Over the past decade, politics has increasingly involved a divide between what we might call technocrats and populists. The former offer “sensible” policies, while the latter emphasize popular sovereignty. In Western Europe and North America at least, these divisions have arguably become more important than the Left-Right divides of old.
It would be hard to conceive a more perfect representation of technocratic policymaking than the North American Free Trade Agreement (NAFTA). Its promised advantages were derived from economic trade theory and were meant to produce benefits on an aggregate scale. Designed and sold as a “non-zero sum game” for all three participants, it neglected the adverse, micro-level consequences of its implementation and the political pushback it would engender. The election of Donald Trump, who had campaigned on either reneging or renegotiating NAFTA to protect U.S. jobs and prevent Mexico from “ripping off” American workers, signaled the ascendancy of the “populist” wing in American politics—and a credible challenge to NAFTA itself.
Was NAFTA a “good thing” for the North American economy as a whole? Yes, even if its impact was much less revolutionary than predicted. Did it produce pains in certain sectors that have translated into political opposition? Again, yes—and perhaps with greater force than was expected. The designers of the agreements certainly expected some of these costs, but they could not predict the rise of China, a development that has caused more political headaches than any specific provision of the deal itself. Trade economists have found that U.S. regions with higher exposure to Chinese imports experience fewer employment options and more social transfer payments.
NAFTA was agreed among the three countries’ leaders in August 1992 and signed in December of that year. Canadian Prime Minister Brian Mulroney argued that NAFTA would provide an economic boost for Canada’s export sector, create domestic jobs, foster stronger cooperation with the United States, and strengthen democracy, free markets and rule of law in Mexico. For Mexico, NAFTA meant an opportunity to access a larger consumer market, the promise of higher wages for Mexican workers, and a regulatory environment that would encourage increased foreign direct investment (FDI), particularly in infrastructure. NAFTA, many claimed, would also help address immigration disputes with the United States; Mexican and U.S. political elites argued that NAFTA could create enough jobs for Mexicans to induce them to stay at home. For the United States, NAFTA was about ensuring access to the natural resources of its two neighbors, stemming immigration from Mexico, creating some domestic jobs (by encouraging Mexico to purchase more U.S.-made products), and in general contributing to the continuing U.S.-led globalization process.
NAFTA made possible a significant increase in trade among the three countries. Trilateral trade increased by 125 percent in real terms from 1993 to 2015, while U.S.-Canada trade increased by 63 percent and Mexico-U.S. trade by a whopping 432 percent. The consensus is that NAFTA did account for some of the growth experienced by the region and especially by Mexico (no surprise, given its smaller economy relative to its richer northern neighbors). It also arguably consolidated the North American region as an integrated and integral part of the global economy. But the lack of U.S. government investments in Mexican infrastructure and the failures of successive administrations to reform immigration policy have limited the impact of the agreement, making it more of a tariff-free zone than the institutionalized road to growth and convergence it could have been. Moreover, China’s entry into the world market changed the context in which NAFTA operated. The effect of China’s entry into the WTO in 2001 was that China’s trade with the United States increased roughly twenty-fold, and thus indirectly limited the expected job growth in Mexico.
The United States as Central Node
The United States has always been the linchpin of NAFTA, the indisputable juggernaut of the agreement. NAFTA has faced few challenges involving the Canadian-Mexican relationship; most disputes have concerned each country’s relationship with the United States. Those relationships are by nature asymmetrical. So, for example, while Mexicans and Canadians have had to move closer to U.S. borders to benefit from the industries that emerged after the trade agreement, Americans have not needed to relocate for the same reasons.
Canada has a material interest to preserve NAFTA, as nearly 2 million Canadian jobs, especially car manufacturers in Ontario, depend on exports to the United States. NAFTA has also resulted in an increase in Canadian crude oil to the United States. In the first years of the agreement (1993 to 2000), Canada’s economic dependence on exports increased from 29 percent to 44 percent of GDP, but since the Great Recession (2010s) that figure has stabilized back to around 30 percent. As a larger economy, the export dependence of the United States is only a little more than 10 percent of GDP, which has barely increased since the passage of NAFTA. NAFTA has been linked to job losses in the Canadian manufacturing sector, as Mexican assembly line worker wages ($8) are half the minimum wage in Ontario ($15). Car production in Mexico increased twelvefold from 1994 to 2016, while remaining stagnant in Canada and the United States. On the other hand, automation has been another major cause of job elimination, especially in the automobile sector. Selected Canadian industries like lumber, media, and dairy farming have been clamoring for continued protection even under NAFTA. But, on balance, the developed country profile of Canada attenuates some of its vulnerability to U.S. trade demands.
The story is somewhat different for Mexico. Mexico’s middle class has grown since 1994, and Mexican wages have grown—but not by nearly as much as American wages have. Mexico’s industrial landscape has changed in the years since NAFTA. Mexico, alone among Latin American economies, is no longer dependent on primary exports. Though several American auto companies opened factories in Mexico (clustered in northern Mexico next to the U.S. border to allow for lower shipping costs), the wages for Mexican autoworkers are significantly lower than they were for American autoworkers. The abundant availability of workers from the south and central parts of Mexico have not allowed trade unions to take hold, and the weaker working class mobilization allows for the continued payment of low wages to Mexican manufacturing workers. In addition, there have been limits to industrial upgrading in the Mexican economy. Though improving university training of industrial engineers has increased the supply of such high-skilled workers and the former Mexican President Felipe Calderon had promised the creation of 130,000 engineering jobs in 2012, many of these trained engineers remain unemployed and are still searching for work in their chosen field.
