Policy Implications: Clinton and Obama on International Trade Policy, NAFTA, and SWF’s

Policy Implications: Clinton and Obama on International Trade Policy, NAFTA, and SWF’s


By Osman Aziz


ITSSD Intern, Blogmaster of the ITSSD Journal on Economic Freedom


Much rhetoric has been exchanged on the campaign trail regarding the status of free trade and the future (or lack thereof) it has in American foreign policy. Both democratic hopefuls Hillary Clinton and Barack Obama have been in a perpetual state of flux over the status of NAFTA (North Atlantic Free Trade Agreement) and the perceived ills that it has accrued for the people of America. However acidic such criticisms of free trade may have appeared on the cameras, questions abound to the actual positions of each candidate on the undeniable progress that trade liberalization has taken in the world. Given the track record, neither Obama nor Clinton actually appear to be enemies of a free trade paradigm, which begs the question as to why such critical stances need to be taken against free trade agreements that, on the whole, have provided greater benefits than damages.


“In the minds of hard-core opponents of free trade, both Mrs. Clinton and Mr. Obama have checkered records in the Senate on trade agreements. Both voted against the Central American Free Trade Agreement but supported a trade pact with Peru last year, citing the inclusion of labor and environmental provisions that were not part of Nafta. Opponents, however, said crucial provisions in Nafta that led to jobs being shipped overseas were also part of the Peru agreement. Mrs. Clinton and Mr. Obama were also among only a dozen Senate Democrats who voted for a trade agreement with Oman in 2006.”[1]


The questions being framed as a position of political pandering is undeniable given the records that both candidates have on trade; but the irrefutable consequences of publicly assailing free trade policies could carry over to other aspects of international trade policy. Recent controversy over the ascendancy of Sovereign Wealth Funds (‘SWFs’) and the apparent lack of “transparency” that they possess has sparked a backlash from Democrats and protectionists alike who point to, without proper knowledge, the inherent “political” interests involved in such funds. Senator Obama’s position on altering the tax code to subsidize businesses that keep jobs in the US also smack of an underlying misunderstanding of economic efficiency and the effect such a position can have on inflating the prices of consumer goods by retaining inefficient employment capacities for higher wages.[2]


The Senators' indirect call for more governmental intervention in the reshaping of NAFTA and the US’ global trade policy seems to reflect a broader ideological agenda. First, it would seem that the candidates are attempting to label ‘trade’ as the cause of what many anticipate will be a US recession. Second, it appears that the Clinton-Obama strategy is to cast more not less governmental intervention in the marketplace as the necessary ‘change’ or ‘solution’ that will bring the US out of its current economic malaise. However, with little to say about the causes and eventual outturn that the current subprime crises harbors with it, protectionism and the scepter of populism may only serve to drive the US economy into further disarray. What appears to underlie these sentiments, are the overlooked benefits that such agreements as NAFTA have really had on the US and the region as a whole.


“While it is politically incorrect to say so, NAFTA has been good for all of North America. By opening the continent to investment and trade, capital has found more efficient uses, with benefits to producers and consumers alike. In NAFTA's first decade after 1993, trade between the U.S. and Mexico multiplied to $232 billion from $81 billion. Trade with Canada has also blossomed, with Canadian exports to the U.S. by surface transport rising 79% in a decade and U.S. exports to Canada increasing 38%. The deal also increased U.S. productivity. U.S. firms found they could be more globally competitive by putting some manufacturing in Mexico or Canada while retaining high-end production in the U.S.” [3]


By virtue of the fact that the same can be said regarding the projected benefits of the US-Peru FTA a year down the road reveals the hidden side that neither Senator is willing to uncover, namely the increase in economic efficiency that is followed by the passing of such free trade agreements. The very fact that increases in real GDP for all three nations member to NAFTA by approximately 50% each is evidence unto itself of the successes it has yielded, adding further distress to either the withdrawal, or the amending of an agreement that has worked so far.[4] Unilateral withdrawal from NAFTA, a trade agreement that has epitomized the inherent benefits of trade liberalization would be a fool hardy move and would send the wrong signal to the rest of the world regarding the US’s stance on international treaties, which up to this point has been maintained by a track record of trust and reciprocity. The fact that much rhetoric over NAFTA was staged in Ohio begs the question as why such sentiments are not being capitalized on in Texas. Given the fact that Ohio suffers from a six percent unemployment rate may help to explain the shifting positions of Senators Clinton and Obama (whether or not job loss can be attributed to NAFTA is a matter discussed later). The fact that such critical stances haven’t been assumed in Texas is evidence of the Democrats’ incessant need to position regarding the matter of free trade.


“As fiercely as they've fought in Ohio over the issue, the rivals haven't focused much on free trade in Texas, which has seen job growth and a huge spike in exports since NAFTA went into effect in 1994. ‘Every trade agreement has winners and losers,’ said Southern Methodist University economist Thomas Osang, who studies free trade. Texas had many of the industries poised to benefit, notably electronics and chemicals, and those industries outweighed losers such as lumber and furniture roughly 2-1.”[5]


Although Senators Clinton and Obama capitalize on protectionist and neo-mercantilist rhetoric in securing the votes necessary for election, the potential policy implications that such talk will have up to this point seems innocuous at best. What should come at greater concern are new up and coming issues such as SWF’s and sparking further regional trade agreements after aggregate bilateral agreements stabilize macroeconomic policy. Hostility to these new issues have already arisen on the campaign trail, and with no definitive voting record to base any judgment off of, speculation becomes a tricky game. The recent move by the Department of the Treasury to increase oversight of SWF’s and the additional pressure being applied to the IMF, although not nearly as caustic as the perspective promoted by Clinton and Obama, smacks of the age old argument surrounding “oversight” and regulation.


