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NAFTA needs Benefits for Everyone – Seccareccia

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September 13, 2017

NAFTA needs Benefits for Everyone – Seccareccia

By Mario Seccareccia

When former Prime Minister Brian Mulroney negotiated and signed the original Canada-US Free Trade Agreement (CUSFTA) in 1989, followed by then newly-elected Prime Minister Jean Chrétien’s endorsement of the North American Free Trade Agreement (NAFTA) in 1994, there was much fanfare and promises of greater prosperity in terms of rising productivity resulting from greater economies of scale and specialization that would eventually lead to lower prices for North American consumers. However, during those same debates over free trade, there were also promises of more good jobs for everyone that would result from the greater commercial integration and rising real wages resulting from the lower prices and the rising productivity.

Almost a quarter century later, current US President Donald Trump appealed to the American electorate by attacking NAFTA during the Republican Primary and then during his campaign against the Democratic Party candidate, Hillary Clinton, in 2016. His criticism rested largely on the belief that the free trade agreement had destroyed jobs for many Americans and that this outcome had been unfair to those, especially in certain sectors of US manufacturing, who saw their jobs permanently disappear.

Senator Bernie Sanders, during the Democratic Primary in 2016, had raised similar concerns when he pointed to not only the net job losses but also to the flat or declining real wages and rising income inequalities that had accompanied greater trade liberalization. It may well be debatable whether the NAFTA environment was the sole reason for the job losses, or whether these losses are due also to the longer-term evolution of technologies and industry mixes, as well as to the China factor since 2001 (that has been devastating particularly for Mexico). However, what is undeniable is that many Americans feel strongly that NAFTA and growing trade liberalization internationally was the cause of the lower growth in both employment and output.

This view about the negative consequences on employment has been shared also by a good number of economists on the left of the policy spectrum, who have also criticized other such agreements, such as the Trans-Pacific Partnership (the TPP) (see Stiglitz 2015) and the Comprehensive Economic and Trade Agreement (CETA) with Europe (see Kohler and Storm 2016). Despite these criticisms, many policy makers in Canada continue to refer, almost as if it were an act of faith, to the enormous production and consumption gains that freer trade brought, especially with the signing of CUSFTA and NAFTA over the last few decades. With these conflicting perspectives on the effects of NAFTA being put forth nowadays by various economists and policy makers in our respective countries, it is not surprising why many Canadians are puzzled and really do not know who to believe!

In putting forth Canada’s objectives, Foreign Affairs Minister Chrystia Freeland proposed to modernize NAFTA based on a half-dozen core objectives for the renegotiations. These Canadian concerns are more defensive in nature (such as on the issue of dispute settlement), but others are ostensibly more “progressive” social goals of strengthening labour and environmental standards and addressing issues of gender inequality and protecting the rights of indigenous people. These are all laudable goals, some of which had actually been debated already in the early 1990s during the negotiations over NAFTA. However, as much as I agree with this important progressive agenda, the strategy of the Canadian government fails to address directly the concerns of all those citizens in the three NAFTA countries (such as those supporting Trump and Sanders) who were (and continue to be negatively affected) by greater trade liberalization.

Since the 1970s with the collapse of the Bretton Woods System, already under the General Agreements on Tariffs and Trade (GATT), North American economies at the time had moved progressively in the direction of greater trade liberalization. CUSFTA and NAFTA were merely important institutional “add-on” deals in accelerating a pattern that had actually begun since the end of the preceding Bretton Woods era of greater protectionism and regulation of both commodity and financial capital movements.

Did this greater trade liberalization, associated with rising foreign trade, lead to higher growth in output and productivity as the basic free trade theory, based on the principal of comparative advantage, would predict? In a paper published in 2014 (see Seccareccia 2014), which I had written on the occasion of the twentieth anniversary of NAFTA for an international conference in Mexico City in January 2014, I had presented some important stylized facts that tended to contradict some of the views about the benefits of trade liberalization. When pooling the data for the three NAFTA countries (constituting the free trade zone), the evidence in Figure 1 showed that broadly speaking for the whole half century from 1961 to 2010, the growing share of exports out of GDP for three countries combined was associated with lower (not higher) growth in output.

This meant that, say, for a constantly growing labour force and productivity in the three countries, this would have been associated with a structurally higher longer-term unemployment on average. Of course, the scatter of data around the regression line in Figure 1 below would suggest that there were obviously other factors affecting growth as well. Nevertheless, the underlying negative relation would substantiate much of what the critics of NAFTA, such as President Donald Trump and Senator Bernie Sanders, have been saying about the negative consequences of trade liberalization on growth and employment.

Figure 1: Scatter Diagram of Real GDP Growth and Percentage Share of Exports, Combined North American Countries, Annual Observations from 1961-2010

(Image to be added)

Source: World Bank DataBank – World Development Indicators.

In the original paper published in 2014, I had emphasized that these negative macroeconomic consequences of greater trade liberalization within the NAFTA region had to do partly with the deflationary consequences of the greater competitive trade environment. However, the lower growth had also resulted from the impact of the type of accompanying macroeconomic policies adopted during that era, which had been somewhat conditioned by the policy exigencies of low inflation and greater labour cost competitiveness associated with these trade deals. If this slower growth environment that had been partly caused by these trade deals, and which have, in turn, led to the politically charged atmosphere in this Trumpian era, what ought to be the position of the Canadian government in the current context?

In my opinion, within the macro context, the answer ought to be an obvious one. To avoid the negative consequences arising from an environment of job losses, slow real wage growth (associated with a statistical decoupling from productivity growth) and growing polarization of incomes, the three NAFTA governments ought to commit themselves to a veritable full employment policy. This would suggest a return to the type of labour market commitments and outcomes witnessed during the “Golden Age” of growth of the early postwar era before the mid-1970s and until the end of the Bretton Woods period. Only in a desirable environment of high employment growth in all three NAFTA countries would the benefits of free trade accrue more equitably to everyone.

References:
Kohler, P., and S. Storm (2016), “CETA without Blinders: How Cutting ‘Trade Costs and More’ Will Cause Unemployment, Inequality, and Welfare Losses”, International Journal of Political Economy, Vol. 45, no. 4 (Winter): 257-293.
Seccareccia, M. (2014), “Were the Original Canada–US Free Trade Agreement (CUSFTA) and the North American Free Trade Agreement (NAFTA) Significant Policy Turning Points? Understanding the Evolution of Macroeconomic Policy from the Pre- to the Post-NAFTA Era in North America”, Review of Keynesian Economics, Vol. 2, no. 4 (October): 414–428.
Stiglitz, J. (2015), Trans-Pacific Partnership, TPP, YouTube Video at: https://www.youtube.com/watch?v=QTkDcx_GPG0

Mario Seccareccia is Professor of Economics, University of Ottawa

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