to new NAFTA provisions that increase auto production and jobs in the United States also.

The second starting point is the wage issue: a new NAFTA should contain labor provisions that begin to repair the link between wages and productivity in Mexico – and the United States. The Canadian Prime Minister’s suggestion that a new NAFTA prohibit U.S. “right to work” (for less) laws would help in the United States, for example.

The broadest point is that trade policy needs to be approached through the lens of “will this agreement create the broadly shared gains from trade so often promised but so rarely delivered in the past forty years?” To put it more succinctly, trade policy, like U.S. domestic economic policy, needs to be looked at through the lens of “will it create an economy less rigged against people?” That was the lens the OTA used when it urged Congress to come up with a NAFTA that would lead to “pulling together” not “pulling apart.” Second time’s a charm? 

(For a Power Point outlining additional dimensions of an approach to trade based on promotion higher wages in all trading partners and broad sharing of the benefits, see here.

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