Testimony of DLC Trade Project Director Edith R.Wilson,
to the Subcommittee on Trade
House Committee on Ways & Means

Introduction

Mr. Chairman, support for trade liberalization, like other aspects of American foreign affairs, has usually been handled on a bipartisan basis, as it should be. We hope this tradition continues as Congress considers fast track negotiating legislation this fall, and that the new "vital center" of American politics will hold. I am here on behalf of the Democratic Leadership Council, which endorsed NAFTA three years ago, to explain why we did so and why Americans should be proud of President Clinton's historic achievement in expanding ties to our neighbors in North America.

By explaining why we believe, based on the evidence to date, that NAFTA has been good for ordinary Americans and serves the national interest, we hope also to demonstrate why we support further trade expansion. We believe a successful trade policy recognizes three core components: the significance of international trade to domestic growth; the importance of leadership in trade to America's international leadership overall; and the need to help American workers adjust and compete to changing economic conditions. Trade currently represents one third of America's economic growth.¹ Maintaining growth in trade is critical to sustaining our robust growth overall, and particularly important to maintaining a resurgence in manufacturing jobs.² That, in a nutshell, is why Americans cannot be pro-growth without being pro-trade. Trade is critical to the new economy.

Our goal in expanding trade should be a more dynamic and compassionate economy in which companies, workers, and government share responsibility for helping working Americans adapt to the changing economy. The burdens of change must not fall solely on the shoulders of working Americans. Government, business, and other institutions share responsibility for the security of those few who might be left behind. We will be looking to new models, such as business and jobs consortia, to help workers and companies to succeed and share in the benefits of expanded trade, and thus "expand the winner's circle."

Assessing NAFTA Three Years Out

Today the Progressive Policy Institute is releasing a study, The NAFTA Success Story: More than Just Trade, by Rebecca Reynolds Bannister, a former trade official. I draw substantially on that research in making my own analysis.

One point must be clarified at the beginning. Contrary to popular impression, NAFTA has not yet been fully implemented. While many NAFTA provisions went into effect immediately in 1993, others phase in over five, ten, and even fifteen years for the most sensitive sectors. This was intended to permit the workers and industries of all three countries ample time to adjust. At this point, no NAFTA study can adequately measure the agreement's full results because much of NAFTA's impact still lies ahead. The benefits to the United States will improve as implementation continues, and as NAFTA provides the conditions for increased economic growth in Mexico and Canada.

Nonetheless, the 1997 congressionally-mandated assessment of NAFTA by the Administration released this July is useful and timely. It provides Congress with a snapshot of this work in progress and allows it to determine if anything is dramatically wrong. Most importantly, the Clinton Administration report and hearings such as this provide an excellent opportunity to examine the facts.

NAFTA Lessons and Results

There are three main lessons to be learned from the NAFTA experience to date. First, the United States can liberalize trade with developing countries, if the agreements go beyond reducing tariffs on merchandise trade and cover other essential aspects of a sound and fair trading relationship. Longer phase-in periods are also necessary in such cases. This is critical information for the future, since the fastest growing markets lie in developing countries. Second, trade does follow trade agreements, and dramatic increases in trade are possible from agreements committed to lowering barriers on both sides. Third, lowering trade barriers between neighboring countries--those who can through proximity and familiarity easily, quickly, and at lower cost become better customers and partners--is one of the most effective ways to increase trade rapidly.

We have learned from the Clinton Administration report and the Progressive Policy Institute examination that NAFTA is fulfilling its promise. Our trade relations, the benefits to our consumers, the competitiveness of our workers, and the security of our investments are stronger for having concluded NAFTA. It helped increase trade and investment in North America. It put in place rigorous rules for governing trade, setting a higher standard than previous agreements. Institutions, working groups, and mechanisms that NAFTA created have smoothed the path to allow North American businesses to trade, invest, and position themselves for better productivity and comparative advantage, making our economies stronger against shocks such as Mexico's 1994-95 crisis.

This summer, North America was ranked as one of the world's fastest growing regions, with growth projected at 3.5 percent, compared to the average 2.7 percent growth rate for the rest of the industrialized nations. Not only is there strong economic growth in all three countries, but Mexico's economic growth has been particularly impressive this year, with 8.8 percent GDP growth in the third quarter of 1997 and a projected aggregate rate of between 5 and 6 percent GDP growth.³ Canadian GDP growth for this year is projected at 3.3 percent. In 1996, nearly one-third of U.S. trade in goods was with Canada and Mexico ($421 billion). When our two top customers grow, we grow, and vice versa: our NAFTA partners accounted for 53 percent of the growth in total U.S. exports in the first four months of 1997. Trade is not a zero-sum proposition, as some would suggest.

