Student Blog — Alexander Stephenson | Trump vs. NAFTA

The United States is facing a political climate unlike anything it has seen in recent memory northamericadue to the recent election of American businessman Donald Trump as the next president. The Trump administration will usher in a new era of American politics and bring with it policies that Washington D.C. might find radical and hard to stomach. Throughout the election, controversy over free trade and the North American Free Trade Agreement (NAFTA) rose to new heights.  America has recently endured one of the most tumultuous economic periods since the Great Depression. Citizens are passionate about maintaining growth and keeping American employment numbers climbing. President-elect Trump feels that the United States’s involvement in NAFTA is a ‘bad deal,’ because it is reducing the number of American jobs by making it possible for citizens to get their goods for less through Canadian and Mexican outlets. This paper will:  1) examine Trump’s controversial NAFTA policies and protectionist attitude; 2) inform readers on the institutional roots of American trade policy; 3) define the origin of NAFTA and why it was formed; 4) create an understanding of why free trade is so controversial; and 5) explain the possible effects to the U.S. economy and global market if NAFTA falls apart. First, the paper will discuss Trump’s current policy and how it compares to Ross Perot’s in 1992, to show similarities between the two.

President-elect Donald Trump has not gone into much detail about the specifics of his policies regarding the North American Free Trade Agreement, which is surprising considering how much controversy he stirred up on this subject during his campaign. The fact sheet on Donald Trump’s presidential website contains only two lines discussing NAFTA which state, “NAFTA will be renegotiated to get a better deal for American workers. If our partners do not agree to a renegotiation, America will withdraw from the deal” (Donald J. Trump. 2016). For such a big and important statement one would assume that there would be some concrete evidence or reason for such a claim, but there is not. On the other hand, the possibility of withdrawing has stirred up a lot of controversy and debate about whether or not the agreement is beneficial for the United States. Trump’s views on NAFTA as a presidential candidate strikes comparisons to Dallas businessman and former presidential candidate Ross Perot. During the 1992 presidential election campaign, third party candidate Ross Perot opposed the idea of NAFTA and famously described it as a “giant sucking sound” in the 1992 Presidential Debate. Perot was worried that too many American businesses would send work south of the border for cheaper production. Today Donald Trump expresses these same concerns. To address Perot’s 1992 concerns Gary Hufbauer, a Senior Fellow at the Princeton Institute for International Economics, stated in a New York Times article that Ross Perot was wrong about NAFTA sucking away jobs. He then clarified that between 1994 and 2000, the United States annually created two million jobs (Hufbauer 2013). A classic example of mythical job loss is in the automotive industry. Those of the public who believe many American automotive companies are having cars totally made in Mexico are wrong. Final assembly may happen across the border in some cases, but an average car has about 30,000 different parts and skilled technicians here are needed to engineer many sections of a car such as engines and transmissions. These sections are then shipped, already assembled, to a plant for final assembly, some of which happens in Mexico. It is important to have a full-scale picture of the process to be able to critique it. It is equally important to comprehend the reasons America decided to join NAFTA to be able to critique the action.

In order to understand why the United States agreed to join NAFTA, it is necessary to be informed on the institutional roots of America’s trade policy. In chapter 24 of International Political Economy, authors Michael Bailey, Judith Goldstein, and Barry R. Weingast explain the United States’s transition from a protectionist state to one which embraces free trade. Before President Franklin D. Roosevelt and the Democrats took control of Congress and the White House, U.S. trade policy was protectionist and partisan. Republicans were famous for raising tariffs to discourage foreign imports and/or exports. The highlight of this notion was in 1930 during the midst of the Great depression with the infamous Smoot-Hawley Tariff Act (Bailey; Goldstein; Wengast. 2010).  The Act raised tariff rates to a record 48 percent and, according to many, prolonged the Great Depression and contributed to the breakout of World War II (Bilaam; Dillman. 2014). Shortly after the Democratic Party and FDR took control of Washington, they passed the Reciprocal Trade Agreements Act (RTAA) of 1934. Bailey, Goldstein and Weingast shed light on the RTAA and explain that it allowed Congress to “delegate authority to the executive branch to reduce tariffs through reciprocal trade agreements with other countries.” So not only did this legislation create an institutional change in U.S. trade policy, but it also engendered greater bipartisan support for free trade (Bailey; Goldstein; Weingast. 2010). With Donald Trump winning the presidency and Republicans maintaining control of Congress, it is possible that the United States will revert to being a protectionist nation. To some, this might seem like the country would be taking a step back in free trade, to others a necessary step forward to protecting American jobs. This question was likely discussed at the conception of NAFTA as well, and as history shows us, free trade won the argument.

In 1991, United States President George H.W. Bush, Mexican President Carlos Salinas, and Canadian Prime Minister Brian Mulroney began negotiations for the North American Free Trade Agreement (NAFTA Now. 2016). The United States, Mexico and Canada eventually signed the treaty in 1992; however, it did not take effect until 1994 and remains controversial as to how much the members benefit (Balaam; Dillman. 2014). As a “state-of-the-art free trade agreement,” the treaty successfully opened markets between the regional powers allowing an environment beneficial to long-term investing to exist between the three countries. NAFTA has been eliminating tariff and nontariff barriers to trade and investment since it took effect. According to NAFTA’s website the agreement “sets the rules for international trade and investment” between the three member states. Highlights of the treaty address the following: market access for goods, protection for foreign investments, protection for intellectual property, easier access for business travelers, access for government procurement, rules of origin, side agreements, commitment to the environment, and commitment to labor cooperation. Specifics pertaining to these highlights can be found within the agreement’s eight sections and twenty-two chapters (NAFTA Now. 2016). Hearing these highlights might elicit questions that call into light the opposition view: why is free trade considered a ‘bad deal’ as stated by the President-elect.