“Second, we have proposed that the international community collaborate on the development of a multilateral framework for best practices. The International Monetary Fund, with support from the World Bank, should develop best practices for sovereign wealth funds, building on existing best practices for foreign exchange reserve management. These would provide guidance to new funds on how to structure themselves, reduce any potential systemic risk, and help demonstrate to critics that sovereign wealth funds can be responsible, constructive participants in the international financial system.”[6]


This sort of even-handed approach by US lawmakers and Hillary Clinton is diametrically opposed to the position adopted by Barack Obama. Citing that the largest investment arms are located predominantly in the Middle East, Obama crafted the debate surrounding SWF’s as a matter of the US’s reliance on oil from the region while ignoring wholesale the fact that such investment vehicles as the Abu Dhabi Investment Authority and Kuwait Investment Authority are reacting as developing countries would be expected to act. Although Senator Obama does echo the sentiment regarding oversight and greater transparency that Senator Clinton trail-blazed, it seems as though it is difficult to assess how these two candidates will react when placed in the Oval Office and are tasked with the responsibility to react to new trends originating from developing nations. The apparent dearth of information regarding such emerging trends as decoupling theory and international financial integration on the part of the politicians vying for office so far reflects a more deeper and profound misunderstanding of the macroeconomic policies that will need emerge in the near future to handle such trends. Subsidizing producers in the US that produce consumer goods will only provide for more expensive goods, which coupled with a weakening dollar, will severely affect foreign nations’ economies which rely off of a robust trade with the US.[7] It seems that the only ostensibly legitimate contentions that the Democrats have so far leveled against the existing establishment are issues over labor and environmental policies.


Contentions over NAFTA: Why the Labor Rights/Environmentalist/Job Loss argument carries little to no weight


The contention that NAFTA has provided for a negative paradigm in terms of labor rights and environmental protections reflect yet another disturbing trend, that of misinformation. Although much talk has been thrown about regarding the lack of a sustainable provision for labor rights in NAFTA, the very fact that a supplemental labor stipulation under the North American Agreement on Labor Cooperation (NAALC) is provided for under NAFTA contradicts such claims.[8] The existence of a five year strategic agreement through the Commission of Environmental Cooperation also provides a framework through which environmental policy can be worked out.[9] Both Hillary Clinton and Barack Obama lambaste NAFTA as the sole perpetrator in the loss of jobs across the board within the US to foreign firms. Although NAFTA never promised a net total increase in jobs themselves, the fact that overall productivity increased significantly during the years that NAFTA has been in affect provides a clear contradiction to the overarching contention of job loss.


“U.S. employment rose from 112.2 million in December 1993 to 137.2 million in December 2006, an increase of 25 million jobs, or 22 percent. The average unemployment rate was 5.1 percent in the period 1994-2006, compared to 7.1 percent during the period 1981-1993… Growth in real compensation for manufacturing workers improved dramatically. Average real compensation grew at an average annual rate of 1.6 percent from 1993 to 2006, compared to just 0.9 percent annually between 1980 and 1993”[10]


The hidden benefits of an increase in overall productivity translate into cheaper consumer goods that would have been much more expensive if left to inefficient producers within the US. Constituency, instead of fact, seems to be playing a more significant role in swaying the supposed sentiments of both Senators Clinton and Obama (although the leaked memo detailing Obama’s “political positioning” may serve to shed a different light on things)[11]. Senator Clinton, whose reliance on the AFL-CIO has pushed her to a more protectionist stance, differs marginally from Senator Obama, whose support hails from the Teamsters and the Service Employees International Union, both of which benefit from increased trade with other nations.[12] Without a clear agenda from either democratic candidate on what they see as the ills of NAFTA and free trade, it seems as though the stances that each candidate has so far amplified has been done so with more emotion than substance. The three primary contentions that each candidate has regarding NAFTA specifically are addressed already within the agreement or are on their way to being accomplished under the current framework, leaving much to be asked about the actual disagreements each candidate has with not only NAFTA, but with free trade as a progressive paradigm.


[1] The New York Times. Despite NAFTA Attacks, Clinton and Obama Haven’t Been Free Trade Foes. February 28, 2008.
[2] The Wall Street Journal. CAPITAL: Decoding Candidates on Trade. February 21, 2008
[3] The Wall Street Journal. Unilateral Democrats. February 28, 2008
[4] US Department of Commerce. NAFTA-A Success for Trade. October 2007
[5] Todd J. Gillman, Gromer Jeffe. McClatchy - Tribune Business News. Punches Fly over Trade, Rival Tactics as Democrats Debate in Ohio. Washington: Feb 27, 2008.
[6] US Department of the Treasury. Under Secretary of International Affairs David H. McCormick Testimony Before the Joint Economic Committee. February 13, 2008
[7] The Economist. Finance and Economics: An Independent Streak: Decoupling 1. Jan. 26th 2008
[8] Office of the US Trade Representative. NAFTA-The Road Ahead. (2007)
[9] Office of the US Trade Representative. NAFTA Environment Ministers Adopt Trade and Environment Stratgeic Plan. (06/23/2005)
[10] Office of the US Trade Representative. NAFTA Facts: NAFTA Benefits. (October 2007)
[11] Financial Times. Obama under fire over NAFTA Memo. March 3, 2008
[12] Bhagwati, Jagdish (Financial Times). Obama’s free trade credentials top Clintons. March 3, 2008