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NAFTA: Veronique de Rugy’s Response

I’m pleased that Pierre Lemieux and Roberto Salinas-Leon have no serious quarrels with my overview of the North American Free Trade Agreement’s first 25 years. Unsurprisingly, I in turn have no real quarrel with either of their excellent essays.

Matters differ, however, with Julius Krein’s unfavorable response to my favorable assessment of NAFTA. While I disagree with his substantive points, because they are ones that feature prominently in the case that protectionists make not only against NAFTA in particular but free trade generally—and because Mr. Krein states them with great clarity and force—I thank him for affording me the opportunity to correct some of these errors and misperceptions.

Let’s begin with the background against which Mr. Krein suggests NAFTA and trade should be considered. He describes this background as one in which the United States has been for many years now in “economic and political decline.” The implication is clear: America’s increased participation in the global economy has been harmful, at least to ordinary Americans.

If the accuracy of his description of decline were as great as Mr. Krein’s certitude in offering it, we Americans might indeed have a real problem. But despite the longstanding popularity of the “decline” trope—mostly among those on the political Left, but increasingly also among many on the Right—credible evidence to support it is impossible to find. Indeed, all the evidence points in the opposite direction.

What American Decline?

It’s unclear what Mr. Krein means by “political decline.” Sure, our politics is often raucous, but that’s as it has often been since the days of George Washington. And despite attention today paid to people protesting for causes ranging from pro-life to pro-choice, and from LGBT rights to white nationalism, no informed person would deny that today’s disputes and protests pale in comparison to the more violent disagreements that divided Americans in the 1960s.

And consider that since NAFTA went into effect on January 1, 1994, just as Democrats were about to lose their nearly four-decade-long monopoly hold on the House of Representatives, control of the U.S. Congress has switched among the two political parties much more frequently than in the 40 years before that. While there’s no reason to suppose that NAFTA played any role in fostering this enhanced political competitiveness, surely the GOP’s improved ability over the past quarter-century to compete successfully against Democrats for congressional seats is evidence of political dynamism rather than political decline.

Even more refutable is the notion of U.S. economic decline. As my colleague Don Boudreaux points out, despite the dips that occur during all recessions,

U.S. manufacturing output has long been, and continues to be, on a pretty steady trajectory upward. It is today 45 percent higher than it was when NAFTA first took effect and continues to rise. Furthermore, U.S. industrial capacity has risen consistently since NAFTA took effect (as it had for many years before), and is today at an all-time high and 66 percent greater than it was when NAFTA was launched.

Boudreaux also notes that American exports “hit an all-time high this past April (before declining a bit because of Trump’s trade war). U.S. exports are today, in real terms, 200 percent higher than they were when NAFTA commenced.”

When combined with the solid and mountainous—if often conveniently ignored—evidence of high and still-rising American middle-class living standards, these facts shred the very premise of Mr. Krein’s case for skepticism of free trade.

Loss of Sovereignty?

On NAFTA specifically, Mr. Krein complains about its investor-state dispute settlement (ISDS) provisions. He warns that “[w]hatever one’s position on ISDS, it is striking that classical liberals so often neglect to even mention the implications of ceding jurisdiction to arbitral panels unconstrained by any constitution or common law tradition.”

Sounds ominous. Yet despite 25 years of NAFTA being in operation, Mr. Krein offers not a single bit of evidence that its dispute-resolution arrangements have been abused or have otherwise caused problems for Americans. The reason for his silence on this front is that, in reality, these provisions have worked well.

And that they’ve work well is unsurprising. Contrary to Mr. Krein’s claim, there is no ceding of jurisdiction. First, these dispute-resolution panels—while they aren’t perfect—are ones that U.S. officials agreed to in what was, in effect, a complex contractual negotiation. Had they refused to do so, Canada and Mexico, not wishing to have NAFTA disputes ultimately resolved by American panels, would have had every incentive not to join the agreement in the first place. Second, any anti-U.S. biases in NAFTA’s dispute-settlement process would have driven American investors out of its neighbor’s jurisdictions. Because the Canadians and Mexicans sought greater and longer-term commercial ties to Americans, each of these countries have strong incentives to ensure that the dispute-resolution process is unbiased.

Mexico’s View of NAFTA

I’m also genuinely puzzled by Mr. Krein’s saying that I “overlooked” the fact “that Mexican voters seem no happier with the NAFTA status quo than many Americans. Andrés Manuel López Obrador, a leftwing ‘populist’ who has been highly critical of NAFTA, just won the Mexican presidency in a landslide.”

First of all, so what? Voters are often thoroughly misinformed about economics. For assessing the agreement’s actual empirical record, we must consult, not the current mood of voters but, well, NAFTA’s actual empirical record. It is positive.

