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What Should the Next President Do on NAFTA?

Discussants: Jeffrey J. Schott, and Thea M. Lee
Updated: March 18, 2008


Exit polls in the 2008 U.S. presidential nominating contests repeatedly show economic concerns outweighing all others. Analysts say embedded in this economic angst is a deep mistrust of free trade agreements and globalization. The North American Free Trade Agreement (NAFTA) has become the embodiment of these worries in many states that have lost manufacturing jobs. Jeffrey J. Schott, a senior fellow at the Peterson Institute for International Economics, and Thea M. Lee, policy director for the American Federation of Labor and Congress of Industrial Organizations (AFL-CIO), debate what new steps the next president should take on NAFTA.

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Thea M. LeeMost Recent

March 18, 2008

Thea M. Lee

Fourteen years after NAFTA was put in place, it is interesting to see that former adversaries on NAFTA (Jeff and myself) have found considerable common ground—although new fault lines have emerged. 

Jeff and I agree that many aspects of NAFTA need “fixing” (my word) or “modernizing” (Jeff’s word). Jeff agrees that the labor and environmental provisions could be strengthened, and concedes vaguely that other aspects could also benefit from some tinkering. 

It is worth noting that during the heated NAFTA debate of the early 1990s, NAFTA critics were treated as simple-minded protectionists for suggesting that the deal presented to Congress could be improved upon. Now it is accepted by many former supporters that NAFTA didn’t yield the promised results in many areas, but—unfortunately—they argue, it is simply too late and too difficult to go back and fix it.

Jeff rejects out of hand any suggestion that our next president should use the threat of exit to bolster bargaining power in discussions with the Canadian and Mexican governments. This essentially concedes that the next president should only look for new consensus in relatively non-controversial areas.

While I think it is fine to seek common ground on areas like border security and reduction of greenhouse gases, as well as to adequately fund new cross-border labor and environmental initiatives, this should not be the end of the conversation. We need to face up to the ways in which the NAFTA model has failed us, and put all options on the table—including exit.

But, as I have said before, “fixing NAFTA” is relatively small potatoes and old news relative to other pressing trade reforms. In 2009, our new president will face an enormous trade deficit, a weak economy, and a politically and economically problematic relationship with China. These are the areas that will demand both leadership and guts.

The lessons I hope we all have learned from NAFTA are the following:

  • Details matter! We do need to pay attention to the content of trade agreements, whether labor and environment provisions, or investment, procurement, or intellectual property rights. These details are at least as important as the tariff cuts.
  • No false urgency. It is better to take the time to negotiate a strong deal than to ram through a weak one. Contrary to conventional wisdom, the sky actually does not fall in if implementation is delayed by a year or two. 
  • The real labor impact of trade liberalization is on wages and quality of jobs, not the aggregate number. 

Jeffrey J. SchottMarch 14, 2008

Jeffrey J. Schott

I agree with Thea: opening a new dialogue with Canada and Mexico on NAFTA “is both necessary and constructive.” Where we disagree is over how to do so…though I think the gap between us would not be as wide if she reflected more carefully on my previous comments.

For example, I do not “downplay the importance” of labor and environmental issues on the North American agenda; recall that I proposed upgrading NAFTA’s provisions and providing a dedicated source of funding for new initiatives. However, a trade agreement cannot resolve many of the problems cited by Thea in these areas—including patching the holes in each country’s social safety net. That’s the job of each government, guided by its own socio-economic objectives and social compact with the electorate.

Thea also misinterprets my comment on energy and climate change. U.S. efforts to promote alternative fuels and to reduce greenhouse gas emissions already are distorting regional production and trade and raising food prices in each country. Moreover, numerous bills on the congressional docket endorse additional subsidies and border taxes against carbon-intensive imports, presaging new barriers to North American trade.

Climate change is a big challenge for the NAFTA partners, but so too is border security. Cargo inspection requirements, and travel and immigration controls, threaten to clog the borders. To be sure, in the post-9/11 era, there is a clear security imperative to better monitor and control cross-border flows of goods and people; at the same time, there is an economic imperative to maintain unfettered access for legitimate purposes.

Canada and Mexico worry about being sideswiped by these well intentioned but poorly executed U.S. initiatives. As our neighbors and main trading partners, Canada and Mexico have an interest in working out solutions in the NAFTA context. Doing so could have an additional benefit since regional cooperation could promote global solutions in multilateral trade talks and in negotiations on a new global climate change regime.

