NAFTA Did Hurt U.S. Workers - But Trump Won't Fix That

(Free trade cartoon is by Khalil Bendib at bendib.com.)

From the Economic Policy Institute. It helps you understand why Donald Trump won't actually fix the real problems with NAFTA -- its provisions that actually hurt workers in both the United States and Mexico. It was written by Jeff Faux. Here is part of his excellent article:

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. . . .

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.

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. . . .

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. . . .

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. . . .

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.