Hoover Daily Report

Nafta at 20: A Model for Trade Policy

via Wall Street Journal
Sunday, January 5, 2014

It's easy to take for granted the North American Free Trade Agreement, which turned 20 years old last week. Those who predicted that Nafta would lead to joblessness and poverty have been proven definitively wrong. Freedom to trade with the neighbors (Canada, Mexico and the U.S.) has instead created wealth and opportunity and made the continent more globally competitive.

Yet Nafta's stellar performance won't keep pace with rising expectations if North American integration is not deepened. And that won't happen without vision and leadership. For inspiration, I recommend a look back at the creation.

David Ricardo couldn't have dreamed up a better example than Nafta of how voluntary exchange makes all parties better off. A continental web of supply chains now supports production facilities and serves consumers in three countries with a combined population of 470 million. An estimated 40% of the content of imports to the U.S. from Mexico, and 25% of what Americans buy from Canada, originated in the U.S.

In everything from agriculture to aerospace, producers in North America now draw on comparative advantages in design, technology, labor and component manufacturing throughout the continent. This more dynamic region takes on competitors like China.

Yet if continental interconnectedness has become routine, it was never inevitable. Before Nafta, genuine free-trade agreements were rare, and even rarer between a developed country like the U.S. and a developing economy like Mexico's. Let's remember too that all three countries had powerful special interests bent on hanging on to the privileges of protectionism.

In December I was invited to the Hoover Institution at Stanford University for a panel discussion about the past and future of Nafta. Participants included the three top Nafta negotiators: American Carla Hills, CanadianMichael Wilson and Mexico's Jaime Serra Puche.

Mr. Wilson kicked things off with Canadian (trade) war stories. He noted that the 1965 auto pact, which removed tariffs on vehicles and parts, marked the birth of "the North American supply chain." It wasn't free trade but it was a crack in the door that let in light. Canada wanted more access to the U.S. market. On Jan. 2, 1988, Prime Minister Brian Mulroney signed the U.S.-Canada Free Trade Agreement.

It was a huge political risk, as the federal election in November of that year—still known in Canada as "the free-trade election"—proved. "It was fierce," Mr. Wilson recalled. Mr. Mulroney prevailed but only after "he took off his jacket and fought." His Conservatives won the election but lost 34 seats.

Less than two years later, in the winter of 1990, U.S. Trade Representative Hills and her Mexican counterpart, Mr. Serra Puche, had a discussion in Davos, Switzerland, about a bilateral agreement. Mrs. Hills told the Hoover panel that she brought the idea to President George H.W. Bush and in August "Jaime and I issued a report, saying it was a good idea." Mr. Bush agreed and announced that the U.S. "would pursue a bilateral." Canada's Mulroney government wanted in. The Nafta negotiations were launched.

These visionaries also had to be salesmen. Mrs. Hills went on the offensive. Her team "intensified our meetings with Congress," attended the governor's conference in Seattle in 1991, and took a congressional delegation to Mexico. She spoke at a textile manufacturing convention, where she "got booed." Listening to Mrs. Hills, I'd say she relished the fight.

Under President Carlos Salinas, the cultural fabric of Mexico's one-party corporatist system was coming apart. The economy had been "highly protected for five or six decades," Mr. Serra Puche pointed out, and there were "huge distortions in prices." To build support for Nafta, the Mexico team worked to show the business community that the reliance on trade preferences was hurting competitiveness.

The Nafta dreamers came from different worlds. But they held in common the belief that more freedom would make life better for all North Americans. Never did they shrink from their main challenge, which was to persuade skeptics.

Bill Clinton, who took office in January 1993 when the Nafta deal was on the one-yard line, played a key role in getting it across the goal line. According to his trade representative, Mickey Kantor, who was also at the Hoover gathering, the Clinton team ran into trouble with the Florida congressional delegation. To break the impasse, Mr. Clinton told him: "Open the candy store."

Mrs. Hills said she would have "liked to have seen immigration and energy as part of the deal. It would have avoided many problems today." The Obama administration's decision to block TransCanada's TRP.T -0.95% Keystone XL pipeline comes to mind. Some panel participants commented that the Keystone stall threatens to undermine confidence in the good faith of the U.S.

It's not too late. But now, as then, expanding economic freedom in North America requires a commitment to the cause. Regrettably that is in short supply in Washington