Improving on NAFTA

by Alberto Diaz-Cayeros, CDDRL Poverty and Governance Program; Director of the Center for Latin American Studies

What would an improved North American Free Trade Agreement (NAFTA) look like? From the perspective of the nativist discourse of candidate Donald Trump, the US administration would simply initiate a process to withdraw unilaterally from the framework that regulates the flow of goods and services of the US with its two most important trading partners. For President Trump the calculation is different. He has come to realize he cannot just pander to his supporters. As effective as his Mexico bashing and hyperbolic statements were during his campaign, energizing his supporters with the typical easy fix populists always promise, now real business interests and the newly learned realities of government are forcing him to reconsider.

Most everyone would agree that a better NAFTA is possible. The real question is whether opening up a round of renegotiations could result in a breakdown of mutually advantageous bargains, that could jeopardize the status quo, and lead to an outcome that is worse for all trading partners. For some observers, opening the agreement is a Pandora box that will unleash the protectionist forces that exist in all the involved countries. A round of renegotiation could lead to a protectionist agreement, with consequent losses in economic dynamism. Free trade generates jobs and opportunities. The dislocations that Canadian, Mexican and US workers have suffered during the years that the agreement has been in force are related to technological change and an incapacity by governments in all the nations to create compensatory mechanisms to redistribute resources from the winners to the losers.

‪‬Technological change and trade do have distributive consequences, and societies find different ways to organize themselves to deal with the shift in economic fortunes of their citizens. The US and Mexico, in particular, have failed their citizens by not putting in place better policies that may help those who are left behind in a world of globalization, international competition and free trade. Trade is a positive force that increases welfare and curbs autocratic excesses. Democracies engaged in free trade do not fight wars with each other. NAFTA is a good thing. The challenges of a better NAFTA are not related to how to structure free trade itself, but instead on engaging in a profound rethinking of how commercial cooperation in the region has not benefited everyone equally.

For the young Mexican engineers who have become trained with skills for the aerospace industry, NAFTA has been a source of better jobs and opportunities. US companies have found complementarities they never imagined when the agreement was signed 24 years ago. The automobile industry is not longer something that can be located in a city like Detroit, but is instead a complex network of contracting and highly productive specialization and continuous innovation. But for corn growing peasants in Mexico who cannot compete with the far more efficient mechanized farms from the US Midwest, NAFTA has little to offer. Or US workers in steel mills, cement factories or other antiquated heavy industrial sectors cannot expect to receive the wages they were used to before the current wave of globalization.

So the real issue of creating a better trade deal is about figuring out whether the three countries could cooperate in providing not trade but other public policies such as worker retraining, harmonization of labor codes and other worker rights. The goal is to ensure that the labor forces from all partners are able to compete and specialize, and not be left behind by technological change.

The three countries could make the North American Development Bank (NADBANK) a true source of major infrastructure projects that may allow regions in the three countries, not just the border between Mexico and the US, to become platforms for competition in the world stage.

Environmental regulation and other important safeguards to the safety of people and our natural resources could be streamlined to ensure that the whole Northern hemisphere of the Americas charts the way for balancing sustainability and economic growth.

Energy should be conceived as a long term strategic sector where new technologies may allow for thriving business opportunities on renewables like wind and solar while tar sands and natural gas opportunities are used wisely for the transition to susainability.

Mining sectors in all countries could take advantage of the world demand for metals and ores while ensuring that the most advanced technologies are used to extract these valuable resources.

Manufacturing, agribusiness and service sectors including finance, insurance or logistics will continue to offer many business and employment opportunities. Cars and computers will be built and tourists will enjoy the warm Mexican beaches while Mexicans will continue to go shopping to the US.

The challenge, however, is that such opportunities will only materialize with a radical move away from the naive assumption that all this will be done by market forces. Compensatory schemes for temporary job loss, cyclical shifts in economic activity and ancestral burdens of poverty will require massive investments by governments. A renegotiated NAFTA could explore how to provide better cash transfer programs to alleviate poverty, whether public health services could be shared to reduce the mounting costs of chronic disease, how to make schools and retraining opportunities affordable. The idea is a new NAFTA that would create a framework that enhances opportunities for trading in services that we seldom conceive as tradeable. And a NAFTA that strengthens government action.

That kind of NAFTA is surely not what President Trump has in mind when he criticizes the agreement as the worst deal made in American history. But as unrealistic as this may appear, the fact that the negotiation will open up space for a multitude of actors with interests in keeping the ties that bind North America, makes it possible to imagine such scenario. When NAFTA was first negotiated, it was in the end the economic interests of the various sectors of the three economies, with varying degrees of organizations, that ultimately decided what form the agreement would take. It was not really made by the governments, but by the economic actors who were eventually validated by a political process that was approved by the legislatures. Politicians accepted NAFTA as it was agreed originally, because it made economic sense (and with some side payments like the NADBANK). This round should be no different. A renegotiated NAFTA could actually be a better agreement.