So what will happen in January 2009? High oil prices and terrorist threats will continue to dominate the president’s morning briefing. Global warming will be high on the agenda as well. Trade policy per se won’t be a top priority, but the harsh rhetoric on NAFTA during the campaign will require the president to work with Canada and Mexico to improve the North American regime. 

Thus I conclude as I began this mini-debate. The most important issues that the NAFTA partners now face are how to counter threats to border and energy security and how to work together to promote a viable global regime to reduce greenhouse gas emissions. Those are the issues that will bring the three countries together in a new dialogue; other issues can then be appended to this framework.

Thea M. LeeMarch 13, 2008

Thea M. Lee

Jeff notes that I have provided a “long laundry list” of needed NAFTA fixes. Without space constraints, believe me, that list could have been quite a bit longer. It is not entirely surprising that he and I order priorities within that list differently. 

Our next president will not face an easy set of choices with respect to “fixing” NAFTA, but talking honestly about the outcomes of past trade policies and laying out a practical, but ambitious, agenda for addressing prospective challenges is enormously important. NAFTA should be only one small piece of the next president’s trade agenda, but it carries great symbolic weight.

I don’t discount the difficulty of reaching consensus with Canada and Mexico on this list, but—unlike Jeff —I believe that opening that dialogue is both necessary and constructive.

The NAFTA debate was our first vigorous national debate over trade policy, and critics raised many legitimate issues. Some of the disappointing NAFTA outcomes stem directly from the unwillingness of NAFTA’s negotiators to take those issues seriously.

Jeff notes that the Canadian and Mexican governments have “objected strenuously” to the Democratic candidates’ demands to reopen the pact. As during the initial debate, Jeff gives little weight to the many loud complaints about NAFTA from Canadian and Mexican unions, farmers, and environmentalists. Past trade negotiations have suffered from a “democracy and transparency” deficit. Governments have been unwilling to acknowledge that any groups outside of multinational corporations have a credible voice in trade policy.

Isn’t it conceivable that reopening the NAFTA conversation—with progressive leadership from the United States and open minds all around—could allow all three countries to revisit aspects of the deal that have not worked out as advertised?

Jeff downplays the importance of the labor and environment issues. Allow me to politely disagree. With respect to labor, even NAFTA proponents have conceded that NAFTA had unforeseen distributional consequences. Reforming dysfunctional labor laws and restoring workers’ rights to organize are crucial for both Mexico and the United States to close their income gaps and strengthen their middle classes. Of course, a labor chapter in a trade agreement cannot fix what national leadership is determined to wreck, but it is an important starting place.

NAFTA’s weak environmental accord was an early recognition that environmental problems do cross national borders and do have competitive consequences — the very principles now being discussed in the context of global climate change. But on climate change, I’m afraid, a North American solution will be far from adequate: that global problem can only be solved on a global scale.

Jeffrey J. SchottMarch 12, 2008

Jeffrey J. Schott

Thea presents a long laundry list of NAFTA provisions that she believes “should be reexamined.” I am sure that there are specific elements in all of the areas that could be improved. And I am also sure that her list is incomplete… and would be matched by a Canadian and Mexican “punch list” that undoubtedly would include problems related to trade in sugar and softwood lumber, and restrictions on Mexican truck drivers operating in the United States. Like Senators Clinton and Obama, she gives short shrift to the notion that new NAFTA initiatives would have to accommodate the priority interests of the Canadian and Mexican governments—and both objected strenuously to the candidates’ demands to reopen the pact.

We obviously differ on the most important challenges facing the NAFTA partners. Thea states that “Our [meaning AFL-CIO?] top priority would be to strengthen the weak labor and environmental side agreements.” I suggested in my opening comment that for the United States, the issues of border and energy security and climate-change initiatives should be at the top of the North American agenda. That is not to say that Thea’s concerns about the side accords are misplaced, but they are not the most critical issues that should command the immediate attention of the next administration.

The NAFTA side agreements were not designed with enough ambition to resolve labor and environmental problems that have been decades in the making. More recent FTAs [free trade agreements] improved on the NAFTA model, incorporating more extensive obligations in the core treaty text and supplementing the trade provisions with commitments to develop programs that attack workplace and environmental problems in the partner country. Congress supported the U.S.-Peru FTA with those provisions, and I suspect that neither Mexico nor Canada would object to upgrading NAFTA in these areas as part of a broader effort to promote border security and sustainable development throughout North America.

