The sabre-rattling on NAFTA is worrying, but take it as an opportunity

MICHAEL HART AND WILLIAM DYMOND

Globe and Mail Update

March 14, 2008 at 11:39 PM EDT

Thanks to some opportunistic electioneering in Ohio by the two Democratic hopefuls, Hillary Clinton and Barack Obama, Canadian interests – specifically, the North American free-trade agreement (NAFTA) – briefly became an item in the U.S. presidential campaign. While the campaign has moved on, the Canadian chattering classes remain fixated on the apparent threat to NAFTA, with many voices urging the government not to let the Americans bully us into reopening the agreement. As former officials involved in the negotiation first of the Canada-U.S. free-trade Agreement (FTA) and then of NAFTA, we are gratified to see such solicitude for these two treaties. On closer examination, however, there is both more and less to this story.

First the “less.” No, the Clinton-Obama political pandering poses no serious threat to NAFTA. Ohio is a vote-rich and union-rich state, two facts of life that make it almost axiomatic that Democratic politicians would rattle some sabres on trade. Ohio is also part of the U.S. rust belt that is undergoing some serious adjustments to changing economic conditions. Highly paid, unionized manufacturing jobs in that region have been declining since the 1970s. International trade contributes to this trend, though it has also fuelled the growth of high technology, financial services and other sectors in the U.S. Other factors, notably technological change, are more important causes of the rapid economic adjustments. Trade, however, is the politically easiest target. In the case of Ohio, it is not trade inside NAFTA, but trade with China and other low-cost suppliers that is burrowing into its manufacturing base. If anything, NAFTA has helped prolong auto-industry and other manufacturing jobs, by providing a more integrated North American trade and investment environment.

The evolution of the Ohio economy – and that of Michigan, Indiana, Illinois and other parts of the rust belt – is too complicated a story to be captured in the images and slogans that make up a political campaign. Politics is about simplifying complex problems and phenomena, and offering attractively packaged solutions. Claims that NAFTA is part of the problem and that it can be renegotiated to create a better balance fall easily from the mouths of candidates fighting for every delegate they can get.

But that prospect is not real, as Austan Goolsbee, Senator Obama's economic adviser, admitted in an unguarded moment to Canada's consul-general in Chicago. It is unreal for any number of reasons. First of all, the FTA/NAFTA regime is now approaching its third decade. Negotiations began in 1986, to respond to problems that had been recognized in the early 1980s. The FTA came into force in 1989, NAFTA in 1994. Both have now been fully implemented; all transitional arrangements have been exhausted. Opening up NAFTA would consequently be tantamount to going back to the 1980s. Too much adjustment and investment have taken place since then, in reliance on the agreement's rules. By targeting NAFTA, the two Democratic candidates are promising a better yesterday.
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(Brian Gable/The Globe and Mail)
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Senators Clinton and Obama insist their real concern has to do with the labour and environmental side agreements. Sen. Clinton seems to have conveniently forgotten that it was her husband and a Democratic Congress who insisted on these side agreements. They are integral parts of NAFTA and form part of the U.S. legislation that has implemented it. The environment pact has worked well, providing a spotlight on potential problems in the enforcement of domestic environmental laws. The labour pact has been less active, not because of its terms, but due to a lack of credible complaints. If the U.S. has serious proposals for updating these agreements, Canada should be prepared to look at them with an open mind.

So much for the less, what about the more? Is there anything Canadians should be worried about? Yes, there is.

IF THINGS GET UGLY

Washington is going through one of its periodic protectionist moods on trade and investment. For all their talk about reaching out more and working with their friends and allies after the Bush administration is gone, Democrats show little interest in enhancing the global role and image of the U.S., when they talk threateningly about unilateral actions on trade. If our neighbours elect a Democratic president, Senate and House on Nov. 4, things could get ugly, as a falling U.S. dollar, the credit crunch and serious troubles in the housing market add to recession anxieties.

The target for much of that ugliness will be China and other low-cost suppliers to the U.S. consumer market. Most Americans do not have much understanding of the role of these suppliers in maintaining U.S. economic activity. Both politicians and the public fail to realize the benefit of Chinese manufacturing goods produced to U.S. design and using U.S. technology. A recent University of California study found that, of an Apple iPod sold in the U.S. for $299, $160 goes to American companies that design, transport and retail iPods. Only $4 stays in China with the firms that assemble the devices.

