Bridgewater Review Volume 37 | Issue 1 Article 5 Apr-2018 NAFTA, Globalization and Free Trade: Can the U.S. Maintain Leadership in the World Economy? Elmore R. Alexander Bridgewater State University, [email protected] Recommended Citation Alexander, Elmore R. (2018). NAFTA, Globalization and Free Trade: Can the U.S. Maintain Leadership in the World Economy?. Bridgewater Review, 37(1), 11-15. Available at: http://vc.bridgew.edu/br_rev/vol37/iss1/5 This item is available as part of Virtual Commons, the open-access institutional repository of Bridgewater State University, Bridgewater, Massachusetts. Nevertheless, international trade is NAFTA, Globalization and Free constantly attacked—every candidate (Republican and Democratic) in the Trade: Can the U.S. Maintain recent presidential election questioned trade policies. The most vocifer­ Leadership in the World Economy? ous attacks came from now President Donald Trump, who labeled the North Elmore R. Alexander American Free Trade Agreement uring election season in 2002, in an MBA (NAFTA) the worst trade agreement ever negotiated. course on global management I was teaching Can we reconcile the positive effects of Dat Philadelphia University, I identified trade since World War II with current competitive U.S. congressional races where the issue sentiments in America? More impor­ tantly, are we headed toward a sort of of globalization was relevant. The students then protectionism comparable to that expe­ focused on these races to develop comprehensive rienced during the Great Depression? analyses of the candidates’ positions and understanding The Rise of of globalization. The results were telling: the Anti-Globalization candidates who were judged by the students to Nationalist sentiment is on the rise. understand globalization best lost every single race. The shock of the United Kingdom’s June 2016 “Brexit” vote was fol­ This is the quandary of globalization— refuse to pay more for a U.S. product.1 lowed by Donald Trump’s election it involves complex issues that neither In reality, international trade has been a on a populist­nationalist agenda. The political leaders nor the general public positive force since World War II. Trade trend continued across Europe from completely understand. While 70 per­ has expanded, global living standards the Czech Republic to Hungary, cent of Americans think it is important have improved dramatically, and mil­ Poland and Rumania. While there have to buy US products, 37 percent would lions world­wide have escaped poverty.2 been recalibrations with Emmanuel April 2018 11 Macron’s May 2017 defeat of right­ United States experienced its first pro­ Businesses and members of the skilled wing populist Marine Le Pen in France ductivity decline since 1982, which has workforce have typically benefited; in and the victory of Angela Merkel’s created an economic recovery without contrast, lower­skilled workers have centrist Christian Democratic Union in wage growth.4 The final dynamic to typically been hurt. In reality, a sub­ Germany, Merkel is still struggling to consider is the decline in global trade. stantial proportion of the job losses are form a stable government, and nation­ Global trade hit its apex in 2008. U.S. attributable to automation as opposed alistic rhetoric has not disappeared. It is trade actually declined $500 billion to trade. Nevertheless, only 35 per­ important to understand the underlying in 2016.5` Growth is occurring only in cent of workers think that the U.S. has dynamics of the movement as well as restricted industrial and geographic benefited from globalization while 55 the experience of workers in the cur­ sectors. In 1975, 109 firms accounted percent believe that we have lost.9 Given rent economy. for one­half of U.S. profits. By 2015, these trends and the experience of the workforce, the rise of nationalist senti­ ment is not surprising. U.S. agriculture depends heavily The Current State of U.S. Trade Policy on agricultural exports to Mexico Upon taking office, President Trump withdrew from the Trans­Pacific ($18B) and Canada ($23B). If Partnership (TPP) negotiations, a NAFTA were to expire, tariffs on proposed trade agreement that would have linked the U.S. economy to 12 agricultural products (currently countries in the Asia­Pacific region and North America. Next, he began at zero) would jump dramatically renegotiating NAFTA and threaten­ ing action on numerous bilateral fronts and bring devastation to from Korea to China. The President’s rhetoric has been loud and aggressive, midwestern farmers. especially as it has concerned NAFTA. Indeed, NAFTA has been controver­ sial in North America, ever since it was signed with Canada and Mexico Underlying Dynamics that number had fallen to 30. In 2015, 75 percent of U.S. venture capital went in 1993. The agreement consists of six There are three underlying dynamics to just four metropolitan areas—New basic provisions: a) the elimination that must be considered. The first of York City, Boston, Los