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Populism, Globalization and the Future of Trade: An Assessment

Posted July 12, 2017


The past year’s populist resurgence has brought to the fore ongoing debates about trade and underscored public concerns about internationalism. Can the mechanisms of globalization that shaped the twentieth-century world economy be salvaged to continue delivering prosperity in the coming decades?

In recent installment of Project Syndicate’s “Issue Adviser” feature, Rohinton Medhora, President of the Center for International Governance Innovation in Waterloo, ON, considers the differing perspectives and arguments by the diverse range of trade experts, economists and commenters that regularly contribute to the independent media organization in order to assess the populist threat to globalization and international trade.

With ample prodding from US President Donald Trump and other populist demagogues, public angst about globalization has become one of the defining issues of our time. Indeed, out of all of globalization’s many manifestations, populists have singled out international trade agreements for special criticism. To hear Trump tell it, “horrible” trade deals are to blame for almost everything that is wrong in the world today.

To be sure, populist nationalism appears to have suffered a setback in recent months, losing badly in national elections this year in the Netherlands, France, and the United Kingdom. But globalization is not out of the woods yet. Public concerns about the impact of international economic integration have been building up for years, and will not simply dissipate as a result of a few elections or referenda.

Ongoing debates about globalization have naturally focused on individual free-trade agreements, and on bilateral trade arrangements such as those between the United States and China. But they have also addressed more abstract questions, such as what the future of globalization may hold, and, specifically, whether a new rules-based global consensus can be forged for the twenty-first century. […]

One crucial indication of where global trade is heading came when Trump took office, and immediately withdrew the US from the 12-country Trans-Pacific Partnership (TPP). But another indication will come later this summer, notes Harvard’s Christopher Smart, a former special assistant to US President Barack Obama for international economics, trade, and investment, when the Trump administration’s strategy and objectives for renegotiating the North American Free Trade Agreement will finally “receive prime-time scrutiny.”

During his election campaign, Trump called NAFTA the “single worst trade deal” ever signed by the US. But it is worth recalling that when NAFTA came into force in 1994, it went far beyond the existing international-trade norms and practices at that time, and it significantly advanced the goals of economic liberalism. This was especially important for Mexico, whose membership in NAFTA signaled its intent to become a modern, developed economy. As Laura Tyson of the University of California, Berkeley, points out, “After NAFTA’s passage in 1994, trade between the US and Mexico grew rapidly,” such that, today, “the US and Mexico are not just trading goods with each other; they are producing goods with each other.”

It isn’t evident that the Trump administration understands this fact, not least because standard trade figures tend to hide the full impact of cross-border value chains. According to one estimate that Tyson cites, “40% of the value added to the final goods that the US imports from Mexico come from the US; Mexico contributes 30-40% of that value; the remainder is provided by foreign suppliers.” When these value-chain dynamics are considered, the US trade deficit with Mexico actually falls by half.

And that doesn’t even account for the millions of US jobs that are directly connected to imports, notes Anne Krueger, a former World Bank chief economist. After all, “Foreign automobiles,” Krueger points out, “would not be sold [in the US] if the parts and mechanics for servicing them were unavailable.”

Were Trump to impose a higher tariff on Mexican imports, as he has repeatedly threatened to do, US exports of intermediate goods to Mexico and Mexican exports to the US would both decline. The result, suggests Daniel Gros of the Center for European Policy Studies in Brussels, would be a smaller market for US exports to Mexico, more expensive Mexican inputs in US production, and higher prices for US consumers. In fact, one area where US consumers will almost surely foot the bill, contends Smart’s Harvard colleague, Jeffrey Frankel, is in the sugar industry, which has long enjoyed “trade protection, in the form of import tariffs and quotas, to ensure that domestic sugar prices far exceed those in supplier countries like Australia, Brazil, the Dominican Republic, the Philippines, and Mexico.”

According to Frankel, these protectionist measures have cost US consumers “an estimated $3 billion per year,” while fueling environmental degradation and job losses in other sectors of the US economy. But despite this poor track record, Frankel expects Trump’s NAFTA renegotiation to “produce a sweet deal for the US sugar industry,” owing to “a small group of wealthy sugarcane growers, largely in Florida, who offer generous campaign contributions to the relevant politicians.” And, beyond exposing conflicts of interests – a prominent feature of Trump’s presidency – Smart also suspects that the NAFTA renegotiation will reveal “fundamental flaws in Trump’s thinking” on trade.

That’s too bad, because, as Frankel points out, the decades-old trade deal could stand to be updated. For example, NAFTA does not currently cover “e-commerce and data localization,” and it could do more to protect the environment and workers. Moreover, the US in particular would benefit from adjustments to the current investor-state dispute resolution system and stronger intellectual property (IP) protections.

A reconceived NAFTA could also be expanded. With more countries in the mix, Canada could agree to import more dairy products from the US, in exchange for easier access to Japanese markets for its pork, beef, and lumber exports. Of course, at that point, Frankel concedes, NAFTA would closely resemble the ill-fated TPP.

Likewise, Smart argues that if Trump had kept the TPP on track, he could have improved not just the US position in Asia, but also his own position in the NAFTA renegotiation. Indeed, Mexico was “more willing to engage in a conversation about modernizing NAFTA when the prize included US-backed access to Asian economies through the TPP.” Now that the “TPP is off the table, Mexican enthusiasm for a new NAFTA could dim.”

Click here to read the entire piece as it appeared at Project Syndicate.