Second, as Salinas-Leon, a Mexican economist, makes clear in his contribution to our discussion, Mexicans in fact are far keener on NAFTA than Mr. Krein thinks them to be.

A Word on Autor, Dorn, Hanson

Finally, I would be remiss if I didn’t mention the use by Krein of the “China Shock” studies by MIT economist David Autor and his coauthors David Dorn (of the Center for Monetary and Financial Studies) and Gordon Hanson (of the University of California San Diego). According to the trio’s 2016 paper, a look at local labor markets that face direct competition with Chinese imports over the 1999 to 2011 period (which includes the Great Recession) reveals that, contrary to the predictions of economic theory, 2.4 million net jobs were destroyed.

Let’s assume that these authors are right about the local markets’ net job loss (though it is an assumption that suffers from serious flaws). It’s a finding that isn’t terribly surprising. Yes, all competition, whether domestic or international, destroys—in the short term, that is—some jobs in particular sectors or localities, and even a net number of jobs. No economist has ever denied this reality. You would find the same result if you looked exclusively at the impact of Netflix on the DVD rental company Blockbuster in the short term and never bothered to track what happened to the former Blockbuster employees in the longer run, the benefits to American movie fans, or the resulting economic impact on, and innovation in, multiple industries around the United States and the world.

And here lies the problem. Contrary to what Autor and company claim, their studies—and the few others that mirror their findings and suffer from the same analytical limitations—are not very useful for understanding the full impact of the “China Shock” or any other changes in international trade patterns. How about the jobs created as the result of capital fleeing from lower-productivity industries and invested in higher-productivity industries? How about the gains to American consumers and import-consuming industries? How about the gains to American exporters? And, by the way, how about the gains for tens of millions of people who escaped abject poverty in China? All of these effects matter.

For those truly curious about what the broad and vast literature says on whether we can really blame the current hardship of working-class Americans on trade with China (even assuming, incorrectly, that the “China Shock” is relevant in a piece about NAFTA), I highly recommend reading this detailed piece by the Cato Institute’s Scott Lincicome. If you want firm evidence, serious economic studies, a thorough review of the literature, and solid data, he’s got them.

Lincicome concludes that, while import competition does affect the U.S. labor market, there is another side to the “China Shock” coin:

That side shows the substantial net benefits from trade (certainly not only or “overwhelmingly” for “elites”) and reveals the China Shock issue to be more uncertain and complex than the one-sided, myopic caricature painted by many PNTR/China trade critics and more similar to the standard trade story: discrete, but more concentrated, pains versus larger, but more diffuse (and harder to see), benefits.

Finally, how many destroyed jobs are Autor and company talking about? And how does that number compare to the number of total jobs lost each month to all manner of economic change?

Boudreaux has the number for you. In a recent piece on the Café Hayek site, where my Liberty Forum essay and Krein’s response have been discussed, Boudreaux writes:

Autor et al claim to find that expanded U.S. trade with China destroyed on net 2.4 million American jobs from 1999 to 2011—which is an average of 15,385 jobs destroyed during each of those 156 months. But also during each of those months the average number of jobs destroyed by all causes was about 1.75 million, while the average number of (non-farm) jobs created by all causes was 1.783 million . . . The total number of non-farm jobs in the U.S. rose from 127,725,000 in January 1999 to 132,924,000 in December 2011. If Autor, et al., are correct, had the U.S. not increased trade with China the December 2011 number would instead have been 135,324,000. Especially—but not only—because the years covered by the Autor, et al., econometric study include those of the Great Recession, I do not believe that even the most careful and advanced such study can reliably determine that, had we Americans been ‘protected’ from one particular source of job churn—trade from 1999 through 2011 with China—the total number of jobs in 2011 would have been 1.8 percent higher than it actually was.

Now all this isn’t to say that the labor adjustments that resulted from Chinese import competition were quick and easy. They rarely are, especially for the men and women who confront the competition. But the same is true of all competition, like the one that resulted in Blockbuster’s filing for bankruptcy. And please let us not pretend that these adjustment issues can be wished out of existence by a return to protectionism.

Reader Discussion

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on January 31, 2019 at 11:06:52 am

"Boudreaux also notes that American exports “hit an all-time high this past April (before declining a bit because of Trump’s trade war)"

I think you are lying by statistics but I don't have the time to uncover how. My guess is that all those increases in exports are in the agricultural and energy sectors that employ only about 3% of the total population. Whoop de doo.

Show me how real employment has increased over the last 25 years AND real wages have grown along with it or get lost. We are a republic and the Trump and Tucker conservatives are winning the argument against you. At least half of the voters don't respond to dialectical arguments and a growing number of the other half don't trust your b.s. arguments anymore.

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Harold
on January 31, 2019 at 13:58:13 pm

Harold: Take a look at the data supplied at the links here: https://www.aier.org/article/straightforward-facts-about-american-economy

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Don Boudreaux

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