Trade & politics: Bark and bite

Clinton and Obama stoke protectionist fires that could prove hard to contain.

In the lead-up to the Ohio primary, the Democratic candidates repeatedly clashed over which one is most authentically anti-NAFTA. “We will opt out of NAFTA unless we renegotiate it, and we renegotiate on terms that are favourable to all of America,” said Hillary Clinton during a debate in Cleveland on Feb. 26. “I will make sure that we renegotiate,” Barack Obama shot back. “We should use the hammer of a potential opt-out as leverage to ensure we actually get labour and environmental standards that are enforced.”

Who won the war on NAFTA? In the March 4 primary, Clinton took Ohio. (And Rhode Island and Texas. Obama took Vermont. John McCain, who backs NAFTA, won the Republican nomination.) But the NAFTA-bashing from both Democrats must have been music to the ears of many in Ohio — large parcels of which remain a wasteland of shuttered mills, seven years after the last recession. Unions also hear sweet harmonies in such talk. When the Teamsters endorsed Obama on Feb. 20, president Jim Hoffa cited the candidate’s pledge to fight for “fair trade.”

Less charmed is Canadian Minister of International Trade David Emerson, who didn’t hesitate to point out that Canada is the largest supplier of energy to the United States, and that NAFTA provides the “foundation” of the integrated North American energy market. In other words, cool the rhetoric.

After all, blaming NAFTA for America’s economic woes doesn’t make much sense. A study by the Economic Policy Institute finds that the U.S. economy has lost one million jobs, mostly in manufacturing, since 1994. In the same period, 25 million more jobs have been created, according to an October 2007 policy brief from the Office of the U.S. Trade Representative. As former Council of Economic Advisers member Matthew Slaughter, a professor at Dartmouth College, points out, job losses in manufacturing have to do more with technological change and Asian competition than with NAFTA. Unfortunately, says Slaughter, in all the NAFTA-bashing, policies that offer real fixes — making the payroll tax more progressive, say, or making a real commitment to investing in skills retraining — are not being focused on.

What’s most significant here is that neither Democratic candidate is coming clean on what the talk actually means. It’s unclear what stricter “labour standards” are, or how they might be negotiated, implemented or enforced. This silence on details speaks volumes. By not committing to a clear agenda for “fixing” the treaty, both politicians leave themselves an exit strategy large enough to drive a truck through. Once in office, the much-ballyhooed labour standards could suddenly prove more difficult to find consensus on; discussion of the standards’ enforcement mechanism could get lost in the bureaucratic quagmire.

Richard Parker doesn’t buy the NAFTA-bashing for a second. A professor of public policy at the John F. Kennedy School of Government at Harvard and a veteran of many Democratic political campaigns, Parker pointed out in an interview before the primary that Obama, in particular, has “made noises about doing right by workers in the past. But so did Bill Clinton. So did George W. Bush. Yet Obama voted for free trade with Peru. So I wouldn’t put much credence in the anti-NAFTA rhetoric.”

Consider the countervailing economic influences. The volume of trade at stake in the NAFTA zone is an estimated US$2.4 billion per day, accordingto the Office of the U.S. Trade Representative. Taking time out to renegotiate the treaty would plunge all three economies into chaos, when the U.S. can ill afford it. “It’s Ohio, Ohio, Ohio, Ohio, Ohio,” says Parker. “They wanted to win Ohio. Last time around, they lost it. So they will say and do anything to make it in that state.”

This interpretation is borne out by the alleged antics of Austan Goolsbee, Obama’s senior economic adviser. According to media reports, Goolsbee privately reassured Canadian officials last month that the anti-NAFTA rhetoric was mere political posturing. In advance of Ohio, the Obama camp, eager to shore up labour support, claimed the reports were “inaccurate,” without clarifying exactly what was inaccurate about them. Meanwhile, Stephen Harper, whose office had been fingered as the source of a leaked memo about the Goolsbee meeting, says he is looking into it.

All of this would be mere entertainment — amateur hour, frankly — if the soaring rhetoric about saving the hapless American worker from NAFTA wasn’t coming at this particular point in time. According to a January working paper by Philipp Maier of the Bank of Canada, “now the risk of protectionist trade policies has increased.” In his paper, Maier points to a poll done in 2007 in which six out of 10 Republicans say they now believe free trade hurts the U.S. economy. Add the plethora of trade skeptics elected to Congress in November 2006, and Schumer-Graham, a pending bill that initially proposed to slap a tariff of up to 27.5% on goods from China, and the Democrats’ populism might touch off a fire that even golden-tongued Barack Obama may not be able to put out, were he elected to office.

In such a political atmosphere, argues Maier, election promises made by an “opportunistic policy-maker” could resultin significant economic consequences. Maier posits beggar-thy-neighbour scenarios in which tariff walls erected by the United States to placate specific interest groups are met with tariffs elsewhere. In the short term, foreign goods would become more expensive in the States, and U.S. GDP rises. But in the long term, U.S. goods become more expensive globally, leading to a fall in export volumes that ultimately hurts both workers and consumers. “If this risk were to materialize,” writes Maier, “the potential negative impact on global economic growth could be very large.”

Why the worry? The last time we saw this movie was in 1930, when the passage of the Smoot-Hawley act raised tariffs on agricultural imports to the United States. That act became associated with a wave of protectionist economic activity worldwide, in which mounting tariffs contributed to an overall decline in world trade of 66% between 1929 and 1934.

Many Canadians might not consider that “change we can believe in,” to borrow the Obama campaign rhetoric. But the potential long-term international consequences of their man’s or woman’s rhetoric don’t exactly seem to be top-of-mind in either Democratic camp.

In the short term, some respite should arrive in the wake of the March 4 primary. But come April, when the campaign trail hits Pennsylvania, another Rust Belt state, the anti-NAFTA chorus will return to the podium. Just don’t lose too much sleep about what it all might mean. At least, not yet.