Trade

A third lightning round of North American Free Trade Agreement (NAFTA) talks begins in Ottawa on September 23. Negotiators reportedly made progress during the first two go-rounds in Washington and Mexico City, reaching tentative agreements on intellectual property, e-commerce, and environmental protections, likely following the general outlines hammered out within the Transpacific Partnership agreement, or TPP. Yet the thornier issues – investor dispute settlement options, rules of origin, Buy American clauses, and importantly labor rules and wages – remain. And even as trade negotiators met in round-the clock sessions to get these initial breakthroughs, U.S. President Donald Trump revived his public existential threats, saying he will end up “probably terminating NAFTA at some point.” Commerce Secretary Wilbur Ross chimed in that ending the agreement is “the right thing” to do if the United States doesn’t get what it wants by the end of the year. Trump, along with many Americans, condemns NAFTA for taking jobs. The president repeatedly asserts Mexico is “killing us on jobs and trade” and NAFTA is “a one-way highway out of the United States.” Average Americans echo these fears. In 2016 two out of three Americans believed globalization was good for the overall economy and country, but only forty percent thought it created employment and just one in three thought it protected jobs already here. NAFTA is viewed with particular skepticism, with nearly half of Americans believing the United States got a bad deal. The facts belie these perceptions. The non-partisan Congressional Research Service, reviewing dozens of studies conducted over the last twenty years, found that the trade agreement has had little to no effect on net employment in the United States. Yes, jobs were lost, as others were gained, leading to a net wash. And while these transitions are undoubtedly hard for individual workers, NAFTA-inspired job losses (leaving aside the new positions created by more trade) accounted for less than 1 percent of the nearly 18 million positions eliminated every year. These limited effects reflect the fact that even at $1.2 trillion dollars, North American trade represents just 6 percent of the U.S. economy. In the larger worry over jobs, the United States should be commiserating rather than condemning its southern neighbor. A recent International Labour Organization (ILO) report shows that Mexican workers, like their U.S. colleagues, suffered the most from Chinese competition, not each other. Over the last two decades, Mexico lost nearly 650,000 net jobs to the Asian giant, as textiles, shoes, and computer factories shuttered in the face of cheap imports or as management moved operations across the Pacific. The United States, according to estimates by scholars David Autor, David Dorn, and Gordon Hanson, lost 2.4 million jobs to China over a roughly similar period. Per capita this represents 11 of every 1,000 workers in Mexico, and 14 per 1,000 workers in the United States... View full text of article, originally published in Americas Quarterly.

Anupam Chander argues that a renegotiated North American Free Trade Agreement could set the gold standard for digital free trade, an opportunity the Trump administration should not miss.

MILAN – In a recent commentary for the South China Morning Post, Helen Wong, HSBC’s chief executive for Greater China, shows that China’s rising generation of 400 million young consumers will soon account for more than half of the country’s domestic consumption. This generation, Wong notes, is largely transacting online, through innovative, integrated mobile platforms, indicating that it has already “leapt from the pre­web era straight to the mobile Internet, skipping the personal computer altogether.” Of course, China’s rising middle class is not news. But the extent to which digitally oriented younger consumers are driving rapid growth in China’s service industries has not yet received ample attention. Services, after all, will help drive China’s structural transition from a middle- to a high-income economy. Not too long ago, many pundits doubted that China could make the shift from an economy dominated by labor-intensive manufacturing, exports, infrastructure investment, and heavy industry to a service economy underpinned by domestic demand. But even if China’s economic transition is far from complete, its progress has been impressive. In recent years, China has been offloading its labor-intensive export sectors to less-developed countries with lower labor costs. And in other sectors, it has shifted to more digital, capital-intensive forms of production, rendering labor-cost disadvantages insignificant. These trends imply that supply-side growth has become less dependent on external markets. As a result of these changes, China’s economic power is rapidly rising. Its domestic market is growing fast, and could soon be the largest in the world. And because the Chinese government can control access to that market, it can increasingly exert its influence in Asia and beyond. At the same time, China’s declining dependence on export-led growth is reducing its vulnerability to the whims of those who control access to global markets. But China does not actually need to limit access to its own markets to sustain its growth, because it can increase its bargaining power by merely threatening to do so. This suggests that China’s position in the global economy is starting to resemble that of the United States during the post-war period, when it, along with Europe, was the dominant economic power. For decades after World War II, Europe and the US represented well over half (and near 70% at one