Insight and Analysis

December 2018

By Jesica Lindgren and Gabriella Ippolito

Matching the Trump Administration’s aim to streamline international development assistance, the U.S. Congress recently passed the BUILD (Better Utilization of Investments Leading to Development) Act. With China now gaining as a leading global donor, the U.S. Government wants to make its own international development assistance more focused and coordinated, now under one agency: the U.S. International Development Finance Corporation (USIDFC). The new agency will offer increased flexibility in lending with the aim of spurring greater U.S. private sector participation in international development assistance.

Once Congress passed the Act, the White House said in a statement that Congress had taken an important step toward fulfilling the President’s commitment to reform development finance institutions “so that they better incentivize private-sector investment in emerging economies and provide strong alternatives to state-directed initiatives that come with hidden strings attached.” OPIC’s president, Ray Washburne, said that the Act would allow the new development agency to take an equity stake in projects and will let the agency provide political risk insurance to help foster private investment in emerging markets.

The BUILD Act consolidates the Development Credit Authority (DCA) of the U.S. Agency for International Development (USAID) and the Overseas Private Investment Corporation (OPIC). And it more than doubles OPIC’s current $29 billion funding cap to permit USIDFC’s investments to reach $60 billion. The Act also has a “preference” for U.S. investors, rather than a requirement. USIDFC merges OPIC with some key private capital functions, such as USAID’s very successful Development Credit Authority, which provides guarantees up to 50 percent of financing made by developing countries’ local banks or financial institutions to small companies that might be deemed too risky for bigger financial players.

The BUILD Act has generated particular interest in Latin America and the Caribbean, which has long perceived the United States as in retreat from supporting the large infrastructure projects that will be required to advance regional development. The BUILD Act may now better position the United States to engage in Latin America at a moment when China has increasingly become the infrastructure provider of choice in a growing number of countries that have historically preferred to partner with the United States.

USIDFC has three objectives: (1) to align the U.S. Government’s development finance tools with broader foreign policy and development goals to enhance U.S. competitiveness; (2) to establish appropriate risk-management protocols for U.S. taxpayers, including for co-investment with the private sector; and (3) to increase efficiency by reducing duplicate efforts in the existing programs. The new agency is not prohibited from working in upper-middle income countries, and it can do so on two grounds: for national security reasons, or to support development of an underdeveloped part of the country in question.

What’s exciting about USIDFC is the opportunity to offer more flexibility in lending and U.S. private sector participation in international development assistance. The Administration is expected to take one year to structure the new agency, primarily with OPIC and USAID staffing, and is sending positive signals that the U.S. wants to compete internationally in the “soft power” arena.

USIDFC will offer welcome opportunities for collaboration and investment and interested private sector entities are now actively investigating areas to participate in what its proponents believe promises to be a win-win public-private partnership.

November 2018

By Étienne Bodard and Étienne Soula

In the face of new findings regarding the challenge of climate change, exciting new initiatives on both sides of the Atlantic are finding greater and greater expression.

On October 8, 2018, the Intergovernmental Panel on Climate Change (IPCC) issued a special report documenting the consequences of global warming for life on Earth. Its conclusions are bleak. The Paris Agreement pledged to limit global warming to 1.5 degrees Celsius above pre-industrial levels. The IPCC report explains that reaching two degrees Celsius would expose hundreds of millions of people to dangerous climate-related risks by 2050 and would likely wipe out 99% of coral reefs. As is, we have already reached one degree Celsius and our current trajectory appears to have us headed for a warming of around three degrees Celsius.

By way of comparison, 4-7 degrees Celsius is what separates temperatures today from those of the last ice age.

According to the IPCC, the only way to avoid a climate shift of cataclysmic proportions is “rapid, far-reaching and unprecedented changes in all aspects of society.” However, when it comes to a transatlantic response along these lines, the reality is complicated. In the European Union, ambitious efforts promoted by Brussels to transition toward a low-carbon economy are hampered by diverging national interests. Whereas in the United States, the White House has vocally expressed its skepticism regarding climate science and is actively undoing existing environmental regulations.

In his most recent State of the Union speech, Jean-Claude Juncker, the head of the European Commission, used the words “climate change” no less than three times. The conclusions of the October 2018 European Council meeting explicitly referred to the IPCC report. By 2030, the member states must cut their greenhouse gas emissions by 40% compared with 1990, reach a 27% increase in overall energy efficiency, and have 27% of their total energy consumption come from renewable energy. Following a recent agreement between member states and EU institutions, a vote in European Parliament on November 13 should increase this proportion of renewable energy to 32%.

But this ostensible ambition does not mean that all EU member states share the same level of commitment in the fight against climate change. Industry-reliant Germany and several Central European countries energetically, if unsuccessfully, lobbied against the European Parliament’s push for a 40% reduction in car emissions by 2030. At the second One Planet Summit, organized in New York in September of this year, French President Emmanuel Macron told the representatives of 150 countries that, “We are not here just to speak, but to be accountable.” Yet, the surprise resignation of Macron’s popular Environment Minister and the French government’s slowing down of the planned phasing-out of nuclear energy in favor of renewables have damaged Macron’s credibility on environmental issues. At the European level, the fact that French and German energy mixes are structured differently is causing divergences within the Franco-German engine on how to best tackle climate change. The fact that the 24th Conference of the Parties to the UN Framework Convention on Climate Change will be hosted by Poland—a member state still overwhelmingly reliant on coal plants—highlights the ambivalence behind the EU’s ambitious climate agenda.

