There’s a Silver Cloud in Every Lining
By William Reinsch
One of my favorite malapropisms growing up was, “There’s a silver cloud in every lining,” a twisted reminder that sometimes good news comes wrapped in smelly old newspaper. That’s a possibility that should be considered if the president decides to pull out of NAFTA, as he has threatened to do multiple times. Indeed, the news from the fourth round of negotiations so far suggests that is daily becoming a more likely possibility.
On the surface, there is no question this would be a disaster both economically and politically. Economically, the earliest losers would be America’s farmers who could see the market growth they’ve developed in Mexico over the past 23 years dry up fairly quickly if pre-NAFTA tariffs are re-imposed (and remember, that will be up to the Mexicans, not Donald Trump). Longer term, our losers will be in manufacturing as companies either struggle to develop new supply chains that meet higher rule of origin standards or decide to drop out of that rat race and simply import. Either way we get more expensive products and a prolonged period of uncertainty as companies try to cope with the huge disequilibrium that has been created. What we don’t get is new jobs.
Perhaps more important but harder to measure will be the opportunities foregone because of Trump’s move to dis-integrate the three markets. Services providers in particular will no doubt find doing business in either Canada or Mexico more difficult as both countries resort to their own Plan B’s as alternatives to the newly unreliable U.S. trading partner.
Politically, the president has in a few short months already destroyed the good will in Mexico that the previous ten presidents patiently built up, and a NAFTA withdrawal will doubtless push his personal standing down into single digits as well as lower the overall image of the United States more than he already has.
Interestingly, all that has happened even though he has not actually done anything — his bark truly is turning out to be nearly as bad as his bite. If he ultimately takes a big bite out of NAFTA, you can expect North American relations to get markedly worse, as both Canada and Mexico will likely have proportionally even more losers than we will. If that happens, we will also be painfully reminded that we are living in a world where friends and allies matter, and if you don’t have any — a condition we are rapidly developing — it is much more difficult to achieve your political objectives. It turns out that globalization is not just an economic phenomenon; it’s a political one as well.
So, what’s the good news in this fetid pile of wrapping paper? It’s the possibility that if all these bad things actually happen, protectionism will be thoroughly discredited, and it will be easier for the pro-trade forces to move their agenda once Trump has left the scene. The trade skeptics have done a good job over the past decade convincing a lot of people that more trade means less income and fewer jobs. Perhaps if we have a period of less income and fewer jobs because of less trade, those voters will come to their senses.
That said, there are two reasons why this is probably wishful thinking. First, we’ve seen this movie before in the perennial debate over supply side economics. Despite a mountain of evidence that it doesn’t work, Republicans still push forward with it — look at the current tax reform debate. That teaches us that expecting rationality from our politicians is too big an “ask,” and it may be too big to of ask our voters, or at least the Trump voters, as well.
Second, as my longtime friend and colleague, former USTR Susan Schwab, reminded me last week when I tested my hypothesis on her, the bad fallout from a NAFTA withdrawal will not likely happen so quickly that people will see a direct link. Indeed, when one talks about opportunities foregone, it’s likely the connection will never even be noticed. The farmers, having lots of experience with random disruptive events, have already figured it out and see the link between NAFTA and their prosperity very clearly, but our manufacturing workers may not. If our auto companies are faced with absurd NAFTA content requirements and decide instead simply to import and pay the tariff because it’s cheaper, who will get the blame? One thing is certain when it comes to blame — our president will pass it on to someone else.
So, perhaps there is no silver lining out there, but like the old story about the little girl looking at the room full of horse manure, I still choose to look for the pony.
William Reinsch is a Distinguished Fellow with the Stimson Center, where he works principally with the Center’s Trade21 initiative.