point) of global output, and they were not heavily dependent on markets elsewhere, other than for natural resources such as oil and minerals. Now, China is rapidly approaching a similar configuration. It has a very large domestic market – to which it can control access – rising incomes, and high aggregate demand; and its growth model is increasingly based on domestic consumption and investment, and less on exports. But how will China wield its increasing economic power? In the post-war period, the advanced economies used their position to set the rules for global economic activity. They did so in such a way as to benefit themselves, of course; but they also tried to be as inclusive as possible for developing countries. The post-war powers certainly did not have to take that approach. It was within their power to focus far more narrowly on their own interests. But that might not have been wise. It is worth remembering that in the twentieth century, following two world wars, peace was the top priority, along with – or even before – prosperity. China shows every sign of moving in the same direction. It most likely will not pursue a narrowly self-interested approach, mainly because to do so would diminish its global stature and clout. China has shown that it wants to be influential in the developing world – and certainly in Asia – by playing the role of a supportive partner, at least in the economic realm. Whether China can achieve that goal will depend on what it does in two key policy areas. The first is investment, where China has moved aggressively by introducing a variety of multilateral and bilateral initiatives. For example, in addition to investing heavily in African countries, it created the Asian Infrastructure Investment Bank in 2015, and, in 2013, announced the “Belt and Road Initiative,” meant to integrate Eurasia through massive investments in highways, ports, and rail transport. Second, how China manages access to its vast internal market, in terms of trade and investment, will have far-reaching consequences for all of China’s external economic partners, not just developing countries. China’s domestic market is now the source of its power, which means that the choices it makes in this area in the near term will largely determine its global standing for decades to come. To be sure, China’s current position on domestic-market access is less clear than its economic ambitions abroad. But China will most likely move toward an open, largely rules-based multilateral framework. The lesson from the post-war period is that this approach will do the most good externally, and will thus enhance China’s international influence. At this stage of China’s development, such an approach will have few if any costs, while most likely conferring many benefits. What remains to be seen is how China’s relationship with the US fares. The US is suffering from non-inclusive growth patterns and related political and social upheavals. And it now seems to be departing from its historical post-war approach to international economic policy. But even if the US is isolating itself under President Donald Trump, it is still too big simply to ignore. If the Trump administration enacts aggressive policies directed at China, the Chinese will have no choice but to respond. Still, in the meantime, China can continue to pursue a rules-based multilateral approach, and it can expect broad support from other advanced and developing countries. The key is not to be distracted by America’s descent into nationalism. After all, it is anyone’s guess how long that will last. This article originally appeared on project-syndicate.org.

The North American Free Trade Agreement was the first in U.S. history to slash trade barriers between a wealthy country and a much poorer one. This week, the NAFTA will mark another first when officials from Mexico, Canada, and the United States sit down in Washington to begin renegotiating the deal. The two milestones are not unconnected—NAFTA was the most controversial trade deal ever negotiated by the United States, in part because of the incentives it created for companies to relocate to Mexico to take advantage of lower wages. The success or failure of the coming negotiations will largely determine whether U.S. trade policy can find a firmer footing for the future or continue to be handcuffed by a lack of political and popular support. Here’s the challenge in a nutshell: how to take a two-decade old agreement that President Trump has called “the worst trade deal ever negotiated,” and somehow alter it sufficiently that the president becomes its champion if and when it goes to Congress for ratification. Trump has many times called himself a great negotiator, and NAFTA will be the acid test of that boast. Here are the four challenges that must be overcome for a successful NAFTA renegotiation: 1)    Putting America first: Trump’s biggest objection to NAFTA is that it was a one-sided deal, pointing to the large increase in the U.S. trade deficit with Mexico since its enactment and the loss of manufacturing jobs to Mexico. Whether the economic benefits of NAFTA to the United States have outweighed those costs—my colleagues James McBride and Mohammed Aly Sergie have a good backgrounder weighing the arguments—is beside the point. Trump needs to show that he has changed the agreement not just in ways that may benefit all three countries, but in ways that will help the United States relative to Canada and Mexico. That is a much harder task. The “America first” issues in the U.S. negotiating objectives include eliminating the special dispute settlement provisions under Chapter 19 of NAFTA, strengthening “Buy America” and