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Protecting Trade

Manufacturing jobs have been moving from advanced to emerging economies for decades, but only recently has the challenge posed by emerging economies fueled a broader political response. Elites who long ignored the problem are finally feeling the competitive pressure themselves, and have responded in the most cynical way possible.

CHICAGO – Toward the end of the last decade, globalization – the lowering of barriers to cross-border flows of goods, services, investment, and information – came under severe pressure. Populist politicians in many countries accused others of various economic wrongs, and pushed to rewrite trade agreements. Developing countries have argued for decades that the rules governing international trade are profoundly unfair. But why are similar complaints now emanating from the developed countries that established most of those rules?

A simple but inadequate explanation is “competition.” In the 1960s and 1970s, industrialized countries focused on opening foreign markets for their goods and set the rules accordingly. Since then, the tide has turned. Emerging economies, especially China, got a lot better at producing goods; and the old rules dictate that developed countries must keep their markets open to the now-more-productive producers from elsewhere.

To a cynical observer, developed countries’ current efforts to rewrite the rules look like an attempt not to level the playing field, but to thwart competition. One reason why emerging-market producers are competitive is because they pay workers less (typically because those workers are less productive). Hence, the United States-Mexico-Canada Agreement (USMCA, the renegotiated NAFTA) would limit Mexico’s advantage by requiring that 40-45% of automobile components be made by workers earning at least $16 per hour (by 2023). It also mandates a variety of labor protections, including stronger union representation for Mexican workers, which will be monitored by US inspectors. What looks like a good deal for Mexican workers imposed by sympathetic US negotiators could also be seen as a US effort to limit the number of manufacturing jobs in Mexico.