Economic news is grim all around the world. This year’s output growth has been disappointing, and the IMF expects only a slight improvement next year. Europe might be sliding back into recession, with even the once-robust German economy teetering on the brink. China is downshifting, and Brazil, Russia and India are struggling to avoid a stall.
So it is a pity that three important opportunities for growth from trade liberalization — the WTO’s Doha Development Round, the Trans-Pacific Partnership (TPP) in the Asia-Pacific region, and the Transatlantic Trade and Investment Partnership (TTIP) between the US and Europe — are being neglected.
If designed properly, all three have the potential to spur global growth. Through the reduction of tariffs and non-tariff barriers, the protection of intellectual property, and the harmonization of regulations, hundreds of billions of US dollars of output — and millions of better-paying jobs — could be generated.
This is the lesson of the North American Free Trade Agreement (NAFTA), which celebrates its 20th birthday this year. In NAFTA at 20, a book that I edited, policymakers and scholars explain how the landmark trade treaty exemplifies the benefits of trade liberalization — and why political leaders should pursue it.
The elimination of tariffs among Canada, Mexico and the US was innovative, risky and controversial. NAFTA became a lightning rod for complaints about globalization, capitalism and the decline of organized labor. Many claimed that the treaty would depress wages, destroy jobs and ravage the US’ agricultural industry. Instead, NAFTA boosted all three signatories’ economies and became the template for hundreds of subsequent free-trade agreements.
NAFTA helped open what former Mexican Minister of Trade Jaime Serra Puche said had been “a highly protectionist economy for five or six decades.”
US agricultural exports threatened some Mexican farmers, but others were able to boost their exports — and profits — to the US. Meanwhile, the nation’s consumers, especially the urban poor, benefited from lower food prices.
According to Stephen Haber, my colleague at Stanford University’s Hoover Institution, “After, and to a considerable extent because of, NAFTA, the Mexican economy and political process became far more competitive.”
Canada also benefited. The nation’s firms and workers saw their productivity rise by 14 percent, leading to what University of Toronto economist Daniel Trefler estimates is the equivalent of a decade’s improvement in living standards.
Meanwhile, Canada and Mexico have become the US’ top two export markets, accounting for a combined US$625 billion last year, more than the next ten largest export markets combined. Prior to NAFTA, exports to Mexico roughly equaled those to the UK and about half of what was going to Japan. Moreover, this surge in trade has created a myriad of well-paying jobs.
NAFTA produced something far different from the outsourcing its opponents predicted. Some 40 percent of what the US imports from Mexico actually originates in the US. For Canada, the figure is 25 percent. By contrast, the share for China is just 4 percent.
“We’re not just selling things to each other,” Serra Puche said. “Now, we’re producing things jointly.”
According to Yale School of Management economist Lorenzo Caliendo, a surge in cross-border trade and increases in real (inflation-adjusted) wages in all three nations can be attributed to NAFTA — even once other factors, like the opening of China, the peso crisis, the dotcom bubble and the 2008 economic downturn, are taken into account.
Today, NAFTA can continue to serve as a model for ongoing trade negotiations. A NAFTA 2.0 could focus on areas that were originally excluded, such as labor mobility and energy. The development of Canadian oil sands, the shale-energy revolution in the US, and the opening of Mexico’s oil sector to foreign investment imply the biggest geopolitical shift since the collapse of communism.
Moreover, the finalization of either the TPP or the TTIP could spur progress in the WTO’s Doha Round.
“There is no question that a high-quality major agreement today, as the NAFTA was in 1994, could cause multilateralism to take a giant leap forward,” former US trade representative Carla Hills said.
Trade liberalization has been stalled for too long. Since the end of World War II, US presidents, Democrat and Republican alike, have promoted free trade as a key pillar of growth. Former US president John F. Kennedy launched what became the Kennedy Round of the General Agreement on Tariffs and Trade, and former US president Bill Clinton helped secure congressional passage of NAFTA and the Uruguay Round of trade talks, which had been initiated and negotiated under former US presidents George W. Bush and Ronald Reagan.
US President Barack Obama has promoted the TPP in Asia, but he only recently asked Congress for fast-track negotiating authority — the ability to request an up-or-down congressional vote without amendments. Obama’s request was rebuffed by US Senate Democratic Majority Leader Harry Reid. The new Republican-controlled Senate should act quickly to approve it.
“There is no way we would have completed the NAFTA negotiation without fast track,” Hills said.
Nobody would negotiate seriously with the US if Congress can cherry-pick amendments. Former US trade representative Mickey Kantor recalls Clinton’s horse-trading with congressional Democrats to persuade them to join Republicans in passing NAFTA, overcoming both parties’ protectionist wings. Obama and the new Republican majority must now decide if they are going to follow in their predecessors’ footsteps and spark a new era of economic growth.
Michael Boskin is a professor of economics at Stanford University and a senior fellow at the Hoover Institution. He served as chairman of former US president George W. Bush’s Council of Economic Advisers from 1989 to 1993.
Copyright: Project Syndicate
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