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The US Needs a New International Trade Consensus

May 9, 2022 | Economics, International

In 1992, presidential candidate Ross Perot stated Americans would hear a “giant sucking sound” in the aftermath of the North American Free Trade Agreement (NAFTA), as he believed domestic manufacturing companies would ship jobs and production lines abroad. A little over a year later, with bipartisan support from Democrats and Republicans, President Bill Clinton signed NAFTA into law under the pretext that the self-correcting free market would offset harm to domestic industry.

The agreement served as one of the final examples of a longstanding bipartisan consensus around the merits of free trade. In the wreckage of this consensus, leaders have begun shifting focus. President Biden consistently employs rhetoric such as “Made in America” when advocating for government procurement to support American manufacturers. After winning the presidency by courting voters in key electoral states negatively impacted by free trade, President Trump replaced NAFTA with the United States-Mexico-Canada Agreement (USMCA). Senators Josh Hawley (R-Mo.) and Bernie Sanders (I-Vt.) might be ideological foes, but they find common ground in their belief that free trade has caused enormous harm to the U.S.  

To right the wrongs of decades of unfettered free trade and globalization, policymakers must establish a new economic consensus that features a renewed emphasis on manufacturing. While NAFTA represents the failures of U.S. trade policy, the USMCA represents a step towards a changed consensus.

Pros and Cons of Free Trade

Despite its downsides, trade has contributed to the significant reduction of global poverty levels, provided the grounds for increased international collaboration among allied countries, and allowed American consumers to enjoy cheap imports. The primary goals of NAFTA — which included eliminating trade barriers, increasing the flow of goods and services, protecting intellectual property rights, and increasing investment opportunities — were realized in its aftermath. Trade quadrupled between the U.S. and its northern and southern neighbors. The U.S. became the primary export destination of each respective country. Import prices were reduced for all member countries, resulting in cheaper goods for domestic consumers. American farm exports to Mexico and Canada quadrupled from 1993 to 2016, in line with the increase in overall trade, after the elimination of high Mexican tariffs.

Despite free trade’s accomplishments, it presents inevitable, significant shortcomings that have directly impacted domestic American workers. NAFTA contributed to the hollowing out of the American manufacturing base, destroying jobs and upending rural communities in the process. Estimates say that NAFTA contributed to the loss of approximately 700,000 manufacturing jobs in Michigan, Wisconsin, Indiana, and other areas of the Rust Belt. The American automobile sector lost roughly 350,000 jobs while Mexico gained 430,000. In the aggregate, the number of U.S. manufacturing jobs has starkly declined over the last 20 years.

The USMCA

Recognizing that government could help correct NAFTA’s failures, the Trump Administration negotiated the USMCA to help Americans who have been hurt by free trade. The USMCA has several notable policy differences that protect U.S. industry while leaving low tariff agreements in place:

  1. Auto Manufacturing Requirements: To qualify for no tariffs, NAFTA required 62.5% of the content of automobiles to come from North America. Under the USMCA, the share of content of automobile parts from North America was increased to 75%. An effective “minimum wage” was also negotiated. Forty percent of automobiles must be produced by employees who are paid an average wage of $16 per hour.
  2. Strengthened Labor Laws: Lawmakers strengthened labor rule enforcement to help American workers. Under the USMCA, Mexican workers gain the right to collectively bargain, closing the wage gap between U.S. and Mexican labor markets. This will lower the incentive for companies to move their manufacturing bases abroad, since the difference in labor costs will be lower.
  3. Access to New Markets: Previously, Wisconsin dairy farmers routinely voiced concerns about import quotas instated by Canada on American ultra-filtered milk. The USMCA provides American dairy producers access to an additional 3.6% of the Canadian market. Access to an additional 3.6% of the market was a larger share than previously agreed upon in the Trans-Pacific Partnership, another free-trade agreement from which President Trump withdrew. Additionally, the USMCA opens Mexico’s energy markets to the U.S. and Canada, allowing American energy companies to sell products to new consumers.