On the other side of the Atlantic, the White House has been anything but ambivalent on climate change. President Trump has pledged to exit the Paris Agreement as early as possible. He has rolled back environmental regulations, taken an axe to the Environmental Protection Agency’s budget, and appointed Scott Pruitt (who has since resigned in July 2018)—who argued that climate change might actually be good for the planet—to the agency’s helm. Trump himself has been vocal in his attacks against climate science, famously denouncing it as a hoax “created by the Chinese in order to make U.S. manufacturing non-competitive.” His latest prominent statement on the issue accused climate scientists of having a “political agenda.”

While some are hoping that the Trump administration will not be able to rescind many of the environmental policies enacted during the Obama era, the current White House appears clearly uninterested in supporting efforts required to avoid the grim future predicted by the IPCC. Moreover, the White House's approach seems to be finding others following suit. The winner of Brazil’s recent presidential election, Jair Bolsonaro, declared during the campaign that he intends to withdraw Brazil from the Paris climate accord. While he has since rescinded those words, Mr. Bolsonaro remains committed to further opening the Amazon to mining interests. Such a measure is seen as having the potential to irreversibly damage the forest’s ecosystem and contribute to the release of billions of tons of carbon into the atmosphere. Not only is the current White House undoing the climate policies undertaken by the Obama administration, its approach is seeing countries take similar stances.

Yet, despite all these divisions and misgivings, local officials and, increasingly, private sector stakeholders from both sides of the Atlantic are actively working—often cooperatively—to rise to the challenge of climate change.

For example, the Atlantic Council recently highlighted the proactive efforts of several U.S. states where many governors are not following the White House’s lead on climate policy but instead are actively working with European partners to find new ways to confront the challenges. California is perhaps the most prominent actor in the field, hosting the Global Climate Action Summit in San Francisco in September 2018. The summit stood out from comparable initiatives due to the number and diversity of the stakeholders in attendance. The gathering brought together foreign government officials, U.S. state and regional leaders, and U.S. mayors as well as private sector CEOs, investors, and civil society representatives from both sides of the Atlantic. The attendees unveiled a range of new commitments across five specific challenge areas: healthy energy systems, inclusive economic growth, sustainable communities, land and ocean stewardship, and transformative investments. They issued a call to action asking for “strong national policies”, “net-zero mid-century emissions plans”, and “climate action at the local and regional level."

The Power Past Coal Alliance is another initiative aimed at facilitating a transition to clean energy. It brings together 28 national governments (including 14 EU member states), 19 sub-national governments (including seven U.S. states), and 28 private sector businesses. Such coalitions are already having a tangible and noticeable impact. For example, speaking as the Chair of C40 Cities, a group of large cities actively combating climate change, Paris mayor Anne Hidalgo announced at the San Francisco summit that the network’s members were no longer increasing their greenhouse gas emissions.

With each of these initiatives and in the absence of high-level political cooperation, it is becoming increasingly clear that the corporate sector is well-positioned to stake a greater and greater role in fostering transatlantic cooperation on climate change. Not only will the transition to a low-carbon economy reduce the extent and severity of global warming, but also moving to a greener economy is expected to result in trillions of dollars of economic benefit over the next decade, generating millions of new jobs. Initiatives such as Science Based Targets—a collaboration between the UN Global Compact, several NGOs, and nearly 500 companies committed to taking concrete steps to reduce greenhouse gas emissions—are bound to proliferate as more and more businesses realize the gains they stand to make by joining the fight against climate change.

All told, keeping global warming below the critical 1.5 degrees Celsius threshold will require a global, sustained, and whole-of-society effort. China, where emissions levels are now higher than the EU’s and U.S.’s put together, has seen its largest surge in emissions since 2011. In this context, it is crucial that developed economies pave the way for other developing giants such as India. With the Trump administration’s skepticism of climate science and the EU’s efforts mired by internal obstacles, there are now significant opportunities for a range of sub-state and non-state actors from both sides of the Atlantic to double down and deliver on their pledges.

The lack of tangible engagement by public authorities is, perhaps ironically, serving as a clarion call to action for nongovernmental stakeholders—most notably global companies and investors—to rise up to the challenge and reap considerable economic benefits from a transition to a low-carbon economy and to ensure that our planet remains habitable for future generations.

November 2018

By Daniel P. Erikson and Gabriella Ippolito

Latin America’s tumultuous political year has produced a new generation of leaders in countries as diverse as Brazil, Mexico, Colombia, Costa Rica and Paraguay. Several have vowed to make their countries more business-friendly as a result. The most recent edition of the World Bank’s flagship “Doing Business” Report shows how much work they have to do.

The latest report, “Doing Business 2019: Training for Reform” was released on October 31, 2018. The World Bank has been performing this study annually since 2002, and it currently ranks 190 countries on the ease of doing business, based on criteria including starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protections for minority investors, paying taxes, trading across borders, enforcing contracts and resolving insolvency. The World Bank formulates the scores on a series of questionnaires on these topics and assesses which countries pass reforms in these sectors and have legal regimes that are already considered “best practices” globally.

