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As a friend, neighbour, and trusted partner, Canada is well positioned to help strengthen North America’s supply chain resiliency and industry competitiveness. What is more, we can take pride in knowing that our highly-integrated North American economy, founded and built upon the principles of transparency, diversification, security, and sustainability, allows us to offer an excellent value proposition in world markets. Canada will continue working with like-minded partners—especially our North American friends and neighbours—to help build a cleaner, greener, and more resilient global economy that is founded on the principles of free and open trade that has served us all so well.

The two-day summit saw the countries’ leaders and their delegations focus on a series of topics, including efforts to combat climate change, drug trafficking and racism. The leaders also focused significantly on economic issues, as the three countries seek to build more resilient supply chains in key industries. Ahead of the summit, the U.S. and Mexico publicized a shared desire to collaborate on actions that would attract supply chains currently based in Asia to move to North America. The U.S. last year passed the CHIPS Act, a law that incentivizes semiconductor manufacturing investments in the country. And in December, Mexico’s Economy Secretary Raquel Buenrostro met with U.S. Secretary of Commerce Gina Raimondo to discuss the relocation of companies from Asia to North America and ways to strengthen semiconductor and printed circuit board supply chains, according to a readout of the meeting.

In this climate of uncertainty, jurisdictions around the world are looking for stability and predictability. They are turning to their most trusted allies, choosing to localize manufacturing capacity in locations with partners who are reliable, safe, and secure. As members of the world’s largest free-trade zone, Canada, the United States, and Mexico know that they have no better friends than each other. Since 1994, free trade agreements among our three countries have raised the fortunes of all North American businesses, workers, and families, as our economies have become more integrated and prosperous. By working together to improve the reliability and fluidity of our supply chains, we have a chance to seize the moment and enhance the overall North American value proposition–and each partner has a role to play. Domestically, Canada is making strategic investments in key sectors to make essential supply chains more accessible and secure. Our Critical Minerals Strategy, for example, is securing the key inputs in batteries and semiconductors needed to support the world’s transition to the green digital economy of the future. In world markets driven by demand for microchips and batteries, Canada’s critical minerals, coupled with our reputation as a safe, reliable, and secure supplier of goods and services, make us the strategic partner of choice. That is why we have already secured investments from globally leading companies, including battery manufacturers, and continue to put into place a domestic battery ecosystem that will help meet the global demand for cleaner transportation alternatives.

The importance of USMCA for regional economic relations is amplified by growing geopolitical competition with China and the COVID-19 pandemic. This competition is over whether China will develop the world’s largest and most innovative economy in this century with attendant military prowess, or whether the U.S., and the West more broadly, will retain its economic lead and dynamism. These tensions are leading to calls to reduce North America’s economic reliance on China. The pandemic has also underscored the importance of expanding and deepening resilient supply chains, of which reshoring activities within North America will be vital to the region’s economic health and sustainability. USMCA presents an opportunity for the three countries—U.S., Mexico, and Canada—to “build back better” and leverage the region’s collective talents, capital, and expertise to develop a more competitive, sustainable, and inclusive North American economy, which can rival some of its fiercest competitors. Ideally, USMCA will also provide a sustainable framework for the region to work as key partners on important and forward-looking issues.

The agenda moving forward should build on the key elements in the USMCA that help generate broad political support and then identify the challenges and opportunities that can only be addressed through regional cooperation. The priorities are strengthening each country’s global competitiveness (e.g., resilient supply chains); developing opportunities for digital trade; and ensuring the compatibility of international trade with labor and environmental standards. When setting the new agenda, governments need to consider the shifting global economic context such as rising nationalist politics, increased uncertainty over the ability of international trade to deliver broad-based social gains, and growing western tensions with China. In fact, USMCA currently reflects some of these trends. One example is an increased protectionist approach, particularly with respect to the auto industry. The USMCA also includes an option for the parties to leave the agreement if one enters into another free trade agreement (FTA) with a non-market economy—a way to prevent any of the participating governments from entering into an FTA with China.8 Looking ahead, an important inflection point is the six-year review of the agreement at which time the focus will be on whether the USMCA can deliver across all the important dimensions mentioned earlier, most likely with a focus on the impact on Mexican wages.

