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Annals of free trade: will TPP learn from our NAFTA past, or are we condemned to repeat it?

President Clinton trumpeted NAFTA’s labor protections when he signed the deal into law in 1993. Reuters

The Trans-Pacific Partnership (TPP) – a mega deal between the United States and 11 trading partners – has provoked the fiercest trade debate since the North American Free Trade Agreement (NAFTA) more than two decades ago. Like NAFTA, a Democratic president is leading the charge and relying on mostly Republican votes to muscle it through Congress.

Let’s clear something up from the start: the increasingly heated debate over TPP is not about free trade versus protectionism or even about more trade versus less trade. All trade in so-called “free trade agreements” is heavily managed. The real issue concerns the rules of the game. The key question is: who wins and who loses as a result?

Proponents of TPP have tended to sing the praises of free trade in the abstract and point glowingly to theoretical gains trade makes possible – as if the alternative were no trade.

Not true. Of course trade can produce real gains, but rules of the game that give better protection to workers, consumers and the environment are vital to boosting trade by expanding purchasing power. And these gains can minimize the economic devastation in US communities that has sparked such a strong backlash against “free trade.” These protesters aren’t necessarily opposed to trade but are desperate to stop the reality of trade that is coming at their expense.

Here we can learn something from the experience over the last 20 years of NAFTA, a pact that included Mexico, Canada and the US, all of whom will now become part of the proposed TPP. That deal got a boost last week when the Senate passed a measure that would limit lawmakers from amending the final deal. They would only be able to vote it up or down. If the House also passes so-called fast-track trade authority, TPP will more likely – but not automatically – get Congress’s nod as well, perhaps as soon as later this year.

My research into the impact of NAFTA paints a dark picture of what we can expect from TPP unless lawmakers ensure stronger labor protections than are currently included in the deal.

Lessons from NAFTA

In 1993, when NAFTA was being debated, Mexico faced a disturbing reality: manufacturing productivity was rising at the same time real wages for Mexican workers were declining. Autos and color televisions were moving along assembly lines in state-of-the-art factories whose productivity and quality rivaled that of the US or Japan, while workers were often living in communities without running water.

Economists tell us low wages reflect low productivity, but here we were seeing high productivity and rock-bottom wages. The result was high-productivity poverty. Why? A key factor was a lack of critical labor rights: the virtual impossibility in the export sector for Mexican workers to form independent unions and bargain collectively for better wages and conditions.

US unions forged the link between rising productivity and wages from 1945 to the mid-1970s. As a result, highly competitive companies and strong unions produced a robust middle class and a growing economy. Today, declining union strength has contributed to a similar wage-productivity disconnect. US productivity has outstripped wages by 40% since the mid-1970s. Robust is hardly the word you’d use to describe today’s middle class.

NAFTA contained strong language to harmonize upwards the standards covering investment and intellectual property rights so that building a plant or opening a business in Nuevo Leon would be as secure as doing it in Ohio. And Mexico instituted extensive reforms on its own to ensure a “business-friendly” climate even before NAFTA was passed.

When it came to labor and the environment, however, the details were relegated to side-agreements that were nonetheless hailed as the strongest and most progressive to date, including by then-President Clinton. But the accord excluded the core issue of the right of workers to form independent unions and has had weak to nonexistent enforcement for what it did cover.

Effusive praise, meager results

In fact, all free trade agreements the US has signed since NAFTA have followed the same pattern: effusive praise for labor protections followed by meager results. Senator Elizabeth Warren released a review of this experience in May, titled “Broken Promises,” documenting the anemic enforcement of these protections.

Senator Warren on TPP.

The report points out that the US Department of Labor “has accepted only five claims against countries for violating their labor commitments, and it only agreed to restart the first ever labor enforcement case under any free trade agreement in 2014, six years after the initial claim was filed.”

As my research has shown, by strengthening investment protection and largely ignoring worker protections, real wages in Mexican manufacturing continued to slide in the wake of NAFTA, declining almost 20% from 1994 to 2011 while productivity grew almost 80%. This loss for Mexican workers also contributed to a sharp downward pressure on manufacturing wages in the US. The combination of high productivity and depressed wages not surprisingly can serve as a beacon for investment.

