Despite "Presidential" Gaffe, Obama Has a Point

NAFTA needs to be renegotiated -- for various reasons

This past week, would-be Democratic presidential candidate Barak Obama provoked a notable response when he mis-titled the Prime Minister of Canada.

"I would immediately call the president of Mexico, the president of Canada, to try to amend NAFTA, because I think that we can get labour agreements in that agreement right now," Obama announced during a Democratic debate in Chicago.

While the remark has spawned numerous criticisms accusing Obama of lacking an understanding of foreign policy issues, many of the critics are overlooking a fundamental fact about Obama's gaffe.

Mostly, that he's right.

While Free Trade has benefited Canada's economy in various ways -- including allowing for increased flow of American development capital into Canadian industries -- NAFTA has, in many respects, turned out to be a failed god economically.

Part of this has to do with fundamental flaws in free trade regimes. Free trade is an economically sound concept. It focuses around the belief that every different country in the world possesses areas of competitive advantage, and encouraging countries to focus on their areas of competitive advantage allow for an aggregate increase of production of those various products, thus benefiting everyone by making them superior, more plentiful, and cheaper.

This is free trade in theory. In practice, free trade has turned out to be very different. For one thing, because it focuses on generating wealth through aggregate production increases that are pursued through an economic environment that encourages non-competition in areas of competitive advantage, the concept of trade deficits should not be part of the economic lexicon of a free trading state.

Yet, the trade deficit has become something of an obsession for some American economists. An economic moral panic emerged when 2003 turned out to be a record year for the American trade deficit, as the United States imported 17.1% more than it exported. Under proper free trade principles, this is entirely to be expected in a country whose comparatively strong currency gears its economy toward importing.

Of course, this is an area where free trade theory fails. Comparative advantage may encourage countries to import more than they export, but this importing must be sustainable, and it becomes unsustainable if insufficient wealth is being produced within the country to finance such imports.

In particular, the outsourcing of American jobs into the Mexican market has become problematic. As American jobs are exported to Mexico, putting those once employed out of work, this undermines the economic viability of the United States, in both its private sector (as exporting manufacturing jobs also undercuts the domestic market for those products), as well as the public sector (as the tax revenue lost harms the government's ability to operate and remain fiscally solvent).

Part and parcel of this problem is the comparatively poor wages paid to such workers in Mexico, which also contributes to the problem of illegal immigration into the United States, as Mexican workers smuggle themselves north in order to live in the United States and enjoy its far superior labour conditions.

NAFTA has also contributed to the spread of sweatshop work conditions in Mexico. This is no surprise, as this has turned out to be the case almost anywhere where free trade policies have allowed business from developed countries to exploit the lax labour laws of such countries.

This is actually natural under free trade, as labour becomes a comparative advantage for countries that have such lax conditions -- advantageous for nearly everyone involved but the workers; those who would be unemployed, and those who would be exploited.

When Barak Obama talks about the need for labour agreements to become part of free trade agreements, he isn't demonstrating a lack of understanding of the issue. In fact, he's demonstrating rare and remarkable clarity.

The other reason why NAFTA needs to be renegotiated is that the United States has, of late, has refused to abide by it.

Consider the recently-settled trade dispute between Canada and the United States in regards to softwood lumber. During the dispute, the United States argued that the Canadian government unfairly subsidized softwood lumber producers.

NAFTA and World Trade Organization rulings routinely favoured Canada (although one NAFTA ruling merely concluded that the tariffs being imposed were too high, although tariffs were, in principle, justified).

Yet, the United States refused to abide by the rulings, all along insisting that Canada negotiate with them. A 2003 attempt to negotiate such a deal failed, although a deal was reached in 2006, amidst great controversy.

As a treaty signed between the United States, Canada and Mexico, NAFTA represents international law. Yet international law is administered essentially in two ways: what countries agree to do (as in the case of NAFTA) and what countries actually do (as in the softwood lumber dispute).

As such, NAFTA is already a broken agreement, and needs to be either renegotiated or scrapped althogether. Because Free Trade has proven to have economic benefits for everyone involved -- fuelling Canadian economic growth through the acquisition of development capital and increased exports and fuelling American economic growth by making it easier and cheaper to acquire the necessary resources -- the necessary action is pretty clear: NAFTA needs to be renegotiated. The case for scrapping it outright is rather thin.

If Obama, as the American president, does choose to renegotiate NAFTA, he'll need to be very careful about how he goes about it. The United States desperately needs the resources it can acquire in Canada, and any move that hurts Canadian business by making it harder to export south of the 49th parallel will only hurt the American economy more, possibly even forcing it to the verge of strangulation.

If one presumes that Stephen Harper will still be Prime Minister by the time Obama has hypothetically taken office, this is something that can pay dividends for him, as well. He would do well to see a Conservative Prime Minister building an amicable relationship with a Democratic president (something that hasn't occurred since John Diefenbaker and John F Kennedy put the two parties at odds).

Most importantly, however, the United States will have to learn to abide by NAFTA one way or the other, and find ways to stop the treaty from stabbing America's working class in the back.

In the meantime, Barak Obama could stand to get better acquainted with Canada.