Question

In fall 1993, President Clinton was lobbying hard for passage of NAFTA but facing tough opposition from Ross Perot, among others. To help get out the administration’s message and build congressional and popular support, Vice President Al Gore agreed to go on CNN’s Larry King Live to debate—and discredit—the Texas billionaire. During the debate, Al Gore talked about the critical importance of NAFTA to the future of the United States. ‘‘This is a major choice for our country of historic proportions,’’ Gore said. ‘‘Sometimes we do something right; the creation of NATO, the Louisiana Purchase, Thomas Jefferson did the right thing there, the purchase of Alaska. These were all extremely controversial choices, but they made a difference for our country. This is such a choice.’’ Elaborating, Gore then said, ‘‘This is a choice between the politics of fear and the politics of hope. It’s a choice between the past and the future.’’ The reviews for Gore’s performance were solid, with most observers agreeing that he won the debate. Seven years later, however, when Al Gore was running in the Democratic presidential primary against Senator Bill Bradley, he and his supporters hammered Bradley for the latter’s support of NAFTA (while neglecting his own role in NAFTA’s passage). A story in the New York Times helped explain Gore’s conversion: Many officials from the powerful industrial unions in Illinois, Michigan, Missouri, Ohio, Pennsylvania and Wisconsin—the auto workers, the steelworkers and the machinists—say that if Gore hopes to motivate union activists to campaign for him and union members to vote for him in primaries and in the general election, he must address labor’s concerns on manufacturing and the related subject of trade. ‘‘It’s one thing for the vice president to get the AFL-CIO’s endorsement, and it’s quite another to mobilize our members,’’ said George Becker, president of the United Steelworkers of America. Becker met with Gore last week to press him on trade and manufacturing. ‘‘I have one overall goal in life,’’ Becker said, ‘‘and that is to reverse the trend of de-industrializing America and to stop these insane trade laws that force our manufacturers to compete against impossible odds.’’ Shapiro c01.tex V2 - July 27, 2013 7:55 P.M. Page 34 34 CHAPTER 1 • Introduction: Multinational Enterprise and Multinational Financial Management In 2004, virtually all the Democratic presidential hopefuls came out strongly against free trade, thereby reversing the position the Democratic Party had taken while Bill Clinton was president. Howard Dean, John Kerry, John Edwards, and Wesley Clark abandoned their past positions on trade and joined Richard Gephardt, a longtime critic of free trade and favorite of labor unions, in resisting efforts to lower trade barriers with Mexico and other nations in South America and Asia. Of the top-tier Democratic presidential candidates, only Joseph Lieberman continued to push the Clinton emphasis on forging trade agreements. ‘‘We cannot put a wall around America,’’ he said. During the 2008 Democratic presidential primaries, both Barack Obama and Hillary Clinton criticized free trade in general and denounced NAFTA in particular. According to Senator Obama, ‘‘If you travel through Youngstown and you travel through communities in my home state of Illinois, you will see entire cities that have been devastated as a consequence of trade agreements.’’ Both pledged to withdraw from NAFTA if Mexico and Canada refused to renegotiate the treaty. This pledge was made despite the difficulty in discerning NAFTA’s harmful impact from the data: From January 1, 1994, when NAFTA took effect, to 2008, the U.S. economy gained 26 million new jobs (a 21% increase in employment), while real (inflation-adjusted) hourly compensation (wages and benefits) of U.S. workers rose by 26%.

Questions 1. What might explain the candidates’ and Democratic Party’s reversal of position on free trade? Which voting constituencies would be most likely to reject free trade? Why?

2. What leverage do the trade unions have in persuading Al Gore and other Democratic candidates to pay attention to their anti-free-trade position? Explain why these particular unions might be particularly powerful.

3. What trade-offs did Al Gore and other Democrats face in accommodating labor? Explain.

4. How can U.S. manufacturers compete with foreign producers? Are they doomed, as suggested by the president of the United Steelworkers of America? Explain.

5. Are the unions and their members right to be concerned about the effects of free-trade policies? What are these effects that they are concerned about? Who would be helped and who would be hurt if the unions got their way on trade? Explain.

6. In 2007, Senator Obama’s campaign called Hillary Clinton ‘‘the senator from Punjab,’’ referring to her and her husband’s close political and economic ties to India. However, in 2010, President Obama traveled to India with an entourage of almost 250 businesspeople to drive home the message that India could be a goldmine for American jobs. What might account for the turnaround in Barack Obama’s public position on the importance of India for American jobs?