Angeles and San of duties and tariffs for goods traded these involves recent declines in popu- Francisco.6 Today, American companies between the three countries; b) the lation growth rates. The post­World seem to be more risk averse, choosing protection of the foreign direct invest­ War II period saw dramatic population to redistribute capital to shareholders ment of the three countries; c) the growth creating a young demographic. rather than investing in growth. protection of intellectual property; d) Recently, growth rates have declined in ensuring ease of movement for business the developed world, resulting in an The Experience of travelers; e) mechanisms for independ­ older demographic. Japan and China the Workforce ent resolution of trade disputes; and f) face the toughest challenges, but nine freer access to government procure­ In addition, the American workforce of the 56 largest countries are already ment for suppliers from each coun­ is undergoing significant change. dangerously older.3 The second try.10 The details are complicated and Manufacturing employment fell by dy namic is equally important: there controversial. With the exception of between six and seven million jobs in has been stagnation in worker produc- the provisions for dispute resolution the 2000s. The average income for the tivity. Productivity growth surged and the definition of what constitutes a bottom 90 percent of families has been during the “dot com” bubble. NAFTA­compliant product, however, stagnant since 1980, and wage growth However, since 2007, productivity the disputes that have emerged among has been one­half the rate of produc­ growth has been just one­half of that the partners since 1993 have focused tivity growth.7 Much of this has been experienced since 1945. In 2016, the more on outcomes than on the specific blamed on international trade. Clearly, provisions of the agreement. there are winners and losers from trade.8 12 Bridgewater Review Why is NAFTA so significant? NAFTA the U.S. labor force, a miniscule num­ NAFTA: The Negotiations combined two developed economies ber when compared to recent monthly The initial NAFTA renegotiation with a developing one (a first in mod­ job growth of approximately 150,000 process in the spring and summer of ern trade history). More concretely, it jobs. Furthermore, U.S. states with a 2017 was very positive. Congressional encompasses fully one quarter of global higher proportion of NAFTA trade hearings were held soliciting input trade.11 Interestingly, most NAFTA have a higher involvement in advanced from a wide variety of interest groups. trade is focused on “intermediate manufacturing, and the jobs created Seasoned trade professionals who had goods” (components that make up by NAFTA pay 15 to 20 percent more been a part of the original NAFTA parts of finished goods). For example, than the jobs that were lost.15 negotiations were appointed to han­ automotive components cross U.S.­ Has NAFTA increased trade deficits? dle the talks. The announced objec­ Canadian and U.S.­Mexican borders First, there is not a deficit with Canada. tives were thoughtful and moderate, approximately eight times before a The exact number varies from slightly and reflected the interests of both completed car reaches a U.S. show­ positive to slightly negative from year Republicans and Democrats.18 They room.12 This illustrates the economic concept of “comparative advantage.” to year. With Mexico, trade has moved focus on four goals: a) higher­paying Each country specializes in what it does from a surplus of $1.7 billion before the U.S. jobs; b) growing the U.S. econ­ best, yielding a higher­quality and less­ agreement took effect to a deficit of omy; c) reducing the trade deficit; and expensive product and raising the Gross $61.2 billion in 2016.16 The intermedi­ d) trade rule enforcement reform. The Domestic Products of all. The resulting ate trade effect (percentage of imported first negotiation rounds resulted in integrated North American economy is products with U.S. components), how­ agreement on many issues including primed to compete in Asia, Europe and ever, means that that the deficit is closer those involving the environment, tel­ the rest of the world. to $30 billion. While that number may ecommunications, digital trade, small­ seem worrisome, consider the larger and medium­sized businesses, and In the past 25 years, trade among the context keeping in mind that it is only services.19 Even the rhetoric surround­ three NAFTA countries has increased about 5 percent of our overall trade ing the negotiations was positive. threefold—from approximately $300 deficit. Trade deficits do not result from billion in 1993 to $1.1 trillion in 2016.13 Then things became complicated. trade agreements. They are macroeco­ The integration of the three economies In late fall 2017, the U.S. began nomic phenomena caused by low U.S. is dramatic. Forty­five percent of the mak ing untenable demands on the consumer savings and the attractive­ value of U.S.