Shadow Government

Have Old Ideas About NAFTA Hurt the TPP?

Anti-trade rhetoric cood doom the Trans-Pacific Partnership.

Ministerial Representatives from  12 countries take part in the signing of the Trans-Pacific Partnership agreement in Auckland on February 4, 2016.  / AFP / MICHAEL BRADLEY        (Photo credit should read MICHAEL BRADLEY/AFP/Getty Images)
Ministerial Representatives from 12 countries take part in the signing of the Trans-Pacific Partnership agreement in Auckland on February 4, 2016. / AFP / MICHAEL BRADLEY (Photo credit should read MICHAEL BRADLEY/AFP/Getty Images)

The White House has growing concerns that anti-trade rhetoric could harm the the Trans-Pacific Partnership’s chances of passing before President Barack Obama leaves office, according to a Financial Times report. Although all of the major remaining presidential candidates publicly criticize the TPP, FT singles out Donald Trump as its most vehement opponent. The piece closes with reassurance from Jim Kessler, of the think tank Third Way, that presidential engagement can solve the problem. “There are very few people who get the better of Donald Trump, but Barack Obama has every time,” he says. The question remains: Can Obama still get his way with one hand tied behind his back?

Though the TPP is the agreement on the table, much of the debate revolves around the North American Free Trade Agreement, concluded over twenty years ago. “It’s a disaster….We will either renegotiate it, or we will break it,” Trump has said of NAFTA.

If that has a familiar ring, go back eight years to the time when Obama, then a junior senator from Illinois, sent a flier around Ohio. It argued, “one million jobs have been lost because of NAFTA, including nearly 50,000 jobs here in Ohio.” He used this argument as the basis for his demand that the United States renegotiate NAFTA, under threat of withdrawal.

The notion that NAFTA had cost a million jobs was clearly specious at the time. It conflated the Canada-United States Free Trade Agreement with NAFTA, the latter of which included Mexico, and relied upon the popular but badly flawed idea of a link between exports and jobs created. To understand the problem with this critique, rather than delving into confusing macroeconomic and trade policy, or the difference between average and marginal job links, just hold one figure in mind: Average U.S. tariffs on Mexico, heading into NAFTA, were roughly three percent. Did the difference between $1.03 and $1.00 really kill a million jobs?

Some of what NAFTA did was tariff reduction, but that mostly meant the reduction of Mexican tariffs against the United States. More importantly, NAFTA set rules for trade in the region, and it helped lock in Mexican economic reforms and openness: When the Asian financial crisis hit in the late 1990s, Mexico did not respond by raising barriers against the United States, as it might have been expected to do.

There is an interesting “underestimation” parallel here between NAFTA and the TPP. The United States already has free trade agreements with six of the 11 TPP partner countries, and has negotiated fairly low tariffs with others through global deals. Thus, when the United States International Trade Commission released its long-awaited analysis of the TPP’s likely impact, the numbers were rather small. By 2032, the commission predicted, U.S. real annual income would be 0.23 percent higher. Over the same 15-year period, employment would go up by 128,000 jobs — positive, but fewer jobs than the U.S. economy created this April alone, in what was seen as a disappointing month.

In focusing on the parts of the TPP that can be analyzed most reliably, the commission very likely underestimates the deal’s positive effects. Michael Froman, the U.S. trade representative, highlights the unquantified benefits of establishing new rules on state-owned enterprises and intellectual property rights protections. Peter Plummer and Michael Petri point to other more ambitious (and rosier) academic estimates. Numerical estimates do not justice to NAFTA or the TPP.

Back to NAFTA: It is hardly news that a presidential candidate might make exaggerated claims during campaign season, only to later retreat. As a candidate, Obama pledged to label China a currency manipulator. That stance seemed to change almost immediately when he took office.

However, Obama has not renounced his earlier claims about NAFTA. The criticisms of NAFTA have become gospel, particularly for organized labor, and the president remains loath to recant. In what was supposed to be a pitch for the TPP, during his 2015 State of the Union, he said, “Look, I’m the first one to admit that past trade deals haven’t always lived up to the hype…”

This puts the White House in a conspicuously weak rhetorical position. It is left to argue that trade agreements in the past have been bad, while this new one is good. The administration can try to base the distinction on some particular differences between the old and new agreements. But it strains credulity to think that enhanced commitments to labor regulation could reverse a 60-year trend of declining employment share in the manufacturing sector — a trend that long predates NAFTA, but that underlies much of the criticism.

In fact, it is the very self-inflicted weakness of its economic argumentation that has left the administration highlighting the strategic importance of the TPP, and the question of whether the United States or China will write the rules of trade. If the president’s misguided “concession” on past trade agreements served to mollify labor critics, one might see it at least as a savvy tactical move. Instead, those critics embrace the “NAFTA was bad…” premise, while rejecting the “…but TPP is fine” conclusion.

Both the new TPP analysis and our experience with old trade agreements strongly suggest the United States would gain from adopting the TPP. But the awkward politics of trade in the Democratic party meant that the TPP was pushed back into an election year. Time is now running short, and the tenor of the political debate is trending in the wrong direction. This is an important fight, but not one the president is likely to win single-handedly.

Photo credit: MICHAEL BRADLEY/AFP/Getty Images

Phil Levy is the chief economist at Flexport and a former senior economist for trade on the Council of Economic Advisers in the George W. Bush administration. Twitter: @philipilevy

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