As usual, the top five spots on the list went to New Zealand, Singapore, Denmark, Hong Kong, and South Korea, respectively. The United States ranked at number 8, and Canada at 22. No country in Latin America and the Caribbean ranked in the top 30, or top 40, or top 50. The highest ranked country in the region is Mexico at 54, where its high ranking for the ease with which businesses can apply for and receive credit was mitigated by poor rankings on paying taxes. The next best ranked countries in the region are Chile (56), Colombia (65), Costa Rica (67) and Peru (68). With the exception of Costa Rica, which is seeking to become a member of the Pacific Alliance trade bloc, all of these nations are Pacific Alliance members and all have free trade agreements (FTAs) with the United States. These nations are generally perceived as having strong protections for foreign investors and as being business friendly. 

After this initial business-friendly cluster a few Central American countries follow with Panama (79), El Salvador (85), and Guatemala (98). Much of the Caribbean is then clustered in the low 100s and is led off by the Dominican Republic (102), Dominica (103) and Trinidad and Tobago (105).

Afterwards, some of the region’s largest countries Brazil (109) and Argentina (119) follow. In both countries starting a new business takes a lot of time and getting construction permits is extremely difficult. Brazil’s low ranking is actually a significant improvement over the prior year, due to a series of reforms that the government undertook in the past year, which the World Bank took into account. Still, as the World Bank makes clear, the old adage “Brazil is not for beginners” still rings true in terms of business

Venezuela is ranked at 188, surpassing only Eritrea and Somalia. Venezuela is ranked last for the ease of starting a business (190) and almost ranked last for trading across borders (189). Venezuela’s score has been lowered annually as basic activities like ensuring electricity to a business have become increasingly difficult during its economic crisis. Meanwhile, Cuba is not listed at all – presumably due to lack of data.

Although the Doing Business Report is just one tool for foreign investors to consider when examining a particular country, over the past fifteen years it has become increasingly influential and governments are regularly inspired by the report to implement needed reforms which hopefully will create a better business environment globally and create jobs in their countries.

Will new pro-business leaders like Jair Bolsonaro in Brazil, Ivan Duque in Colombia, and Maurcio Macri in Argentina have any success in making their countries more business-friendly? Latin America’s economic future may depend on it.

October 2018

By Karen A. Tramontano

To understand where the 2018 U.S. midterm elections may be headed, it helps to understand what voters were doing in 2016. Conventional wisdom holds that voters were angry and that only Trump understood that voters were angry—and it was these angry voters who determined the election’s outcome.

What pundits fail to acknowledge is that a significant percentage of voters in every election are angry and most, if not all, candidates understand why they are angry. Typically, candidates try to address citizens’ anger with promises to change policies that hurt them and improve policies that benefit them. Obviously, Trump’s response to citizen anger was quite different.

That said, the 2016 election was no more ‘the year of the angry voter’ than any other election year. It also was not the angry voter who determined the 2016 outcome. Instead, it was voters who did not vote or who voted for one of the alternative candidates—these citizens actually determined the 2016 outcome.

Non-voters who declined to be full participants in the democratic process did so for a myriad of reasons. Some simply did not like the choices. Others believed that Hillary Clinton was going to win and that there therefore was no need to vote. Some believed that because President Obama had been elected twice that the country had conquered racism and that Trump was not a threat. Still others believed that because Hillary had been nominated, the country had conquered misogyny and a misogynist could not be elected. Some were victims of voter suppression and others of Russian misinformation. And millions of other eligible voters lodged a protest vote for candidates they knew could not win.

The fact that over 95 million voters (or 42% of eligible voters) did not vote is significant. Election analysis should have tried to determine why voters did not vote. It did not. It also ignored the contamination of citizens’ enthusiasm to vote and the misinformation that caused their misunderstanding of the issues.

With more clarity about the impact of the 2016 election, many non-voters have joined together with those voters who did vote, but who do not like the election results, to organize a more full-throated democratic response to the upcoming 2018 midterm elections. These voters—collectively and individually—have decided that they want more control of their political destiny and want to put the nation back on what they perceive is the “right track.” They’ve decided that they want their voices heard, whether by participating in and supporting movements such as Black Lives Matter or #MeToo or by individually running for elected office or by supporting candidates at every level of government. And it’s not only women (although they may be the majority) who have decided to re-engage; men too are taking a stand about the kind of society in which they want to live.

So what does this all mean? No one will really know for sure until the midterm elections happen. But if we are to believe the numbers, there are far more people interested in change—change that moves the country forward, not backwards.

In a majority of the U.S. states that have held primary elections (candidates from each party seeking their party’s nomination), there have been huge increases in Democratic party turnout, compared to only a slight increase among Republican voters. To demonstrate the significance, the most relevant comparison is to compare voter turnout data in the 2014 midterm election with voter turnout data in 2018. That data shows an increase of 78% for Democrats voting in primaries, while showing Republicans only increased their primary vote by 23%. Overall, Democratic primary election turnout was 53% of the primary ballots cast. In 2006 when the Democrats took control of the House of Representatives, their party made up 54% of the primary ballots.

While Trump has turned conventional wisdom on its head, the U.S. president’s party typically, at least since the mid-1930s, has lost an average of 29 seats in the first midterm election after a president’s election victory. The Democrats need 23 seats to take control of the House of Representatives. President Trump’s low approval rating is expected to contribute to a poor showing for his party. And the fact that Democrats are outpacing Republicans in raising campaign contributions—although Republicans are known for dropping lots of money in Congressional district races closer to an election—outpacing Republicans at this stage will impact the end results.