While there is no policy, trade deal, or negotiation that can bring back the hundreds of thousands of jobs lost to NAFTA and free-market fundamentalism, the USMCA is a clear step toward a more balanced trade policy.

Where We Went Wrong

The former consensus around the merits of free trade led to the implementation of policies that had lopsided results: high national trade deficits, cheap imports, and the destruction of domestic production capacity. How did we get here?

The Ricardian model of trade argues that nations should produce goods in which they have a comparative advantage, export their surplus to other nations, and import goods they are less efficient at producing. The result, according to the model, is two nations producing and consuming higher quantities of goods than they could independently. However, the problem with the Ricardian trade model, as Oren Cass eloquently states, is its flawed assumption that capital remains fixed in domestic markets. In reality, as Cass points out, a “system of mutual dependence between capital and labor” incentivizes “owners of mobile capital to forsake the interests of their fellow citizens and search for higher profits through labor arbitrage abroad.” 

For years, U.S. trade policy has taken the assumptions of the Ricardian model to the extreme. Policies such as NAFTA have rotted the heart and soul of American industry, destroying lives and communities in the process. While imperfect, the USMCA represents a step in the right direction. Automobile manufacturing requirements, stringent labor laws, and increased access to new markets are three deliberate reforms that will help alleviate NAFTA’s failures.

Towards A New Consensus

Conservatives and progressives must work together to implement policies that will provide for the revitalization of domestic manufacturing. A national industrial strategy might be out of line with the recent laissez-faire consensus, but it aligns with U.S. economic tradition. Some of America’s greatest leaders and statesmen — Alexander Hamilton, Henry Clay, and Abraham Lincoln — supported what they described as the “American System,” which emphasized fair trade, protection of manufacturing, and infrastructure development.

Today’s new trade consensus should be based on similar goals and policies:

Production Over Consumption: 
While companies and consumers both benefit from cheap imports, domestic production is outsourced as a result. Domestic production capacity and innovation must be bolstered to provide opportunity and stability to rural Americans and decrease reliance on imports. This can be done by strengthening and enforcing “Buy American” requirements and increasing federal investment in R&D to stop its decline as a share of GDP. Legislation that incentivizes private investment into manufacturing capacity, such as the American Innovation and Manufacturing Act, must also be considered.

Lower Trade Deficits: 
The Economic Policy Institute notes the “bulk of the U.S. trade deficit is concentrated in manufactured goods.” A quick examination of our manufacturing output reveals there is only one manufactured good the U.S. exports more than it imports: airplanes. Closing this gap should be a primary goal of the new consensus, and can be accomplished in the following ways:

  • Demand an even playing field. Cass writes extensively about policies that can re-balance trade, arguing when American producers are denied market access through “discriminatory regulations and local content requirements, [and] the U.S. should respond in areas where its own advantages give it the greatest leverage — for instance, by limiting access to American student visas, advanced medical technologies, and capital markets. Denying any of these to a foreign country would hit its own ruling classes hardest while doing little damage to its lower-income population or to American households.” The U.S. must also work with the World Trade Organization (WTO) to deny Most Favored Nation Status (MFN) to countries who continue taking advantage of the U.S.
  • Refuse to enter new trade deals until the playing field is leveled.
  • Implement pro-worker policies in future trade deals. Future trade deals should follow the lead of the USMCA by implementing content requirements and other policies that will increase domestic production capacity.

Maintain Low Tariffs:
Foreign governments can easily counter tariffs with subsidies, rendering them ineffective. A more effective policy to consider might be a wage subsidy, which, if properly implemented, can provide relief to domestic workers who have experienced negative repercussions of free trade and globalization.

Conclusion

Ross Perot’s “giant sucking sound” prophecy turned out to be true. Now that U.S. policymakers are recognizing the errors of unrestricted free trade, it is time to establish a new economic consensus that will correct prior mistakes. While no overnight magical fix can bring back manufacturing jobs, a new consensus must be established so future trade policies work to revitalize industry. The USMCA is a step in the right direction, and divergence from NAFTA provides a foundational building block that will help turn the tide of economic thought in the United States.

Featured Image by Kurt Cotoaga on Unsplash.

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