On the Giant Sucking Sound

February 1, 2017

During the campaign, Donald Trump time and again expressed his disapproval of the North American Free Trade Agreement (NAFTA), and early signs are that he was serious. Plans are already in the works to renegotiate the trade agreement with the leaders of Canada and Mexico. (He has also withdrawn the United States from the Trans-Pacific Partnership.)

From the American perspective, there are good reasons to disapprove of NAFTA. While the Congressional Research Service (CRS) has found that the “net overall effect of NAFTA on the U.S. economy appears to have been relatively modest, primarily because trade with Canada and Mexico accounts for a small percentage of U.S. GDP,” [1] the fact remains that NAFTA has had a serious and devastating impact on American workers. As the Economic Policy Institute (EPI) points out, NAFTA “caused the loss of some 700,000 jobs as production moved to Mexico. Most of these losses came in California, Texas, Michigan, and other states where manufacturing is concentrated.” [2]

Moreover, NAFTA has had adverse effects on the bargaining position of American workers, as well as that of communities that wanted to retain local employment opportunities. The EPI puts it this way:

“Second, NAFTA strengthened the ability of U.S. employers to force workers to accept lower wages and benefits. As soon as NAFTA became law, corporate managers began telling their workers that their companies intended to move to Mexico unless the workers lowered the cost of their labor. In the midst of collective bargaining negotiations with unions, some companies would even start loading machinery into trucks that they said were bound for Mexico. The same threats were used to fight union organizing efforts. The message was: ‘If you vote in a union, we will move south of the border.’ With NAFTA, corporations also could more easily blackmail local governments into giving them tax reductions and other subsidies.”

Notwithstanding the rhetoric, NAFTA was never really about expanding trade. Its real goal was “to free American corporations from U.S. laws protecting workers and the environment.” The results were both predictable, and predicted. During the 1992 presidential election, third-party candidate Ross Perot said this about the then pending agreement during the second debate:

“To those of you in the audience who are business people, pretty simple: If you’re paying $12, $13, $14 an hour for factory workers and you can move your factory South of the border, pay a dollar an hour for labor, hire young—let’s assume you’ve been in business for a long time and you’ve got a mature work force—pay a dollar an hour for your labor, have no health care—that’s the most expensive single element in making a car—have no environmental controls, no pollution controls and no retirement, and you don’t care about anything but making money, there will be a giant sucking sound going south.” [3]

Mr. Perot was right. It was easy to see that he was right. American leadership pressed ahead nonetheless, and the outcome was unavoidable. As the EPI observes,

“The inevitable result was to undercut workers’ living standards all across North America. Wages and benefits have fallen behind worker productivity in all three countries. Moreover, despite declining wages in the United States, the gap between the typical American and typical Mexican worker in manufacturing remains the same. Even after adjusting for differences in living costs, Mexican workers continue to make about 30% of the wages of workers in the United States. Thus, NAFTA is both symbol and substance of the global ‘race to the bottom.’”

This outcome, of course, is precisely what NAFTA was really designed to achieve. From that perspective, then, NAFTA has been a tremendous success. Of course, in some quarters, the evaluation of a program’s success does not consider adverse effects on the lives, fortunes, and overall well-being of working people.

But the failure of NAFTA to raise the level comparative wages in Mexico stands as a refutation of any argument that free trade agreements are of benefit to developing countries. History also stands as a refutation. As University of Cambridge economist Ha-Joon Chang points out,

“Part of the conviction in free trade that the proponents of globalization possess comes from the belief that economic theory has irrefutably established the superiority of free trade, even though there are some formal models which show free trade may not be the best….After all, the defenders of free trade ask, isn’t free trade how all the world’s developed countries have become rich? What are some developing countries thinking, they wonder, when they refuse to adopt such a tried and tested recipe for economic development?

“A closer look at the history of capitalism, however, reveals a very different story….when they were developing countries themselves, virtually all of today’s developed countries did not practice free trade (and laissez-faire industrial policy as its domestic counterpart). Rather, they promoted their national industries through tariffs, subsidies, and other measures. Particularly notable is the fact that the gap between ‘real’ and ‘imagined’ histories of trade policy is the greatest in relation to Britain and the United States, which are conventionally believed to have reached the top of the world’s economic hierarchy by adopting free trade when other countries were stuck with outdated mercantilist policies. These two countries were, in fact, often the pioneers and frequently the most ardent users of interventionist trade and industrial policy measures in their early stages of development.” [4] 

Given this history, why would anyone prescribe free-trade policies for developing countries today? The 19th century economist Friedrich List told us why:

“It is a very common clever device that when anyone has attained the summit of greatness, he kicks away the ladder by which he has climbed up, in order to deprive others of the means of climbing up after him. In this lies the secret of the cosmopolitical doctrine of Adam Smith, and of the cosmopolitical tendencies of his great contemporary William Pitt, and of all his successors in the British Government administrations.

“Any nation which by means of protective duties and restrictions on navigation has raised her manufacturing power and her navigation to such a degree of development that no other nation can sustain free competition with her, can do nothing wiser than to throw away these ladders of her greatness, to preach to other nations the benefits of free trade, and to declare in penitent tones that she has hitherto wandered in the paths of error, and has now for the first time succeeded in discovering the truth.” [5] 

Simply put, free trade agreements are cynical ploys to get developing nations to compete in an arena where they cannot. And they provide the additional advantage of depressing wages, as they allow manufacturers of developed nations to avail themselves of the cheap labor in developing countries. That is their purpose, and that is their effect.

Even though Mr. Trump opposed NAFTA during the campaign, and appears ready to instantiate that opposition in the early days of his presidency, due caution is warranted before we dub him a pro-labor president. He did, after all, say during the campaign that even our NAFTA reduced wages are “too high.” [6] A better assessment on this head can be made once the terms of the renegotiation become known.

Jack Quirk