other procurement rules that benefit American companies, and tightening so-called “rules of origin” to encourage sourcing in the United States and North America. Each issue is fraught for different reasons. Canada will fight to its last breath to retain the Chapter 19 rules, which allow it to challenge U.S. antidumping and countervailing duty orders before a NAFTA tribunal rather than in U.S. courts. With the ongoing fight over softwood lumber, and a new case that could block sales of Bombardier aircraft in the United States, the issue is still a vital one for Canada. Both Canada and Mexico will object to restrictions on their access to government procurement in the United States, but may be willing to live with this concession. Rules of origin—which is largely an issue for the automotive industry—is a wild card. If they are renegotiated to require more “North American” content, then Mexico will cheer; indeed, it is the U.S. car companies that would object. But if the Trump administration tries to introduce an “American” content requirement, this would clearly violate the spirit of the deal. Of course, Trump could try out a more traditional “pro-America” argument for trade—that strengthening NAFTA rules for digital commerce, for intellectual property, for labor and environmental standards, would all help U.S. companies and the workers they employ. But since the U.S. negotiating proposals on these issues are borrowed almost entirely from the Trans-Pacific Partnership (TPP) agreement that Trump tore up on his first day in the Oval Office, this seems unlikely. 2)    Dealing without deadlines: All three countries are saying that they want to move quickly on the renegotiation to reduce uncertainty for investors in North America. The coming Mexican election next year, which could bring the populist Andrés Manuel López Obrador to power, is seen as an especially strong motivation to get the deal done early. But modern trade negotiations are difficult and complex. The TPP took nearly a decade to negotiate. The Trans-Atlantic Trade and Investment Partnership (TTIP) with Europe was supposed to be concluded last year and has barely made it past the preliminary issues. Mexico’s economy minister Ildefonso Guajardo said last week he sees a “60 percent chance” of the deal being done by the end of the year, which is another way of saying it likely won’t happen. The bigger problem for Trump is that Mexico and Canada have strong incentives to delay. The longer the talks drag out, the wearier the president is likely to become of the whole exercise, and the more likely he becomes to accept modest changes and try to call it victory. Or, more worrisome, it could force Trump to trigger the NAFTA withdrawal provisions that he came so close to invoking in April, which would be highly disruptive but would have the negotiating advantage of setting a hard, six-month deadline for the talks to succeed or fail. 3)    Holding back the wolves: American business and American farmers really like NAFTA. Except the trucking industry, which wants permission for foreign drivers to “reposition” empty trucks within the United States. And the textile industry, which wants to revisit the “tariff preference levels” agreed to under NAFTA that allow for foreign fabrics to be used in some clothing. And the California wine industry, which objects to the special treatment given to domestic wines in Canadian retail outlets. And the dairy industry, which has long chafed at Canada’s protectionist regime for milk and cheese.  In the testimony in June to the International Trade Commission, U.S. companies that were by and large supportive of NAFTA nonetheless raised dozens of issues they would like to see addressed in the negotiations. But the more issues that are thrown on to the negotiating table, the more difficult it will be to reach a deal in any sort of timely fashion. To get the agreement done, the Trump administration is going to have to get very good at saying no to a host of special interests, each of whom comes armed with influential political allies in Congress. 4)    Dealing with Democrats: Many congressional Democrats, who were frustrated with President Obama’s embrace of the TPP and Hillary Clinton’s lukewarm rejection of the deal, have been chomping at the bit to re-establish themselves as the anti-NAFTA, trade-skeptic party. Senate Democratic leader Charles Schumer (D-NY) earlier this month released the party’s “better deal” agenda, which tries to out-Trump Trump in its criticisms of U.S. trade deals. It can be said with confidence that whatever deal Trump can extract from Canada and Mexico will immediately be denounced as a sell-out and a give-away by the congressional Democrats. That will put the president is a position he would surely prefer to avoid—arguing the merits of NAFTA against vociferous opposition from Democrats, and needing pro-trade Republicans like Speaker Paul Ryan (R-WI) and House Ways and Means Committee Chairman Kevin Brady (R-TX) to carry the load for him in Congress. NAFTA was the beginning of an era, the first great experiment in freeing trade between high wage and low-wage countries. It set the basic template for many deals that followed, including the CAFTA with Central America and the Dominican Republic, and China’s entry into the World Trade Organization. None of those deals has become more popular with age. A successful renegotiation of NAFTA would be another milestone, demonstrating such deals can be living agreements that can be updated, improved, and continue to work in the interests of both wealthier and poorer countries. A failure, however, would continue to erode the already fading public confidence in trade.

