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Stefano Tijerina is a senior lecturer in Management at the Maine Business School. He is a member of the Maine chapter of the national Scholars Strategy Network, which brings together scholars across the country to address public challenges and their policy implications.
In 1993, President Bill Clinton signed the North American Free Trade Agreement (NAFTA), unleashing the forces of globalization that had been contained since World War I. Until then, protectionist measures had prevailed, including tariffs designed to defend domestic industrial production from the internationalization of the market.
Clinton’s decision represented a victory for the Republican Party that backed the principles of neoliberalism revived by Milton Friedman and pushed forward by President Ronald Reagan in the 1980s. These principles — deregulation, smaller government, privatization of public services and free trade — finally provided U.S. businesses the ideal conditions to execute a business strategy that went beyond the limitations of the nation state and its protectionist policies. In the case of Maine, a state that had benefited from these protectionist policies, the shift to free trade marked the end of manufacturing as the engine of economic development, replacing it with services, and more specifically hospitality and tourism. It led to an economic development strategy that became incrementally dependent on Canada, not only for its tourists, but for the back-and-forth movements of parts and semi-finished goods that resulted from the free trade dynamics of the North American Free Trade Agreement (NAFTA).
States like Maine did not fare well, while others flourished with the dynamics of globalization. U.S. companies relocated production overseas, dismantling local production systems and communities that depended on these domestic structures. Millions of good paying jobs vanished, the “giant sucking sound” of NAFTA predicted by Ross Perot became a reality.
More than 30 years and 14 free trade agreements later, a new voice of protectionism surfaced with President Donald Trump. His solution is tariffs, but will this old-fashioned remedy be the cure for the domestic damage caused by globalization? Difficult to predict, things are very different from the British-led first era of globalization.
This new era of globalization allowed the U.S. business sector to reshape the global market system through foreign direct investment, the engine of economic development for most nations across the world today. It gave China’s economy a second wind, incorporated Russia’s oligarchs and resources into the system of trade and created new robust consumer markets as in the case of India and Brazil.
Domestically, it was the business sector that reimagined North America, turning Canada and Mexico into an integral part of the U.S. supply chain system, as well as the other 18 nations that make up our free trade system. It was through the scaffolding of free trade deals that our business sector was able to construct layers of security against future protectionist threats. Yet the forces of protectionism surfaced again, and not from foreign nations trying to defend their domestic market, but from the designer of the second era of globalization itself, the United States.
President Trump’s protectionist measures of the past five months have sent shock waves across the global market system. The impacts have been felt domestically and abroad. Although the ramifications are just beginning to be understood domestically, its impact may already be quantified across the global market system, as nation after nation raises alarm about future economic growth. Tariffs have generated market chaos, diminished consumer confidence, and increased geopolitical instability. Moreover, they have uncovered layers of interdependence that have diminished our capabilities of self-sufficiency and increased our dependency on the global market system.
A look into Maine’s economy reveals its dependency on the global market system, and more particularly Canada. More than 50 percent of Maine’s imports and exports are dependent on the Canadian economy, as are the tourist and hospitality sectors. The lobster and broader seafood industry is dependent on global and not just domestic consumers. The potato and blueberry sectors are heavily intertwined with the global market system, and so is the lumber industry, which is vertically integrated with the Canadian market, just like the cannery industry. The state’s largest aquaculture companies are mostly foreign owned. The two biggest electricity companies are also foreign owned; Central Maine Power belongs to Spain’s Iberdrola and Versant Power to ENMAX from Calgary. Meanwhile the small business sector, the bread and butter of rural communities, is heavily dependent on imports as well as foreign supply chains, more signs of the dependency on the global market system.
Maine’s case reflects the nation’s current dependency on the global market system. Each state’s economy is intertwined with the system in one way or another. Therefore, today’s tariffs may no longer have the national impact they had in the 1930s when the economy was domestically interconnected. Effective tariffs need long-term structural and systemic adjustments and a willingness of the business class to develop a cohesive and self-sufficient internal market, while abandoning the capabilities provided by the dynamics of free trade. They require both political parties to be on the same page, as was the case 30 years ago with the globalization of the market.
The reality is that business, for the most part, is not interested in protectionism, and neither is the Democratic Party. The remedy of tariffs is not going to cure the damage done by globalization; this is an issue of redistribution and regulation. Presently, protectionism may incentivize U.S. and foreign companies to onshore operations to places like California and Texas that rank as the 4th and 9th largest markets in the world, but not to Maine, the 130th largest market in the world. Tariffs will only exacerbate the gaps between states, as the benefit trickles down the national supply chain.
