As negotiations unfold around the world for many new agreements on trade and investment, it’s easy to forget that not long ago the governments of most countries used to be much less enthusiastic about globalization than they are now. In 1980, for example, the governments of Canada and Mexico issued a joint statement flatly rejecting “current informal proposals for trilateral economic cooperation among Canada, Mexico and the United States.” As it turned out, of course, policymakers in both of those countries eventually changed their minds, and by 1994 we had NAFTA.
What happened to make the governments of Canada and Mexico, like so many others, rethink the merits of free trade? To some, the answers are obvious: Free trade arose as the power of special interests lobbying for protection declined. Meanwhile, politicians, businesspeople, and the public finally accepted the case for free trade that economists had been making since the days of Adam Smith. In short, globalization wins politically because of good democracy and good science.
But this isn’t really what happened in the case of NAFTA. And it’s not what’s happening today either.
The Coming of Free Trade
U.S. politicians wanted something like NAFTA long before those in Canada and Mexico. In both of the latter countries, the rise of free trade came out of the rethinking in elite circles, not the neutralization of any particular special interests.
Canada’s politicians came around to the idea because the CEOs of that country’s biggest corporations did first, in the early to mid-1980s. This was a historical novelty: until then, more Canadian businesspeople saw free trade with America as a threat than an opportunity. As would happen in the U.S. several years later (in the run-up to congressional ratification of NAFTA), big business in Canada then pumped millions into a campaign for public support. A federal election in 1988 was largely fought on the issue, and free trade won only because two opposition parties split the popular vote weighing against it.
In Mexico, the decision to negotiate NAFTA was taken in clearly undemocratic circumstances: the 1990s were the ruling party’s seventh straight decade of uninterrupted control. At that time, Mexico’s top politicians and officials were largely technocrats—PhDs in economics from top American universities—and they were true believers in the benefits of freer trade and investment. They worried about a possible public backlash against the opening, but they pursued it anyway, particularly since a decade of lingering crisis and slow economic growth had left Mexico under the thumb of its foreign creditors, who supported the technocrats’ agenda.
In both Mexico and Canada, then, NAFTA was a key policy priority for a powerful, well-placed few, not most citizens. Free traders in both cases needed a bit of finesse—and good fortune in Canada—to circumvent the democratic impediments to NAFTA.
What about science? It is almost an axiom of economic theory that nations are better off with a policy of free trade. (And, though there are more caveats with respect to finance, much the same holds for investment.) Maybe, then, in pursuing NAFTA and globalization, governments have come around to economists’ way of looking at the world?
But this explanation also doesn’t hold water. The NAFTA negotiations did not really reflect economists’ worldview, and most current negotiations don’t either. Even just the language that politicians use when they talk about globalization is a tip-off that they think very very differently (unless they happen to be trained in economics). For economists, the whole point of trade is to acquire cheap imports. Why wouldn’t you want access to cheaper cars, steel, air travel, etc.? But trade policymaking and most of the debates about it suggest just the opposite: exports are good, and imports are bad—especially when they’re cheap. Economists themselves have long complained that the world simply doesn’t get the notion of comparative advantage that underlies just about everything they have to say about trade. So even when politicians do something that economists consider a good thing—negotiating agreements for freer trade—they seldom do it because they’re thinking like economists.
The Folk Economics of Unusual Folks
That of course raises the question: What exactly do politicians think they’re doing when they make globalization happen, using agreements like NAFTA, or the Transatlantic Trade and Investment Partnership, or whatever? If we take them at their word—and there is no reason not to—they seem to see their countries rather like large firms. Above all, they have the impression their “firm” (country) is competing with others, and that good policies will help out. This mental metaphor is telling. Politicians far too often misunderstand the differences between running a business and running an economy. Unfortunately, in absorbing this sort of “folk economics,” politicians take up the priorities of some very unusual people: the leaders of big business, who are exceptionally good at getting heard and shaping the public agenda.
If policymakers listened more carefully to economists, they would hear that comparative advantage has a lot going for it. But in practice even many economists think international trade and investment need careful managing if they are to work for most people. Globalization and even free trade could take very different forms than agreements like NAFTA. They would come with more safety nets for ordinary people (trade-displaced workers) and fewer safety nets for corporations (no shady rights to sue governments for measures taken in the public interest). They could be negotiated with more transparency, without carving the world up into a confusing mix of trading blocs, and without preventing developing countries from using many of the policies that today’s rich countries used to get rich.