The following article by Robert A. Blecker, Professor of Economics, American University, was posted on the Conversation website July 27, 2017, and updated August 15, 2017:
The Trump administration is plowing ahead with plans to renegotiate the North American Free Trade Agreement (NAFTA) with Canada and Mexico, with talks beginning Aug. 16.
Having made restoring the United States’ manufacturing might a cornerstone of his “America first” nationalism, Trump seems to think that obtaining what he believes would be a better “deal” with our two closest neighbors will accomplish that goal.
Unfortunately, renegotiating NAFTA – especially as planned by Trump’s trade team – is unlikely to bring significant benefits to U.S. workers.
The wrong objectives
Although plausible estimates of job losses caused by U.S. trade with Mexico range up to nearly 700,000, the tweaks to NAFTA proposed by U.S. Trade Representative Robert Lighthizer would not bring most of those jobs back.
Lighthizer said the administration’s top objective is to shrink the U.S. trade deficits with Canada and Mexico. The real objective, however, should not be to improve bilateral trade balances for their own sake but rather to foster an integrated industrial structure in North America that can provide jobs and higher wages for workers in all three countries.
In fairness, there are some positive elements in the USTR’s proposed negotiating agenda. For example, the administration wants to strengthen NAFTA’s rules of origin to ensure that only goods with substantial amounts of North American content qualify for preferential (often zero) tariffs.
Lighthizer has also proposed moving labor rights and environmental standards into the main body of the agreement and making them enforceable, which would be an improvement over the current toothless side agreements.
But the proposal also includes various in-your-face elements that the Canadians and Mexicans are sure to reject or demand for themselves as well. One such objective is the right to pursue “buy American” policies. Lighthizer also wants to strengthen the ability of the U.S. to impose trade restrictions such as tariffs and anti-dumping duties on the other two NAFTA members.
Rather than punishing the other NAFTA members, it would make far more sense for the three parties to focus on better coordinating their policies to counter unfair trade practices from outside the continent, such as import surges in steel from China.
Furthermore, the proposed changes to NAFTA would not even begin to address the greatest problem affecting most U.S. workers: the widening gap between rising labor productivity and stagnant inflation-adjusted wages. In fact, this gap is rising in Mexico as well, suggesting that Mexican workers have not benefited from the NAFTA trade strategy of their government either.
None of the administration’s proposed changes would change the fact that manufacturing labor costs in Mexico average only about 16 percent of U.S. levels, a gap that will continue to pull many industries south of the border regardless of any revisions to NAFTA.
In fact, since a revised NAFTA would not do much (if anything) to raise Mexican wages either, it would do nothing to end the economic disparities that underlie both the outsourcing of jobs to Mexico and the flow of Mexican workers to the U.S. It would also do nothing to boost the bargaining power of U.S. workers relative to their employers, who are more free to move jobs abroad thanks to trade agreements like NAFTA.
What we should do instead
My own research on NAFTA and the U.S. and Mexican economies – as well as the work of others – suggests there are several things that the U.S., Canada and Mexico could to to make North America a more competitive trading zone and benefit all of its workers.
One of the best ways would be for all three countries to commit to investing more in their public resources, such as infrastructure, education and technology. Although Trump promised a “massive” infrastructure plan during the campaign, he has backed away from making a significant federal investment, and his budget proposes large cuts to science and research and development.
Another serious problem is that labor’s share of national income has been falling in both the U.S. and Mexico because workers’ wages are not keeping up with their growing productivity. In other words, the average worker is producing more and more but not seeing any increase in his or her paycheck.
A first step for addressing that would be an increase in each country’s minimum wage to a level that would afford a family a decent (above-poverty) living in terms of its own standards, and then to index minimum wages to inflation so as to prevent the erosion of their purchasing power over time. At present, the minimum wage in Mexico is about a fifth of the poverty line, while in the U.S. families earning the minimum wage have a hard time staying out of poverty.
If the Trump administration seriously wants to curtail illegal immigration and reduce incentives for U.S. companies to open factories south of the border, it needs to make sure that a renegotiated NAFTA benefits Mexico’s economy. That’s the only way to push Mexican wages higher and thus turn Mexico into more of a market for U.S. products than a competitor for U.S. jobs.
An “America first” negotiating strategy that focuses only on what the U.S. gains while impoverishing Mexico with greater trade restrictions would only worsen the problems that Trump says he wants to address.
Toward a shared prosperity
We should not kid ourselves that a few tweaks to NAFTA will achieve the kind of shared and inclusive prosperity that would truly benefit workers in the U.S., Mexico and Canada.
In the end, what would really put workers first across North America would be policies that would lift up all of us together. U.S. and Mexican leaders promised that NAFTA would accomplish that, but as my research with Mexican economist Gerardo Esquivel shows, the agreement failed to raise Mexican wages and living standards closer to U.S. levels.
Trump’s combative, America first negotiating strategy would only take the U.S. and its neighbors in the wrong direction, leading to a Balkanized North American industrial structure that would be less competitive globally. Rather than focusing on shared growth, the administration sees a zero sum game in which for every benefit going to Mexico or Canada, the U.S. loses.
As Canada and Mexico are the United States’ two largest export markets, we should be working together to make North American industries more competitive and boost wages on all sides of our two borders. This would be the right way to create jobs and promote prosperity in the U.S. as well as its neighbors.
View the post here.