… and Trump is right about renegotiating it
NAFTA needs major overhaul, not small tweaks
North American Free Trade Agreement (NAFTA) renegotiation talks kicked off in Washington this week with a mighty punch. U.S. Trade Representative Robert Lighthizer announced that the U.S. intends to do considerably more than “a mere tweaking of a few provisions and a couple of updated chapters” to NAFTA. Why? As Lighthizer stated soon after, because NAFTA has “fundamentally failed many, many Americans.” Are he and President Trump right? Definitely.
NAFTA has caused significant economic harm to the U.S. It went into force in January 1994 with grand promises of a trade surplus with Mexico, higher wages and good-paying jobs. Fast forwarding 23 years and we see how wrong those promises were. Our trade deficit with Mexico is now our fifth-largest. The Mexican deficit alone represents some 600,000 lost U.S. jobs.
In addition, competition with cheap Mexican labor has depressed U.S. wages. Our agricultural trade with Mexico has swung from a small surplus in the early 1990s to a substantial deficit today.
Multinational corporations took advantage of the opportunity to use cheap Mexican labor and enjoy free access to the large U.S. market thereby eroding our wages and trade performance.
Table 1 shows, U.S. goods exports into Mexico rose by 452 percent in those 23 years, far faster than U.S. total exports, which rose just 212 percent. But U.S. imports from Mexico rose even faster, by 637 percent.
That was much faster than total U.S. imports. The result was the transformation of a small surplus with Mexico in the early 1990s into a huge $64-billion deficit last year.
Lighthizer is right, small tweaks to NAFTA won’t stop the continuing damage of this agreement. In fact, Coalition for a Prosperous America stated during the U.S. Trade Representative’s NAFTA hearings that the “U.S. should not be afraid to walk away from and terminate NAFTA if our national economic interests are not achieved.”
So what should the new NAFTA look like? America’s overall objectives for NAFTA renegotiation should include reducing the trade deficit, growing the U.S. goods production base, improving wages and growing our economy.
Reducing the trade deficit
Lighthizer said eliminating the “huge” trade deficit is among the top U.S. priorities for a new NAFTA, which is definitely a step in the right direction.
If the U.S. had run a positive or even a zero trade balance for some or all of the last 41 years, instead of a persistent deficit, many industries would be many times larger today, in terms of both revenue and employment. There would be millions more well-paying jobs in many parts of the nation, including many of today’s most deprived areas.
Growing U.S. goods production base
The U.S. has lacked a strategy to produce more of what the nation consumes, in both the civilian and defense markets. Conversely, our major trading rivals pursue strategies to ensure persistent trade surpluses and promote the offshoring of U.S. manufacturing. As a result, the U.S. is losing critical mass of production capacity and skilled workers.
Trade negotiations should further — and their success should be measured by achievement of — those goals, not just for selected sub-parts, but for the supply chain as a whole.
Improving wages
Without substantial wage improvement, countries like Mexico cannot become true consumers of U.S. goods and services. Further, leaving wage rates unaddressed will exacerbate American wage stagnation while providing offshoring incentives for producers. Fair labor standards will simultaneously improve U.S. competitiveness and increase worker prosperity in other countries, enabling them to become consumers of U.S. goods.
Growing our economy
Trade agreements have a poor track record in producing economic gains for the U.S. Indeed, trade agreements often take the focus from, and sometimes restrict our ability to use, domestic policy tools that can cause growth and rebalance trade.
Drastically changing NAFTA, or even walking away from it completely, will not cause a doomsday. Tariffs are unlikely to rise substantially in the event of NAFTA withdrawal for legal, political and economic reasons.
Paola Masman is the media director for the Coalition for a Prosperous America, an organization that works for a national strategy to eliminate the trade deficit, create good paying jobs, protect U.S. sovereignty and achieve broadly shared prosperity.
