William Watson: Trump risked losing his base by renegotiating NAFTA (and survived)
Some years you make great progress. Others you just dodge bullets. A new study by the U.S.’s National Bureau of Economic Research on the cost of losing NAFTA suggests that in 2018 this country dodged a bullet. True, now we have 2019 to worry about. In the age of Trump, best not make too many assumptions. But the fact that the Democrats have taken over the House of Representatives — even though many Democrats aren’t crazy about trade — suggests we probably won’t lose North American more-or-less-free trade, even if the president has threatened to cancel Old NAFTA so Congress will pass his re-negotiated but not-bigly-changed New NAFTA.
The new study, by economists Barthélémy Bonadio and Andrei Levchenko of the University of Michigan and Raphael Auer of the Bank for International Settlements, looks at the “general equilibrium” or the “once everything shakes out” effects of going from NAFTA tariffs, which are generally zero, back to WTO “most-favoured-nation” tariffs — the basic tariff structure for members without better free-trade deals. “Most-favoured-nation” tariffs are what Britain will suddenly face if a “no-deal Brexit” happens on March 29th.
The study also controls for the return of non-tariff barriers negotiated away under NAFTA, although they’re harder to model.
Losing NAFTA wouldn’t hurt the U.S. much, causing about a 0.2-per-cent loss in economic welfare (think GDP, roughly). The hit to Mexico and Canada is about 10 times bigger in relative terms: about two per cent of economic welfare. In fact, the absolute hit to the U.S. measured in dollars is larger, but because the U.S. is such a behemoth, it shakes that off with the economic equivalent of a shrug. That’s almost always the case with free-trade deals. Big countries that already have big internal markets don’t notice them so much. Small countries have to make bigger adjustments but also get bigger benefits — or suffer bigger costs when deals come undone.
A two-per-cent hit obviously wouldn’t have killed our economy. But it would be two per cent forever, so it adds up to a lot of lost well-being. And changes in the way we do business would be dramatic. In what you might call the full-frontal version of the simulations, with both tariffs and non-tariff barriers reimposed, exports to the U.S. are estimated to fall by more than a third. That’s partly made up by greater exports to the rest of the world, against which our tariff structure would be effectively less biased. But still: a third.
The study also looks at sectoral and geographic effects. The sectoral effects in this country would have been dramatic: wage declines of almost 15 per cent in the auto sector and of more than 10 per cent in rubber and plastics manufacturing and mining and quarrying. On the other hand, the geographic distribution of wage losses is pretty uniform: on average, workers in all provinces are hit between one and 2.5 per cent, while in Nunavut and the Northwest Territories, whose mining sectors are slammed, the average loss is between 2.5 and five per cent.
If Trump were a base-expanding politician, he’d chance hurting his strongest supporters (to gain) persuadable voters …
Not surprisingly, the study spends more time on the geographic distribution of wage losses in the U.S. The authors look at the data by congressional district to see if there’s a political pattern to American wage losses — which aren’t as big as in Canada or Mexico but do consistently average up to one per cent.
What’s the political pattern? With a couple of exceptions in mining districts in Wyoming, Texas and West Virginia, the pattern is politically perverse. Doing away with NAFTA brings larger wage losses to congressional districts that voted for Trump than to those that voted for Hillary. That relationship isn’t just chance but is statistically significant at the 99-per-cent level of confidence.
What’s going on? “You only hurt the ones you love,” the old song says. In politics, change that to “the ones that love you.” If Trump were a base-expanding politician, he’d chance hurting his strongest supporters in order to bring around persuadable voters who so far have been less devoted to him. But then, he doesn’t really seem to be a base-expander.
Or maybe it really is all about West Virginia, although why a New York showman should suddenly care for coal miners is a puzzle. (Is it because they both work in dirty businesses?) As for Wyoming, it has only half a million people and one House seat so it’s hardly worth the effort.
Or maybe Trump’s goal all along, despite his threatening rhetoric, has not been to kill NAFTA but to tilt its benefits to the U.S. in general and his voters in particular. As the study shows, dumping NAFTA 1.0 wouldn’t have done that. Maybe adopting NAFTA 2.0 will. We’ll have to await version 2.0 of the study to find out.
Published at Tue, 08 Jan 2019 12:03:26 +0000