Blog No. 160. Carla Hills On NAFTA (and Job Training)

Forty years ago or so, I had the opportunity to work for Carla A. Hills when she was Secretary of Housing and Urban Development, and several years later we were law partners. In the meantime, Carla had served as United States Trade Representative under President George H.W Bush and formed her own international trade consulting firm, Hills & Company, in Washington, D.C. Today, Carla remains in the latter role, a highly sought-after expert whose practice takes her on an exhausting schedule of travel around the globe. (Not so coincidentally, she also serves as Co-Chair of the Council on Foreign Relations.)

Increasing speculation that President Trump might withdraw from NAFTA has prompted concern on the part of many, including former Secretary of State George Shultz who, with a former Mexican official, Pedro Aspe, recently wrote a New York Times op-ed, “NAFTA Needs an Update, not Repeal.” I found the arguments by Shultz and Aspe persuasive, but I also wanted to try to draw on Carla’s expertise. Somehow, amid travels to Mexico, China and Canada, she found time to give me detailed comments, strongly supporting the concept of “Update, Not Repeal.” I found them so informative and well-stated that I wanted to share them with readers of this space, and Carla gave me permission to do so:

Carla A. Hills’ Comments:

First, start with what the NAFTA accomplished, (i.e., would we want to give it up?).  It was the first comprehensive trade agreement that joined a developing and developed economies. By linking Canada, Mexico and the U.S., it created a $19 trillion market with 490 million consumers. The governments agreed to:

1. Eliminate tariffs on all industrial products and almost all agricultural products but for a handful with Canada;
2. Open a broad range of services including financial services, and provide national treatment for cross-border service providers ( the 1^st trade agreement to do so);
3. Remove significant investment barriers, ensure basic protections for North American investors, and create an effective dispute settlement mechanism to ensure investors had access to neutral, third party arbitration in cases of disagreements with host governments;
4. Establish enforceable protection of copyright, patents, trademarks, and trade secrets, (the 1^st trade agreement to do so).

What has been the impact after nearly a quarter- century?  All three economies have benefited. Focusing on the U.S.:

1. U.S. manufacturing output is up 40% since the NAFTA was signed and last year exceeded $2 trillion (I believe 2.4 trillion, a record).
2. 14 million U.S. jobs depend on U.S. trade with Canada and Mexico.
3. Today 80% of world trade is conducted through global supply chains and NAFTA created one of the most vibrant. Specialization has boosted the region’s productivity making North America the most competitive region in the world.
4. Our intra-regional trade is up 5-fold since NAFTA took effect. Today 1/3^rd of U.S. global trade is with our NAFTA partners.
5. Although most of the political criticism of the NAFTA has focused on Mexico, most do not know that U.S. exports to Mexico are up 6-fold since NAFTA took effect in ’94. Today the U.S. sells more to Mexico than to all of the rest of Latin America combined. Indeed, we sell more to Mexico than to Germany, France, the UK, and the Netherlands combined. In reality, we do not simply sell to one another, we make things together:  40% of what the U.S. imports from Mexico contains U.S. content, and 25% of imports from Canada contains U.S. content. That compares to 2% for Japan and 4% for China.
6. In addition, Mexico is a terrific export agent for the U.S. Since it has twice as many trade agreements as the U.S. (involving 45 nations including the EU) and its exports have high U.S. content, our producers get preferential access to markets where we have no trade agreements.
7. In the U.S. it is often said that Mexico has taken our jobs. But the NAFTA has helped to create jobs in both our countries. In 1993, US jobs connected to trade with Mexico totaled 700,000; today that figure is 5 million.

In my view we cannot afford to lose these very substantial economic benefits. Without NAFTA the average tariff on U.S. shipments to Mexico would be 7.4% (twice as high as U.S. tariffs would be on Mexico imports) and in particular sectors they would be much, much higher. Sectors like agriculture and autos would suffer enormously.

But we would not only suffer commercially. Even more worrisome, decoupling would put at risk unprecedented trilateral collaboration in dealing with today’s strategic challenges. Our three governments work very closely together, including sharing intelligence, to improve security at our borders. This is not a time when we can afford unfriendly neighbors.

Having said all of that, we certainly need to “upgrade” the agreement. We did not have digital trade in the early 90s. The environmental and labor side agreements should be incorporated in the main agreement. Mexico had constitutional restrictions on energy and telecommunications. There are substantial benefits from covering those sectors. We need to address  21^st century economic issues.

With respect to your Central American query, we are experiencing far more migrants from Central America than from Mexico (in fact more Mexicans currently leave the U.S. each year than enter). For security reasons, we want to work with Mexico on the issue of migration flows that come across its southern border to the U.S..  We could not deal effectively with that issue alone.

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Granting that the overall effect of NAFTA on employment in the United States has been positive, I asked Carla about the workers who have lost jobs as a result of NAFTA or other trade agreements, and she responded directly and with creative suggestions:

Although I believe we have done a very good job in leading the world in establishing rules that will encourage the opening of markets, which has boosted our GDP (the Peterson Institute calculates that the GDP of the US is up by $2.1 trillion as a result of the opening of global markets since WWII), in my view we have done a poor job in two areas: (1) in explaining to Americans the benefit our nation derives from international trade, and (2) in training those who have lost old jobs to take new jobs that are available.

Although much has been said politically about trade costing us jobs, most studies calculate that fewer than 9 or 10 percent of total U.S. jobs lost are the result of trade or international competition; the vast majority are lost because of advances in technology. Compared to the mid-80s, we are producing twice the output with half the workers. We could and should do a better job in assisting those who have lost their jobs for whatever reason (international competition, changes in consumer preferences, or technology). Trade Adjustment Assistance is inadequate. It requires a person to show his/her job was lost because of trade, but what about the majority whose jobs were lost for other reasons? We benefit as a nation from a talented workforce. As our people move up the economic ladder, they pay  taxes and respond to the needs of the 21^st century. The assistance we give today is an investment for tomorrow, making us more competitive.   We should be assisting that movement up the economic ladder.

Today we have 6 million jobs crying for trained workers. These jobs do not require a college degree, but usually just 10 to 20 weeks of training. We desperately need to upgrade our human infrastructure (just as we need to upgrade our physical infrastructure) to maintain our competitive leadership and our values. To this end we could: post on the internet a description of open positions and their geographic locations; provide a stipend to cover relocation and a stipend to cover support during training; and launch a public-private partnership to create community training centers in those geographic areas. Companies in need of skilled workers would be pleased to support such training centers (like community colleges) and many would support 100% of the cost. Taking these steps will require an improved understanding of how we benefit from open markets.

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Readers who find Ambassador Hills’ analysis as cogent and compelling as I do are urged to pass it on either directly or through social media. I believe that her message, concerning both NAFTA and the importance of job training, deserves attention well beyond the learned audience of RINOcracy.com.