The United States, Mexico, and Canada just renegotiated the North American Free Trade Agreement. At a high level, the new deal underscores the political fact that the free trade approach to globalization is exhausted, and we are moving in a different direction.
For decades, establishment thinking told us that free trade was the only possible approach for managing globalization. The 2016 presidential campaign and NAFTA 2.0 have burst that bubble. While millions of voters are ready to ditch free trade, we need more clarity on what comes next.
Rules in the original NAFTA tilted heavily in favor of global companies. The NAFTA approach blurred national boundaries, national identities, and national interests. It merged our economy into the global economy. It exploited low wages and weak protections in Mexico for workers and the environment. The NAFTA approach delivered big gains to a few, while millions were left behind.
The new NAFTA, known as USMCA, starts to move us in a new direction.
- USMCA says a certain fraction of imported automobiles must be made by workers making at least $16 per hour. This is not free trade. It’s a national strategy that requires a large portion of autos to be made in Canada and the U.S.
- USMCA raises the components of cars that must come from North America. That is not free trade. It is a regional strategy to retain our automobile supply chain in North America, rather than moving more production to China, Korea, Japan, and other countries.
- USMCA says Mexico will improve its labor standards. That’s a damn good idea. But it’s not free trade. It is an industrial strategy to help workers share in the gains they create.
- USMCA partially dismantles the notorious corporate-friendly dispute settlement system established in the old NAFTA. This dispute settlement system was a gift to global producers who wanted to move production from the U.S. and Canada to low-wage countries, and escape legitimate labor and environmental regulations. By partially eliminating that dispute system, USMCA moves us away from the NAFTA model and makes it easier for the U.S., Mexico, and Canada to regulate in the public interest.
- USMCA recognizes a sovereign right for Mexico and Canada to strengthen their cultural industries and shelter their cultural identity from the dominant influence of the U.S. Protecting cultural and national identity is the opposite of free trade.
This may explain why the name USMCA – the United States-Mexico-Canada Agreement – does not contain the words “free trade.”
USMCA keeps many bad features from the original NAFTA.
USMCA retains costly patent and licensing advantages for pharmaceutical companies. That provision is bad industrial policy. Pharmaceutical companies pocket that policy incentive, but they have closed production facilities in New Jersey and other states. Instead, China and India produce 80 percent of active pharmaceutical ingredients.
USMCA ignores climate change, arguably the biggest market failure in human history. Stronger environmental provisions are must-haves for any national strategy. Same for currency misalignment, and protections for human rights, food safety, public health, prudent financial regulation, and other significant public interests.
Canada has a supply management system for dairy where Canadian farmers produce just the right amount to supply their own country at stable prices. We dismantled our supply management system years ago. Since then, family farms in the U.S. have declined drastically. Global agribusinesses have done well, using economies of scale and access to products in different markets to overproduce and drive down prices for smaller farmers in the U.S.
Maybe we should reconsider our opposition of Canada’s supply management. We could think more about family farmers who sustain social and economic well-being in rural communities, and less about factory farms that overproduce and force young people to migrate away from rural communities.
China has never paid any attention to free trade. It has the largest publicly funded infrastructure program in the world to help move its goods to customers around the world. China makes that investment as part of its national manufacturing strategy. That’s the opposite of free trade. Meanwhile, we defer investment in our own aging infrastructure.
China has targeted 10 industries of the future for R&D and economic development. China invests heavily in artificial intelligence and renewable energy, which helped China dominate production of solar panels and wind turbines. That’s the opposite of free trade.
Germany, Switzerland, and other European countries see workforce programs and other public policies as legitimate investments in a national industrial strategy to build and retain their manufacturing base. That’s not free trade.
These national strategies recognize legitimate national interests, raise living standards, and bring long-term well-being to their home countries.
So, here are two approaches to globalization.
- The free trade approach (which was never free and not really about trade) blurs our national identity, merges our economy with others around the world, produces a race to the bottom, helps hold wages stagnant, worsens inequality, deindustrializes our economy, erodes social cohesion, and destabilizes us politically. In this model, the purpose of an economy is to put investors and global corporations first. Gains may or may not trickle down to workers and communities.
- The industrial strategy approach recognizes legitimate national interests, gives government an important policy role in raising living standards, improves well-being, and invests in infrastructure, research in new technology, and workforce development. These public investments are meant to reindustrialize our economy. In this model, the purpose of an economy is to raise living standards and improve well-being. Investors and global companies then share in the gains from a prosperous stable society.
To be clear, USMCA doesn’t fundamentally shift our approach from free trade to national strategy. Instead, USMCA marks a turning point. It recognizes that we are in a deep hole and stops digging the hole deeper. USMCA reduces the harm we saw from the original free trade model in NAFTA.
Good. We should reduce harm.
Even better would be to pause trade deals, recognize legitimate national interests, and develop appropriate national strategies. We would then write very different trade agreements – ones that share gains more equitably and restore trust in the way we manage globalization.