In the NAFTA Deal, Trump Got What Democrats Couldn’t

No, the renegotiated North American Free Trade Agreement (NAFTA) announced Monday is not, as President Trump predictably called it, “the most important trade deal we’ve ever made by far.” Not even close. The Trans-Pacific Partnership agreement with 11 Pacific Rim countries, which Trump walked away from on his first week in office, would have been far more significant for the U.S. economy. The Uruguay Round agreement that created the World Trade Organization in 1995, and China’s subsequent entry into the WTO in 2001, for that matter, were vastly more important. The new NAFTA’s economic impacts are likely to be minor in comparison because of the already deep cross-border trade ties in North America.

But the hyperbole should not detract from the president’s accomplishment. He has succeeded in refashioning the agreement, ironically, in ways that have long been demanded by many Democrats and those on the labor left. Robert Lighthizer, the U.S. Trade Representative who negotiated the deal, has said, to much skepticism, that he wants to refashion U.S. trade policy to “return to the days where there was a substantial majority of people in both parties that voted for these trade agreements.” Despite the confrontational and sometimes ugly way in which it was achieved – with tariffs and the threat of more against Canada and Mexico – the new NAFTA could be an important step in that direction.

To understand why, a little history is needed. U.S. organized labor and the Democratic Party were strong supporters of free trade well into the 1960s. They turned against trade liberalization for one big reason – they feared, with good cause, that lowering trade barriers and easing investment rules would result in a flight of investment chasing lower wages in Mexico, China and other developing countries. As the AFL-CIO’s legislative director, Andrew Biemiller, put it way back in 1967, when U.S. companies like RCA were just starting to dip their toe into manufacturing in Mexico: “The U.S. worker cannot effectively bargain for higher wages, better health standards, better work rules – and all of these are cost factors – while the investment and trade policies of private firms operate to escape these costs. The advantage is only to those firms. This does not necessarily benefit the United States.”

What Biemiller was foreshadowing, of course, was what third party presidential candidate Ross Perot would call in 1992 “the giant sucking sound” of U.S. jobs moving to Mexico chasing lower wages. And it was no illusion. Trade economist Richard Baldwin has identified a big shift in the early 1990s, what he calls “the second unbundling,” which came from the combination of mobile capital and modern information technology. Whereas companies once could not easily manage their best technologies in developing-country factories, today the biggest companies have global supply chains and can move production to wherever it can be done most efficiently for the company’s bottom line. The car companies, for example, can marry the best U.S. technologies with the lower-cost Mexican labor force, an unbeatable combination.

Organized labor has tried for half a century to fight back. In 1971 the unions tried and failed to push through the Burke-Hartke bill, which would have slapped tariffs on a wide range of imports and pushed up tax rates on overseas investments by U.S. companies. The legislation went down in a hail of lobbying by U.S. multinational companies.