Answer 1

1. What might explain the candidates’ and Democratic Party’s reversal of position on free trade? Which voting constituencies would be most likely to reject free trade? Why?

The Democratic Party relies heavily on cash and union votes. And unions, particularly the industrial unions that make up the center of the union movement, are opposed to free trade, as they expose their members to competition from foreign labor represented in foreign goods and services. The candidates themselves seek to appeal to the unions because they are among the Democratic Party's best-organized group, and are able to turn out votes in primaries where few voters go to the polls. Owing to the low turnout, a primary is often decided by the most dedicated voters, who are also members of the Union affected by free trade job losses.

2. What leverage do the trade unions have in persuading Al Gore and other Democratic candidates to pay attention to their anti-free-trade position? Explain why these particular unions might be particularly powerful.

The strength of the unions stems from the fact that in presidential elections, their membership is concentrated in six major manufacturing states which are critical swing states. With its high vote numbers, Al Gore requires these states to win a national election. In these six states there are enough leaders of the trade union that they could tip a close contest. If the representation of the union is scattered across the United States, their strength would diminish considerably because they could not coordinate their votes to deliver key states.

3. What trade-offs did Al Gore and other Democrats face in accommodating labor? Explain.

If Al Gore gives in to protectionist sentiment to appease these industrial unions, he risks losing states such as California (Silicon Valley), Washington (Boeing), New York (Wall Street) and New Jersey (pharmaceutical companies) that rely on foreign trade for their livelihood. For example, Gore has made a particular move for Silicon Valley to gain money and votes, which is heavily dependent on exports. Pushing protectionist policies could lead Silicon Valley executives to retaliation against Gore, who realize that foreign countries are likely to retaliate against U.S. goods. In addition, a protectionist approach could also cost Gore farm state votes, as farmers are heavily dependent on exports. Gore must also be worried that he could lose the middle-of-the-road Democrats and independents votes if he is perceived as a weapon of labor – as Walter Mondale was.

4. How can U.S. manufacturers compete with foreign producers? Are they doomed, as suggested by the president of the United Steelworkers of America? Explain.

The objective evidence shows that U.S. manufacturers can compete against foreign producers, although not across the board. Rather, U.S. firms have a comparative advantage in a number of high technology industries and industries where close coordination between customer and producer is key. In fact, U.S. industrial output is up but the number of manufacturing jobs has not risen; it’s just that higher productivity means that companies don’t have to hire as many new workers to produce the higher output. U.S. companies also have a comparative advantage in many service industries, such as financial services, consulting, and telecommunications.

5. Are the unions and their members right to be concerned about the effects of free-trade policies? What are these effects that they are concerned about? Who would be helped and who would be hurt if the unions got their way on trade? Explain.

Yes, the industrial unions have set wages and benefits well above market levels. They were able to get away with such high levels of compensation as long as they were not facing competition from lower-paid foreign workers whose labor is embodied in imported products. Lower-priced foreign imports will put pressure on competing U.S. goods and, therefore, on the compensation enjoyed by industrial union members. Thus, protectionist policies will protect the wages and benefits of these union workers. At the same time, they will lead to higher prices to U.S. consumers of both foreign goods and services and the domestic goods and services that compete with them. A less obvious effect will be the harm caused to companies that export. Protectionism will lead to less demand for foreign exchange, thereby raising the value of the dollar and making U.S. exports less competitive overseas.

6. In 2007, Senator Obama’s campaign called Hillary Clinton ‘‘the senator from Punjab,’’ referring to her and her husband’s close political and economic ties to India. However, in 2010, President Obama traveled to India with an entourage of almost 250 businesspeople to drive home the message that India could be a goldmine for American jobs. What might account for the turnaround in Barack Obama’s public position on the importance of India for American jobs?

In 2007, Senator Obama was running for the Democratic nomination and was seeking to appeal to the most ideological members of his party since they have a higher propensity to vote in the primaries. Ardent Democrats tend to be against free trade. Hence, Obama’s position on trade, which mirrored that of his supporters, emphasized its negative aspects. Once he became president, he had to focus more carefully on what was in the nation’s best interest. Free trade helps create jobs. Notice, however, that his position on free trade hasn’t changed that much. He is promoting American exports, not free trade. He is not promoting outsourcing or trade as a means of reducing costs and improving the options available to consumers.

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