Adding to these factors is the fact that 44 House Republicans are retiring, making those once encumbered seats now open and competitive. All said, the geography for control of the House is expansive and, unlike in previous midterm elections, includes many more competitive seats—in Minnesota, Iowa, Illinois, Texas, California, New Jersey, Kansas, Michigan, and Washington.

While Republicans hope it is meaningful that their party held on to the eight or nine seats in special elections—seats vacated by Republicans prior to the midterm elections—Democrats saw a 10-point shift in favor of their candidates even in those districts, districts President Trump won by double digits. Added to that shift, there are 25 districts that Republicans currently hold that Hillary Clinton won, in some cases by double digits.

Two other factors will influence the 2018 midterms that pundits fail to mention: the decline of voters who identify as Republicans; and the role of voters who identify as independent. In the United States, the percentage of voters who identify as Democratic has remained at 44% since 2016, while the percentage of voters who identify as Republican has decreased from 42% to 37%. Why does this matter? First, if voters are leaving the Republican party, those voters are far less likely to vote for candidates who identify with the party they have left. Second, 19% of voters who identify as independent—clearly enough to “swing” an election—are growing increasingly dissatisfied with Trump and with Congressional Republicans and are much more open to voting for Democrats than in previous elections.

The Senate, with statewide elections and many more Democrats (23) up for re-election than Republicans (7), is unlikely to “flip” from its current Republican majority. Although there are multiple scenarios that could produce Democratic control of the Senate, of the 23 seats that are being contested, 10 seats currently held by Democrats are states that Trump won in 2016. And, of those 10 seats, eight are very competitive and voters in three of those states continue to support the president.

The eight states to watch include West Virginia, where currently Senator Joe Manchin has a solid lead over his Republican contender but where Trump support is well over 60%. Other states where the race lead shifts within the margin of error on a weekly basis and are too close to call include: Indiana (Senator Joe Donnelly) where Trump approval is below 50%; Missouri (Senator Claire McCaskill) where Trump approval is below 50%; and North Dakota (Senator Heidi Heitkamp) where Trump approval is above 50%.

Senators who, despite Trump’s 2016 win in their states, are several solid points ahead of their Republican contenders include Senator Tammy Baldwin (Wisconsin), Senator Jon Tester (Montana), and Senator Sherrod Brown (Ohio). Florida, where Trump eked out a victory and his current support is at 41%, is experiencing a very expensive midterm contest between the incumbent Democratic Senator Bill Nelson and the retiring Republican Governor Rick Scott. While Trump’s approval rating in Florida is at 41%, the polls show that this race is close.

There are several Senate seats currently held by Republicans (either retiring or running for re-election) that could be “pickups” for Democrats. Those seats are in Nevada were Senator Dean Heller is considered very vulnerable, Arizona, where a conservative Democrat, Representative Kyrsten Sinema, is vying for Republican Jeff Flake’s seat, who is retiring, and Tennessee, where former Governor Phil Bredesen, a moderate Democrat, will be facing former Representative Marsha Blackburn.

Currently, Republicans have a very slim 51-49 margin in the Senate. Democrats need a net win of two seats to take over control of the Senate. While Democrats could achieve a net two seat gain, the odds are stacked against them. To get there, they would have to win most of the eight competitive seats and, for any seat they lost of the eight, they would not only need to pick up a seat in Nevada, Arizona, and/or Tennessee but also gain two seats. It’s a very difficult task to achieve.

But then there is Texas where Senator Ted Cruz is facing a mounting challenge from Beto O’Rourke. Statistical models forecasting the race in Texas are divided about whether Cruz or O’Rourke will win. But that fact that the race is as close as it is should be a warming sign to Republicans who now have to put resources—resources needed in other races—towards a race that they should be winning handily.

At the very least, November 6th will prove to be an interesting evening. Hopefully, it will also give U.S. leaders a better understanding of the values held by voters and their aspirations for the country.

October 2018

By Daniel P. Erikson and Gabriella Ippolito

When the North American Free Trade Agreement (NAFTA) came into force between the United States, Canada and Mexico on January 1, 1994, it created the world’s largest free trade area of 444 million people that now produces $17 trillion worth of goods and services. Canada is presently the United States’ second largest trading partner and Mexico is the third largest. U.S. trade with its NAFTA partners stands at $1.2 trillion and the two countries buy one-third of U.S. exports.

President Donald J. Trump placed NAFTA and its discontents at the center of his presidential campaign and has criticized the deal, which he has described as “horrible,” relentlessly throughout his presidency, threatening to unilaterally withdraw while holding out the prospect that his administration would try to negotiate a better alternative. In August, the efforts to renegotiate NAFTA led to a possible preliminary agreement with Mexico and on Sunday, September 30, after another month of negotiations, Canada agreed to join.

In 2017 we first described NAFTA as “in the cross-hairs” in September, while in October we wrote that NAFTA was “still on the brink,” and in November we warned of “turbulence ahead.”  In May 2018, we asked whether the NAFTA negotiations were in “overtime or sudden death?” and in September assessed whether there was a “deal or no deal.” Now it appears that NAFTA could become the USMCA (US-Mexico-Canada Agreement) if the three nations’ governments ratify the deal. 

What’s happening now?

On Sunday, September 30, Canada was added to the preliminary trade deal between the United States and Mexico that was previously announced at the end of August. This was the last possible date a deal could be agreed upon that could be signed by outgoing Mexican President Enrique Peña Nieto before he leaves office on December 1, to be succeeded by the populist president-elect Andres Manuel Lopez Obrador. Peña Nieto and Trump have presented the agreement to their nations’ respective Congresses.