Canada will not be a direct target of know-nothing economics that believes trade is bad and no trade is good. But we could be sideswiped. Canada needs open global markets for trade and investment. Protectionism directed against any country hurts our economy. To forestall protectionist sentiment in the U.S., Canadians need to take a serious look at the Canada-U.S. relationship and consider areas where there is scope for constructive, co-operative engagement with the next administration. We should do this, whoever is sworn in as president next Jan. 20.

The Canada-U.S. relationship has drifted for more than a decade. It came close to coming off the rails in the Martin years. Dialogue at the most senior levels of government almost ceased, as petulance and prickly self-righteousness became the salient characteristics of Canadian management of the relationship. The Harper government brought maturity and perspective, but it is still difficult to discern to what purpose the Prime Minister wants to put this civility. He urgently needs to fill that gap, and no later than the end of this year. Specifically, he needs to reconnect Canadian policy with Canadian interests. Ministers and officials, now devoting resources to minor trade agreements with minor trading partners – that includes the European Union – need to refocus their energy on matters that count. As it stands, to use a Texan saying, Canadian trade policy is “all hat and no cattle.”

THICKENING BORDER

Ideas and initiatives have always had to come from Canada because Americans do not devote a lot of thought to the Canada-U.S. relationship, and when they do come up with ideas, Canadians are quick to see these as threatening. It will be better for Canadians to begin mapping out what kind of agenda meets the interests of both countries. Finding an answer big enough to interest American politicians and not so big as to frighten Canadian politicians will tax the imagination of officials and others interested in Canadian public policy. In our view, Canadians need to work out a plan to deal with these concerns:

What steps can be taken to achieve a more open and more secure border for cross-border trade and investment? Ever since Sept. 11, 2001, the border has been thickening, to the detriment of trade.

What can we do together to promote our common interests in the security of the Arctic, the sustainable exploitation of Arctic energy supplies, and environmentally responsible navigation through Arctic waters? Russian and other claims in the high Arctic could be problems and need to be contained by well-thought-through efforts to establish a Canadian presence there. U.S. support will be critical.

What kind of legislative and other programs can we pursue in order to ensure long-term North American energy security?

What further steps can be taken to promote cross-border regulatory co-operation? As the two economies have become more integrated, small, incidental regulatory differences are adding to costs and reducing wealth-creating trade and investment opportunities.

What kind of institutional capacity do we need to have in place to facilitate and promote the governance of North American economic and security concerns and to ensure appropriate co-operation at the state/provincial and legislative levels?

What steps can we take to work together in promoting global peace, security and development, particularly in Afghanistan and other troubled states?

What do we need to do together to address global and cross-border environmental issues?

On some of these matters, direct bilateral interests are at stake. On others, we share values and goals that arise from our common humanity. Canadians like to make a difference in world affairs. The U.S. is the one country that has much in common with us and has the capacity and resources to make a major difference. We can be more effective if we work with the Americans, not at cross-purposes.

At one level, the sabre-rattling on NAFTA is worrisome. At another, it is a wakeup call and an opportunity. Let's seize it.

Michael Hart is Simon Reisman professor of trade policy at Carleton University's School of International Affairs. William Dymond is Senior Executive Fellow at Carleton's Centre for Trade Policy and Law. Both are former federal officials.

Gaza's economy barely alive

Since Hamas took over the strip, Israel has closed the border. Even as jobs are lost, one merchant gambles on a reopening.
By Louise Roug
Times Staff Writer

July 20, 2007

GAZA CITY — Defying southern Gaza's dusty soil, sturdy little sprouts stand in neat rows before Zakary Hejazi.

The buds are a gamble: $162,000 worth of carnations. In the coming months, Hejazi hopes to export them to Europe.

But politics could make this harvest, and his business, wither.

"All the farmers are having nightmares," he said on a recent afternoon. "If the border closure continues, it'll be the death of the people — not just the flowers."

Since the Islamic militant organization Hamas took control of the Gaza Strip in mid-June, Israel has in effect sealed off the territory, closing border crossings to the import and export of most produce and other goods.

As a result, the already weak and aid-dependent Gaza economy is on the verge of collapse. Hundreds of factories have closed and tens of thousands of people are out of work.

