Protection or prosperity?
President Donald Trump has vowed to renegotiate NAFTA, which he calls “a disaster.” But before he tears up the trade deal and walls America off from the world with a man-made mountain of tariffs, let’s take a moment to take stock of why NAFTA was created, what it has achieved and what the U.S., North America and the world might look like after NAFTA is gone.
President Ronald Reagan sketched the outlines of NAFTA in 1979. The idea of a free-trade zone stretching from the Yukon to the Yucatan was so important to Reagan that he made it a central feature of the speech announcing his presidential candidacy. Noting how “We live on a continent whose three countries possess the assets to make it the strongest, most prosperous and self-sufficient area on earth,” Reagan proposed what he called “a North American accord” to allow the “peoples and commerce” of the United States, Mexico and Canada to “flow more freely across their present borders.” Reagan believed such an accord “would serve notice on friend and foe alike that we were prepared for a long haul, looking outward again and confident of our future”—and that a U.S.-Mexico-Canada alliance of free trade and free enterprise would unleash an economic potential beyond which “any of them, strong as they are, could accomplish in the absence of such cooperation.”
Building on the foundation laid by Reagan, Presidents George H.W. Bush, Bill Clinton and George W. Bush all enthusiastically supported NAFTA.
Regrettably, the two most recent occupants of the White House do not share what had been a consensus view about NAFTA in particular and free trade in general. During his campaign, Trump declared NAFTA “the worst trade deal maybe ever signed anywhere, but certainly ever signed in this country.” His inaugural address suggested that trade deals have “enriched foreign industry at the expense of American industry.” Once in office, Trump withdrew the U.S. from the Trans-Pacific Partnership, underscoring this wasn’t mere rhetoric. Trump has threatened punitive tariffs—up to 25 percent for Mexico and 45 percent for China. A White House spokesman says tariffs will be imposed “when a company that’s in the U.S. moves to a place, whether it’s Canada or Mexico or any other country seeking to put U.S. workers at a disadvantage.”
In short, Trump is sketching the outlines of an America that has turned away from free trade and toward autarky, an America focused on itself in a zero-sum world.
Although his hagiographers would never admit it, President Barack Obama’s views on NAFTA are far closer to Trump’s than to the Reagan-Bush-Clinton-Bush consensus: What Trump calls “a disaster” Obama called “an enormous problem.” As a candidate, Obama said, “There’s no doubt that NAFTA needs to be amended,” adding, “We can’t keep passing unfair trade deals like NAFTA that put special interests over workers’ interests.” Sounding positively Trumpian, Obama concluded, “Decades of trade deals like NAFTA and China [sic] have been signed with plenty of protections for corporations and their profits, but none of our environment or our workers, who've seen factories shut their doors and millions of jobs disappear.”
As president, Obama didn’t view trade as a priority. Consider that trade agreements with South Korea, Panama and Colombia—all hammered out by Bush 43—hung in limbo for almost three years before Obama finally limped them across the finish line.
Moreover, Obama spent much of his presidency blocking extension of the Keystone XL pipeline. This made-for-NAFTA/made-by-NAFTA project would solidify dependable markets for Canada’s oil-sands fields, ensure dependable supplies for American consumers, strengthen distribution channels in the U.S. and bring North America one step closer to becoming the world’s energy superpower. Before scoffing at this, consider that: tens of billions of barrels of oil have been discovered in the U.S. and Canadian Arctic, North Dakota, Montana and the Gulf of Mexico; oil-shale deposits in Colorado, Utah and Wyoming “contain up to 3 trillion barrels of oil, half of which may be recoverable,” according to GAO studies; Utah holds 12-19 billion barrels in the form of oilsands deposits; Alberta holds 166 billion barrels in the form of oilsands; Mexico holds some 87 billion barrels of crude; and Mexico’s decision to open its state-dominated energy sector to private investment could double annual oil outputs.
In short, what Reagan predicted decades ago—that North American trade would “improve national security through energy sharing”—could soon come to fruition.
