What Donald Trump Doesn't Get about "Free Trade"

Unfortunately for the American working class, Donald Trump doesn't know what he's talking about when he talks about trade, writes John R. MacArthur. (Photo: Jae C. Hong / AP)

What Donald Trump Doesn't Get about "Free Trade"

The future Republican presidential nominee is right to criticize so-called 'trade’ deals like NAFTA, but he does so for the wrong reasons.

As Donald Trump prepares to accept the Republican nomination for President Thursday night, he carries with him a record of verbal violence so extreme that it supposedly has placed him beyond the pale for much of his party's establishment. The billionaire dealmaker is said to be hated for his insulting and racist behaviour, to the point that a good number of "respectable" Republican leaders and fundraisers will either sit on their hands or quietly campaign for Hillary Clinton.

Sadly, such an analysis underestimates the cynicism of many American politicians, who will tolerate just about anything short of murder to get their way. Trump does have a problem with his party, but it's not personal -- it's business. And the one thing the Republican Party leadership really hates about Trump is his stated opposition to "free trade" deals like the North American Free Trade Agreement, Permanent Normal Trade Relations with China, and the proposed Trans-Pacific Partnership.

But Trump without his trade critique -- "I'm messing with bad deals that we could make good" -- has no chance of beating Clinton. The Democratic nominee is so identified with her husband's push for NAFTA, as well as her own support for trade deals as senator and secretary of state, that an entire generation of angry workers blame the Clintons for selling their jobs down the river to cheap-labour Mexico and China. Every one of these former factory workers is a potential Trump voter, and Trump's self-contradictions -- "I love free trade, but I want to make great deals" -- are mostly overlooked by his blue-collar supporters.

Unfortunately for the American working class, Trump doesn't know what he's talking about when he talks about trade. In fact, for him to call NAFTA and PNTR "free trade" agreements is misleading and unfair to more sincere critics.

There are free-trade elements within NAFTA, such as the elimination of the high Mexican tariff on imported U.S. and Canadian corn. But whatever classically trained economists might say about the nuances of NAFTA, it is principally an investment agreement, both financial and political, and was seen as such by the Republicans and Democrats who negotiated and promoted it.

U.S. tariffs on imported Mexican goods were already low in 1991 -- 3.5 per cent on U.S. "exports" of parts destined for assembly in maquiladoras and returned as finished products to the U.S. -- when the government of Mexican President Carlos Salinas entered into talks with the George H.W. Bush Administration. Before NAFTA went into effect in 1994, there was nothing formally preventing a U.S. company from setting up shop on the Mexican side of the border and profiting from cheap labour, proximity to American markets, and lax environmental regulation. But undermining the benefits of investing south of the border was American fear of Mexican political instability, best exemplified when President Lazaro Cardenas nationalized the country's oil industry in 1938. Salinas walked and talked like an economic liberal, but an American executive had to ask: what if the left returned to power and turned nasty toward their gringo guests, like Cardenas had done? And what about Mexican corruption? Shakedowns by the local ruling-party functionary or labour union boss were routine and disruptive.

Thus, the key provisions of NAFTA are found in Chapter 11, which is designed to protect against expropriation and assure that American companies would be paid off in a G7 currency (not pesos, if possible) under international law, adjudicated by non-Mexican tribunals, if American assets were seized, as in 1938. Affixed to this legal reassurance was the hope that more consistent inflows of American money would civilize the Mexicans -- make them more American, so to speak -- and stabilize their politics and currency. Corrupt though he was, Salinas believed in the salutary effects of free markets on businessmen and politicians.

Similarly with Permanent Normal Trade Relations with China -- rammed through Congress by the Clinton Administration in 2000 -- critics forget that PNTR is not, strictly speaking, a free trade deal. Like NAFTA, PNTR was sold as a way to boost U.S. exports, but it was really a prerequisite to China gaining entry into the World Trade Organization. Membership in the WTO constitutes investment insurance for every foreigner who puts money in the People's Republic. After all, China is officially communist, which from an American businessman's perspective is even worse than being Mexican, despite its even cheaper labour. While the WTO doesn't yet have NAFTA-like regulations, membership implies a commitment to playing by the rules of the world commercial order. It's no surprise that the day after House passage of PNTR, the Wall Street Journal reported: "The China investment rush is on." As Joseph Quinlan of Morgan Stanley told the paper, "This deal is about investment, not exports. U.S. foreign investment is about to overtake U.S. exports as the primary means by which U.S. companies deliver goods to China."

For Trump's contemptuous rivals in the Republican Party, that's a "great deal." And it's why so many Republican donations will stream to Hillary Clinton, who despite her opportunistic reversal on TPP, is seen as a much better bet for the big money.

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