On Monday, President Bush said the U.S. was giving $190 million in aid to the Palestinians. But the money is intended for Palestinian Authority President Mahmoud Abbas' government in the West Bank.

Israel, the United States and some European countries are trying to undermine Hamas, which they consider a terrorist group, by dividing the Palestinians and isolating Gaza.

But residents, business leaders and officials in Gaza said in interviews that they think Israel, not Hamas, is to blame for the economic crisis.

"People don't have anything against Hamas," said Mohammed Talabani, owner of a Gaza cookie factory. "It's Israel that is creating the crisis."

Talabani normally exports $750,000 worth of biscuits, wafers and ice cream to the West Bank every month. But there are no more exports, and the Al Awda factory is running out of imported cocoa, sugar and ice cream sticks.

Talabani has cut production by two-thirds, sending home hundreds of workers.

In the industrial sector alone, as many as 35,000 workers have been laid off, with losses amounting to $20 million, said Ali Hayak, the director of the Palestinian Federation of Industry. The problems add to Gaza's already considerable economic woes.

Official figures put unemployment at about 50%, but unemployment in effect is closer to 85% because many workers receive salaries that are so meager as to be meaningless, said Omar Shaban, a leading economist who blames both Israeli and Palestinian politicians.

Almost two-thirds of Gaza's budget comes from outside aid, he said.

"We cannot work without coordinating with the occupation," Shaban said. "We have to be logical. We have a responsibility for 1.5 million people in Gaza."

As many as 1.1 million of them are dependent on international aid, said John Ging, director of the United Nations Relief and Works Agency in Gaza. With the border all but closed, the last functioning part of the economy is collapsing, and the impending humanitarian crisis could overwhelm U.N. resources in Gaza, he said.

"If people are hungry, they will go to Hamas for help and aid," Hayak said. "But if the borders are open, people will be busy in their business, taking care of themselves."

Hejazi, for one, has been unable to get fertilizer to his hillside nursery. He is hoping his carnations might still make it through the sweltering summer and that, come fall harvest, the border will be open again.

Other farmers have already been forced to sell their produce for a pittance. Vegetables destined for Israeli markets instead have flooded the 140-square-mile Gaza Strip. One dollar now buys 26 pounds of tomatoes.

Palestinian textile producers, whose summer clothes may not make it to Israeli shops before the season is over, stand to lose as much as $5 million, according to observers and trade groups in Israel and Gaza.

Meanwhile, prices of imported materials have soared. Supplies of concrete are running out, and the construction sector has ground to a halt, delaying $93 million worth of United Nations projects — among them schools, refugee camp repairs and sanitation networks, Ging said.

Like Talabani, many Palestinian importers are forced to pay thousands of dollars in storage fees for goods stuck at the Israeli port of Ashdod, just north of Gaza City, and elsewhere. During the first two weeks of closure alone, Palestinian importers racked up $1.5 million in such charges, according to a report by Gisha, an Israeli-based advocacy group that promotes freedom of movement for Palestinians.

Hundreds of Palestinian traders and merchants who normally commute to Israel daily for business are also trapped in Gaza because of the border closures. And thousands of other Palestinians remain trapped on the Egyptian side of the Rafah border crossing.

When Hamas took control of Gaza last month, Palestinian border guards affiliated with the rival Fatah party fled their posts, leaving the crossings staffed only on the Israeli side.

Through intermediaries, Hamas officials have sought to resolve the situation with the Israelis, said Alaa Araj, an economics advisor to Ismail Haniyeh, the dismissed Palestinian Authority prime minister.

Abbas, who is based in the West Bank, fired Haniyeh and his government after the fighting in Gaza last month. But Haniyeh rejected the termination of his administration and has continued to govern.

Araj said border guards affiliated with Fatah were welcome to come back to work as long as they were not corrupt.

But Israeli officials say they will not negotiate with groups they consider terrorists or that do not recognize the state of Israel.

"As long as Hamas doesn't rethink its position, things will stay the way they are," said Shlomo Dror, an Israeli government spokesman, highlighting that the Israelis have allowed the passage of tons of food, medicine and other aid.

