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New North American free trade deal reveals cracks in international relations

by Jon Farrow Nov 9 / 18

The recent announcement of a revised free trade agreement between the US, Mexico and Canada, termed the USMCA, had us wondering what role agreements like this have to play in the success of the nations that make them. When we asked CIFAR Senior Fellow Dan Trefler, we got a surprising answer.

Trefler is an economics professor at the University of Toronto and an expert on international trade. With two recent papers on the topic (Renegotiating NAFTA and International Trade and AI), and a record of advising governments and policymakers on these issues, Trefler is no stranger to the complexities and vagaries of North American free trade.

According to Trefler, the most interesting and instructive part of the story at this point is not necessarily the content of the deal, although the ramifications of its 1,809 pages will be hashed out in the press and parliaments over the coming months, but rather the way it was struck. Pointing to key features of the negotiations, he showed examples of the work fellows in CIFAR’s Institutions, Organizations & Growth (IOG) program have been doing to understand the drivers of wealth and wellbeing. “The way I think about free trade has been deeply impacted by conversations I’ve had in CIFAR meetings”.

Trust and checks and balances

In the United States, the renegotiation of NAFTA was a divisive issue along many lines, pitting Democrats against Republicans, manufacturing against energy, Midwestern farmers against Silicon Valley programmers. Many did not believe that their negotiators (or the President) were working in their best interest.

North of the border, Trefler says that “at extraordinarily few junctures did opposition parties in Canada cry foul. And at no point did anybody in civil society say they didn’t trust the negotiators. Canadians, by and large, trusted the capacity of government officials, elected and bureaucratic.” Canadian trust that its government had the best interests of its people at heart strengthened its position.

This sort of trust in government is the focus of Senior Fellow Daron Acemoglu’s research. In a paper published in 2012, he described a model for understanding how distrust and polarization develop. More recently, his work on balancing power between governments and the people they govern shows that the most successful societies are ones with strong checks and balances. Acemoglu argues that these checks on power are eroding in the Trump era and Trefler sees that clearly in the negotiations.

Special interests hinder innovation

Another way the negotiations shed light on the underlying dynamics of healthy societies is in how special interests were treated. Trefler believes groups representing the priorities of particular sectors have disproportionate power in international agreements, which undermines innovation and growth. “They get a seat at the table and are able to effectively do an end-run around domestic laws by lobbying for language at the international level.”

Trefler pointed out that recent developments in the US, including the closing of White House visitor logs and the Supreme Court ruling that political spending is protected as free speech, increase the power and access of special interest groups.

In the new agreement, protections were extended for patents on biologics, something Trefler sees as the direct result of the influence of the pharmaceutical lobby. And this is bad for innovation, but to be expected. As industries mature, major companies seek to limit the entry of new players. Trefler believes it’s governments’ job to resist this urge.

Philippe Aghion, another senior fellow in the IOG program, has written extensively on innovation and the conditions under which it thrives. Agreements that promote free movement of goods, people and ideas between nations are good for innovation. “Free trade is overall a positive force for innovation. It promotes competition and enlarges the market. This is particularly good for firms at the forefront of their fields, but can be bad for those lagging behind” said Aghion when we caught up with him in Toronto.

But the part that worries Trefler is the precedent set by the USMCA. The new agreement adopts much of the same language as the Trans Pacific Partnership when it comes to intellectual property, which protects incumbents and special interests. With the world watching the outcome, this will no doubt become a template for future agreements across the world.

The story of NAFTA renegotiation is by no means over. The text of the agreement now has to be ratified by all three states, and with a new president in Mexico, elections coming up in Canada, and the possibility of big changes in the US legislature, its fate is not certain. What is certain is that events like this show the cracks in international relations, which provide a unique opportunity to peer in and see what makes societies work.