The U.S. focus on “rules of origin” for the automotive sector led to an agreement that 75 percent of vehicle components must be made in North America (up from 62.5 percent) by 2020. In addition, by 2020 at least 30 percent of the automobiles must be made by workers earning $16 an hour or more, and 40 percent must be by 2023. These provisions were intended to reduce the competitive advantage presented by Mexico’s lower wages. 

Once the preliminary deal with Mexico was concluded, the U.S. negotiators focused on Canada’s dairy industry as a point of major contention. In the end, Canada did make some concessions such that the U.S. will be able to export more products (particularly protein concentrate, skim milk powder and infant formula). This is equivalent to access to about 3.6 percent of Canada’s dairy market, slightly above the 3.45 percent negotiated by the Obama administration in the Trans-Pacific Partnership. 

In return for the dairy concessions, Chapter 19, the special dispute resolution process for anti-dumping and countervailing duties, which Canada has invoked in its softwood lumber dispute with the U.S., stayed intact although it is now in Chapter 10. However, investor-state dispute settlement (ISDS) will be phased out for Canada and will be restricted to four areas of investment in Mexico: oil and gas, power generation, telecommunication, transportation and the ownership or management of infrastructure.

In addition, a new Intellectual Property (IP) chapter which many business leaders believe is necessary, was drafted. The chapter contains more-stringent protections for patents and trademarks, including for biotech, financial services and other related industries. U.S. pharmaceutical companies also will now be able to sell pharmaceuticals in Canada for 10 years before facing competition from generic medications, an increase from the current standard of 8 years. 

Notably, USMCA also has a provision in Chapter 32 that requires a country to inform the other two trading partners if it engages in trade negotiations with a “non-market economy” (think China) and presents an option to withdraw from USMCA if such a trade agreement is signed. This could mean that the U.S. could walk away from USMCA if either Canada of Mexico signs a trade deal with China, which could be an important source of leverage in the future.

What are people saying?

• On Monday October 1, President Trump called the re-worked agreement "the most important trade deal we've ever made by far." He added that it is "truly historic news for our nation and indeed the world . . . It is my great honor to announce that we have successful completed negotiations on a brand new deal to terminate and replace NAFTA . . . with an incredible new U.S.- Mexico-Canada Agreement called the USMCA. It sort of, just, works. USMCA. That'll be the name that 99 percent of the time that we'll be hearing." Trump added, “It has a good ring to it.”
• In a press conference on October 1, Canadian Prime Minister Justin Trudeau said, “Like any important negotiation, we had to make compromises . . . Today is a good day for Canada.”
• In a joint statement, U.S. Trade Representative Robert Lighthizer and Canadian Minister of Foreign Affairs Minister Chrystia Freeland said that the new deal will "strengthen the middle class, and create good, well-paying jobs and new opportunities for the nearly half billion people who call North America home.”
• Senator Orrin Hatch, chairman of the Senate Finance Committee, said, “I look forward to reviewing this deal to confirm it meets the high standards of Trade Promotion Authority.”

What’s next?

A formal vote in the U.S. Congress won’t be held until 2019, and Congressional support is not assured. Republican members of Congress say they want to read closely the final details regarding the dispute settlement and intellectual property issues and Democrats want to examine the agreement’s labor and environmental standards.

In addition, this agreement does not cover all of the trade issues the three nations have. Other issues will be negotiated on “separate tracks” including the Trump administration’s tariffs on Canadian and Mexican steel.

Though the announcement that NAFTA would be replaced by the USMCA was the most significant step yet in the year-old negotiations, the USMCA’s future is not yet assured. We will continue monitoring the agreement as it moves through the U.S. Congress.

September 2018

By Jeremiah J. Baronberg

Every September on Labor Day, the United States pays tribute to the social and economic achievements of U.S. workers and emphasizes their vital contributions to the strength, prosperity, and well-being of the nation.

In the U.S., Labor Day became a federal holiday in 1894 and serves as a reminder of the critical role played by American workers in the U.S.’s standard of living, innovative production, and vibrant economy. It was not long ago that the average American worked 12-hour days and seven-day weeks. Where school age children toiled in mills, factories, and mines across the country. Where manufacturing employees worked 100 hours a week. And where the working poor and wave after wave of new immigrants faced unsafe working conditions, while lacking access to fresh air, bathrooms, and breaks.

Today, while we have much to be grateful for, Labor Day forces us to remember that the modern U.S. standard eight-hour workday and 40-hour workweek, even the very concept of a weekend, cannot be taken for granted. Like other worker protections—such as a minimum wage, the right to organize and bargain collectively, unemployment insurance, health benefits, overtime pay, and the prohibition of child labor—they are the product of decades of pressure and public advocacy from labor organizers and their supporters and the sacrifices of generations of American workers.

Unfortunately, this progress is somewhat diminished as we experience the many challenges we face as an economic and social polity. For example, a recent finding by the Pew Research Center shows that for most U.S. workers, actual wages have barely risen in decades. The Pew research reveals that, despite a strong labor market, real average wages for American workers have “about the same purchasing power (that they) did 40 years ago…(and) what wage gains there have been have mostly flowed to the highest-paid tier of workers.” The result is that even though their paychecks may be bigger than they once were, the actual purchasing power of many American workers’ wages just hasn’t kept up.