"The Palestinians in Gaza can survive without the opening of the crossings," he said. "True, there are difficulties and the situation isn't good, but they're not collapsing tomorrow morning. There will not be starvation in Gaza."

But Ging of the United Nations said that, while important, food handouts are not a solution.

"It's not just about keeping people alive. But alive to do what?"

Israel pulled out of Gaza two years ago and has since intermittently shut down the border crossings, sometimes for weeks on end. However, the current stranglehold on commercial goods and material is unprecedented.

"Every time there is a closure, we say, 'This is the worst,' " Shaban said. "But this is the worst of the worst."

For their part, Israeli fruit growers cannot sell their produce in Gaza and are losing millions of dollars in revenue.

Israeli officials recently said Hamas had banned Israeli fruit from entering Gaza, but Hamas officials denied this, and it is unclear how fruit would be able to pass the closed border crossings.

Shaban said opening the border was the most pressing short-term concern but added that Palestinian politicians needed to develop the economy, paying special attention to successful sectors, such as flower growing.

In Hejazi's business, trade trumps politics.

He imports the seeds from Israel. He grows the flowers in Rafah, not far from demolished Jewish settlements. And he monitors prices online before selling his crop through the Dutch flower bourse in Europe. Carnations yearly bring $20 million to Gaza, create jobs and, with that, hope for the future.

"We need food, yes," Shaban said. "But we also need flowers."

--

roug@latimes.com

Special correspondent Hamada Abu Qamar contributed to this report.

New Populism Is Spurring Democrats on the Economy

By ROBIN TONER

WASHINGTON, July 15 — On Capitol Hill and on the presidential campaign trail, Democrats are increasingly moving toward a full-throated populist critique of the current economy.

Clearly influenced by some of their most successful candidates in last year’s Congressional elections, Democrats are talking more and more about the anemic growth in American wages and the negative effects of trade and a globalized economy on American jobs and communities. They deplore what they call a growing gap between the middle class, which is struggling to adjust to a changing job market, and the affluent elites who have prospered in the new economy. Senator Hillary Rodham Clinton, Democrat of New York, calls it “trickle-down economics without the trickle.”

Populism is hardly new in the Democratic Party. Al Gore vowed to fight for “the people versus the powerful” in his presidential campaign seven years ago, and Republicans have long accused the Democrats of practicing “class warfare.”

But the latest populist resurgence is deeply rooted in a view that current economic conditions are difficult and deteriorating for many people, analysts say, and it is now framing debates over tax policy, education, trade, energy and health care. Last week, Senate Democrats held hearings on proposals to raise taxes on some of the highest fliers on Wall Street, the people at the top of private equity and hedge fund firms.

In the House, Representative Barney Frank, the Massachusetts Democrat who is chairman of the Financial Services Committee, convened party leaders and economists for a searching discussion of “globalization, outsourcing and the American worker — what should government do?” Speaker Nancy Pelosi, Democrat of California, offered the participants some blunt marching orders: “The American people want to know what we’re doing about their economic security.”

Their language, and to some degree their proposals, reflect a striking contrast with the approach taken by Democrats during much of the 1990s, when President Bill Clinton asserted that trade would create American jobs and that paying attention to the concerns of Wall Street would help the economy by lowering interest rates. The more populist tone is one indication of a broader debate among Democrats over economic policy and how much they should break with the careful centrism of the Clinton years embodied by Robert E. Rubin, the former treasury secretary, who was a champion of free trade and cutting deficits.

So far, Republicans have, by and large, stuck by their free-market philosophy. They point to a rebounding stock market, declining deficits and steady if unspectacular economic expansion as evidence that conservative policies of tax cutting, less regulation and more trade are working.

But Democrats say they are responding to economic trends that the statistics in the headlines do not capture, including middle-class insecurity about jobs, the affordability of health insurance and the costs of education. The times have changed, these Democrats argue, and six years of Republican tax and economic policies have heightened the inequities.

Even as Mrs. Clinton has sought to associate herself with the economic growth of her husband’s administration, she, like other Democratic presidential candidates, has been expressing a sharp skepticism toward trade and globalization under President Bush. In recent weeks she has announced her opposition to the proposed South Korean Free Trade Agreement and denounced globalization that “is working only for a few of us.” She accepted the endorsement of former Representative Richard A. Gephardt, who spent much of his political career fighting what he asserted were unfair trade agreements.

