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Alden: NAFTA Wrong Target for Concerns on U.S. Economy

Interviewee: Edward Alden, Bernard L. Schwartz Senior Fellow
Interviewer: Bernard Gwertzman, Consulting Editor
February 28, 2008

Edward Alden, a CFR expert in U.S. trade and immigration policy, says it is wrong to pin blame on the North American Free Trade Agreement (NAFTA) for the ills of the U.S. economy. “If you analyze the sum total of all the trade agreements that the United States has signed over the last decade, they have definitely reinforced the globalization of the American economy, which has put a lot of sectors, particularly manufacturing, under intense new competition,” he says. “But only a small fraction of that competition has actually come from the countries that are part of NAFTA, namely Mexico and Canada. Most of the competition has come from the rest of the world.”

There’s been a growing unease in the United States, particularly among Democrats and labor unions, over free trade agreements signed by the United States with various countries. In particular, during this current presidential campaign NAFTA has become a kind of symbol to the critics for everything wrong with free trade agreements. Do you think it’s fair to criticize NAFTA as both Senator Hillary Clinton (D-NY) and Senator Barack Obama (D-IL) have been doing?

I think you worded it correctly. NAFTA has for many in the Democratic party become a symbol for what they think has gone wrong in the American economy over the last ten or fifteen years. Many in the Democratic Party look particularly at the stagnation of wages for ordinary, middle class people. Wages have not grown significantly in the last decade and certainly have not kept up with labor productivity. Secondly, they look at the widening income inequality; people at the top end are doing really well while those in the middle and the bottom have not done as well.

A lot of that anger has focused on NAFTA. The question is whether NAFTA is the appropriate target for that anger. Clearly it is not. If you analyze the sum total of all the trade agreements that the United States has signed over the last decade, they have definitely reinforced the globalization of the American economy, which has put a lot of sectors, particularly manufacturing, under intense new competition. But only a small fraction of that competition has actually come from the countries that are part of NAFTA, namely Mexico and Canada. Most of the competition has come from the rest of the world, particularly from China, from India, from the European Union and from other places.

In fact, I thought it interesting in the debate between Obama and Clinton on Tuesday night that neither of them said if he or she were elected president, he or she would revoke NAFTA. They both said they wanted to renegotiate parts of it. On NAFTA itself, what is really driving the criticism?

It’s a fascinating debate that’s become quite divorced from the reality of the agreement. I mean, David Leonhardt in the New York Times a couple of days ago, talked about it as being as almost the equivalent as the Republican Party debate over abortion, which only has slightly to do with the actual issue and a lot to do with a whole lot of symbolic baggage.

Let me try to disentangle it a bit. If we take the core concern, the core concern is the stagnation of the middle class and rising inequality, but when you get into the question as Tim Russert asked it, “What would you do about NAFTA? Would you renege on NAFTA?,” the answer becomes, “No, what we want is we want tougher labor and environmental standards in Mexico.” That connection to ordinary people must be completely baffling, but here’s the chain of logic. The chain of logic is that if we force tougher labor and environmental standards on Mexico , that raises the cost of Mexican production. Therefore, Mexican goods that are being sold in the United States will be priced slightly higher than they would be otherwise and so their American competitors can raise their prices slightly and pass that price rise onto their employees in the form of higher wages.

Even that convoluted chain imagines that trade with Mexico is the only thing that matters, which of course it isn’t. A huge amount of American trade right now is with China, with Japan, with India, with other places. So it’s become a very strange debate. You hear inflammatory claims about how destructive NAFTA has been and then when the candidates are asked what are you going to do about it, they say, “Well, we’ll insist on tougher labor and environmental standards in Mexico,” but that doesn’t begin to respond to the problems they have associated with NAFTA. You see, it’s very hard to get a handle on what they actually want to do differently; the truth is not very much.

The issue that was raised in the Ohio debate was really about workers who have lost their jobs. I gather that the manufacturing industry in Ohio has suffered significant setbacks in the last decade but is there any evidence that this is because of NAFTA?