Despite dire predictions, NAFTA to date has not produced a flight of U.S. investment or jobs. The U. S. economy now creates in approximately one month the total number of jobs lost due to NAFTA in three years. Today we find that despite NAFTA's reduced tariff barriers and an economic crisis in Mexico in 1995 that lowered the value of the peso and made Mexican labor comparatively even cheaper, the United States has not lost even a small fraction (1/40th) of the 6 million jobs that Ross Perot predicted. In fact, under President Clinton's leadership, the U.S. economy has created 8.6 million jobs since NAFTA's inception. NAFTA's impact on jobs in the U.S. economy has been negligible in most sectors with positive job growth in others. Quite simply, neither NAFTA nor GATT nor any of our other lesser trade agreement has hurt the U.S. economy. Instead, they have been a vital component in our economic growth by opening new markets and eliminating barriers.

But when we look at the agreement's results, we are continually reminded that NAFTA was about more than trade. It was a pathbreaking, comprehensive trade and investment accord that "locked in" not only a steadily decreasing tariff rate on almost all products but also significant market reforms, as well as dispute settlement and investment guarantee procedures. It has increased certainty and stability in our commercial relations with our two top customers. No less than fifteen non-tariff accomplishments of the agreement are truly significant, covering areas such as inputs, transparency, services, investment, conflict resolution/protections, and environment.⁴ These features of NAFTA don't just safeguard U.S. businesses; they protect the technology, processes, and markets that provide employment for our workers, too.

So, what do we find when we look at this section of the agreement four years later? Trade and investment disputes are now being handled with relative transparency and according to the established procedures agreed to in NAFTA. The agreement was, in particular, a step forward in enhancing the ability of small businesses to participate in international trade. Under NAFTA, small businesses as well as large firms have been given secure market access as well as methods for resolving commercial disputes in a developing country market. No other agreements do this. When the scope of the agreement is considered as well as the vast amounts of trade and investment flows covered under NAFTA's legal boundaries, the number of disputes since 1993 has been surprisingly low. Congress should consider this lack of conflict as a particular endorsement of how well the agreement is working.

States and Sectors: Michigan and South Carolina

Nearly all states have posted gains in exports with Mexico since NAFTA. Key industries such as autos, electronics, and the service sector have benefitted from NAFTA's provisions--despite Mexico's economic crisis of 1994-95. Let us examine for a moment two states that were particularly concerned about negative impacts when NAFTA was signed: Michigan and South Carolina. Both are excellent examples of how states and sectors have benefitted generally from increased trade and specifically from the terms of NAFTA.

As overall unemployment and inflation have fallen to their lowest levels since the 1960s, Michigan's economy has prospered. Michigan's unemployment is at its lowest level in nearly 30 years. Michigan's unemployment rate has fallen from 6.8 percent in November 1993, to 4.4 percent in April 1997, since the passage of NAFTA. Michigan's export growth has increased 68 percent between 1992 and 1996, making it the fourth largest state exporter of goods. Michigan's export-related jobs--which pay, on average, 13 to 16 percent more than non-export related jobs--increased by an estimated 40 percent, or 147, 883 jobs, since 1992.

Michigan's exports to NAFTA countries increased by 40 percent between 1993 and 1996. During 1996, Canada was Michigan's largest export market and Mexico was its second largest. Between 1993 and 1996, Michigan's exports to Canada rose by 56 percent. During this same period, Michigan's exports to Mexico declined by 2 percent, due to the deepest but shortest lived recession in Mexico in 50 years. Transportation equipment accounted for 63 percent of Michigan's total exports.

Some U.S. sectors--such as the automotive industry--have experienced large net import and export growth as well as job growth. U.S. employment in the automotive industry grew by 14 percent between 1993 and 1996, including a 10.6 percent increase in employment in automotive assembly. This job growth was accompanied by a 5.6 percent increase in hourly earnings for automotive production workers. While U.S. imports of Mexican automotive vehicles and parts nearly doubled, thanks to NAFTA provisions, those imported vehicles now include a high percentage of components made in the United States. In fact, U.S. exports to Mexico of automotive vehicles and parts increased 11 percent, from $7.5 billion in 1993 to $8.4 billion in 1996. These positive developments in the automotive sector have certainly helped the state of Michigan, which is the leading manufacturer of automobiles in the United States.⁵

In South Carolina, unemployment in 1993 stood at 7.6 percent. In April, 1997, it was 4.6 percent, a decline of 2.9 percent. In this state, we find that record levels of foreign investment have supported 21,000 additional high-paying, high-skilled jobs since 1992. During 1995, Canada was South Carolina's largest export market, while Mexico was South Carolina's second largest export market. Since 1993, exports to Canada have increased by 23 percent, from $1.3 billion in 1993 to $1.7 billion in 1997. South Carolina's exports to Mexico have increased by 58 percent, from $300.3 million in 1993 to $719.0 million in 1995.

