Sunday, July 6, 2008

NAFTA and Protectionism in the U.S.

Now that the Democratic Presidential nominee is all but official, the rhetoric about revising successful free trade agreements has dissipated, but the underlying protectionist movement continues. Recent actions by Congress blocking free trade agreements favoring U.S. companies, most notably the Columbian Trade Promotion Agreement, has destroyed years of precedence and hamstrung U.S. trade negotiators. Despite frequent consultation with members of Congress and years of negotiation, Democrat Nancy Pelosi, the House Speaker, effectively killed the Columbian agreement by blocking a vote within the 90-day limit. Columbia already enjoys preferential access to U.S. markets as a result of the Andean Trade Preference Act. The U.S. – Columbia TPA would convey substantial benefits to U.S. industry, but election year politics and rhetoric unearths a growing protectionist bias that threatens to derail the global economy and further disadvantage American companies.

Protectionists, viewing globalization as a threat to American workers, seek to block all trade pacts under the guise of human rights, working conditions, or environmental policies. The most vocal of all protectionists are the large unions that wish to maintain their profitable control over a shrinking organized workforce. Unions exploit their base by extorting dues from hard working Americans, utilizing the majority of these funds for political purposes rather than labor negotiations. Legislative attempts to enable workers to request a refund of dues not used for collective bargaining have been met with fierce resistance. Unions prefer to leech off the productive labor of their members and lobby for protections that often are aligned with political ideology rather than the interests of their constituents. The protectionist movement reasserted its voice once the Democrats regained control of Congress, severely threatening global economic growth and opportunities for developing nations.

As one of the global economic superpowers, the United States has significant negotiating power ensuring that trade agreements are beneficial to society as a whole. The North American Free Trade Agreement (NAFTA) has strengthened ties between the U.S., Canada, and Mexico. Signed into law in 1994 by President Clinton, NAFTA eliminates virtually all duties on goods traded between the three counties. The efficient U.S. agricultural and equipment industries have boomed as a result of open access to new markets. Alternatively, Mexico has benefited from a rising wage base due to an influx of basic assembly jobs in the automotive and appliance industries. U.S. manufacturers are more competitive globally due to the basic assembly work performed by their Mexican subsidiaries while many Mexican workers have obtained relatively high paying local jobs. As trade increases the standard of living in Mexico, the strains on U.S. infrastructure due to illegal immigration are abated. Conversely, the integration of Canadian and U.S. economies has provided access to Canadian natural resources that are integral to the energy and raw material intensive U.S. economy.

Why, then, would there be such opposition to a mutually beneficial trade pact by well educated politicians such as Barack Obama and Hillary Clinton? The comparative advantage of nations dictates that some industries will benefit more than others leading to displacement of workers in less efficient industries while creating higher paying jobs in others. In Mexico, NAFTA has led to more jobs in assembly and manufacturing while the domestic agriculture industry has suffered due to a relative inefficiency compared to U.S. agribusiness. Alternatively, the U.S. has seen a decline in basic manufacturing jobs but a dramatic increase in high value research, technology, and service industry jobs. Labor unions, fighting to protect their gravy train of dues, lobby intensively and wield extraordinary political influence. The authenticity of the anti-trade rhetoric extolled by Barack Obama while campaigning in Ohio, a state suffering from a decline in manufacturing jobs, has been called into question. Some Democrats, however, acquiesce to the demands of the unions and embrace the protectionist movement knowing that a windfall of campaign contributions and political support will ensue. They choose to forsake the good of the nation and deliver protections to the minority. Currently labor unions represent only 7.8% of the private sector workforce, but their lobbying power far exceeds their size as a result of their ability to extort dues from the American workforce.

The trend towards protectionism has dire consequences for the U.S. economy. It was protectionism, such as the Smoot-Hawley Tariff act of 1930, which drove the U.S. economy into the devastation of the Great Depression. More than 1000 economists opposed this legislation, but President Herbert Hoover acquiesced under political pressure leading to devastating consequences. The mere prospect of greater tariffs and barriers to trade likely precipitated the stock market crash of 1929. The U.S. will quickly be left behind in a global economy that bows not to the whims of self-interested politicians, but instead reacts to the demands of market forces. Growing protectionism threatens more than just the union jobs it seeks to defend, but also undermines the economic growth and competitiveness of American industry. Given the current fragility of the global economy combined with anemic growth domestically, the U.S. can ill afford a resurgence of protectionism and the devastating consequences that are sure to ensue.