Trade issues have been a big talking point in the current presidential election campaign. Republican Party nominee Donald J. Trump has criticized many trade deals the U.S. is party to, such as the North American Free Trade Agreement (NAFTA), the Trans-Pacific Partnership (TPP) and the U.S. support for China joining the World Trade Organization. While the Republican Party seems focused on jobs, the Democratic Party has raised more substantive issues with trade deals, said Philip Nichols, Wharton professor of legal studies and business ethics. He finds merit in revisiting some trade deals like the TPP, but cautioned against talk of walking away from them, noting that such moves would create uncertainties akin to the Brexit vote in the U.K.
Nichols discussed the outlook for trade deals on the Knowledge at Wharton show on Wharton Business Radio on SiriusXM channel 111. (Listen to the podcast at the top of this page.)
Here are five key takeaways from their conversation. Jump to the corresponding spot in the podcast using the time codes provided:
Is Trump Right on Trade Deals? It’s impossible to accept or reject Trump’s charge that the trade deals the U.S. has entered into are good or bad for the country, said Nichols. “There is no counter-factual,” he added, explaining that no data exists to show what would have happened without NAFTA, for example. However, the broad, nonpartisan consensus among economists and non-economists is that “NAFTA has been of net benefit to all three countries” — the U.S., Canada and Mexico, he said. For instance, he said NAFTA has reduced documented and undocumented immigration into the U.S. (14:25). “If we are concerned with immigration from Mexico into the U.S., it seems counterproductive to take measures that damage the economy of Mexico and create an incentive for people to leave Mexico and come here,” he said (14:50).
“[Pulling out of NAFTA] would be our own form of Brexit.”
A Seamless Idea Chain: NAFTA helped the U.S. auto industry gain competitiveness by breaking trade barriers between the three countries, said Nichols (04:15). “It’s more competitive because there is this seamless supply chain among the three countries and more importantly, a seamless idea chain,” he added (04:45). “The auto industry that straddles the three countries gets its ideas from all over the place.” Also, while Mexico ships cars to the U.S., the U.S. and Canada export auto parts to Mexico, he noted. Canada benefitted substantially from NAFTA, especially since trade accounts for a massive 75% of its GDP, compared with 28% of GDP in the U.S., he added (16:45).
Failed Promises? But NAFTA failed in delivering on an “implicit social promise” that people who were adversely affected by it “would be helped in some way,” said Nichols (02:15). “That failure to keep that promise legitimately engenders bitterness and disappointment with trade agreements even though … overall, they were beneficial.” He noted that industries like agriculture in Mexico were damaged by NAFTA, while other experts have cited missed goals in environmental protection, immigration, drug trafficking, higher-paying U.S. jobs and trade deficits.
Campaign Rhetoric or Substantive Arguments? Nichols found it hard to identify Trump’s specific problem with NAFTA. “[Trump] seems to suggest that NAFTA has allowed jobs to go to Mexico, but that is not supported by the evidence,” he added (07:15). He noted that the Democratic Party has identified specific issues with trade deals, but Trump is focused on “just jobs, not necessarily anything structural” in regards to both NAFTA and the TPP. By contrast, the Democratic Party is specific, especially on labor, wage, environmental and health standards with respect to the TPP, he said. The TPP may need be revisited, especially its investor protection clauses, he added.
“The notion that we can rip them all up (trade deals) and create something better is a fanciful notion.”
Could NAFTA Fall Apart? NAFTA’s member-countries could withdraw from the agreement with a six-month notice. If that were to happen, there would be a tremendous unraveling of supply chains” that would extend beyond the auto industry, and a short-term shock. “It would be our own form of Brexit,” Nichols said (13:00). He added that it would introduce a massive amount of uncertainty, similar to what Brexit has triggered (23:15). He also noted that trade deals involve complex negotiations, where each participating country doesn’t reveal all its cards and moves cautiously and incrementally. “The notion that we can rip them all up and create something better is a fanciful notion,” he added (22:45).