The House Ways and Means Committee held a hearing last Tuesday with two trade topics: the WTO Appellate Body and NAFTA 2.0. The first half of the hearing was devoted to the Appellate Body, including both support for the U.S. government’s longstanding concerns over the flaws with the dispute settlement system, as well as a desire for the United States to maintain its leadership role at the WTO.
The second half of the hearing was focused on the new NAFTA. Democrats sang the praises of the new labor provisions – rightly so.
What was missing, however, was any sense that the discussion around the Appellate Body and the discussion around the new NAFTA are, and should be, linked.
The Mexican diplomatic corps, which is usually sterling, fumbled badly in the run-up to the hearing, creating various mini-dramas out of paranoia that every U.S. government official with a labor portfolio becomes a “cowboy inspector“ upon setting foot south of the border.
With respect to the labor issues and NAFTA, Senator Pat Toomey explained both the problem and how the agreement addresses it:
[T]here are a lot of American companies that have subsidiaries in Mexico and now there’s a mechanism to accuse them of violating Mexican labor laws and a process by which they can be punished for having done so.
The more Mexico saw labor inspectors behind every corner, the clearer it became that these new labor rules matter.
But what we have not adequately focused on is why Mexico, even with a labor-friendly government, has such an allergic reaction to labor enforcement. We can certainly look at one end of the bell curve and blame those businessmen with Snidely Whiplash tendencies. And we can consider corrupt relationships between business and government officials.
It’s more complicated than that, though.
Mexico feels the cost pressure of competing with China. A former Mexican ambassador pointed out that Mexico is a beneficiary of the U.S. tariffs on China. For some products, China’s costs leapfrogged Mexico’s, giving the Mexicans an edge in exporting to the lucrative American market.
Of all WTO members, China has benefited most from the structural race-to-the-bottom suite of incentives that is – but should not have been – the global trading system. Labor rights suppression, loose or non-existent environmental rules, currency manipulation, lack of disciplines on anticompetitive behavior (which is the real problem with Chinese industrial policy). All of these have hurt American workers. But they have also hurt Mexican workers, as the pressure to compete with China fed into a longstanding business/government coalition to suppress labor rights. An ebbing tide grounds all boats.
In the meantime, the rules of origin for manufactured goods still provide massive loopholes for the use of Chinese inputs, in some cases allowing China to provide the vast majority of those inputs. The Chinese don’t have to adhere to the new labor rules. Mexico does.
The answer isn’t to strip labor rules out of the new NAFTA.
The answer is to put labor rules into the WTO.
It’s what Congress instructed the Trade Representative to do back in 1974, when the WTO was still the GATT. We didn’t do it then, and we didn’t do it when we stood up the WTO in 1995. For those who default to blaming the Republicans for these types of omissions, fairness dictates pointing out that the 1979 GATT Tokyo Round Agreement and the WTO Agreement were both delivered by Democratic administrations. Sometimes mistakes are bipartisan, too.
As we sing the praises of the rules-based system, and urge a resumption of U.S. leadership, we need to make sure we get those rules right. That means U.S. leaders have to insist on labor rights for the entire multilateral trading system. We’re the only ones willing to do it.
Of what value is the rule of law if the rules themselves are unjust?
