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Free Trade 101: Breaking Down NAFTA

April 6, 2018
Refreshing the 24-year-old agreement requires unraveling a complex web of politics and economics

By: Dawson Bell

By one straightforward measurement, the North American Free Trade Agreement (NAFTA) has been an unequivocal success. The threeparty deal between the United States, Canada and Mexico — which removed tariffs on most cross-border commerce and aimed to create a continental trading bloc capable of competing with the European Union — has led to increased trade. Since its inception in 1994, goods sold across NAFTA borders have tripled, to the tune of more than $1 trillion annually.

Michigan companies have been major beneficiaries. The Michigan Economic Development Corp. (MEDC) estimates that, in 2016, firms based here earned $23.5 billion exporting to Canada and $12 billion to Mexico, making them Michigan’s No. 1 and No. 2 trading partners respectively. But trade deals are not only about trade. They are also about jobs (complicated) and politics (confusing) and notions like national sovereignty (unmeasurable).

Recall that as the original NAFTA was being negotiated and ratified, independent presidential candidate Ross Perot famously predicted the trade deal would result in a “giant sucking sound” of U.S. jobs leaving for Mexico. When newly-elected President Bill Clinton signed the final NAFTA a year later, he said he did so only because it would mean “good-paying American jobs.” Twenty-four years later, it is not far-fetched to say they were both right.

U.S. employment in sectors like manufacturing, which is critically important to Michigan, has declined overall in the NAFTA era. But manufacturing jobs rose in the immediate post-NAFTA period, and only reached their nadir in the wake of the international financial crisis in 2007-08.

Automotive-related employment has grown by more than 300,000 jobs since then. Currently, the MEDC reports 122,920 Michigan jobs rely on exports to Canada, more than half of them automotive-related. And a series of independent economic analyses attribute most of the decline in U.S. manufacturing to unrelated factors, like increased automation.

Meanwhile, the overall unemployment rate in Michigan and the United States is lower now than it was in 1994. At the heart of the jobs debate is a Catch-22 that affl icts the case for free trade. As described by University of Michigan economist and trade expert Alan Deardorff: “The benefi ts of trade are huge. But they tend to be spread out across the entire population (in the form of increased overall prosperity and consumer buying power).”

The costs of trade are concentrated more on those who lose jobs when U.S.-based manufacturers shift operations to lower wage countries like Mexico, Deardorff said.

For them, “trade is very personal. They feel it viscerally,” said Daniel Ujczo, an international trade attorney with Detroitbased law fi rm Dickinson Wright.

Ujczo has spent much of the last year working to defend the underlying framework of NAFTA, and rallying clients and other stakeholders to understand the challenge it faces. That’s where the politics — and a good deal of confusion — come in. For most of the last half century in American politics, Republicans generally embraced open markets while Democrats ranged from wary to hostile. President Trump is not a conventional Republican. During the 2016 campaign, Trump decried NAFTA as “the worst trade deal maybe ever.”

While there is some speculation the president’s vow to withdraw from NAFTA is more negotiating tactic than credible threat, Ujczo and others believe the potential for talks to collapse is real. Trump’s position on NAFTA has been relatively clear and longstanding. And, Ujczo notes, opposition to NAFTA was not incidental to Trump’s election victory in key Midwestern states, including Michigan.

The task for NAFTA supporters is to persuade the president, and those who voted for him, that robust trade between the United States, Canada and Mexico is not incompatible with putting American interests fi rst. That case can be made, said economist Bill Anderson, director of the Cross-Border Institute at the University of Windsor. One needs to merely point to the daily traffi c across the Detroit-Windsor Ambassador Bridge, where hundreds of trucks ferry car parts in both directions in a virtually integrated cross-border manufacturing marketplace, Anderson said.

Douglas George, a veteran Canadian trade negotiator who currently serves as that country’s consul general in Detroit, said free trade agreements have always faced political resistance. The precursors to NAFTA, bilateral deals between the United States and Canada dating back to the 1960s, were enacted over stiff political opposition, he said.

Free trade agreements are complex, he said, balancing multiple interests from each participating country. But on balance, NAFTA has been a boon to Canada, Mexico and the United States.
“Ending NAFTA would be bad for all three countries … an economic disaster,” George said.