Since free trade was established there have always been controversies which question the benefits of the liberal policy. It is, however, important to understand what the policy of free trade is before one can comprehend its controversies. The official definition of Free Trade in Introduction to International Political Economy is as follows: “It is one of the most popular policies advocated by economic liberals. In keeping with the laissez-faire notion that government intervention in the economy undermines efficiency and overall wealth, free trade removes protectionist measures, such as tariffs, that are designed to insulate domestic producers from international competition. It has been a major goal of most international trade institutions since 1947” (Balaam; Dillman. 2014). According to Cletus C. Coughlin in International Political Economy, most economists believe that free trade is the best policy; however, there are those of the general public who believe that free trade is not beneficial and is controversial (Coughlin. 2010). Coughlin clarifies that low income industrial workers are likely to support trade restrictions because it can improve the job environment and creates job protection. Scheve and Slaughter did a recent study explaining that the lower the skill levels of a worker, the stronger his or her support for new trade barriers. They were able to measure the worker’s skill levels by examining education levels and average occupational earnings. Coughlin explains that the public, or non-economists, struggles to understand the benefits of free trade from a broad-based gain aspect. NAFTA even recognizes the questions surrounding free trade and its own policies which is why it addresses these ‘myths vs. realities’ on its website. For example, one of the myths surrounding NAFTA is that the treaty has resulted in the loss of jobs for the three member states, when in reality total employment has grown by over 40 million jobs since 1993 (NAFTA Now. 2016). One can argue, however, that this does not tell the whole story or provide a breakdown on who is benefiting the most. One can also make the argument that advancements in technology have taken more jobs away, especially with regard to industrial workers. These facts might persuade one to be in favor of any action that claims it will bring jobs back to America, even if they do not fully understand the reparations that would cause in the American economy and the global trade market.

One of biggest questions surrounding NAFTA and the U.S. economy is whether or not it has helped create or diminish jobs in the U.S. In 2014, an article from the Wharton School at the University of Pennsylvania examined whether or not NAFTA’s benefits outweigh the costs. Two of the main arguments proposed in the article about jobs and NAFTA were conducted by Robert Scott, chief economist at the left leaning Economic Policy Institute in Washington D.C., and by management professor, Mauro Guillen, from Wharton. Robert Scott argues that “By 2010, trade deficits with Mexico had eliminated 682,900 U.S. jobs, mostly (60.8 %) in manufacturing.” Mauro Guillen argues that what those like Robert Scott fail to recognize is “that without NAFTA, many jobs that were lost over this period would probably have gone to China or elsewhere.” Walter Kemmsies, chief economist at Moffatt Nichol, an international infrastructure consultancy, also weighs in and points out that roughly 40 percent of what the United States imports from Mexico is derived from U.S. sources (the Wharton School. 2014). It is also important to note that since its creation, NAFTA has helped create a rise in U.S. manufacturing output. According to NAFTA, between 1993 and 2008 the U.S. experienced a 62 percent rise in output compared to just 42 percent between 1980 and 1993 (NAFTA Now. 2012).

Now that Donald Trump will indeed be the next President of the United States, controversy and speculation about NAFTA is higher than ever. Many American businesses are now anxiously awaiting Trump’s decision on NAFTA. Whether the President-elect can negotiate a new deal with Mexico or kills the whole agreement is causing great concern. In the scenario that the U.S. leaves NAFTA, how does that decision affect the US economy and the global market? According to an article written by Tami Luhby in CNN Money, the United States “has not withdrawn from a trade agreement since 1866,” (Luhby. 2016) which ultimately implies that abandoning NAFTA leads to navigating in uncharted waters. As the world’s resident hegemon, the U.S. can cause international havoc by setting a precedent for reducing free trade and promoting protectionist policies. By advancing protectionist policies, Trump would be opening the door for China to become more dominant in the global trade market resulting in U.S. jobs ultimately flowing across the Pacific. Compounding the problem is that China, as a global economic power, is not just an economic concern for the U.S., but also a national security concern as well. If withdrawing from NAFTA becomes a precursor to not signing the Trans-Pacific Partnership (TPP), thereby reducing access to freer trade in Asia, the U.S. risks losing its spot as a regional power and creates a window of opportunity for China to play a more dominant role. Though there remains a lot of economic instability in China, it is still too risky for the United States and the rest of the global market for the U.S. to diminish the important role it plays in maintaining regional security and freedom of the seas.

President-elect Trump has a daunting task ahead of him: to change American free trade policies. The notion that NAFTA has taken jobs away from the United States is not entirely true; it does not show the full picture of the situation. Both Gary Hufbauer and Walter Kemmsies give evidence that shows NAFTA doesn’t have great effect on the loss of American jobs. Specifically, Hufbauer states that between 1994 and 2000, the United States annually created two million new jobs. Kemmsies articulates that roughly 40 percent of what the United States imports from Mexico is derived from US sources. The free trade policies laid out by the NAFTA treaty are multifaceted, and like other complex relationships it has points that can be argued in support and in opposition of the overall concept. President-elect Trump has not clearly explained what terms he would like NAFTA to renegotiate, or how serious he is regarding his threat to back out of the agreement. One thing is for sure — this will not be the only policy that the new president and his administration are going to try to re-work, and the American people have a responsibility to stay informed and hold President-elect Trump accountable.

alexstephensonAlexander Stephenson transferred to SMU in 2015 to major in political science. In 2012 he took a gap year to work in Opposition Research at the Republican National Committee (RNC) for the Mitt Romney Presidential Campaign. He has interned at the George W. Bush Institute and spent his sophomore and junior years of high school studying abroad in Portugal while his father was serving there as the United States Ambassador.