NAFTA: Old Enough to be Tried as an Adult

Published on Real-World Economics Review Blog, by Kevin P. Gallagher, January 13, 2010.

In a welcome move, President Obama’s US trade representative, Ron Kirk, has made a new year’s resolution to craft “a new kind of trade agreement for the 21st century.” Those were the words he used in his letter to congressional leaders notifying them of the administration’s intent to negotiate the Trans-Pacific partnership agreement (TPP), a proposed eight-country trade deal with countries as diverse as New Zealand, Chile and Vietnam. 

The trade pact would be the largest US endeavour since the North American Free Trade Agreement (Nafta) was signed between Canada, Mexico and the US. Kirk is yet to unveil many specifics, but a 21st century trade agreement that brings growth, stability, and prosperity to the US and its trading partners will have to abandon the out-dated Nafta-model.

This month is the 16th anniversary of Nafta coming into force, so the agreement is now old enough to be tried as an adult. In the US, the agreement is blamed for job losses, for adding downward pressure on wages, particularly in manufacturing, and for contributing to a large US trade deficit. In Canada, critics point to job losses, the declining competitiveness of the manufacturing sector, and the constraints Nafta has put on Canada to deploy adequate policies for public welfare.

As we detail with Mexican economist Eduardo Zepeda in a new report, Rethinking Trade Policy for Development: …

… A key recommendation by the task force is that any 21st century trade agreements should not elevate the rights of private firms over governments and should provide safeguard measures to make sure nations can adequately address financial, environmental and development-related challenges. Currently, US trade agreements allow private companies to undermine national efforts to regulate for the public interest. Under current rules, it is not clear that proposals for financial regulatory reform, climate change mitigation or poverty alleviation would be allowed under trade agreements because they could be construed as “tantamount to expropriation,” as not providing a stable regulatory environment, or simply because some agreements don’t provide safeguards for public welfare provisions.

Nafta offers lessons for future agreements, but what about North America? President Obama should also make good on his promise to fix Nafta as well. Canada and Mexico are the US’s first and third biggest trading partners and account for more than one quarter of total US trade. Key to revitalizing Nafta would be a reforming the rules and invigorating the North American Development Bank to help address the pre-existing development asymmetries among Nafta partners that have only been accentuated by the agreement. Nafta should not merely serve as a pilot project for other, less economically important, trade agreements. Nafta’s failures in Mexico have direct repercussions in the United States, be it migration, the drug trade or weak demand for US exports.

It is welcome news that the administration has picked 2010 to chart a new course for US trade policy. It is clear that a 21st century trade agreement should not look like Nafta. Neither should Nafta. (full text).

Published on January 7 in the Guardian.  More Gallagher columns.

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