In the countdown to the March 4 primary in Ohio, the North American Free Trade Agreement, that was signed off by the United States, Canada and Mexico almost fourteen years ago, is suddenly in play. Why? Let’s take a look at the facts, the circumstances that are thrusting this landmark trade agreement back into the limelight, the rhetoric and the potential scenarios that could evolve.
A Look at the Facts
The three NAFTA countries have created more jobs and grown more rapidly since NAFTA was signed than in the preceding years. From 1994 to 2006, the Canadian economy expanded an average of 4.1 percent per annum, the U.S. economy 3.8 percent and the Mexican economy 3.5 percent. Since 1993, the U.S. economy has generated 25 million new jobs and the jobless rate has averaged 5.1 percent as compared to 7.1 percent in the thirteen years prior to NAFTA. One needs to keep in mind that this low jobless rate has been maintained despite the acknowledged loss of jobs to low cost producing countries such as China during this period.
However, one of the issues in debate is how many of the jobs have been created because of NAFTA or as a result of the profound changes in technology and the increased global demand created during this period. Gary Hufbauer, a senior fellow at the Peterson Institute for International Economics in Washington, has noted that the agreement has become a reflection of the biases and preconceived notions about trade. NAFTA has not been either the outstanding success or the economic disaster that it has been characterized to be. Mr. Hufbauer has estimated that NAFTA has created 60,000 U.S. jobs a year in an economy that creates and destroys 16 million jobs a year.
Why are we talking about NAFTA 14 Years Later?
Most political observers in the United States acknowledge that the primaries in Texas and Ohio are critical for both Senator Obama and Senator Clinton. If Hillary Clinton loses these two primaries, this would make it 13 straight losses and virtually ensure her withdrawal from the race to become the Democratic candidate for President. Should Senator Obama lose one or both primaries, this would create a new dynamic in the race and perhaps re-create a strong two person competition.
It should also be mentioned that the Democratic party is seen as the party of the workers and not as the party of “big business.” Ohio is a “blue collar” state and autos, steel and tires are still important industries. These are all industries that have suffered job losses for a variety of reasons, some unrelated to NAFTA. Nevertheless, in this heavily unionized state, 185,000 factory jobs have been lost over the past five years. This makes Ohio a receptive market to the NAFTA bashing rhetoric of the top two Democratic candidates. It is important to note that Senator McCain, a virtual certainty to receive the Republican nomination, has not jumped on the dump (or re-negotiate) NAFTA bandwagon.
A closer look at the statistics in Ohio paints a somewhat different picture. Since the deal was signed in 1994, its jobless rate has fallen, factory output has gone up and exports to Mexico have increased. In fact, the state’s exports have grown by nearly 10 percent every year since the signing of the agreement.
What are the Two Democratic Senators Saying?
The two Senators stated in the presidential debate this week that they would withdraw from NAFTA if Canada and Mexico don’t agree to renegotiate the trade pact. They have indicated that they would provide six months notice (which is allowed under this agreement) to meet with their trade partners and use this as leverage to secure a new deal with stronger labour and environmental conditions. Mrs. Clinton has indicated that she would like to eliminate the right of foreign firms to sue Washington for enacting measures to protect its workers. Senator Obama agreed. Some observers have read into this a move to protectionism that is politically appealing to “blue collar” American workers.
Where Do We Go From Here?
There are several scenarios that can unfold. Some folks think that when we wake up on the morning of March 5, the so-called “posturing” and vote-getting will have played itself out and this issue will fade from the radar screen. The argument is that NAFTA is working reasonably well and we should move on to other issues. Some folks believe that the critical comments are directed more at Mexico rather than Canada.
Other folks argue that it is time to re-negotiate the treaty. There are a variety of issues that all three sides can and should bring to the table. While this may open a “can of worms,” it will allow the parties to address certain issues that were not well structured fourteen years ago such as the dispute-resolution mechanism that failed to solve the long-running softwood trade war between Ottawa and Washington.
The headline in Thursday’s Globe & Mail (“Ottawa plays oil card in NAFTA spat”) is worth noting. Canada and the United States have free trade in energy because the accord effectively prohibits discriminatory export controls on oil and gas. Canada’s Trade Minister commented that “knowledgeable observers would have to take note of the fact that we are the largest supplier of energy to the United States and NAFTA has been kind of a foundation of integrating the North American energy markets.” This is not likely what the Democrats have in mind when they talk about re-negotiating NAFTA. There aren’t many Americans (or Canadians) who would like to see America buy more energy from the Middle East or Venezuela. By re-opening NAFTA, these provisions could end up being included in the discussions?
My hope is that a third scenario will prevail. Cooler heads will prevail. The three governments will identify their trade priorities. Bureaucrats from the three governments will meet after the U.S. election to review each others’ lists and craft amendments to a trade agreement that has been of enormous value to the three trading partners. Even if Senator McCain becomes President, it may still be worthwhile to revisit NAFTA, fix some of its weaknesses and enhance it so it remains an engine of growth for its three trading partners.