Tag: NAFTA

WPTPN: What an “America First” Trade Strategy Gets Wrong

This World Politics in a Time of Populist Nationalism (WPTPN) guest post is written by Layna Mosley,  Professor of Political Science at the University of North Carolina, Chapel Hill. She researches the political economy of multinational production, labor rights, and sovereign debt and can be found on Twitter @thwillow

President Trump’s first days in office have been marked by a continuation of his pledges to fundamentally remake US trade policy. On January 23, the website of the United States Trade Representative, the executive branch agency charged with negotiating and implementing US trade policy, underwent a radical redesign. The site’s front page now touts the “America First Trade Policy,” in which the “landscape of trade policy” is revised “to work for all Americans.” Four days later, the administration announced – with subsequent qualification later — a 20 percent tax on all imports to the US (or, perhaps, on all imports from Mexico).

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Assume A Rational Actor….

This was just too good to pass up.

With immigration a growing political issues, The New York Times looks back and asks— remember NAFTA, like 14 years ago? Wasn’t that supposed to stop illegal immigration by building up the Mexican economy through free trade?

Why didn’t Nafta curb this immigration? The answer is complicated, of course. But a major factor lies in the assumptions made in drafting the trade agreement, assumptions about the way governments would behave (that is, rationally) and the way markets would respond (rationally, as well).

Neither happened…

Ahh, the dreaded rationality assumption, rearing its ugly head again.

First, it was assumed that the government would respond rationally to the new incentives provided by NAFTA:

When Nafta finally became a reality, on Jan. 1, 1994, American investment flooded into Mexico, mostly to finance factories that manufacture automobiles, appliances, TV sets, apparel and the like. The expectation was that the Mexican government would do its part by investing billions of dollars in roads, schooling, sanitation, housing and other needs to accommodate the new factories as they spread through the country.

It was more than an expectation. Many Mexican officials in the government of President Carlos Salinas de Gortari assured the Clinton administration that the investment would take place, and believed it themselves, said Gary Hufbauer, a senior fellow at the Peter G. Peterson Institute for International Economics in Washington who campaigned for Nafta in the early 1990s.

“It just did not happen,” he said.

Next, it was assumed markets (ie farmers in the agricultural market) would rationally respond to the new incentives offered by NAFTA:

The assumption was that tens of thousands of farmers who cultivated corn would act “rationally” and continue farming, even as less expensive corn imported from the United States flooded the market. The farmers, it was assumed, would switch to growing strawberries and vegetables — with some help from foreign investment — and then export these crops to the United States. Instead, the farmers exported themselves, partly because the Mexican government decided to reduce tariffs on corn even faster than Nafta required, according to Philip Martin, an agricultural economist at the University of California, Davis.

“We understood that the transition from corn to strawberries would not be smooth,” Professor Martin said. “But we did not think there would be almost no transition.”

Two key assumptions, both based on a particular model of a rational, homo economicus, model of actorhood. The State pours investment into areas that lead to the greatest benefit in terms of national product growth. Farmers shift crops to farm what provides them the greatest return at the market. Any rational actor facing these market pressures and incentives would choose this course.

Except that they didn’t. The Mexican government–and here’s the key: despite individuals within that government individually believing that they would–never was able to reform its domestic spending priorities. Farmers, rather than shift to farming a new crop, simply followed other relatives into the United States, creating an immigration network.

Finally, the steady flow of Mexicans to the United States has produced a momentum of its own — what Jeffrey Passel, a demographer at the Pew Hispanic Institute, calls a “network effect,” in which young Mexicans travel to the United States in growing numbers to join the growing number of family members already here.

This brief NY Times article reveals the core difficulty and flaw of rationality assumptions and the real consequences of building policy on social science theory based on rationalist models of human behavior. Quite simply, as the scholarship of most of the contributors of this blog (and a large number of our friends and colleagues) has shown, identity and therefore rationality are social constructs that depend on rules of legitimacy. Government leaders and farmers ask not what offers the greatest return, but rather, “Who am I?” and what do I do now? Absent a domestic political climate that could reform the rules and legitimacy of government spending practices, the investment envisioned by NAFTA couldn’t take place. Governments don’t just “rationally” decide to reallocate funds. Anyone who has ever looked at a defense spending bill can tell you that. Its a political process, and winners and losers in politics are not determined by the same rules as rational returns on investment in economics.

Questions of livelihood are approached with the same process. Farmers suddenly unable to farm corn don’t just say well, what crop would sell. No, they say I’ve lost my livelihood, what do I do now. The look to others who define their identity–family–for opportunity, and see it in America. Hence, the network patterns of immigration. Its not a “rational” response to incentives, rather, its a network push and pull bringing certain people to the US and not others.

Unfortunately,

“We have indeed had one disappointment after another on this score,” Mr. Rodrik said, noting that the same assumption about government spending is part and parcel of the agreements, now before Congress, with Columbia, Peru and Panama.

Perhaps Congress and the USTR should not build in such assumptions to these deals–rather, appreciate that other logics might inform government spending, migration, investment, and trade patterns, and allow for enough flexibility in the deal to address this.

And, perhaps some of the social scientists out there who continually trumpet theories and policies based on those theories that assume a Rational Actor should take a time out and really think about the consequences of what they’re doing.

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