Addressing climate change is a priority for the U.S. and Canadian governments. At President Biden’s Leaders Summit on Climate in April 2021, the U.S. increased its target for reducing greenhouse gas emissions from 50 to 52 percent by 2030 compared to 2005 levels. Canada similarly raised its level of ambition to reduce emissions from 40 to 45 percent by 2030 compared to 2005 levels, up from its previous pledge under the Paris Agreement of a 30 percent reduction. Under the same agreement, Mexico has committed to a 22 percent reduction of greenhouse gas (GHG) emissions and 51 percent of black carbon, as well as to generate 35 percent of power through clean energy sources by 2024 and 43 percent by 2030. President Biden and President Obrador have also agreed to explore bilateral cooperation on climate. Addressing climate change presents a range of opportunities for North American cooperation that can also strengthen competitiveness and build resilient supply chains. One way is to use USMCA to drive innovation and investment in clean energy needed to meet climate change targets. There is a range of climate action coming out of the Leaders Summit that will spur clean technology investments including carbon capture and energy storage.50 In all these areas, there should be a regional approach—that builds on USMCA—to spur investments and develop new supply chains. Reforms on enhancing competitiveness and strengthening the investment environment will be important. Actions to increase North American competitiveness will also support supply chains in areas important to climate change issues such as EV battery productions and Photovoltaic or PV solar systems.51 Another area to address is policies that undercut clean energy, particularly ones that lead to carbon intensive energy sources. For example, the Mexican government’s Electricity Industry Law eliminates the energy regulator Comision Federal de Electricidad’s (CFE) preferences for clean energy or other incentives that would grow Mexico’s clean energy sector. Instead, the existing law prioritizes fossil fuels. Not only is this inconsistent with Mexico’s USMCA commitments, but it is at odds with Mexico’s Paris Agreement pledge to build a low carbon economy. Such actions disincentivize investments in Mexico’s clean energy sector and jeopardize Mexico’s role as a supplier of clean technologies. There is, therefore, an opportunity for the U.S. and Canada to challenge the consistency of Mexico’s Energy Reforms with its USMCA commitments. Another role for USMCA is developing a coordinated approach to dealing with carbon border adjustment mechanisms (CBAM). The EU CBAM extends its domestic carbon price to imports at the border. The effects of the EU CBAM will need to be assessed through a North American lens such as when the mechanisms apply to carbon intensive products—particularly iron, steel, and aluminum—produced through North American value chains. At the same time, Canada is considering whether it should develop a CBAM to support its more ambitious climate targets.52 Trade Representative Tai has signaled that USTR is also looking at this issue53 and proposed a bill for climate border adjustment, signaling a growing interest in Congress to act on this important issue.54 North America needs to develop a unified approach to CBAM to prevent it from becoming a trade barrier. This requires a coordinated approach to developing a regional mechanism as well as reducing the carbon intensity of exports. While USMCA has been criticized for failing to explicitly include climate change commitments, there are a number of provisions that support climate action.55 For instance, the USMCA’s chapter on the environment includes expanding access to climate finance and clean technology innovation and commitments to sustainable forestry management, which reduces deforestation and builds forests as carbon sinks.56 The USMCA strengthens restrictions on ozone-depleting substances under the Montreal Protocol that are also potent greenhouse gases. 57 USMCA also includes commitments to facilitate trade and investment in environmental goods and services by working through the USMCA Environment Committee as well as through international fora such as the WTO. The U.S., Mexico, and Canada should use USMCA to develop an ambitious agenda around trade in clean technology goods and services. Progress here can stimulate production of clean technologies in North America. This will be particularly the case if there is agreement to ratchet up and harmonize energy efficiency standards in North America where the USMCA Annex 12-D on energy performance standards requires cooperation.58 A successful USMCA outcome on reducing barriers to environmental goods and services could become a basis for renewing WTO negotiations on environmental goods.59