MILAN – In the summer, as life slows down, there is space to reflect on fundamental issues. One of the key puzzles occupying my mind of late is the disconnect between widespread political dysfunction and relatively strong economic and financial-market performance. Today, the world’s major economies are experiencing a steady recovery, despite the occasional setback. To be sure, economic performance is far from reaching its full potential: depending on where one looks, one can find output gaps, excess leverage, fragile balance sheets, under-investment, and unfunded longer-term non-debt liabilities. Still, financial markets show no signs of convulsion, even as monetary stimulus is gradually withdrawn. Yet, at the same time, political conditions seem to be deteriorating. Polarization has intensified, owing partly to growing resistance to globalization and the unbalanced growth patterns that have resulted from it. In the United States, for example, the Pew Research Center reports that people not only disagree vehemently with their compatriots on the other side of the aisle; they also don’t like or respect them. The political gridlock long fueled by America’s right-left divide has now become entrenched within the Republican Party, which controls both houses of Congress and the White House. So far, President Donald Trump’s administration has only exacerbated this internal turmoil, while offering none of the hoped-for economic-policy shifts that might elevate investment and growth and boost quality employment. While it is hard to detect the Trump administration’s priorities at this point, it would be hard to argue that they include a concerted and narrow focus on policies designed to make growth patterns more equitable and sustainable. In the United Kingdom, last summer’s vote to leave the European Union surprised many, and concerns across the EU were heightened when Prime Minister Theresa May took over and committed to securing a “hard” Brexit. Now that British voters have stripped May of her parliamentary majority in June’s snap general election, the outcome of the coming withdrawal negotiations – and the fate of the post-Brexit UK – has become even more uncertain. Leaders in Europe, as well as in a number of emerging economies, have now concluded that both the UK and the US are unpredictable and unreliable allies and trading partners. Asia, with China in the lead, has decided to go its own way. International cooperation on economic and security matters – never easy – seems to be unraveling. In this context, the global economy’s resilience – at least so far – is all the more remarkable (though it is of course impossible to know how the economy would be performing in a more stable political environment). There are several possible (and non-mutually exclusive) explanations for this counterintuitive state of affairs. For starters, institutions built over time now limit the capacity of political leaders and legislators to affect the economy. While these institutions can impede the implementation of positive policies, they also serve to minimize economic and investment risk. Particularly on the international front, politicians cannot easily bring about a dramatic and immediate reversal of the patterns of globalization that have been established in recent decades. Any attempt to do so – undoubtedly fueled by intensifying populist and nationalist pressures – would cause serious economic damage, ultimately depleting the political capital of those who spearheaded it. Another, more worrying possibility is that risks are rising faster than perception of them. If this seems implausible, consider the 2008 global financial crisis, in which lax regulation and informational asymmetries led to a pattern of rapidly rising risk and deepening imbalances that were, for the most part, obscured from view. In the current context, the cumulative effect of rising geopolitical tensions, loss of trust, and disrespect for key institutions could produce either a large shock or just deteriorating conditions for investment. But it is harder to construct concrete scenarios than it is to ignore the potential risks we face. Having said that, there is a more hopeful explanation, to which I subscribe, at the risk of being labeled an irrational optimist. The inequality of opportunity and outcomes that have fueled popular discontent and political polarization are very real, and, after years of neglect, they are finally getting the attention they deserve. More concerted attention to social cohesion will not bring quick results. But, over time, it can help to reduce partisan intensity, refocus citizens’ attention on their common values, and restore their leaders’ capacity to deliberate responsibly and implement policy. As always, there will be disagreements – sometimes sharp disagreements – about how to achieve shared goals. The key is to address them in a context of relative mutual respect. This scenario is far from guaranteed, but it is by no means impossible. After all, Emmanuel Macron’s election as France’s president, May’s setback on hard Brexit, and a near-universal rejection of the Trump administration’s stance on climate change and a rules-based global economic order, both within and outside the US, suggest that the center may be holding. In the meantime, national and international institutional frameworks must continue to guard against destructive actions by political leaders. In the final analysis, confidence in these institutions’ resilience – and in an eventual end to the current political dysfunction – is what markets seem to be banking on. This article originally appeared on project-syndicate.org.

China has become Africa’s largest trade partner and has greatly expanded its economic ties to the continent, but its growing activities there have raised questions about its noninterference policy.