How to have Free and Fair Trade?

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    Viridiana Rios

    The North American Free Trade Agreement has been a predominant topic of the Presidential Campaign. Trump has called it “the single worst trade deal ever approved in this country”, repeatedly pointing towards its negative effect on USA’ manufacturing employment. Bernie Sanders claims to have been “on the picket line in opposition NAFTA” because it sets American workers to compete with those “who make 56 cents an hour minimum wage”. Hillary claims to be in favor of trade deals that are “in the best interests of the workers of America” but ready to “stop any trade deal that kills jobs or holds down wages — including the Trans-Pacific Partnership.”

    NAFTA has been blamed for the loss of 682,900 American jobs, 60.8% of them in the manufacturing industry. The most affected states have been California (86,500 jobs lost), Texas (55,600) and Michigan (43,600). The latter is also the state with the biggest losses as a percentage of total labor force (1%). Indeed, some corporations looking for cheap labor have moved to Mexico (and other developing nations), leaving American unions with little leverage in wage negotiations.

    Yet, ascribing to NAFTA (or other trade agreements) responsibility for the dismal state of the USA’s manufacturing sector is quite a difficult case to make. Disentangling the effects of NAFTA from other forces and events that happened at the same time is practically impossible. Concurrent factors such as changes in the demographic balance, technological advances, and the emergence of new commercial competitors have played an important role in changing USA’s trade and production structure. Actually, some studies have found that only 13% of the job losses of US manufacturing industry are due to trade, the rest are due to increases in productivity caused by automation and productivity increases. Some even claim that without the existence of Mexico’s cheap labor, which reduced fixed costs in US production, the country would have not been able to survive competition with Asia and preserve local jobs. It is estimated that for every 10% increase in employment of US companies operating in Mexico, the workforce in the US increases by 1.3%, US exports by 1.7% and investment in research and design at 4.1%.

    Given current levels of integration between the US and Mexican economies, withdrawing from NAFTA may not be a savvy course of action. On a given year Mexican industries consume about $140 billion in USA intermediate goods, and the US consumes $111 billion dollars in Mexican inputs, showing that Mexico and the USA are producing together more than just buying one from another. Mexico buys 11% of its production inputs from small and medium companies in the US, helping many local business at the border to thrive. Furthermore, it has been estimated that the relationship between the US and Mexico sustains 4.9 million jobs in the USA, with at least 123,000 jobs created directly by the Mexican investment in US.

    Keeping status quo does not seem to be an option either. Globalization and technology have driven wages down, and have created large inequalities between those who can access international markets and have been trained in marketable skills, and those whose jobs have been substituted by machines or lower paid foreign workers.

    Rethinking the rules under which trade agreements are conducted is a must. It could be that the problem is the rules and processes which have been accepted as part of free trade agreements have not been sufficiently transparent and democratic, leading industries and corporations to increase their profits at the expense of workers’ wages. The problem may also be that free trade agreements have not been sufficiently free. While corporations are free to move between countries (capital flows), workers are not (immigration flows). These leaves low income countries with many individuals unable to find jobs and thus captive to the opportunities that corporations offer them (whatever these are). Free trade would require free labor movements such that corporations cannot profit from just locating themselves in places with larger workers’ supply.

    It is time to discuss how to create trade deals that are not only free but fair, where the interests of all parties, including workers (local and international), are included. What can be done to transcend a world where trade agreements are perceived as the enemy to one where they are perceived as the enforcer of a more fair and generous world?


    Pamela Starr

    Mylene Cano comments:

    Indeed, there is no free trade agreement that can be analyzed as a black or white issue. There are always some that will be affected and some that will be benefited. Free trade, by its nature and principles, is supposed to eliminate those sectors that do not have a comparative advantage. Hence, considering differences among Mexican and United States economy, is natural that some sectors will be affected that some sectors will be affected more than others. The true challenge remains in how to give also these sectors an opportunity to gain, or at least not lose, from free trade.

    NAFTA’s benefits are undeniable, consumers from both countries can now experience more variety and more quality. US Manufacturing has been able to keep up with China’s and other Asian countries pace. However, weaknesses for both countries are tangible. I agree there is a lack of labour regulations to strengthen NAFTA that cause controversies and conflicts related to migration.

    There is no doubt that we need to transit to more free trade agreements rather than more protectionism and quotas. Technological advances and globalization convert free trade and openness in a necessity. I believe NAFTA can become a useful tool to learn about what was done good and bad and to exhibit what factors promote or inhibit fair trade. For sure, future free trade agreements and amends to existing ones should prioritize fair trade and not only free trade.


    Viridiana Rios

    Thank you Mylene. Indeed, NAFTA and other trade deals can become useful tools to (a)create international regulations that follow OIT standards (with clear punishments to non-compliers, stronger than TPP), (b) set ambitious international minimum wages (adapted by PPP), or (c) create world taxes for corporations (inhibiting tax minimization strategies).


    Pamela Starr

    Omar Espejel comments:

    You have, indeed, proposed a pretty transcendental question. Old School Economics would agree that Free Trades bring Fair Trade. The idea that trade’s fairness depends on competition between buyers and between sellers (careful, not between buyers and sellers) is still on the game and you certainly address this when you say “The problem may also be that free trade agreements have not been sufficiently free. While corporations are free to move between countries (capital flows), workers are not (immigration flows).” This is indeed the dilemma of globalization; a half-globalization (no free workers flows) has this kind of pervasive effects.

    I invite you to consider the option in which you cannot have the three options together: trade fairness, free trade (as free capital flows) and free immigration flows. A bit like the famous “Impossible Trinity” in international economics; which dictates the same schema I just mentioned but with free capital flows, fixed exchange rate and sovereign monetary policy.

    Let’s take a look at this thought’s logic: 1) The European Union has chosen to have free immigration flows and free capital flows, but can we really talk of trade fairness in between the member countries? Can Portuguese workers demand compensations such as their german counterparts? Is it fair for Spain to observe a so-called “brain’s fugue” to Germany? This would have really limiting effects on Spain’s economy; 2) Lets see the case that would most, in theory, resemble the utopian NAFTA’s case; we have free capital flows and certain degree of trade fairness, given this, if we try to open the borders, we would automatically end with fairness since there would be a massive flow of Mexican workers to US, leaving lots of Americans jobless and lots of Mexicans with very low salaries, kind of what is happening today; finally, the third option might be a little harder to conceptualize, precisely because we have to think outside our current box and imagine a world with fair trade, but still with quotas and protectionism, maybe a kind of planned economy?

    I just came up with this, so it is totally error prone. Just trying to be open to new options.

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