Moreover, South Carolina's textile industry illustrates the benefits of integration under NAFTA. Textile and apparel goods production have shifted from the Far East to North America. South Carolina's textile exports to Mexico increased 143 percent, 1993 to 1995, and textile imports to Canada have increased 40.2 percent between 1993 and 1996. Due to NAFTA requirements, Mexican-made apparel and footwear exported to the United States have higher U.S. content, on average, than imports of these products from Asia and other countries. With Mexican plants now purchasing large amounts of U.S. components, U.S. firms are increasing profits and efficiencies. After years of decline, the textile and apparel industries are thriving on the challenges presented by the global economy. Now highly automated and requiring skilled workers, South Carolina's textile industry accounts for 10 percent of the state's total exports ($388.9 million) and employs 22 percent of its workforce.⁶

Similar success stories are found in every state and in sectors such as in computers and electronic machinery and related software, government procurement, and agriculture. In all these critical areas, NAFTA has not only expanded markets for U.S. goods, but has helped position U.S. industries for future competitiveness by strengthening our productive capacity on the North American continent, and allowing the three NAFTA partners to benefit from their comparative advantages.

Economic Reform and Political Reform

NAFTA has been accompanied by other positive trends. This summer, Mexican democracy took a large, peaceful step forward as voters in state and local elections redistributed power among the three political parties. The PRI, after having been in power for over 60 years, no longer has a majority in the Mexican Congress. Mexican labor unions have moved toward independence from government control, and are becoming more vocal on behalf of their members.⁷ These changes make the obvious point: economic reforms symbolized by NAFTA have been accompanied by a process of significant political reform in Mexico.

There is much discussion about how and whether free trade encourages the growth of democracy. In NAFTA, we find a very specific example of how this process works. Through the vehicle of trade liberalization and for sound commercial reasons, NAFTA has introduced to Mexico principles of transparency, the right to appeal government decisions, public access to information, and other processes that are the foundations of open, pluralistic and democratic societies. Two examples: The Mexican government must now publish every federal regulation for review and comment, and an open bidding process is required for government procurement. These are dramatic changes from prior practices. As a result, Mexicans expect increased openness in other areas as well. Finally, to demonstrate how NAFTA has already served as a template for other trade agreements, many of these same provisions have been incorporated by Mexico into recent free trade agreements with Central and South American countries.

Should NAFTA Be Expanded?

The fundamental conclusion we should draw from NAFTA is clear: The prospect of increased trade without the kinds of guidelines, safeguards, and predictability epitomized in NAFTA should be far more alarming to the American people than the proposal to initiate new trade negotiations. If we can negotiate similar comprehensive agreements with other countries, it is in our interest as the world's leading exporter to pursue them expeditiously.

We need to extend the principles embodied in NAFTA to the rest of the hemisphere soon because we have much to gain from increased trade and investment with Latin America, one of the fastest growing regions in the world. How is this to be accomplished? NAFTA contains a "docking" or accession clause that would allow other countries to sign on to its provisions. Since NAFTA went into effect, however, a number of other developments have occurred in our hemispheric trading environment. It behooves the United States to ensure that any future trade agreements meet the standards included in NAFTA. They should also cover current conditions with the proposed trading partner(s) and anticipate future needs. The founding principles and comprehensive approach epitomized by NAFTA should be used in the basic hemispheric agreements. But it is increasingly clear that future agreements--with Chile and Latin America, among others--may be able to raise the bar even higher than NAFTA. Fresh negotiations may be in order and expanding NAFTA in the literal sense may not be the most productive or appropriate approach at this point.

Expanding the Winner's Circle at Home

The American public is right to feel that there is some unfinished business from NAFTA, GATT, and other developments that have changed our economy. Trade, of course, is not the only factor responsible for these changes; actually, technology accounts for more of the economic restructuring we are experiencing.

