Nixon, China, Clinton and NAFTA

Anyone who is elected president wishes they could have a “Nixon in China” moment — an event that so historically changes the world that any mistakes that person makes in office will become somewhat overshadowed in the course of history. But for that event to truly resonate on a historic scale, it must reach into time and shape the world to come.

As is becoming ever evident in hindsight, NAFTA was Bill Clinton’s “Nixon in China” moment.

Ironically, it is the post-Nixon world of China that has made NAFTA a necessity. China and NAFTA have always been linked. Before its enactment, the proponents of NAFTA argued that, if low-cost manufacturing jobs went to Mexico, they wouldn’t go to China.

It would put a brake on Mexican immigration to the United States, and create a need in Mexican factories for U.S. machinery and raw materials — truly a win-win situation.

However, like many political arguments, it was not to be so. For a myriad of reasons, Mexico could not compete against low-cost Chinese manufacturing. Consequently, job creation in Mexico never came anywhere near the dreams of NAFTA proponents. Mexican immigrants still come to the United States and the U.S. benefited only slightly as a supplier to Mexican industry.

But what did occur since the enactment of NAFTA is the continuous metamorphosis of China into a dominating economic power. Six years after Nixon’s February 1972 visit, Deng Xiaoping (the de facto leader of China) revolutionized the world.

By allowing the investment of China’s singular asset, its massive population into a globalizing marketplace, Deng set off an economic chain reaction that is still proliferating around the world today.

Peter Drucker, the founder of modern management, spoke of capital-intensive countries and labor-intensive countries. But Drucker never dreamed of the metastasizing effect that globalization would have on China’s labor investment.

China, the so-called labor-intensive country, is now awash in capital. China’s voracious economy has created a massive market place with a constant need for resources and a self-generating capital-rich home market of enormous proportions.

China’s growth has redefined the concept of globalization itself. Ideas, information and capital flows are still sent electronically around, but the voracious needs of the Chinese economic engine is forcing the world into more nationalistic closed trading relationships. And nowhere is this truer then in the search for raw materials and energy.

Simultaneously, one of the dominant economic advantages that the United States of America had enjoyed for the past 100 years as the world’s largest domestic marketplace, no longer holds true as larger domestic market such as China and the euro zone evolve.

All of these interconnected global shifts — the almost instantaneous and continuous growth of China, the raw material forced re-emergence of mercantilism and the economic importance of ever larger domestic markets — has made Bill Clinton’s difficult decision to enact NAFTA historically clairvoyant.

For NAFTA, with a combined market size of 445 million people and vast quantities of natural resources, gives the United States the ability to adapt to these global changes without forfeiting economic growth.

NAFTA has problems — but they are primarily not the problems that were debated in the 2008 presidential primaries. Yes, the United States has lost 2.4 million U.S. manufacturing jobs since NAFTA took effect in 1994 — a drop of about 14%.

But those jobs mainly did not go to Mexico, they went either to China or to automation. The reality is that, since 1993, the manufacturing output of the United States increased by 66% — while at the same time the percentage of workers involved in manufacturing declined sharply.

The problem with NAFTA is its original structure. For NAFTA to act as both a counter-balance to China and as a growth stimulant for the U.S. economy, it needs to be configured in a manner similar to the European Union.

There, the wealthy nations send substantial development aid to the poorer nations within the union — lifting living standards and creating additional internal markets for such products as German automobiles and French technology.

Under a reformed NAFTA, the United States must to do the same. In addition, as in the EU, there must be a firm set of cross-national antitrust laws.

The lagging Mexican economy dominated by old government protected monopolies must be freed up — so that it can be jump started by aid flows from the United States and Canada. And finally, as was debated in the primaries, there must be more strident labor and environmental standards incorporated into a newly configured NAFTA.

China has re-oriented the economic globosphere. Yet foolishly, instead of strengthening NAFTA, (the U.S. competitive advantage in a Sino market world), we are using NAFTA as a political slogan to represent all the dislocations in U.S. society caused by globalization.

Both of the candidates in the recent primaries have suggested NAFTA must be revisited — and so it must. But the object needs to be to strengthen NAFTA, for any weakening will be disadvantageous to the United States.