There is no question that [due to] NAFTA and the other trade agreements that have happened since the big Uruguay Round [of global trade talks] that concluded at the end of 1993, and the entry of China into the World Trade Organization in 2000, that the U.S. manufacturing sector is facing much tougher competition than it did twenty or thirty years ago. What we’ve seen happen are two things: We’ve seen manufacturing productivity in the United States increase dramatically, which means fewer workers. Industries have shed workers as they’ve become more capital intensive. They’ve become more efficient since that’s the only way they can compete. A lot of American companies have moved portions of their operations offshore to take advantage of lower wages. Overall, American manufacturing output hasn’t really shrunk—it’s grown slightly.

But there’s no question that trade agreements have put a lot of pressure on the U.S. manufacturing base. That has hurt employment; it’s hurt wages in manufacturing-heavy states. Nowhere is that more true than Ohio. You’ve got a real problem here which the Democrats have identified. The question is what you do about it. I would like to see the debate focus less on NAFTA and can we get out of NAFTA, can we renegotiate NAFTA. The answer is probably “no” to both of those things. Instead, we should focus on the things you can do to help the workers who have been affected negatively by globalization, by international trade.

Both Clinton and Obama have a number of good proposals. They talk about much more investment in infrastructure. There’s a lot of work that could be done in the United States just in improving our basic infrastructure—and that would provide a lot of jobs. They are talking about much more ambitious worker retraining programs. What’s done in the United States right now is very inadequate and doesn’t begin to compare to what the Europeans do for workers there who are laid off as a result of international competition. There are ideas out there for wage insurance, to help prop up for a period of time the wages of older manufacturing workers, who are forced to take lower wage jobs.

Let’s talk a little about the other free trade agreements. The United States has signed a trade agreement with Colombia, which is under heavy attack [in Congress], and it’s also signed a trade agreement with South Korea, which is also under attack. Are these agreements really flawed badly or is there some other reason for the criticisms?

Some of the recent agreements have slightly different provisions on labor and environment that some of the Democrats like a bit more. They require countries to uphold International Labor Organization [ILO] standards, but they are really all the same basic template and we’ve seen a series of these bilateral deals which are modeled largely on NAFTA.

In Colombia’s case, the issue is human rights and labor rights. For Congress to reject this deal isn’t going to do anything to improve laborer [conditions] and it isn’t going to do anything to protect trade unionists in Colombia and it’s going to be a big slap in the face of the Colombians.

In South Korea, it really comes down to two issues and they are both sector specific. One of them is beef—South Korea continues to restrict imports of U.S. beef over fears of mad cow disease, going back several years now. The chairman of the Senate Finance Committee, Max Baucus, who comes from a big beef state, Montana, says that he’s not going to let this move until the ban is lifted by the South Koreans. The other issue is autos—the South Korean market has historically been very, very closed, even more closed than the Japanese market, to the imports of American cars, and at the same time the South Koreans have Hyundai and other car brands that have become big exporters to the United States. This agreement is supposed to eliminate the barriers to U.S. car sales in Korea but slowly, over a long period of time. In short, the U.S. car companies really hate the agreement. It’s very hard for Democratic candidates with close ties to labor unions and autoworkers.

What about the Republicans—I haven’t heard much. Where do they stand on free trade? What about McCain?

It’s interesting, you know, the Republican counterpart of this debate was the debate over immigration. When Democrats get nervous over globalization they talk about trade. When the Republicans get nervous about globalization they talk about immigration. Of course, what happened is the most pro-immigration of the candidates, Senator John McCain, now looks almost certain to be the Republican nominee. His position on trade is consistent with that; he is probably the strongest pro–free trader among that plate of Republican candidates, though all of them were pro–free trade. It was never a big issue in the Republican primary. So McCain’s record on this stuff is that he’s never seen a trade agreement that he doesn’t like. That will be a point of contention in the general election. No matter whether it’s Obama or Clinton, you will have a Democratic candidate who is skeptical about the value of these free trade agreements and a Republican candidate who is strongly persuaded that they are a good thing. 

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