Reflections on the Evolution of Trade Policy
The Trump administration’s renegotiation of the North American Free Trade Agreement (NAFTA) could launch a trade war with our major trading partners, Mexico and Canada.
But it also provides the opportunity to revisit the NAFTA agreement and refocus it on the economic gains of trade, rather than an array of non-trade related labor and environmental issues that were added, for the first time, in NAFTA. Returning trade treaties to their core purposes presents a valuable opportunity.
Prior to NAFTA, trade agreements were negotiated under the trade-specific goals of the General Agreement on Tariffs and Trade (GATT), which governed world trade in the decades following World War II. The world was eager to avoid the type of trade wars that had exacerbated the Great Depression, such as the Smoot-Hawley Tariff in the United States, and sought to move away from that era’s protectionist policies.
GATT proved highly successful in providing the rules for global trade negotiations for decades. Trade negotiations are never easy, but GATT greatly facilitated them. It clarified that trade was wealth enhancing, encouraging win/win outcomes to benefit all participating nations.
GATT recognized that some sectorial trade might adversely impact powerful domestic interest groups, such as producers and unions, and created suitable provisions to address those concerns. Nations enacted worker assistance, adjustment aid, and special protections. Still, under GATT, the rules focused on trade, not on other international policy disputes.
NAFTA changed all that by adopting two side agreements, one on labor and one on environmental policy. Labor and environmental groups had become increasingly powerful in American politics. They recognized that trade was becoming an important global economic integrative factor, and sought to piggy-back their global agendas into the process. Most U.S. free trade advocates, having little expertise in these non-trade areas, endorsed NAFTA with its side-agreements, seeing little threat in expanding the treaty policy agenda and hoping it would make passage easier.
Some, including my organization, the Competitive Enterprise Institute, opposed the move, arguing that adding non-trade items to the agreement might lead to global harmonization efforts and reduce the gains from trade.
Originally published to Forbes Online.