Yet NAFTA’s benefits are far more tangible than what might happen with enhanced energy cooperation: This “enormous problem,” this “disaster” otherwise known as NAFTA, generates total trade flows of some $1.1 trillion (up 250 percent since 1993, the year prior to NAFTA). U.S. manufacturing exports to NAFTA are up 258 percent from 1993; by 2011, U.S. imports from NAFTA were up 270 percent from 1993. Since NAFTA came into force, the NAFTA-zone economy has more than doubled; merchandise trade among the NAFTA trio has tripled. In the 15 years immediately after NAFTA came into force, U.S. manufacturing output increased 62 percent (or 4.1 percent annually), compared with 42 percent (or 3.2 percent annually) in the 13 years before it came into force. U.S.-Mexico trade increased by 506 percent between 1993 and 2012, and U.S.-Canada trade by 186 percent. Trade with Canada and Mexico supports at least 15 million U.S. jobs (9 million with Canada; 6 million with Mexico).
Trade War I
We don’t have to imagine what a post-NAFTA, post-open trade world might look like. All we need to do is glance back at what the world looked like during eras of protectionism.
“Protection will lead to great prosperity and strength,” Trump promises.
This is false. A trade war harms all, as history shows, and “protects” no one. The greatest danger is a repeat of the trade war launched by the United States in 1930, which deepened and lengthened the Great Depression by causing a “trade collapse.” It also paved the way for the economic devastation that contributed to the outbreak of world war.
The spark was the anti-trade Smoot-Hawley Act of 1930, which raised U.S. tariffs to their highest level since 1828, obliging other nations to respond in kind.
It pays to recall that Smoot-Hawley actually began small and snowballed. Initially, the idea was to increase tariffs to protect U.S. farmers. But it mutated into the snowball from hell. As it moved through Congress, the political game became “if you support my tariff, I’ll support yours”—until 890 tariffs were raised.
The stupidity was obvious. A petition signed by 1,028 economists demanded a veto by President Herbert Hoover. Thomas Lamont, the most influential banker of his day, reported that he “almost went down on my knees to beg Herbert Hoover to veto the asinine Hawley-Smoot Tariff.”
But reason didn’t prevail. Canada quickly responded. Prime Minister Mackenzie King raised tariffs on products that composed 30 percent of U.S. exports to Canada. Opposition Leader R.B. Bennett demanded more, then won the 1930 election, boosted tariffs and pushed Canada into the Great Depression.
The result was disastrous. World trade fell by 66 percent from 1929 to 1934; U.S. exports and imports to and from Europe each also fell by about two-thirds; and like some Greek tragedy, each attempt at “protection” exacerbated the injury. Indeed, the Depression worsened for farmers and workers, the supposed beneficiaries of the tariffs.
The results would be worse today. At the time of Smoot-Hawley, international trade equaled only a few percentage points of GDP; in 2014, according to the World Bank, U.S. imports and exports together equal 30 percent of U.S. GDP. Canada would be even harder hit. Canadian imports and exports equal 60 percent of GDP, about the world average.
A trade war would devastate jobs, as exports nosedive. Prices would soar, as tariffs add to import costs. The poor would be particularly hard hit because the poor—unlike the wealthy—cannot adjust to or account for rapid spikes in the cost of living. Throwing up trade barriers also would likely drive many middle-class families into poverty.
As an unwelcome bonus, it would also stymie economic activity in general. Economic malaise metastasizes behind trade barriers. For example, in much of the post-World War II period, the U.S. auto industry effectively had an oligopoly on U.S. sales. Comfortable behind trade barriers, management and labor—with exorbitant wages and efficiency-killing work rules—got fat and lazy. Quality plummeted and prices soared. The U.S. (and Canada) became lands of over-priced clunkers hot off the assembly line. Quality began to improve and prices became competitive only after freer trade took hold.
Trade War 2.0?
We fool ourselves if we think that trade wars can’t happen again—or that cooler heads overseas will prevail as America goes through another protectionist phase. In fact, world leaders are already girding themselves for a trade war no one wants.
German Vice-Chancellor Sigmar Gabriel says Germany and the EU must be ready “to defend our interests.”
Mexican President Enrique Peña Nieto warns, “Sovereignty, national interest and protection of Mexicans, will guide relations with the new government of the United States.” In response to Trump’s NAFTA plans, Mexican officials have vowed that, if Washington presses for “something that is less than what we already have,” Mexico will withdraw completely from the pact.
Canadian financial experts are trying to factor in a “Trump risk” in real estate, trade and currency.
The Global Times (the Chinese Communist Party’s mouthpiece) declares, “The Trump administration will be igniting many ‘fires’ on its front door and around the world. Let’s wait and see when it will be China’s turn.”
If there is reassuring news amidst all these worrisome words, it’s that Trump’s cabinet includes a number of thoughtful statesmen and proven leaders. Let us hope they can contain and ultimately extinguish the fires of a 21st-century trade war.