Labor reform in Mexico has been an important priority for the U.S. This reflects the longstanding concern over the impact of lower Mexican wages on reducing investment in U.S. manufacturing, with impacts on U.S. jobs and wage rates.43 The Mexican manufacturing sector has produced the lowest average wages growth among OECD countries as well as low productivity growth.44 Figure 6 shows that China’s wage growth has been 150 percent higher than in Mexico. The underlying driver of low wage growth is low productivity, which has defined the Mexican economy for the past decades. In particular, productivity growth in Mexico’s manufacturing sector has been about half that of the U.S.45 This is despite the enormous progress on increasing exports of complex manufactured products such as cars and computers, and successful integration into global value chains in North America.46

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The U.S., Mexico, and Canada should take advantage of the USMCA to develop the world’s most integrated digital economy that maximizes opportunities for cross-border data flows and digital trade, while still preserving privacy and ensuring cybersecurity.31 Various types of data provide increasingly important information for businesses and government, from developing digital technologies such as AI, driving business insights, effectively managing supply chains, and enhancing innovation and delivery of government services. Cross-border data flows are also transforming international trade21 through e-commerce, digital services delivery, and data use in manufacturing.32 E-commerce is a major industry, totaling $14.5 billion in Mexico and $25.4 billion in Canada. It also provides a pathway for SMEs to engage in international trade.33 For instance, 100 percent of Mexican small businesses using eBay are exporters, compared to 8 percent of traditional offline Mexican SMEs.34 Moreover, the broader use of digital technologies has the potential to boost Mexico’s GDP by 7 to 15 percent by 2025.35 For example, data collected from sensors is being used to improve logistics, and AI-enabled translation services have reduced language barriers to trade.36 Furthermore, global data flows are enabling so-called “Supply Chain 4.0” that includes integrated information flows that can enhance productivity and expand employment opportunities.37 This includes creating new opportunities for SMEs to participate in supply chains by taking on tasks or offering services. The USMCA contains the world’s most comprehensive chapter on digital trade. They cover commitments to supporting cross-border data flows, avoiding data localization, and prohibiting requirements on source code as a condition of market access. These measures provide certainty to businesses that rely on data.38 USMCA can also strengthen e-commerce as a driver of trade by including requirements for raising De Minimis duties and improving customs facilitation and express delivery.39 However, as digital trade opportunities grow, governments are enacting restrictions on cross-border data flows. The U.S., Canada, and Mexico remain relatively liberal in their approach, at least compared to some countries in Southeast Asia, China, and the EU.

North American trade is dominated by trade in intermediate goods and services used in supply chains. As Figure 4 shows, for Mexico and Canada, roughly half of those imports—from within the bloc—are intermediate goods, while for the U.S. about 60 percent of imports from Canada and Mexico are intermediate goods. Given the importance of supply chains in regional trade, gross trade numbers fail to capture the extent of economic integrations and distribution of gains. For example, approximately 40 percent of Mexico’s goods exports to the U.S. contain U.S. valueadded.16

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USMCA could also help correct the failures of the Trump administration to lead on new trade deals in Asia, which has likely harmed U.S. competitiveness as tariffs were imposed on numerous intermediate goods. While the Trump administration spent several years pulling out of trade deals such as the CPTPP and raising tariffs on manufacturing inputs, the rest of the world concluded new trade deals, which lowered barriers and increased economic integration. This included the the EU-Japan and Canada-EU trade deals and Regional Comprehensive Economic Partnership, a regional trade deal in Asia. Against this context, USMCA can provide a North American framework for strengthening the capacity of the three countries—the U.S., Mexico, and Canada—to compete globally.

