The Free Market
From Nafta to "Superstate"
The Free Market 14, no. 10 (October 1996)
One peculiar aspect of the 1993–95 trade debate was the contradictory purposes—or so it seemed—of Nafta and Gatt. They embrace different theories of how the U.S. should conduct trade policy. The "bilateralistists" think that the U.S. should negotiate trade with one country at a time. The "multilateralists" say that leads to protectionist alliances; what we really need is one big agreement with the world.
Nafta was a species of bilateralism: a deal first negotiated between the U.S. and Canada and then extended southward. To be more specific, Nafta was an instance of regional mercantilism. The U.S. would be master of the North American continent, granting preferential trade status ("regional content" laws) to any goods produced in the signing countries, while penalizing goods from outside.
The treaty was as much about protection as trade. In the imaginations of Nafta's Washington theorists, this would give "us" (the U.S., Canada, and Mexico) a boost of market power over "them" (Asia and Europe), which would allow "us" to compete and win in the global competition for resources and markets. The point of Nafta was to allow "us" (which really means the government and its most closely connected banks and corporations) to throw "our" weight around the rest of the world.
The Clinton administration and its Republican allies adopted this rhetoric in the closing days of the debate. Even while denouncing protectionists, they made an openly protectionist appeal that presented the international trading arena as a battlefield, not a setting for mutual economic advantage.
Indeed, the spirit and the letter of Nafta represented an egregious violation of free trade. In real free trade, the government does not establish "regional content" rules or browbeat foreign governments into deals with approved U.S. corporations, for example. The government's only role is to allow business and consumers to trade with whom they choose.
The treaty imposed a restrictive legal superstructure on top of already increasing trade flows between the three countries. It was made worse by its overt attempt to "plan" the economies of Mexico and Canada, determining continent-wide environmental and labor laws, funneling foreign aid to Mexico, and implicitly guaranteeing to prop up the peso through monetary manipulation.
As bad as it was for the consumer, the deal made sense from the government's point of view. Nobody said mercantilism isn't good for the king, even if it impoverishes his subjects. As Commerce Secretary Mickey Kantor, who negotiated Nafta, said at a joint U.S.-Mexico conference, "each of us knows that our nation's prosperity rests on the fortunes of the other."
Thanks to Nafta—which linked the banking and industrial sectors of the two countries—they really do. When the peso collapsed, for example, the administration conspired with Congressional leaders in a $40 billion bailout the Mexican banking system (and the New York holders of Mexican government bonds).
Mexico is now paying the money back "on time"—by floating more bonds purchased primarily by the same New York investment bankers who were bailed out two years ago. Mexico's "credit rating" thrives, thanks to payments made by you and me. Nafta benefitted well-connected industries in both countries as well. They have used Nafta's protectionist machinery as a weapon against competition from abroad and padded their pockets at consumer expense.
The creation of Nafta was driven by the same goal that led to the creation of the European Community—and every other trade bloc in world history. Protectionism on a regional scale is as popular among politicians and the special interests they represent as national protection.
But Nafta wasn't the only trade treaty backed by the U.S. between 1992–1994. There was also Gatt, and the World Trade Organization it created to monitor and manage world trade. This treaty embodied textbook "multilateralism." Its purpose (as advertised) was to prevent precisely the protectionist activity that Nafta seemed designed to encourage.
When confronted with the contradiction, trade officials make an analogy to a wheel (Gatt) and its spokes (regions). But this is merely another way of saying that the U.S. would have never negotiated Gatt without first having entered into Nafta. To use the wartime analogies of protectionists, you should have an expectation of winning before entering battle.
How does the Clinton administration's support of one square with the equally intense support of the other? Put another way, how can a trade strategy be both regionalist and multilateralist at the same time? This is the mystery that has baffled many economists and political observers then and now.
The answer lies in the U.S.'s original pick to head Gatt's new World Trade Organization: Roberto Salinas, then president of Mexico. Working through his good offices, U.S. trade authorities hoped that the Nafta trading bloc could accomplish two purposes at once: protect its own sphere of influence from economic competition, and throw its weight around the world by dominating the trade adjudication mechanisms of the WTO.
It's sweet justice that it didn't turn out that way. After a two-year inflationary run up, the peso collapsed and the Mexican economy fell into a bottomless pit—only two months after the Gatt treaty had been ratified by the Senate. The once-exalted ex-President Salinas and his family were blamed for the catastrophe, and for murders and drug dealing besides. He had the good sense to skip town before his fortunes sunk as low as the peso itself.
Officials at the European Community suddenly had the political upper hand, and installed trade official Renato Ruggiero of Italy as head of the WTO. Dismayed, U.S. officials began subtly attempting to discredit the new organization and what they had praised as its authority over international trade.
In a conspicuous display of sour grapes, the Clinton administration began to threaten a series of trade wars: against China, Singapore, Japan, and, more recently, Iran and Iraq. In some cases, U.S. officials threatened tariffs as high as 100 percent, in open attack on the free trade doctrine the administration used as cover to pass the treaties. The theory of the government is that if you can't rule it, discredit it.
Nobody should be surprised that the government's rhetoric on free trade had no connection to its global designs. No honest free traders backed the WTO, but plenty of phonies did. Keynesian trade theorist Susan Ariel Aaronson—author of a new political history of the WTO—finds it especially amusing that supposed free traders "found themselves defending a Gatt/WTO that included a Committee on Trade and the Environment" and a call for "a working party on labor standards within the WTO."
This remarkable feat was made possible, says Professor Aaronson, because articles by conservative judge Robert Bork and economist Joe Cobb—with their exuberant praise of the treaty—gave it an ideological "cover." Cobb even dismissed the prospect of a global minimum wage on grounds that it would be too low to seriously affect U.S. industry.
For clues on how extreme the WTO's labor standards might eventually become, no need to look further than the charter of the International Labor Organization. It asserts more economic rights than the old Soviet constitution, going well beyond labor to include socialized medicine, guaranteed incomes, free recreational facilities, and more. The ILO remains what the Chamber of Commerce said it was in 1956: "a propaganda forum for statism and socialism."
The WTO may never become a full-blown vehicle for imposing the ILO charter on the world economy, but plenty of powerful people would like it to. "We must be more honest about the implications" of the WTO, writes Professor Aaronson in the final flourish of Trade and the American Dream. "To tame global problems," the WTO may "become a true superstate" and "force Americans to rethink how we are governed."
As this perverse hope underscores, there's an unbridgeable gap between authentic free trade and the global superstate of the socialist pipe dream. But the dissembling of government officials, Keynesian economists, and phony free traders has done much to blur the lines. The job of honest free traders, then, is to clarify the terms of debate, and resist every trade treaty and trade interference, no matter how it is advertised.
As Mises said, free trade means nothing more than laissez-faire economics applied across borders. The role of government is entirely negative: do not stop goods from coming across borders; do not prevent them from leaving. Neither regionalism nor multilateralism is consistent with this ideal. Only a "passive unilateralism," meaning active free enterprise, avoids the twin dangers of compromising sovereignty and illicitly projecting power on the rest of the world.
Jeffrey Tucker edits The Free Market
Cite This Article
Tucker, Jeffrey A. "From Nafta to "Superstate"." The Free Market 14, no. 10 (October 1996).