Stanford Professor Michael Boskin: The Next Trade Breakthroughs

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Economic news is grim all around the world. This year’s output growth has been disappointing, and the International Monetary Fund expectsonly a slight improvement in 2015. Europe may be sliding back into recession, with even the once-robust German economy teetering on the brink. China is downshifting, and Brazil, Russia, and India are struggling to avoid a stall.

So it is a pity that three important opportunities for growth from trade liberalization – the World Trade Organization’s Doha Development Round, the Trans-Pacific Partnership (TPP) in the Asia-Pacific region, and the Transatlantic Trade and Investment Partnership (TTIP) between the United States and Europe – are being neglected. If designed properly, all three have the potential to spur global growth. Through the reduction of tariffs and non-tariff barriers, the protection of intellectual property, and the harmonization of regulations, hundreds of billions of dollars of output – and millions of better-paying jobs – could be generated.

This is the lesson of the North American Free Trade Agreement (NAFTA), which celebrates its 20th birthday this year. In NAFTA at 20, a book that I edited, policymakers and scholars explain how the landmark trade treaty exemplifies the benefits of trade liberalization – and why political leaders should pursue it.

The elimination of tariffs among Canada, Mexico, and the US was innovative, risky, and controversial. NAFTA became a lightning rod for complaints about globalization, capitalism, and the decline of organized labor. Many claimed that the treaty would depress wages, destroy jobs, and ravage the agricultural industry in the US. Instead, NAFTA boosted all three signatories’ economies and became the template for hundreds of subsequent free-trade agreements.

NAFTA helped open what former Mexican Trade Minister Jaime Serra Puche says had been “a highly protectionist economy for five or six decades.” US agricultural exports threatened some Mexican farmers, but others were able to boost their exports – and profits – to the US. Meanwhile, the country’s consumers, especially the urban poor, benefited from lower food prices. According to Stephen Haber, my colleague at Stanford University’s Hoover Institution, “After, and to a considerable extent because of, NAFTA, the Mexican economy and political process became far more competitive.”

Canada also benefited. The country’s firms and workers saw their productivity rise by 14%, leading to what the University of Toronto economist Daniel Trefler estimates is the equivalent of a decade’s improvement in living standards. “Canada…is a much more modern economy today than it would have been, ” says the country’s former finance minister, Michael Wilson.

Meanwhile, Canada and Mexico have become the United States’ top two export markets, accounting for a combined $625 billion in 2013, more than the next ten largest export markets combined. Prior to NAFTA, exports to Mexico roughly equaled those to the United Kingdom and about half of what was going to Japan. Moreover, this surge in trade has created myriad well-paying jobs.

NAFTA produced something far different from the outsourcing its opponents predicted. Some 40% of what the US imports from Mexico actually originates in the US. For Canada, the figure is 25%. For China, by contrast, the share is just 4%. “We’re not just selling things to each other, ” explains Serra Puche. “Now, we’re producing things jointly.”

According to Lorenzo Caliendo, an economist at the Yale School of Management, a surge in cross-border trade and increases in real (inflation-adjusted) wages in all three countries can be attributed to NAFTA – even once other factors, like the opening of China, the peso crisis, the dot-com bubble, and the Great Recession, are taken into account. In short, as former US Secretary of State George Shultz has noted, “NAFTA has transformed the region.”

Today, NAFTA can continue to serve as a model for ongoing trade negotiations. A NAFTA 2.0 could focus on areas that were originally excluded, such as labor mobility and energy. The development of Canadian oil sands, the shale-energy revolution in the US, and the opening of Mexico’s oil sector to foreign investment imply the biggest geopolitical shift since the collapse of communism.

Moreover, the finalization of either the TPP or the TTIP could spur progress in the WTO’s Doha Round. “There is no question that a high quality major agreement today, as the NAFTA was in 1994, could cause multilateralism to take a giant leap forward, ” says former US Trade Representative Carla A. Hills.

Trade liberalization has been stalled for too long. Since the end of World War II, American presidents, Democrat and Republican alike, have promoted free trade as a key pillar of growth. John F. Kennedy launched what became the Kennedy Round of the General Agreement on Tariffs and Trade, and Bill Clinton helped secure congressional passage of NAFTA and the Uruguay Round of trade talks, which had been initiated and negotiated under Presidents George H.W. Bush and Ronald Reagan.

President Barack Obama has promoted the TPP in Asia, but he only recently asked Congress for fast-track negotiating authority (the ability to request an up-or-down congressional vote without amendments). Obama’s request was rebuffed by the US Senate’s Democratic majority leader, Harry Reid. The new Republican-controlled Senate should act quickly to approve it. “There is no way we would have completed the NAFTA negotiation without fast track, ” according to Hills.

Nobody will negotiate seriously with the US if Congress can cherry-pick amendments. Former US Trade Representative Mickey Kantor recalls Clinton’s horse-trading with congressional Democrats to persuade them to join Republicans in passing NAFTA, overcoming both parties’ protectionist wings. Obama and the new Republican majority must now decide if they will follow in their predecessors’ footsteps and spark a new era of economic growth.

Michael J. Boskin, Professor of Economics at Stanford University and Senior Fellow at the Hoover Institution, was Chairman of George H. W. Bush’s Council of Economic Advisers from 1989 to 1993. 

Copyright: Project Syndicate, 2014.
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