Trade on the Trail, Part Cinco
Corporations and constituents in Oregon

Enclave Economy v. Straw Men

My friend Kevin Gallagher of Boston University has a new book out from MIT Press with Lyuba Zarsky called "The Enclave Economy: Foreign Investment and Sustainable Development in Mexico's Silicon Valley."

Unlike a lot of the Friedman-ite platitudes about eating sushi with a Bengali venture capitalist while talking on a cell phone, Kevin and Lyuba actually bothered to go to Mexico and talk to businesspeople and others to learn about the impact that NAFTA has had on Mexico's peoples and policies. Their major case study is Mexico's IT industry, and how it stacks up against its counterparts in Asia and elsewhere.

The picture they paint is not pretty. Under Mexico's pre-NAFTA import substitution regime, the country was able to produce a wide variety of electronics, and at one point nearly 95% of the value-added content of television production. In the 1970s, the government laid out a comprehensive policy to build a domestic computer industry, including by limiting foreign ownership and requiring that firms source nationally and locally. Deemed "an extraordinary success," the program began to unravel and domestic firms began to disappear. First when NAFTA facilitate the massive move-in of multinational companies with less long-term investment in the region, but instead only a temporary commitment to take advantage of low wages. And second when the multinationals traded out Mexico's less than $3-an-hour wages with China's less-than-$1-an-hour wages when that country acceded to the WTO in 2001 and also decided to let footloose capital set up shop without committing to China either.

Why did this happen? Kevin and Lyuba find plenty of blame to go around, but a major culprit is flawed trade deals like NAFTA, which "constrict the scope for developing countries to undertake targeted industrial policies":

Rules on intellectual property rights, for example, make it difficult to develop comprehensive innovation policies. Investment rules outlaw the ability of developing countries to leverage concessions from foreign firms such as content requirements for local suppliers or support for local training. Investment rules also allow private foreign firms to sue national governments when new and un-anticipated (by the investing firms) social and environmental  cut into profits under the argument that such regulations are "tantamount to expropriation." Moreover, the macroeconomic policies need to support contemporary trade agreements - high interest rates and tight fiscal policies - also make it more difficult for governments to design effective policy and offer credit to domestic firms.

Kevin and Lyuba have a summary piece of their book over at IRC.

Contrast this with some other stuff floating around DC recently.

First, there were pieces by the DLC-backed Progressive Policy Institute here and here which erects strawmen that NO ONE is arguing about, namely that the unemployment rate doesn't go up when net imports go up.

I've been in this line of work since 2000, and I've never heard anyone on my side of the argument suggest that a country loses jobs on net because of trade. What I have heard people say is that the composition and quality of jobs in the U.S. is negatively affected by a rising U.S. trade deficit all else equal, i.e. that jobs are lost in tradeable sectors (i.e. manufacturing and perhaps in tradeable services and farms as well) and that more low-cost imports from lower-wage countries tend to reduce the returns to U.S. workers in those sectors and by extension have a depressing effect on wages in the whole economy.

This is exactly why the "downsides" of NAFTA-style trade policies are NOT "concentrated on select communities," as Gene Sperling argues here. It's also why, contra Gene's implication, paper labor rights improvements that everyone from U.S. Chamber of Commerce to Human Rights Watch says cannot be enforced are not going to measurably improve the wage stagnation and loss of opportunity haunting "America's Forgotten Majority."

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