In their first college economics course students are introduced to the principal of comparative advantage and elements of international trade. By each nation producing goods for which its resources are best adapted, and engaging in trade, the world’s resources are used more efficiently. Total production is increased and consumers enjoy lower prices.
This may sound intuitively obvious, and can be easily demonstrated through use of simple diagrams and numbers. But given the controversy over international trade, there must be a catch — and there is. Production is increased at lower costs and consumers are better off in the long run. But as the eminent 20th century economist, John Maynard Keynes, reminded us, “We’re all dead in the long run.” Costs are incurred in the short run.
Globalization and international trade involve real people, lives and income. With international trade, however beneficial in aggregate and in the long run, there are winners and losers in the short run. If the gains from trade are sufficient that the winners would compensate the losers — some parties would be better off and no parties worse off — this would be what economists refer to as a “Pareto improvement,” named after the Italian economist, Vilfredo Pareto. In reality, the losers are seldom so-compensated.
For example, through trade, Americans enjoy lower prices for products produced in foreign countries than if they had to rely exclusively on domestic production. American producers of exported products enjoy higher prices for their products because of export demand. But some American workers lose out through reduced demand and sales of the products of their labor. Reduced prices for American consumers and increased prices for American exporters are no solace for American workers losing employment when imports compete with domestic production and manufacturing is moved south of the Rio Grande because labor is cheaper in Mexico. While in the aggregate, the gains through trade are large, workers who lose employment are not compensated. The Pareto improvement does not occur.
The study of economics centers on efficient use of resources, tending to leave equity considerations to others, including on the grounds that there is no agreed upon objective measure of “fairness.” The profession of economics — along with the profession of politics, and business interests — can be criticized for not appropriately addressing equity issues regarding international trade. To brush it off as, “on balance, we’re better off through international trade” is not sufficient.
While many, even most, lost manufacturing jobs are due to laborsaving technology, enough of it is clearly due to manufacturing performed overseas and south of the Rio Grande that globalization is politically contentious.
There are no simple, uncontroversial solutions by which to compensate workers who lose jobs and income through international trade, even as consumers gain through lower prices. While there have been feeble — some would say disingenuous — proposals to compensate for lost jobs through retraining workers, little of consequence has resulted. Even “retrained” 50-year-old manufacturing workers are unlikely to attain employment that compensates for those lost jobs.
It should be no surprise that international trade agreements have been opposed by organized labor. However, this should bring to light a track that has not received sufficient attention in previous agreements — namely the proposition that international trade should address the needs of all participants, including labor. This brings us to the 1994 North American Free Trade Agreement (NAFTA) that Donald Trump has excoriated as “Our Country’s worst trade deal.”
NAFTA triggered a surge in trade between the US, Canada, and Mexico. But it was criticized as costing American jobs by encouraging factories to move south of the border to take advantage of low wage Mexican laborers.
Trump demanded a rewrite, with Mexico and Canada going along and signing the rebranded agreement as The US Mexico Canada Agreement (USMCA).
The original NAFTA agreement neglected the opportunity to increase labor income of Mexican labor. Higher wages for Mexican workers, for example, would not only raise the income of those workers, hence demand for American products, but would tend to even the playing field. This would reduce the incentive for American manufacturing plants to move across the Rio Grande.
The revised deal provided Democrats the opportunity to weigh in on previously neglected labor interests. Before agreeing to support the USMCA, congressional Democrats negotiated with U.S. Trade Representative Robert Lighthizer for months behind closed doors to include additional labor and environmental standards in the agreement. A perennial problem with insisting on foreign labor standards is that of enforcement. Effort was made to include enforcement standards in the USMCA.
The matter of enforcement created a possible glitch, as Mexico’s top trade negotiator complained that “Mexico will never accept them if it is in any way about disguised inspectors.” Trade rep Lighthizer assured him that “these personnel will not be ‘labor inspectors’ and will abide by all relevant Mexican laws.” Was this a “wink and a nod” — “don’t worry, we’re not serious?”
So will this revised NAFTA, renamed USMCA, be a step toward leveling the playing field by raising standards for Mexican labor? We don’t know, but this is historic in that the USMCA received a rare endorsement from the AFL-CIO. Labor groups applauded the interagency committee that will monitor Mexico’s labor reform implementation and compliance with labor obligations.
While a few Democrats suggested that approving this bill would amount to a “Trump victory,” the predominant view was that this trade agreement that moves in the right direction. It was Democrats who insisted on inserting pro-labor standards. Republicans opposed these pro-labor measures. But if Trump would go along, there would be enough praise to go around.
The House passed the bill the day after the impeachment announcement. Instead of thanking her for getting the bill through the House, Trump continued to denigrate Speaker Pelosi — business as usual.
Including pro-labor measures in the bill was the right thing to do, even worth letting Trump, as expected, claim full credit. We all know it was a joint effort.
— John Waelti of Monroe, a retired professor of economics, can be reached at jjwaelti1@tds.net.