That said, however, I think that Thea and I would agree that the new labor and environmental programs need a dedicated source of funding. The best way to remedy problems is not to threaten our partners with penalties if they don’t meet expectations, but rather to help them pursue constructive solutions to labor abuses and environmental degradation. But to convince Congress to allocate funds for such projects outside the United States, there will need to be some tangible U.S. benefits in areas of priority concern to members and their constituents. Thus, broadening the NAFTA agenda to climate change and other issues offers the best hope to gain support for upgrading NAFTA in other areas as well.

Thea M. LeeMarch 11, 2008

Thea M. Lee

NAFTA was sold to the American public as a market-opening agreement that would create high-paying export-related jobs in the United States, bring prosperity to Mexico, curb illegal immigration, and spur economic growth and political stability throughout North America. The outcome has been quite different.

NAFTA’s main results have been to strengthen the bargaining power of multinational corporations, to limit the scope of governments to regulate in the public interest, and to force workers into more direct competition with each other, while assuring them fewer rights and protections. NAFTA has also served as a template for several dozen agreements negotiated subsequently, which is one reason it has been such a lightning rod for dissent and dissatisfaction.

The next president certainly ought to enter into discussions with his or her counterparts in Canada and Mexico to honestly assess the agreement’s social, environmental, and economic impacts and look for common ground to address some of the key failings.

Each of the NAFTA countries has its own list of complaints and concerns, and within each country groups have different concerns. Workers, environmentalists, farmers, small and large businesses, community groups, and immigration-rights advocates all have their own take on how NAFTA can and should be fixed.

Our top priority would be to strengthen the weak labor and environmental side agreements. After fourteen years and dozens of cases, no one takes the North American Agreement on Labor Cooperation seriously. Despite findings that all three governments have at times “persistently failed to enforce their own labor laws,” no fines have been levied, and no sanctions have been applied. In fact, few companies even bother to show up at the “hearings,” as they know that little is at stake. The environmental side agreement has been equally disappointing.

The NAFTA investment chapter should also be revisited. NAFTA was the first trade agreement that allowed corporations to sue governments and challenge statutes protecting the environment, public health, and consumers. Legislators and ordinary citizens have no effective voice in the dispute resolution process. We would argue for eliminating the investor-state dispute settlement provision and more carefully defining both “investment” and “expropriation.”

Services, intellectual property rights, government procurement, status of our trade laws, and agriculture have all had some unintended consequences and should be reexamined.

Whether the three governments can reach agreement or not on any of these issues remains to be seen. In the meantime, a new American president should also seek grounds for trinational cooperation and coordination in strengthening workers’ rights, protecting the environment, and reforming immigration policy.

Jeffrey J. SchottMarch 11, 2008

Jeffrey J. Schott

The next U.S. president will take office fifteen years after the entry into force of the North American Free Trade Agreement (NAFTA)—the commercial accord that set the terms for Mexico to join the U.S.-Canada free trade club.

Throughout its duration, NAFTA has been hailed by some and derided by others. Proponents have lauded the pact’s contribution to regional trade and investment; critics have charged that NAFTA has blunted wage increases and cost jobs. Both are guilty of exaggeration. Overall, the trade pact has had a positive impact on trade and employment in all three countries, though not as large as promised by politicians during the ratification debate in 1993.

From the start, NAFTA has been a lightning rod for concerns about the effects of globalization on American workers and industries. Such critiques are now standard fare in the stump speeches of the Democratic candidates who claim that the pact is responsible for substantial losses of US manufacturing jobs. With the current slowdown in the U.S. economy, Senators [Hillary] Clinton and [Barack] Obama have escalated their anti-NAFTA rhetoric, culminating in threats to withdraw from the pact if Canada and Mexico do not agree to renegotiate its terms (particularly the obligations on labor and the environment).

NAFTA was “state of the art” when it was crafted in the early 1990s, but it could stand some renovation (including in the specific areas cited by the candidates) to take account of lessons derived from subsequent trade negotiations as well as important changes in the world economy. But to upgrade the pact, the next president will have to work with our neighbors and drop the idle threats of withdrawal if U.S. demands are not met  Why? Because withdrawal is not a viable option for the United States. Such a move would be highly disruptive to the U.S. economy, especially in sectors like autos that have integrated production across the three countries. For that reason, the threat of withdrawal is not credible, and thus—contrary to the candidate’s claims—does not enhance U.S. leverage in trilateral negotiations.

So what should be done? The next U.S. president will undoubtedly continue to work with our neighbors to promote sustainable economic development in the region; he or she will likely give the task higher priority than the Bush administration … and rightly so. There are several important issues that merit priority action—including cooperation on climate-change initiatives and threats to border and energy security—on which all three countries would willingly engage.

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