Canada’s NAFTA Labor Plank

Donald Trump made renegotiating NAFTA—an agreement he has also threatened, including again this week, to “terminate” altogether—a central theme of his campaign, which, as most of you probably remember, he dubbed the worst trade deal ever. While it was never all that clear what exactly he planned to do with a renegotiated pact, and it still isn’t, we are now in the middle of the renegotiation process nonetheless.Yet, likely to the surprise of the Trump Administration, Canada’s government has proposed a progressive labor plank for inclusion in this renegotiated agreement. While the Trump Administration will probably not embrace it, the proposal does provide an example of the sort of labor conditions that progressives can seek to have included in future trade deals.

The proposal includes items that appear targeted toward both the United States and Mexico. On the top of the list on the U.S. side is banning so-called “right-to-work” laws. These laws prohibit union contracts requiring all workers who benefit from a union to pay their share of the union’s expenses. They are used to weaken unions since it means that workers can receive all the benefits from a union without actually having to chip in to support it. Employers have long pushed for these laws at the state level; as a result, they are now in place in 28 states. There is also a Supreme Court case pending that may ban such “agency shop” contracts in the public sector nationwide.

A provision in NAFTA banning right-to-work laws would hugely facilitate union organizing, although it won’t override a Supreme Court ruling that prohibits agency shops in the public sector. It is worth noting, on this point, that while the United States has seen a plunge in union membership over the last four decades, from over 20 percent in the late 1970s to less than 12 percent today, there has been only a modest decline in Canada over this period. The unionization rate there is still almost 30 percent.

Given the similarities in the economies and culture, this difference is probably best explained by an institutional structure that is more supportive of unions in Canada. The two biggest differences are that in most provinces workers can organize a union if a majority sign cards in support of it. This avoids a long election process during which the company can try to intimidate workers. The other difference is mandatory first contract arbitration. This prevents a company from stalling in negotiations and in that way undermining confidence in the union.

Trump is obviously not going to buy rules that give labor unions more power. But it is helpful to at least give this issue some attention, and perhaps to remind people in the United States that it is not crazy to envision a country in which unions have more influence. It is not clear what Canada’s response will be, assuming that Trump refuses to give any ground on these points. It seems unlikely that they will just walk away from NAFTA, but it also seems unlikely that Canada’s Prime Minister, Justin Trudeau, can agree to a deal that has nothing by way of improved labor rights.

The plank also includes rules prohibiting gender discrimination and ensuring workplace safety. These would be largely duplicative of what already exists in law in the United States, but having guarantees in a trade agreement can be helpful in reaffirming such a commitment. This might be the case, for example, on occasions where clever lawyers can take advantage of the wording in an agreement to press a case that might be difficult to pursue under current law.

The proposal has several provisions that could be especially important for Mexican workers. One of these would ban company unions. In many cases, Mexican businesses have effectively established employer-friendly unions as a way of heading off organizing drives by their workers. Such a provision, if it were enforceable, would make it easier for Mexican workers to organize unions that actually represent them.

Notably, another provision being promoted by the Canadian government would require countries to have a minimum wage. Mexico is considerably poorer than the United States and Canada, so no one would expect it to have a minimum wage as high as its richer neighbors. However, its current minimum of $1 an hour is ridiculously out of line, even given its relative poverty. It is not hard to design formulas for a minimum wage that would be based on the wealth of the economy. For example, if we used the U.S. minimum wage of $7.25 an hour as a base, given Mexico’s per capita GDP relative to ours, their minimum wage would have to be at least $2.70 an hour.

There is also the issue of enforcement of wage and hour laws, health and safety laws, and the right to organize. This has been an ongoing matter of debate with regard to trade, as U.S. deals have established a mechanism in that investors can directly take complaints under the agreement to an extra-judicial tribunal, also known as the investor-state dispute settlement mechanism. By contrast, labor has to persuade governments to raise complaints over abuses of labor with our trading partners. Good luck doing that under the Trump Administration.

It is worth noting, though, that even if labor were to get its dream conditions, including these planks and more, they would still will not eliminate the downward pressure that trade puts on the wages of large segments of the workforce, at least as trade deals are currently structured. (While manufacturing workers are forced to compete; doctors and other highly paid professionals are largely protected.)

Workers in Mexico, China, and other developing countries are paid much less than workers in the United States, first and foremost because these countries are much poorer than the United States. Guarantees of labor rights can ensure that workers get their fair share of the pie, but in a country that is one-third (e.g. Mexico) or one-tenth (e.g. Bangladesh) as rich as the United States, this will still leave them with far lower pay than their U.S. counterparts.

It can be hoped that trade will increase growth and thereby raise living standards in our trading partners, so that they are more comparable to living standards in the United States. In some cases, this textbook story describes the situation reasonably well. South Korea and Taiwan went from Sub-Saharan living standards at the start of the 1960s to Western European levels of living standards today. China is making this jump even more rapidly. Trade was not the only factor in the extraordinary growth in these countries, but clearly it was an important part of the story.

However, trade does not necessarily lead to such a convergence in living standards between trading partners. Since Mexico joined NAFTA in 1994, despite what Trump’s rhetoric might insinuate, its per capita income has actually fallen relative to the United States. In this case, the main issue is not ensuring that Mexico’s workers get their share of the pie, the issue is getting the Mexican pie to grow at a respectable rate to begin with.

It is possible to envision trade pacts as part of a larger process of economic integration, as is the case with the European Union. EU rules are designed not only to remove barriers to trade; they also open borders between member states and include provisions for explicit transfers from richer countries to poorer countries to facilitate the convergence process. It would be quite a leap to go from even Canada’s progressive labor plank to a process of economic and political union for the three countries along the lines of the EU, but it could still be useful to hold this up as a pole in the debate. In any case, our neighbors to the north deserve a big “thank you” for a provocative response to Donald Trump’s challenge.

It’s not clear where this renegotiation process ends up, but Canada’s proposal is at least a step in the right direction. These are the sort of planks that progressives in the United States should try to have included in future trade deals. They may not get very far in the Trump-Pence Administration, but the next Democrat in the White House should be pressed to embrace them.

Thanks to CEPR for being on the case.

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