A little over one year into USMCA, we must look beyond the day-to-day market access issues and identify ways in which the agreement can become a framework for building a more competitive, sustainable, and inclusive North American economy. A successful agreement would maintain bipartisan political support and effectively respond to competition from China and other rising economies. There are five primary areas governments and relevant stakeholders must focus on to help achieve these objectives: 1) Expand trade and investment to create a more competitive North American economy: USMCA includes a range of commitments that can strengthen North American competitiveness by increasing within-bloc trade and investment that contributes to the overall competitiveness of the region, including in infrastructure and supply chains. 2) Increase resilience and strength of North American supply chains: COVID-19 underscored the importance of resiliency and proximity to consumers. Going forward, North America needs supply chains that are more resilient to short-term shocks, which in turn have the potential to make North America a competitive alternative to supply chains in China. USMCA can also support policies to increase human mobility in the region as well as investment in worker trainings, which will be crucial as complex supply chains become more knowledge intensive. 3) Develop a digital North America: USMCA includes a comprehensive digital trade chapter that can serve as the foundation for expanding digital trade opportunities across North America. Success here will also strengthen supply chains, create new opportunities for digital technologies such as artificial intelligence (AI), and make North America more inclusive by expanding access for small and medium enterprises (SMEs) to digital trade. 4) Strengthen outcomes for labor: It will be important to show that the USMCA labor chapter commitments are demonstrably effective. This will have two elements: First, proof of compliance by all governments—in particular by the Mexican government where the labor market contains many distortions —with agreements on labor commitments and second, successful use of the rapid response mechanism to address facility-level violations. Overall, USMCA should be successful where NAFTA was not: improvement in wage conditions and rates over time, though this must be paired with other non-trade related reforms to address low productivity growth in Mexico. 5) Support ambitious climate change action: Climate change will increasingly be the challenge through which all other economic policy tools are assessed. With the USMCA environment chapter and other commitments in the agreement, there is scope for North America to position itself as a leader in clean energy technology, discipline government action inconsistent with ambitious greenhouse gas reduction targets, and develop a coordinated approach to carbon border adjustment mechanisms.

But the tale of Librado Velasquez helps show why supporters are wrong about today’s immigration, as many Americans sense and so much research has demonstrated. America does not have a vast labor shortage that requires waves of low-wage immigrants to alleviate; in fact, unemployment among unskilled workers is high—about 30 percent. Moreover, many of the unskilled, uneducated workers now journeying here labor, like Velasquez, in shrinking industries, where they force out native workers, and many others work in industries where the availability of cheap workers has led businesses to suspend investment in new technologies that would make them less labor-intensive. Yet while these workers add little to our economy, they come at great cost, because they are not economic abstractions but human beings, with their own culture and ideas—often at odds with our own. Increasing numbers of them arrive with little education and none of the skills necessary to succeed in a modern economy. Many may wind up stuck on our lowest economic rungs, where they will rely on something that immigrants of other generations didn’t have: a vast U.S. welfare and social-services apparatus that has enormously amplified the cost of immigration. Just as welfare reform and other policies are helping to shrink America’s underclass by weaning people off such social programs, we are importing a new, foreign-born underclass. As famed free-market economist Milton Friedman puts it: “It’s just obvious that you can’t have free immigration and a welfare state.”

The literature suggests a number of possible pathways or links between immigration and social spending: A. Increased immigration is associated with increased social spending, at least in the short term: 1. In Europe and the United States, recent immigrants have lower levels of education and training, weaker economic performance, and heavier reliance on unemployment and social assistance benefits than both previous generations of immigrants and natives. 2. Immigrants tend to be younger on average than natives, altering the demographic profile of the country and raising expenditures on child-related programs, such as child benefits and education. B Increased immigration leads to reduced social spending: 1. For the same reason, that immigrants tend to be younger than natives, immigration reduces the share of the population over 65. To the extend that the welfare state is oriented more to the old than the young, immigration reduces demand for social services quasi-automatically, and this alone would create a negative relationship between immigration and social spending. This relationship would be causal, certainly not spurious, but in contrast to the effect in A.2., it is of little political consequence. Its possibility alerts us to the need for a fully specified setup, however. Conceivably, over the full life-cycle the net demographic impact of immigration on the destination country’s fiscal position is small and ambiguous. 2. Most critically, increasing proportions of “new” beneficiaries – who have not been contributors – may lead to a decline in general public support for redistributive policies, whatever the beneficiary group. 3. Immigration could lead to pressures to reduce the eligibility of immigrants in particular for welfare. If immigrants come to dominate the traditional categories of welfare eligibility, this would reduce the system’s overall transfer capacity or limit growth in social expenditures. 4. Over time, political resistance to high levels of immigration increases support for conservative political parties. In the European context, the vehicle for this protest tends to be radical right-wing parties. Voters supporting such parties may not intend any signal about the welfare state but find themselves inadvertently sending such a signal anyway.

