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Brad DeLong explains what getting NAFTA wrong taught him about TPP

CNN

Before Brad DeLong was known to the internet for his feisty blogging style, he was deputy assistant secretary for economic policy in the early years of the Clinton administration. In that capacity he worked on, among other things, trade policy, including the NAFTA deal with Mexico and Canada.

And he has a fascinating take on what he learned from that experience — how the consequences of the deal turned out to be drastically different from what he forecast:

As one of the people who did the NAFTA economic impact estimates for the Clinton Administration. I definitely have some explaining to do.

Our models showed NAFTA as:

  • a small plus for the American manufacturing sector, including manufacturing workers;
  • a larger but still small plus for American consumers;
  • a substantial plus for Mexico; and
  • a minus for other developing countries that were potential competitors with Mexico for the American market.

In reality, it turned out to be:

  • a substantial short-run minus for Mexico (the 1994-95 financial crisis);
  • a long-run plus for Mexico that I still hope will be larger than the short-run minus (guaranteed tariff- and quota-free access to the US market is worth a good deal);
  • a bigger plus then I expected for Wall Street;
  • a plus for American consumers;
  • a small minus for American manufacturing; and
  • a minus for other developing countries that were potential competitors with Mexico for the American market.

It turned out that the most important aspect of NAFTA was not the increase in balanced trade from lower trade barriers, and was not the increase in factory construction in Mexico because of increased confidence in Mexico's government and in US willingness to accept Mexican exports and in US manufactured equipment exports to enable that construction.

It turned out that the most important aspect of NAFTA was the Mexican financial liberalization that allowed Mexico's rich to cheaply purchased political risk insurance from Wall Street by getting their money into New York.

His bottom line from all of this is that "analyzing modern trade agreements as if they were primarily Ricardian deals is likely to lead one substantially astray." The deals encompass a much wider range of issues, and the biggest impacts can pop up in unexpected places. We know who gets a seat at the table in the TPP negotiations and who does not, but actually understanding its implications is very challenging.

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