Mexico’s agricultural industries have suffered in some areas and grown rapidly in others. For instance, avocado sales have grown significantly under NAFTA. In contrast, Mexico’s corn producers were especially hard-hit by the open market, because they were forced to compete with heavily subsidized American farmers without similar support from their home country. Notably, many of the undocumented migrants who leave Mexico to work in U.S. agriculture are working on farms that grow similar products as the farms that used to exist in Mexico pre-NAFTA. American farms continue to rely heavily on undocumented workers from Mexico to keep their costs lower, and in previous years U.S. farmers have served as one of the most powerful lobbying groups for more relaxed immigration policies to protect their pipeline of cheap labor. The agriculture employment crisis in Mexico was expected, but the jobs that were supposed to absorb displaced labor went to China.
The superior position of the United States with respect to Mexico is underscored by the fact that Mexico has enforced contracts protecting American investors very well, in order to encourage more FDI from U.S. companies, but the United States has been unwilling to make major infrastructure investments in Mexico or to help Mexico enforce environmental regulations that were part of NAFTA. Corporate and economic interests in both countries have trumped environmental considerations. From 1985 to 1999, solid waste production in Mexico grew by 108 percent, water pollution by 29 percent and urban air pollution by 97 percent.
For the United States, the results from NAFTA are much less clear. The consensus is that while some jobs have disappeared due to NAFTA, others have been created by the possibility of new exports and profits. The political problem with this argument is that even if there is a net increase in jobs due to the agreement, job gains and losses will not be distributed equally by region or sector. Certainly, Texas has benefitted much more from NAFTA than has Minnesota, and the auto industry’s profits (if not employment) are in much better shape thanks to the agreement, while the textiles and furniture sectors have been decimated. (China, however, has played a much larger role in displacing workers in these two sectors.)
The future of NAFTA, and more importantly the future of the global trade regime itself, is far from clear. Both rely fundamentally on the willing U.S. provision of dollars, multilateral trade institutions and a military network (an important and understudied component of NAFTA). The Mexican President Enrique Peña Nieto has merely stated that Mexico is open to negotiating the terms of the deal to make the North America region more “competitive.” Mexico needs the deal more than Canada does, which might explain why the U.S. talks with Mexico were wrapped up so quickly (aside from the political expediency of getting a deal done before Andres Manuel Lopez Obrador gets to power).
In Canada, the Liberal Party government under Justin Trudeau faces federal elections next year, and will not want to make too many self-defeating concessions. For instance, Canada wants to maintain its vital culture and dairy industry as well as Article 19, which preserves the bilateral panels to resolve trade disputes between Canada and the United States. On the other hand, going home without a deal could also backfire for Trudeau, as the Trump Administration might use the Canadian intransigence as excuse to further escalate punitive tariffs on Canadian products, thus further undermining the spirit of NAFTA. In the United States, the job trajectory of U.S. workers is unlikely to be much improved with the new deal, given the continued relevance of more important factors like automation or the growing market power of quasi-monopolist firms paying low wages. As such, renewed political attacks against NAFTA will re-emerge even if Trump will miraculously agree to a new NAFTA deal.
Once the nationalist spirit has been unleashed it is hard to contain it. There is an escalating logic to a trade war that can expose the fundamental fragility of the liberal international order. The success of international trade deals relies on the liberal market orientation of political leaders and on mutual trust far more than it does on money or material resources. A loss of economic resources can be compensated by the passage of time and finding new avenues to generate growth, but once trust is gone a spiral of trade war escalation will follow, as happened in the 1930s and 1940s.
Furthermore, increasing discord in the North American hemisphere could allow China to fill the gap by reinforcing trade and political ties with Mexico and Canada. Mexico still directs 74 percent of its exports to the United States, and only 1.9 percent to China, but for imports there is a greater balance with 49 percent from the United States and 17 percent from China. For Canada’s exports, 74 percent goes to the United States, and 4.5 percent to China, while for imports 53 percent come from the United States and 12 percent from China. These Chinese trade figures can only be expected to grow as China’s economic weight is increasing.
When former U.S. President Barack Obama pushed for the negotiation of the Trans-Pacific Partnership, he did not emphasize the point that the deal would benefit the American worker. Rather, he argued that the TPP, a wide-ranging trade deal that includes countries like Australia, New Zealand, Chile, Japan, Malaysia, Singapore and Vietnam, would allow the United States to craft the rules of multilateral trade as opposed to China. The Trump Administration’s withdrawal from the TPP and the businessman’s preference for cutting bilateral (as opposed to multilateral) trade deals implies a political vacuum in international trade relations that China is already filling with its own set of institutions like the Asian Infrastructure Investment Bank (AIIB) and its foreign investment program, One Belt One Road. As a result, we can expect that China is observing the current trade discord in North America with great interest.