And Mrs. Clinton has increasingly focused on “rising inequality and rising pessimism in our work force,” and suggested that another progressive era is — and ought to be — at hand.

Former Senator John Edwards, another Democratic candidate, staked out similar positions months ago and regularly notes that in the last 20 years, “about half of America’s economic growth has gone to the top 1 percent.” Mr. Edwards praises recent efforts to raise taxes on private equity and hedge funds. His campaign manager, former Representative David E. Bonior, notes that Mr. Edwards has been sounding these themes since his first presidential campaign in 2004.

“John Edwards was there at the beginning of this,” Mr. Bonior said.

While campaigning in Iowa last week, Senator Barack Obama, Democrat of Illinois, suggested that even those who followed the standard advice for coping with a globalized economy — get more education for higher-skilled jobs — were losing out.

“People were told, you’ve got to be trained for high-tech jobs,” Mr. Obama said, “and then it turned out that some of those high-tech jobs were being outsourced. And people were told, now you need to train for service jobs. And then it turned out the call centers were moving overseas.”

It is not unusual for candidates seeking the Democratic presidential nomination to move left in the primary season; Mr. Clinton himself touched on some of these populist themes in his 1992 campaign. But all the major Democratic candidates for president are promising to use government to ease the insecurity of the middle class, on issues like education and health care.

Sixteen months before the election, with their domestic platforms being formed, these candidates are proposing, for example, to let the Bush tax cuts expire for the most affluent Americans and, in some cases, redirect that money to expanded health care. On the campaign trail and in Congress, Democrats are also talking about expanding assistance for college and help for workers who lose their jobs to cheaper labor abroad.

Democrats have also been pushing for legislation that would allow the federal government to negotiate drug prices for Medicare with the pharmaceutical industry, a favorite target of the economic populists.

Democratic leaders say that unless Congress restores the confidence of the middle class, it will be hard to sell Americans on more trade or even an immigration overhaul.

“I don’t think we’ll be able to do trade agreements, immigration reforms or any of these other kinds of reforms,” Ms. Pelosi said, “until we present a positive, aggressive economic agenda to the American people — until they know where they stand, now and in the future.”

Representative George Miller, the California Democrat who is chairman of the Committee on Education and Labor, said, “Trade may not be the reason, or the number one reason, they’re losing their jobs, but they think it is.”

Democratic leaders in the House recently announced that their legislative priorities did not include the renewal of the president’s “fast track” authority to negotiate new trade agreements, which expired this month. First, they said, they want to find ways “to expand the benefits of globalization to all Americans.”

There is anxiety on both left and right of the Democratic Party about this new populism. Many on the left worry that the Democratic establishment is merely paying lip service. They are skeptical about the party leaders’ loyalties, noting that many rely on huge contributions from Wall Street, and many have a long commitment to a free-trade agenda. Democratic leaders have, in fact, tried to advance some trade agreements this year, only to meet with substantial resistance within their caucus. Many of the new populists also see the Democratic establishment as far too cautious in confronting what they see as broad inequities in the tax code.

At the same time, centrist Democrats, like those at the research group the Third Way, worry that the party is veering left away from the optimistic, pro-growth, business-friendly policies that Mr. Clinton championed.

But many Democrats argue that this is an inevitable response to the dislocation and unease in much of the country, which was a crucial factor in the party’s victory in Congress last November. The case for populism is made most powerfully by the Democrats who were elected to Congress last fall. Senator Sherrod Brown of Ohio, who defeated a Republican incumbent with an attack on the trade and economic policies of recent years, said he was convinced that the populists were on the rise. He noted that he carried Ohio by 12.5 percentage points two years after John Kerry, the 2004 Democratic presidential nominee, lost the state by only about 2 percentage points, and with it the presidency.

“That’s because of the economic populist message,” Mr. Brown said. “They voted minimum wage, they voted trade, they voted student loans, they voted health care and prescription drugs, over what their traditional conservative social values might suggest. And that’s the route to winning Ohio for Hillary or Barack or anybody else.”

Even Representative Rahm Emanuel of Illinois, who is viewed as far too much of an establishment, free-trade Clintonian by many populists, says the party must respond. “The party that deals with globalization and economic security will win,” Mr. Emanuel said.