Advancing the NAFTA Debate: Global Living Standards Are Key
Against the backdrop of slowing U.S. economic growth and rapid changes in the global economy, the issue of trade and globalization came front and center in the Ohio presidential primary this week. Since 2000, Ohio has lost more than 200,000 manufacturing jobs, real median income there has dropped nearly 10 percent, and entire communities have been devastated.
The causes of workers’ economic insecurity in Ohio and across America are multiple and complex, but the intense heat of international competition has prompted many to voice second thoughts about trade and globalization in general and the North American Free Trade Agreement in particular. Reflecting these concerns, several leading presidential candidates have strongly criticized the agreement and called for a new approach to trade policy.
Debating the merits of NAFTA, however, requires a larger frame of reference. Globalization encompasses far more than one treaty, however important it is to the U.S. economy. If the candidates are looking for a fresh way forward, then they need only turn to CAP’s recent report, Virtuous Circle: Strengthening Broad-Based Global Progress in Living Standards, which offers a new approach that grounds the current trade and globalization debate in a wider context.
Rather than simply declare a pause in trade negotiations, the next president should commit to reevaluating how well our entire international economic policy—trade, development, and monetary policy—are contributing to the twin goals of sustained global growth and broad-based progress in living standards. Refocusing these policies more sharply on the two strategic objectives will help generate additional demand among the growing global middle class for goods and services made in Ohio and other states, thereby enabling progress for our own middle class.
By fully activating this virtuous circle of strong, synergistic advances in median living standards, the next president can help prevent a global race to the bottom and transform it into a race to the top. Major middle-income countries, from Mexico and Brazil to China and India, face economic challenges similar to those our country faced about a century ago—rapid industrialization amid massive social change. As the United States industrialized and integrated more deeply into the world economy, popular pressure mounted to broaden access to middle-class prosperity. Progressive leaders from Teddy Roosevelt to Franklin Roosevelt to Lyndon Johnson responded by establishing a number of economic institutions and laws to protect workers, consumers, investors, and the environment as well as key social insurance programs.
These waves of policy reforms established a national infrastructure of economic institutions that deliberately and successfully broadened the base of our economic growth. How can we apply these historical lessons to our economic engagement with large emerging economies in the 21st century?
Any new bilateral trade agreement with a middle-income country should be considered and perhaps even called an economic integration agreement. Before entering into such negotiations, the United States should conduct an assessment not only of whether an agreement would likely produce a net expansion of trade but also of the quality of the country’s economic institutions and its social safety net.
We should then seek to include within the scope of negotiations major weaknesses in legal or institutional capacities to craft a mutually agreed upon plan of development assistance that bolsters the country’s efforts to reduce these weaknesses. Under this framework, the next president should not only incorporate enforceable workers’ rights into trade pacts with developing countries, but also offer their institutions substantial assistance in realizing the International Labor Organization’s Decent Work Agenda of core labor standards, job creation, social protection, and social dialogue.
How might we apply this lesson to NAFTA? The trade pact substantially increased the quantity of U.S. economic integration with Canada and Mexico, with trade volume among NAFTA countries more than tripling to $930 billion between 1993 and 2007. But the agreement could have done much more to improve the quality of economic integration with our neighbors and especially with Mexico.
U.S. assistance to strengthen Mexico’s own economic institutions and social safety net could help ensure that trade-related gains in national income translate much more effectively into decent work, increased purchasing power, and thus a larger market for U.S. products. One possible program: The United States could help Mexico expand its innovative “Oportunidades” program, which uses financial incentives to encourage low-income families to send their children to school and the medical clinic rather than to the fields or factories.
The European Union is beginning just such programs. The E.U. employs a broad policy framework to help foster sustainable economic integration of higher- and lower-income neighboring countries. Its successful Single Market Initiative, in which countries at vastly different levels of development have combined to form the world’s largest internal market, has involved a far broader policy agenda than the simple removal of barriers to cross-border trade and investment.
Specifically, the elimination of conventional trade barriers has been accompanied by a wide range of legal and regulatory reforms and targeted development assistance aimed at helping the new entrants: Spain, Portugal, and Greece in the 1980s and 1990s, and Eastern European countries today. This approach created the institutional environment necessary for the rapid productivity gains from investment to lead to strong and steady convergence of living standards with those of original E.U. member states.
Similarly, the next U.S. president will undoubtedly share an interest with President Filipe Calderon of Mexico in building institutions to expand Mexico’s middle class so as to bolster our own middle class. On the other side of the globe, China’s leadership is also moving toward some of the same conclusions. According to the Wall Street Journal, among the signature themes of Chinese Premier Wen Jiabao’s speech this week before the National Peoples Congress—a speech equivalent in importance to the U.S. presidential State of the Union address—were “ensuring that growth boosts jobs and incomes” and “increasing spending on social services.”
By pursuing a progressive approach to international economic policy that activates fully the world economy’s virtuous circle of economic growth and rising standards of living, the next U.S. president can demonstrate to the American people that he or she has a credible plan to address the challenges and opportunities of globalization.
Jonathan Jacoby is Associate Director for International Economic Policy and co-author of the Center’s Virtuous Circle report, part of the Center’s Progressive Growth series of papers on economic policy.
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