Workers should be doing better than this.

This lack of wage growth is further compounded when contrasting the difference in real wage growth between those workers in the lowest (3% wage growth) with the top tenth (nearly 16% wage growth) of the earnings distribution. Moreover, the U.S. Bureau of Labor Statistics recently announced that real average hourly earnings were down 0.2 percent over the 12 months ending July 2018. Perhaps most alarming is that wage stagnation, as the Pew data argue, is a key cause—and manifestation—of widening income inequality, which observers cite as a contributing factor to a host of correlated societal ills such as life expectancy, social mobility, health, education, and even innovation and entrepreneurial gaps.

While there are a number of suggested explanations for the persistence of wage stagnation, there is not only no consensus on any one cause behind it nor what to do about it. But that is no excuse for not trying.

Today and every day let us each commit to doing our own part to honor and celebrate the legacy of America’s workers and to recognizing our responsibility to safeguard their future.

September 2018

By Daniel P. Erikson and Gabriella Ippolito

When the North American Free Trade Agreement (NAFTA) came into force between the United States, Canada, and Mexico on January 1, 1994, it created the world’s largest free trade area of 444 million people that now produces $17 trillion worth of goods and services. Canada is presently the United States’ second largest trading partner and Mexico is the third largest. U.S. trade with its NAFTA partners stands at $1.2 trillion and the two countries buy one-third of U.S. exports.

President Donald J. Trump placed NAFTA and its discontents at the center of his presidential campaign and has criticized the deal relentlessly throughout his presidency, threatening to unilaterally withdraw while holding out the prospect that his administration would try to negotiate a better alternative. Late last month, the efforts to renegotiate NAFTA seem to have led to a possible preliminary agreement. We first described NAFTA as “in the cross-hairs” last September, while in October we wrote that NAFTA was “still on the brink,” and in November we warned of “turbulence ahead.” Then in May we asked whether the NAFTA negotiations were in “overtime or sudden death?” Even at this point, the negotiations are ongoing and any talk of an agreement is “preliminary” as various issues between the United States and Mexico have yet to be resolved and Canada has not signed on.

The first round of NAFTA negotiations was held in August 2017, and the negotiating teams from the United States, Canada, and Mexico completed the eighth round in late April. At this point negotiations entered a “permanent round” all summer.

What’s happening now?

On August 27, President Trump announced that the U.S. had reached a preliminary agreement with Mexico. He made this announcement in the Oval Office while placing a call to Mexican President Enrique Peña Nieto on speakerphone. Negotiations with Canada for their entry into the preliminary agreement then took place August 28-30 with President Trump saying he expected them to end by the 31. As of September 4, the Canadians have not signed on.

On August 31, the Trump administration notified Congress that there is an updated deal, starting the 90-day clock on Congressional notification that is required before the president can sign a new trade agreement. This also opens the possibility that the new U.S.-Mexico Trade Agreement could be ratified during a lame duck session of Congress after the November mid-term elections and before the next Congress is seated on January 3, 2019. However, the current Congress has stressed that they want to see Canada included in a final deal.

During the last several months of negotiations, the U.S. and Mexican trade delegations focused on “rules of origin” for the automotive sector. The Trump administration initially demanded that North American-built cars contain 85 percent content made in NAFTA countries by value, up from 62.5 percent but then lowered this figure to 75 percent, which is where the content requirement stands in the most recent iteration of the deal. In addition, 40 percent of automobiles must be made by workers earning $16 per hour or more.

The contentious sunset clause that would require NAFTA to be renegotiated every five years was replaced by an agreement to review the deal in six years, with a phase-out time frame of 10 years if one or both sides decided not to continue with the agreement. The U.S. did continue its insistence on the removal of the investor-state dispute settlement (ISDS) clause (also known as Chapter 19).

Both the ISDS clause and the U.S. aim to increase intellectual property rights and extensions of copyright protections to 75 years from 50 are not supported by the Canadians. In addition, the U.S. and Canada remain mired in contentious discussions about the dairy industry. Trump has insisted that Canada reduce its tariffs on dairy which would be a significant concession for Canada. Canada was reportedly considering lowering protections on its dairy market so as to save the ISDS clause.

What are people saying?

• On August 27, President Donald Trump said "NAFTA" as a name would be scrapped because it has "bad connotations." When he spoke with President Peña Nieto he noted, "It's a big day for trade. It's a big day for our country."
• On August 27, Mexican President Enrique Peña Nieto said, “It is our wish Mr. President that Canada will be able to be incorporated in all of this.”
• On August 27, Senator Orrin Hatch, chairman of the Senate Finance Committee, said, “Today’s announcement by the United States and Mexico is an important step toward modernizing NAFTA, the largest free trade zone in the world… To achieve that goal, a final agreement should include Canada.”
• On August 29, Canadian Prime Minister Justin Trudeau initially said regarding the Friday, August 31 deadline, “We recognize that there is a possibility of getting there by Friday, but it is only a possibility, because it will hinge on whether or not there is ultimately a good deal for Canada. No NAFTA deal is better than a bad NAFTA deal.”
• On August 31, U.S. Trade Representative Robert Lighthizer said, “Today, the president notified Congress of his intent to sign a trade agreement with Mexico – and Canada, if it is willing – 90 days from now. We have also been negotiating with Canada throughout this yearlong process. This week those meetings continued at all levels. The talks were constructive, and we made progress.”
• On August 31, Canadian Foreign Minister Chrystia Freeland said. “We’re not there yet….We know that a win-win-win agreement is within reach. With goodwill and flexibility on all sides, I know we can get there.”
• On September 1, President Donald Trump tweeted: “I love Canada, but they’ve taken advantage of our country for many years!” He later tweeted: “There is no political necessity to keep Canada in the new NAFTA deal. If we don’t make a fair deal for the U.S. after decades of abuse, Canada will be out. Congress should not interfere w/ these negotiations or I will simply terminate NAFTA entirely & we will be far better off.”

