Category Archives: 2016 presidential campaign

How to Re-Negotiate NAFTA

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The Trump Administration says it is sticking with its core campaign promise to renegotiate NAFTA, which remains unpopular with many Americans even though economists think it has been beneficial. The President said again on April 20 that he will invoke the procedures for renegotiating the trade agreement soon (within “the next two weeks”). After that comes a 90-day consultation period with Congress before actual talks begin. It is worth asking how it could be done right.

Of course Mr. Trump could any day think it over more carefully and abandon the promise, as he (fortunately) has now done with the oft-repeated but inaccurate pledge to name China a currency-manipulator on “day one” of his administration and with so many other promises. For now, however, businesspeople and government officials have little choice but to consider the possibility that the currently stated policy will be in fact be pursued.

Options for Mexico

If the US tries to bully its smaller neighbor, for example to raise tariffs in violation of NAFTA and the WTO, Mexico has some options. It could:

  • Raise tariffs to its old high “bound rates” (without violating NAFTA or the WTO)
  • Buy more corn from Brazil and Argentina instead of the US.
  • Accelerate trade agreements with other countries.
  • Allow the passage of Central American migrants through Mexican territory to the US border, rather than impeding them as it currently does.
  • Curtail cooperation with US law enforcement authorities in areas such as drug crime.
  • Suggest that a re-opening of NAFTA should be accompanied by a re-opening of the 1848 Treaty of Guadeloupe Hidalgo which, at the point of a gun, ceded half of Mexico’s territory to the US, including California and the rest of today’s southwest. Perhaps Anglos who have moved to these territories since then would be asked to present documentation papers to the Mexicans who were there before them. (Well, maybe this option is less practical.)
  • Most worryingly, Mexicans could retaliate against US provocation by electing as president their own nationalist, Andres Manuel Lopez Obrador in 2018.

But if only for the sake of argument, let us take at face value that the Trump Administration may want to renegotiate NAFTA in good faith. Mexico’s leaders, for their part, have taken the position that if renegotiation is what the US wants, then “let’s get on with it already”.

Six ways NAFTA could be improved

It has been 23 years since the three-country trade agreement went into effect. If NAFTA is seriously to be renegotiated, how could it be improved? Consider six ways it could be improved.

  1. Updating for some new issues that did not exist when NAFTA was originally negotiated, such as e-commerce and data localization.
  2. Greater protections for labor, such as guaranteeing throughout the region that workers can form independent unions, banning child labor, and strengthening enforcement against human trafficking.
  3. Greater protections for the environment, such as steps to protect the oceans and provisions to enforce bans on trade in endangered species and illegal logging.
  4. The backing up of environmental and labor provisions by a dispute settlement process and threats of economic penalties that are as serious as those that back up regular mercantile disputes.
  5. Some protection against corporate abuse of Investor-State Dispute Settlement. There should be provision for summary dismissal of frivolous suits, such as when a multi-national corporations challenges a new regulation simply on the grounds that it diminishes their ability to earn profits.
  6. The inclusion of more countries in the agreement. Good candidates would be some in South America, including Peru and Chile, and others in Asia and the Pacific. There are various benefits to a broader multilateral approach.
  • For one thing, even though the Trump Administration has expressed a preference for making bilateral deals (and for targeting bilateral trade balances), it is in fact easier to come up with deals that benefit everyone when more countries are in the deal at the same time. For example, as Trump has found out, US dairy producers want Canada to reduce barriers to US dairy products. But Canada wants Japan to remove barriers to its pork, beef, and wood products, more than it wants anything from the US. A trade agreement that includes Japan and other Asian and Latin American countries is more likely to satisfy the requirement that each member sees clearly what export opportunities are in it for them.
  • For another thing, bringing more countries into the agreement might make it easier for firms to deal with the Rules of Origin that govern various American trade agreements. These are provisions that are written to prevent Americans, for example, from buying tariff-free products that are assembled in Canada or Mexico but derive much of their value-added in Asia or elsewhere. The Rules of Origin are currently so onerous that some US importers reportedly choose simply to dispense with the benefits of NAFTA and the accompanying paperwork and instead to pay the low normal tariff that would apply even without NAFTA.
  • Instead of streamlining the rules of origin for US trade, White House advisor Pater Navarro actually wants to make them more demanding by requiring a higher share of local content in order for a product to qualify for NAFTA duty-free treatment. But this approach is unlikely to be very effective. Rather than responding by raising the local value-added in North American trade, it could lead even more importing firms to dispense with the benefits of NAFTA and choose instead to default to the normal US tariff rate (even if the product includes a lot of imported inputs from outside the region). The average normal rate [“bound rate”] for US tariffs is only 3 ½ per cent. The reason is that the US unlike Mexico had low tariffs even before negotiating NAFTA.