As our stake in the new global economy increases, so does our responsibility to ensure that all Americans have the opportunity to compete effectively. Our efforts to accommodate technological progress and trade expansion for the sake of economic growth must go hand-in-hand with a new social compact that offers all U.S. workers lifelong access to career training; provides more effective public support for workers in transition; equips them with the tools to manage their career security by controlling their own health and pension resources; and redefines corporate responsibility in a world of borderless markets.⁸ We must expand the winner's circle through shared responsibility by government, business, and workers for those Americans who may be left behind in the New Economy.

In the same session of Congress that passed the NAFTA implementing legislation, Congress and the Administration were unable to agree on any major proposals to modernize our nation's job placement and worker training systems. A NAFTA trade adjustment assistance program was established but with limited scope and effectiveness. As a consequence, many Americans feel that their needs have been ignored. The United States needs to do better. We must substantially improve our efforts to equip all Americans with the education and skills they need to be as competitive as individual citizens as we now are as a nation, and we must extend a helping hand at key moments. Congress has recently made progress in areas such as health care and pension portability. Now that the budget is balanced, we must turn our attention to the rest of this domestic agenda. In particular, we hope Congress will consider the G.I. Bill for Workers and consider replacing outdated adjustment assistance with comprehensive training programs available through individual vouchers.

Maintaining U.S. Momentum and Leadership in Trade

In closing, I would like to add one word about the debate over fast track authority. It can be hard to distinguish between the genuine and the disingenuous in concerns raised first about NAFTA and now about fast track authority. This is because protectionism mutates in every generation and finds new, socially acceptable ways to hinder trade. Special interests work to protect their gains even if at cost to the national interest. Again, many concerns about issues such as labor rights and environmental protection are utterly sincere. Indeed, we share them.

But it is simply unfair to use such concerns or other means to elevate the interests of industries or groups that seek protection from international competition above the interests of workers in exporting industries, of consumers, of communities that benefit from foreign investment, and of every American who benefits from steady growth, low unemployment, and low inflation. There are many approaches to industrial relations, labor rights, pollution prevention, and conservation that can be pursued productively, particularly through international cooperation. There are connections between trade liberalization and these same issues, but they must be explored cautiously.

Further delay in fast track renewal, with all that is ahead on the trade calendar, will be protectionism in a new and virulent form and could cost Americans dearly. In fact, legislative rejection of President Clinton's request for fast track authority this fall would send a message around the world that America has abdicated international economic leadership--and damage our political leadership as well.

The United States must move forward to lead the world in a new era of open and fair trade. At the global, sectoral, and regional level, many of our key trading partners are about to move ahead without us in critical new trade negotiations. Congress should give President Clinton the same broad authority to negotiate new trade agreements under fast track procedures that every U.S. President since Gerald Ford has received.

Renewed negotiating authority is as vital to U.S. leadership in world affairs as it is to sustaining our economic growth. The message about fast track is clear: If America can't negotiate, Americans lose.

Thank you.

Notes

1. Trade, as a percentage of Gross Domestic Product, is approximately 14 percent when counting only exports.

2. Bergsten, C. Fred, Director of the Institute For International Economics. Testimony before the Senate Finance Committee (June 1997).

3. "Mexican Growth Is Fastest in 16 Years As GDP in Second Quarter Soared to 8.8 percent," The New York Times(August 19, 1997).

4. Bannister, Rebecca Reynolds,The NAFTA Success Story: More Than Just Trade, (Washington, DC: The Progressive Policy Institute, DC, September 1997).

5. All data on the state of Michigan is from the following sources: BLS, USTR (based on data from the Massachusetts Institute of Social and Economic Research), ITC, and U.S. Department of Commerce.

6. All data on the state of South Carolina is from the following sources: USTR (based on data from the Mass. Institute of Social and Economic Research), U.S. Department of Commerce, U.S. Department of Agriculture, South Carolina Department of Commerce, and Study on the Operation and Effects of the NAFTA, Executive Office of the President, July 1997.

7. "Mexico's Unions Form New Coalition," Journal of Commerce (August 26, 1997), p.5A.

8. Rodrik, Dani, Has Globalization Gone Too Far?, Institute For International Economics (Washington, DC, March 1997); I.M. Destler, Renewing Fast-Track Legislation, Institute For International Economics (Washington, DC, September 1997), p.47; and Expanding the Winner's Circle, Fact Sheet, (Democratic Leadership Council, Washington, DC), July 1997.

Edith R.Wilson is director of the DLC Trade Project.