What’s next?

The Trump Administration has started the 90-day clock to sign a U.S.-Mexico trade deal in November, but Congress remains skeptical about a Mexico-only deal. The administration now has less than 30 days to present the text of the Mexico deal to Congress, while concurrently negotiating a new deal with Canada. In theory, Canada could join the agreement with Mexico as it is written but this seems doubtful considering their deep opposition to several clauses. Reportedly, Congress has seen little of the current deal and the text itself could prove controversial.

We will continue providing updates as the NAFTA negotiations with Canada evolve.

September 2018

By Jeremiah J. Baronberg

Ryan Shuman contributed to this article

The NATO Alliance is currently in the midst of an unprecedented flare-up in the bilateral relationship between two of its longest standing members—the United States and Turkey—to the degree that observers are expressing heightened concern for the alliance’s cohesion, health, and effectiveness.

While the past few years have seen growing political and policy tensions between NATO and Turkish leaders, a series of escalating rhetorical threats and counter-threats, financial sanctions, tariffs, and asset freezing by U.S. President Donald Trump and Turkish President Recep Tayyip Erdoğan in recent weeks—have put NATO observers and investors on edge and has precipitated a currency crisis in Turkey.

The standoff between the two presidents has caused alarm bells to sound on both sides of the Atlantic and raised serious concerns about the ability of the two countries’ leaders to manage and deflate this crisis in ways that can champion the alliance’s values and interests and unite, rather than divide it. At the same time, concurrent questions are being publicly reexamined and debated regarding the overall state of democracy in Turkey, its growing strategic, military, and energy ties to Russia and Iran, and, as a consequence—its very status as a member of NATO.

Among the key factors underlying the current tensions include a failed 2016 coup attempt in Turkey—and subsequent purge of opponents—for which Erdoğan has held “foreign powers” responsible (including Fethullah Gülen, an exiled cleric living in the U.S.) and the civil war in Syria, in which the U.S. has provided training and arms for Kurdish groups fighting against ISIS in Iraq and Syria—groups which Turkey recognizes as terrorist organizations and actively, and often violently opposes. For its part, the U.S. is fighting the arrest by Turkey of a U.S. citizen and pastor, Andrew Brunson, indicted on charges of espionage (which the U.S. believes are politically-motivated) and attempting to overthrow the Turkish state.

Critics argue that because NATO’s decisions are consensual, any continued unaddressed tensions with Turkey are particularly dangerous, insofar as they allow one alienated member to undermine the alliance’s overall cohesion and collective defense posture. Fears of Turkey slipping under the influence of Russia have further exacerbated NATO’s concerns over the commitment of one of its longest standing members.

The increasingly uneven trajectory of Turkish-Western relations has been the subject of scrutiny for some time now and includes the failed aspirations of Turkey to join the European Union. Underlying all of this is what NATO experts see as Turkey’s increasingly authoritarian political pivot under Erdoğan’s leadership and its Janus-faced foreign policy tightrope balancing act between East and West. This trend is also seen as having been further enabled and emboldened by broader geopolitical rebalancings and reconfigurations, including among fellow NATO member states.

As its name attests, the North Atlantic Treaty Organization (“NATO”)—founded in 1949 in the aftermath of World War II—was conceived as a Transatlantic security coalition to unite the democratic and free market economy nations on both sides of a vast ocean. Together with other international institutions , NATO helped stand up a stable post-war environment, knitting together the economies and security of countries on the basis of shared values.

Then in 1952, and at the onset of the Cold War, the addition of new members Turkey and Greece underscored NATO’s growing geopolitical imperative of securing its outer flanks to encompass fellow democracies at the frontiers of South Eastern Europe and Eurasia. Thereafter, Turkey served as a critical NATO bulwark against Soviet expansionism and over the next six decades remained a strategic alliance member and ally of the United States. Today, it is home to both the alliance’s second-largest armed forces and the Incirlik air base, a critical strategic staging ground for the international coalition to defeat ISIS.

Whether the current tensions and volatile rhetoric will lead to a further deterioration of U.S.-Turkey relations—and, by extension, NATO-Turkey relations—may be difficult to predict, especially when taking into consideration the two presidents’ personalities and the shifting nature of allegiances and periodic crises endemic to the region in Turkey’s orbit. This August, President Trump signed Congressional defense spending legislation delaying the delivery of the F-35 stealth fighter jet to Turkey , seemingly in the face of U.S. concerns that Ankara’s plans to purchase the Russian S-400 missile defense system would enable Russia “to learn important information about the F-35’s vulnerabilities if Turkey possessed both the fighter jet and the S-400.”

Still, Turkey’s geopolitical importance to the NATO Alliance—and position between Europe and the Middle East and between the Middle East and Russia—shows that any internal tensions between individual member states has the potential to significantly roil the Transatlantic alliance.

Stay tuned as we continue to track these developments.