Tales from the auto industry

Consider the automobile industry, the most important manufacturing industry in both Mexico and the US.

Manufacturing does not have to be a zero-sum game, and rising wages could create new demand in both countries benefiting workers and their families as well as fueling demand. Just the opposite happens if low wages become the source of competitive advantage.

Mexico has achieved striking success under NAFTA in the auto sector. The country has become the seventh-largest car maker in the world and the fourth-largest exporter, trailing only Germany, Japan and South Korea. Mexico now exports more light vehicles to the US than Japan.

Despite a slow-growing economy and traumatic drug-related violence, international automakers have committed US$21 billion in new auto investment in Mexico in the last two years, according to the Wall Street Journal, “lured by Mexico’s low wages and more than 40 free-trade deals.” The country is headed toward producing 5 million vehicles annually by 2020, compared with 3.2 million last year. US assembly lines produced 11.6 million in 2014.

The growth of an advanced auto industry could be a great benefit to Mexico and to workers and companies in the US. When the draw is low wages, however, Mexican consumer demand is diminished and US workers share the pain. Mexican auto wages are 10% to 20% of comparable US wages, in part, depressed by a lack of labor rights.

Seventy percent of light vehicles made in Mexico are exported to the US. Mexico is the production site, but the US is the market. This imbalance has seen the bilateral trade relationship tilt from a $4 billion US merchandise trade surplus in 1992 to a $100 billion deficit in 2014, $63 billion of which comes from the auto sector alone.

Auto supplier jobs in Mexico are expected to climb from 700,000 currently to 1 million over the next several years. In many cases, production that used to take place in the US has moved South. A new Mazda plant that will employ 5,000 by early 2016 replaced assembly in Flat Rock, Michigan. Toyota is breaking ground on a new plant to assemble Corollas in central Mexico, formerly built in a Fremont, California, plant employing 4,000. These workers won’t be singing the praises of free trade anytime soon.

Well, you might be thinking, isn’t all this talk about trade and manufacturing so 20th century? After all, manufacturing in the US now accounts for only about 10% of employment, and what’s the difference if more of these jobs migrate to low-wage areas?

The difference is critical because this sector plays an outsized role in research and development, and each manufacturing job creates many more in the broader economy. Germany’s economic success has shown the value of a high-wage, globally competitive manufacturing sector to an advanced economy.

Reform begins long before ink dries

The countries participating in TPP represent almost 40% of global gross domestic product (GDP). Strong labor and environmental protections are vital to ensure global competitiveness is based on innovation, productivity and quality, not who can press down hardest on wages or have the weakest environmental standards. It is an argument for expanding trade in a way that results in inclusive societies.

The NAFTA experience indicates that for this to happen, serious reform must begin before any agreement is signed – the moment when leverage for change is the greatest – and enforcement needs to be taken seriously. Instead, TPP is in danger of locking in a flawed status quo for labor and the environment.

And there’s a lot more at stake with TPP. The dispute settlement process, at least according to a leaked draft, makes the agreement appear more like a “Trans-Corporate Partnership” with quasi-privatized panels that ignore conflicts of interest. And these bodies would have the power to undermine domestic legislation that protects consumers enacted by elected bodies.

As Joseph Stiglitz noted, “the real intent of these provisions is to impede health, environmental, safety, and, yes, even financial regulations meant to protect America’s own economy and citizens.”

When it comes to healthcare, TPP provisions could prove catastrophic to millions. We need to take seriously the concerns of Deane Marchbein, president of Doctors Without Borders USA, who writes, “TPP, in its current form, will lock-in high, unsustainable drug prices, blocking availability of affordable generic medicines, and price millions of people out of much-needed care.”

Trade promotion authority, also known as fast-track, passed the Senate in late May after a bruising fight and is now on the way to the House where the vote could prove much closer. Approving this bill would ensure one more round of grand promises and nonexistent results for workers and consumers as well as compromising the rights of citizens.

To paraphrase philosopher George Santayana’s famous words: “Those who cannot remember the past are condemned to repeat it, only with TPP on a far larger and more damaging scale.”

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