Hostility to supposedly bad trade deals was a main theme of President Donald Trump’s campaign, and he seems to mean business: Not only has he withdrawn the US from the Trans-Pacific Partnership, but he also confirmed his intention to renegotiate the North American Free Trade Agreement. His exact plans for NAFTA, however, aren’t clear.
NAFTA could stand some improvement. The problem is that every way to make it better would, from Trump’s point of view, make it worse. That’s why his apparent sincerity is so disturbing.
America’s trade pact with Mexico and Canada reshaped all three economies, creating a highly integrated and competitive economic zone. The evidence is clear that, in the aggregate, this helped American workers -- and not just because NAFTA and other free trade agreements make goods cheaper and promote US exports. A subtler point is equally important: When a US firm takes advantage of NAFTA by moving jobs abroad, those investments spur demand for workers at home.
This surprising and little-understood benefit isn’t theoretical speculation. On average, the evidence shows, when US manufacturers create 100 new jobs in Mexico, they create roughly 250 new jobs at home. US manufacturing employment has declined over the years -- but, as one study of NAFTA puts it, more manufacturing jobs are lost from companies that don’t invest abroad. When US companies build foreign plants, they not only hire more US workers, they also invest and spend more on research and development -- at home.
This striving for success in a connected global economy is disruptive: Some workers lose in the process, even as others (in larger numbers) gain. So the US needs a stronger social safety net, better schools, more support for training and worker mobility, subsidies for low-wage employment and other measures. Sheltering US firms from competition with import barriers, or blocking their foreign investments with threats or other interventions, will make them less competitive -- and make Americans overall worse off.
A true “America First” trade policy would combine help for the victims of disruption with efforts to promote, not restrict, international competition and improve US competitiveness. It so happens an excellent blueprint for this exists: the aforementioned TPP, which included both Mexico and Canada and which would have strengthened labor and environmental standards, among other things. But Democrats in the US Congress disowned this hard-won plan, and Trump declared it dead upon taking office.
Nonetheless, the best hope for the coming NAFTA renegotiation is that some of those TPP ideas can be rebranded and revived. This might not be out of the question. The president is no stickler for consistency, and his thinking on economics may be sufficiently unformed to absorb these pro-trade ideas even as he takes credit for ditching TPP.
A different approach would be to pursue some of the changes proposed by critics such as the AFL-CIO: Dismantling the system for resolving disputes between investors and governments, for example, or tightening rules of origin (to make it harder for companies to sell goods made with components sourced from outside NAFTA). Measures of this kind are unwise, because they’re meant to inhibit rather than promote competition, but applied with restraint, they needn’t wreck the agreement.
More forceful efforts, such as the border tax Trump has mentioned, could do just that. Precisely because NAFTA has created such an integrated market, new barriers to trade could be enormously harmful to consumers, producers and workers.
So by all means, Mr. President, feel free to continue to boast about being a tough negotiator, and to make tweaks to NAFTA while calling them radical changes. And take better care of workers hurt by the agreement. But make no mistake: NAFTA is working. Don’t ruin a good thing.