July 2018

By Sally A. Painter with Jeremiah J. Baronberg

This week, the annual meeting of the NATO Heads of State and Government is set to take place in Brussels, Belgium. This vital alliance has served as one of the key global institutions that has helped uphold the international order and foster transatlantic peace for over a half century since the cataclysm of World War II.

In the years since its founding in 1949, the North Atlantic Treaty Organization has well-served its purpose: knitting together the security of its member countries and societies on the basis of shared values, enabling an incomparable era of security, prosperity, and freedom on both sides of the Atlantic. Beginning with its founding membership of 12 nations, the Alliance has since grown, with new countries joining NATO after their historic transitions to freedom and democracy following years of authoritarian rule and planned economies. Today, NATO has 29 member states.

At this year’s Summit, a vital opportunity now exists: for the Alliance to admit the Republic of Macedonia as a new member state. It should do so without further delay. Macedonia has fulfilled all of its obligations for NATO membership, including participating in the Alliance’s Membership Action Plan and closing its 17th NATO MAP cycle in 2017.

Since declaring its independence in 1991 from the former Socialist Federal Republic of Yugoslavia and becoming a member state of the United Nations in 1993, Macedonia has charted a course towards full European and transatlantic integration, making EU and NATO membership a key strategic priority. It joined NATO’s Partnership for Peace back in 1995 and commenced its first NATO MAP in 1999. Macedonia is on the current agenda for future enlargement of the EU, having submitted its membership application in 2004.

For the past 20 years though, Macedonia’s path towards EU and NATO membership has been repeatedly blocked for one reason only: the ongoing objection of one country—Greece—over the official name of the country. Greece has long argued that the name of the independent country implies territorial ambitions towards Greece’s own Northern region, also named Macedonia.

In 2011, the International Court of Justice ruled in favor of Macedonia, stating that by objecting to its admission to NATO, Greece was in breach of its bilateral agreement obligations. While recognizing the ICJ ruling, NATO decided that an invitation would only be extended to Macedonia after a “mutually acceptable solution to the name issue” could be reached between the two parties.

This left Macedonia in the lurch as no one could foresee flexibility in either country’s position.

Yet this June, and under the supervision of a UN negotiations process, an historic accord was reached by Macedonia and Greece, under which Macedonia agreed to change the name of the country to “Republic of North Macedonia,” effectively unblocking Greece’s continued objection. The agreement has been approved by Macedonia’s parliament and a nationwide referendum is scheduled for the fall, after which Greek lawmakers must also ratify it. Nevertheless, with this agreement in place, NATO should send a strong signal and open an unconditional invitation in support of Macedonia’s accession to the Alliance.

This year marks the 10th anniversary of the failed 2008 NATO Bucharest Summit where Macedonia was blocked in its accession process due to the unresolved name issue with Greece. Although Croatia and Albania successfully joined the Alliance and Montenegro was admitted in 2014, Macedonia remained on the doorstep. For an organization devoted to maintaining the collective security of its members, this was both a procedural failure as well as a failure to adhere to its principles, where one member’s political veto was able to derail another’s justified aspirations.

Four NATO Summits and five NATO Ministerial meetings have since gone by and Macedonia still remains outside of NATO—and yet it serves as an active contributor to the Alliance’s peacekeeping missions. The 2018 Summit is an opportunity for NATO to send a strong message to the world that the Alliance remains open to enlargement.

This is indeed an historic Summit, and in a turbulent time, NATO should unanimously extend an invitation to Macedonia to join the Alliance.

July 2018

By Karen A. Tramontano with Jeremiah J. Baronberg

This June, I had the opportunity to participate in the Copenhagen Democracy Summit, convened in Copenhagen, Denmark—on one of the world’s oldest democracies—by former Prime Minister of Denmark and Secretary General of NATO Anders Fogh Rasmussen and the Alliance of Democracies Foundation.

The Summit provided an inspiring environment for discussions about many topics essential to democracy, such as fake news and free speech, co-existence of cybersecurity and democracy, the future of global trade, and nurturing democracy through economic development.

Each discussion brought a wide range of perspectives and experiences and fostered a debate not only among panel members but also with an engaged global audience. While panelists and participants in some cases agreed to disagree, all agreed on the virtue of democracy—that it must be defended and nurtured, globally.

Rasmussen opened the Summit expressing his belief that the “world’s democracies [must] work together for a more peaceful and prosperous world.” Former U.S. Vice President Joseph Biden spoke to the issues confronting democracy in an era of authoritarian revolt. Click here to watch his speech.

Closing out the day-long summit was former UK Prime Minister Tony Blair, who discussed the impact that globalization has had on democracies together with moderator Stephen Sackur of BBC’s HARDtalk program. Blair argued that Brexit was not only a disaster for the UK but most importantly was a decision taken against the choice of Britain’s youth.

I was honored to be a part of the discussion on nurturing democracy through economic development and to discuss the Global Fairness Initiative’s work in Tunisia and Nepal. The importance of GFI’s work in transitioning informal workers to formalized work and eliminating child labor in the brick kilns of Nepal can be found here.

In addition to hosting the Copenhagen Democracy Summit, the Alliance of Democracies Foundation also supports the Campaign for Democracy, a global intellectual movement to advocate for the cause of democracy and the Expeditionary Economics Program, a program that supports successful entrepreneurial projects in emerging democracies.

To learn more about the Alliance of Democracies Foundation and its programs please click here.