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No need to nix NAFTA

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by Nathan Braun

Wednesday, March 5, 2008

To anyone paying attention to the events leading up to yesterday’s fiercely contested Democratic primaries in Texas and Ohio, it might appear that, among Democrats, the North American Free Trade Agreement is about as popular as James Sensenbrenner’s new bill to put George W. Bush’s face on Mount Rushmore.

And while he no doubt supports NAFTA, it seems that even the likely Republican nominee John McCain has a slightly skewed view of the trade agreement. “We need our Canadian friends, and … their continued support in Afghanistan,” Mr. McCain said recently. “So what do we do? The two Democratic candidates for president say they’re going to unilaterally abrogate NAFTA.”

If you ignore for a moment that neither of the two Democratic candidates for president have explicitly said they plan on canceling NAFTA, Mr. McCain is right. We do need Canada’s support in Afghanistan, and opting out of the North American Free Trade Agreement is certainly no way to show our appreciation. But to imply the United States should remain in NAFTA simply to reward Canada for helping out in the War on Terror misses the point. Americans don’t need to support NAFTA because it’s good for Canada or Mexico; we can support it because it’s good for us.

A common misconception, especially among Democrats, is that trade is a zero-sum game, in which any gains made by one country are offset by another’s losses. In reality, trade provides net benefits for all involved. Current Chairman of the Federal Reserve Ben Bernanke sums it up nicely by invoking David Ricardo, who 200 years ago “observed that if England specialized in making cloth while Portugal specialized in producing wine, international trade would allow both countries to enjoy more of both goods than would be possible if each country produced only for domestic consumption and did not trade.” Free trade is a win-win situation.

With any trade agreement, it is important to make sure firms can’t cut costs at the expense of the environment or exploitive labor practices, and NAFTA certainly can be improved in this area, and Barack Obama in particular has focused his criticism on this area. But too often, NAFTA has become a scapegoat for everything ailing labor — including those out of work because of rising worker productivity.

This isn’t to say that trade doesn’t negatively affect some people. Workers in industries facing increases in foreign competition are — temporarily, at least — worse off after barriers to trade are removed. Lost wages, hours and even jobs are real costs of globalization and increased trade, and it takes time for people to adjust. A recent study estimated these “adjustment” costs may total as much as $54 billion. However, the same study estimated that opening up trade since World War II has added between $800 billion to $1.5 trillion to the United States economy. This comes out to a $7,000 to $13,000 increase in the average annual income. The authors of the study estimated removing further barriers to trade would increase annual incomes by another $4,000 to $12,000.

And there are ways to help those negatively affected by trade without enacting protectionist policies such as tariffs or quotas. Education and retraining programs can make it easier for displaced workers to develop new skills, and other policies aimed at increasing the portability of pensions or health insurance plans can make it easier to switch jobs.

These are the types of policies Democrats should be exploring if they really care about making NAFTA — in Hillary Clinton’s words — “favorable to all of America.” As hard as it may seem to believe at the moment, NAFTA and the Democratic Party go back a long way. Bill Clinton signed the agreement in the early 1990s, and Al Gore dominated Ross Perot in a debate on free trade about that same time. Both candidates in this primary election have talked about moving beyond the politics and policies of the 1990s, but — when it comes to NAFTA — they’d do better to revisit them.

Nathan Braun (nbraun@wisc.edu) is a junior majoring in economics.

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Anonymous (March 5, 2008 @ 8:48am):

Dear Nathan Braun, major in economics, how then do you suggest we rebuild our industrial base?

Is our industrial base necessary, or do we rely on Mexico and China for everyday consumables?

Anonymous (March 5, 2008 @ 10:51am):

No one is doubting comparative advantage, since both Democratic candidates are still economic liberals, and because economists for years have been proving to us the benefits of liberal and neoliberal policy using quantitative models rather than any sound qualitative study. But aside from that, NAFTA has arguably been a bigger disaster than the Iraq War. It was predicated on lies and deception, and has failed to deliver economic prosperity to any of the three countries. Perhaps the only country to benefit was China, following the termination of the MFA. The policy has really only benefitted the rich and politically powerful of any of the countries, while widening the gap between the upper and middle-classes.

Anonymous (March 5, 2008 @ 5:39pm):

To anonymous 10:51am-

NAFTA has only benefited the rich? Really? I wonder what those pesky 'facts' have to say about that. Let's take a look:

Since NAFTA went into effect, the U.S. economy has added a net of 26 million jobs. The average real hourly compensation (wages and benefits) of workers has climbed 23%. In fourteen years. Real median household net worth has increased by a third. Take note of that- median income is up by a third. This means that the very definition of the middle class has seen an approximately 33% improvement in 14 years.

(thanks to Cafe Hayek for the numbers).

While all of the gains cannot be attributed to NAFTA, free trade has certainly played an important role in our economic growth, and it certainly hasn't hurt the U.S. economy.

To argue that NAFTA has been a bigger disaster than the Iraq War (a real disaster, to be sure) is not only completely false, it's dishonest and deceiving.

Response?

-Corey Sheahan

Anonymous (March 6, 2008 @ 12:00am):

Corey, the US population grew by 45 million since 1994. So while new jobs were created, it was a relative loss of jobs. And according to the DOL, inflation has caused the cost of living to rise 40%. Many of the new jobs have been in the service sector, while manufacturing jobs decrease. And many of the composite wage increases are due to salaries at the top rising. We can cite all the statistics generated by right wing think tanks that we want, but the fact is, NAFTA never delivered what it promised. Go to Mexico, not Cancun, but the interior. It's still 3rd world. Visit Puebla and its sweatshops. Look at what the US did to Article XXVII of their constitution, we stole the land of subsistence farmers and gave it away to multinationals, and then cut their social service spending. Disaster.

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