July | August 2017

Trade Deals Get More Attention Due to NAFTA

By Mary Branham, CSG Managing Editor
The way Hawaii Rep. Roy Takumi sees it, states didn’t pay close attention to the impact free trade agreements would have on state policies in the 1990s, when Congress passed the North American Free Trade Agreement, known as NAFTA.
They’re paying attention now.
“As (free trade agreements) started to proliferate, legislators, including myself, became more aware of how these trade agreements went beyond international trade and encroached into what (were) matters that states and only states historically dealt with,” Takumi said. That includes procurement, investment and service policies.
As Congress considers additional trade agreements with South Korea, Colombia and Panama, state policymakers are taking action and making their concerns known. That includes what they perceive as lost jobs.
But Takumi and others say it goes well beyond that.
“In every (free trade agreement), there may be sections that are benefits and others that are not,” he said. “Or it could be beneficial/negative to some states and not to others.”
That’s why a growing number of policymakers are questioning whether the federal government should have the power to unilaterally bind states to provisions of those agreements. In fact, a bipartisan group of lawmakers from across the country crafted a letter asking Congress to prioritize state sovereignty in any U.S. trade agreements.
“We strike a fine balance between the powers granted to the state and federal government, and as a democratic society, we must seek transparency to ensure that this balance is not skewed and rights are preserved,” said New York Assemblyman William Colton, a leader in the effort to get state opinions to Congress. He also sponsored the Jobs and Free Trade Act during this legislative session in New York.
“If we continue to expand these types of agreements without any input from the states, state sovereignty will be eroded, diminishing our right to govern based on the characteristic needs of the locality,” Colton said.
His legislation would require New York’s governor to get consent from the legislature before giving the U.S. trade representative permission to bind the state to any trade agreements. It also would establish a task force to analyze the potential effects of such agreements on state laws, regulations, the economy and employment.
Hawaii was the first state to pass such legislation. Although no free trade agreements have been enacted since the state approved the legislation in 2007, Takumi believes it will help his state.
“At a minimum, there would be hearings, which would enable the public to weigh in as to whether or not signing on to (a free trade agreement) is in the best interests of the state,” he said.

NAFTA’s Effects

Policymakers like Takumi and Colton want to pre-empt the negative effects they have seen in the 17 years since NAFTA has taken effect.
The nonpartisan Economic Policy Institute quantified that impact in a recent briefing report, “Heading South: U.S.-Mexico trade and job displacement after NAFTA.” As of 2010, the trade deficit had displaced 682,900 U.S. jobs, said Rob Scott, senior international economist and director of international programs at the institute, the author of the report. Every state and every Congressional district has lost jobs because of the trade imbalance that came when NAFTA took effect in 1994, Scott said.
“Prior to NAFTA, we had a surplus with Mexico that was sustained for a decade or more … roughly balanced trade,” Scott said. “That changed very significantly after NAFTA took effect on Jan. 1, 1994.”
And it’s hit every state. The most affected states are those in the Rust Belt, which were heavily dependent on manufacturing. Michigan was the hardest hit, losing 43,600 job opportunities—about 1 percent of state employment in 2005–07, according to Scott’s research.
Economists predicted at the time NAFTA was passed the U.S. would gain several hundred thousand jobs due to growing trade surpluses with Mexico, according to Scott. But they also predicted that exports to Mexico would grow faster than imports. That didn’t happen.
“These job losses are being driven by growing trade deficits with Mexico,” said Scott. “Exports support domestic jobs, but imports displace them.”
The problem, Scott said, is the government economists simply looked at tariffs, which NAFTA eliminated. But tariffs weren’t the only thing that mattered in the agreement. Scott said the agreement contained 2,000 pages of measures designed to make Mexico a safer place to do business, as well as investor guarantees that eliminated certain tools Mexico had previously used. The agreement, for instance, eliminated the requirements that companies make investments in Mexico or export a certain amount of products, he said.
“What that did was make Mexico a much more attractive place to invest,” Scott said. “The real driving force of NAFTA was the growth of foreign investment in Mexico.”
Many companies, he said, closed U.S. factories and moved to Mexico to take advantage of low wages and a very friendly investment environment.

States Taking Action

Many of these free trade agreements, Scott said, allow states to opt out of certain provisions if they do so before signing on. And that’s just what they are doing with these new agreements after their experiences with NAFTA.
Some state policymakers don’t like the sections on services and government procurement. In past agreements, Scott said, states have been required to participate in government procurement agreements with other countries, which prevents them from purchasing locally made products. States are now opting out of those sections.
“They’re using state purchasing power to keep jobs at home,” Scott said.
And state officials are paying more attention to the new agreements that mirror NAFTA and other trade agreements approved in the past.
“At a minimum,” said Takumi, “states should have the right to decide whether or not trade agreements are in the best interest of their citizens in areas such as procurement, investment and services that have always been under the purview of states and not the federal government.”
As Colton from New York puts it: “As a state legislator, I have no constitutional authority to regulate interstate commerce, let alone commerce with other nations. But I do have the authority under the 10th Amendment to create laws that protect the people living in this state and to improve their quality of life.”