Six ways to improve NAFTA: Updating for new issues, strengthening protections for labor and the environment, improving settlement mechanisms, and including more countries in the agreement…. Is this all pie in the sky? Would it be impossibly difficult to negotiate a new agreement that had every one of these desirable properties? The trade negotiators already did it. It is called the Trans-Pacific Partnership.

[A shorter version of this column appeared at Project Syndicate. Comments can be posted there or at Econbrowser.]

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What Will the Trump Presidency Look Like?

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We unexpectedly find ourselves in uncharted territory, in so many ways. The United States has never before had a president without either political or military experience. And Donald Trump is especially unpredictable: he has so often said things that conflict with other things he has said. So it is hard to know what he will do.

But a possible precedent for what economic policy in the Trump presidency may look like sits in plain sight: the George W. Bush presidency. To be fair, the Bush family clearly did not support Trump’s campaign. But a number of parallels suggest themselves:
• The candidate won the presidency while losing the popular vote.
• The new president nonetheless believes he has a mandate for sweeping change.
• The direction of the change and the results it produces will not necessarily be what those who “voted for change” will like.
• Observers are assuming that Mr. Trump will oppose the Fed’s easy monetary policy, because he attacked it during the campaign; but I predict that when he gets into office he will turn dovish, opposing interest rate increases.
• Of his economic policy proposals, the ones that are most likely to be put into law are big tax cuts for the rich and increased spending on the military and on some other items. The result will probably be the same as when Bush enacted similar fiscal policies: a worsening of the income distribution and huge budget deficits.
• A Trump return to the post-1980 trend of increasing income inequality would follow a temporary reversal of that trend that occurred toward the end of the Obama Administration (by such measures as median family income, real wages, and the poverty rate). This is the same thing that happened in the transition from the Clinton Administration to Bush.
• The new president won’t be able to deliver his 4% GDP growth rate.
• He is unlikely to be able to increase the role of exports in the economy.
• He certainly won’t be able to make good on his promise to bring back the manufacturing jobs that have disappeared since the 1950s.
• Most worrisome of all are possible foreign policy disasters. We should fear miscalculations leading to tragedies (analogous to Bush mistakes regarding the 9/11/2001 terrorist attack, the failure to apprehend Osama bin Laden, and the subsequent invasion of Iraq). A loss of US global leadership is likely, especially loss of “soft power,” in the sense that those who live in other countries have in the past looked to the United States as a leader of the international order and as a model domestically of what they hope their own countries could be like. Finally, Trump’s cluelessness on the international stage will likely embolden some traditional adversaries, such as Russia, Syria, and North Korea.

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Update: More Economists Oppose Trump

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The number of economists having signed a letter opposing the Republican presidential candidate reached 785 the morning before Election Day.  The list of signatories is still open.

To repeat my earlier post, 19 Nobel Laureates endorsed Hillary Clinton. And when the WSJ surveyed all previous members of the President’s Council of Economic Advisers, spanning eight presidential administrations, none, Republican or Democrat, supported Trump.

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