(Congressional Budget Office, “How Changes in Immigration Policy Might Affect the Federal Budget,” pg online @ http://www.cbo.gov/sites/default/files/cbofiles/attachments/49868-Immigration2.pdf //um-ef)

What Federal Benefits Can Noncitizens Receive and What Taxes Do They Pay? Under current law, only qualified aliens—primarily comprising LPRs, refugees, and people who have been granted asylum—and some types of temporary residents are eligible to participate in most federal benefit programs, provided they meet other program-specific eligibility requirements. (For some programs, those requirements include waiting periods of several years following the attainment of qualified alien status). Some noncitizens who are not qualified aliens but are lawfully present (for example, people who have been approved for deferred action) are eligible to receive Social Security and Medicare benefits if they qualify on the basis of their age and work history. Other noncitizens are not eligible to receive benefits from most federal programs; exceptions include emergency health care services provided through Medicaid, some benefits through the Children’s Health Insurance Program (CHIP), and some refundable tax credits. However, noncitizens’ U.S.–born children are eligible for the same federal benefits that are available to other U.S. citizens. (See Table 1 for an overview of the eligibility requirements for noncitizens.) Most noncitizens who live and work in the United States are subject to taxation—including income taxes, payroll taxes, excise taxes, and estate and gift taxes. The specific taxes for which they are liable, and in some cases the amount of those taxes, depend on the type of visa they hold and how long they have been in the country. How Might Proposals to Modify the Immigration System Affect the Federal Budget? Proposals to modify U.S. immigration policy vary greatly in scope and their potential impact on the federal budget. In this report, CBO discusses the possible effects that changes to immigration policy would have on several major federal spending programs and on federal tax revenues. Among the programs and benefits that could be affected:  Health care programs for low-income people— including Medicaid, CHIP, and subsidies for health insurance (which include premium and cost-sharing assistance for health insurance purchased through the exchanges that were established in 2014 under the Affordable Care Act, or ACA),2  The Supplemental Nutrition Assistance Program (SNAP),  Social Security,  Supplemental Security Income (SSI),  Medicare,  Pell grants and federal student loans,  Unemployment insurance, and  Refundable tax credits. Each program has its own set of eligibility rules and criteria, which determine how changes to federal immigration policy would affect participation in the program and spending by the government. Consequently, such policy changes could affect spending in varying ways both in the near term and over time. Spending for some programs would change almost immediately upon enactment if more noncitizens were allowed to enter the country, whereas spending for other programs would not change much for a while: For example, under some proposals, foreign-born people who entered the country lawfully after the policy change was implemented would automatically be eligible for emergency Medicaid benefits and subsidies for health insurance purchased through exchanges; they also would begin paying income and payroll taxes as soon as they entered the country. In contrast, additional spending for Social Security and Medicare would occur mostly after the first few decades, once new entrants had been in the workforce for a sufficient time and reached the age at which they were eligible to claim benefits. Because most noncitizens who live and work in the United States are subject to taxation, changes to federal immigration policy would affect the amount of revenues the government collects. How total revenues collected by the federal government would change under new immigration policy would depend on the resulting changes in the size of the U.S. population, the types of people who would be permitted to work under those new laws, and other considerations. A policy that led to a significant increase in the working-age population would expand the labor force and lead to a significant amount of additional revenues from income and payroll taxes. This report does not address in detail how a change in immigration policy might affect federal spending or tax revenues through its effects on the broader economy—as evidenced in changes to gross domestic product, employment, and total wages. In some instances, when those effects would probably be significant, CBO and the staff of the Joint Committee on Taxation (JCT) have relaxed the long-standing convention of not incorporating such macroeconomic effects in cost estimates. Immigration legislation also could have a broader set of effects on output and income that are not reflected in cost estimates. Those additional economic effects include changes in the productivity of labor and capital, the income earned by capital, the rate of return on capital (and therefore the interest rate on government debt), and the differences in wages for workers with different skills. Those effects and their estimated consequences for the federal budget have, on occasion, been discussed in separate reports regarding the proposed legislation. Earlier this month, the House of Representatives adopted a rule that requires CBO and JCT to include the budgetary feedback of any macroeconomic effects in cost estimates for some major pieces of legislation.3 Legislation that would make significant changes in immigration policy might be covered by this rule; if so, future cost estimates provided to the House for such legislation will, to the extent practicable, incorporate the sorts of effects described here. Because immigration proposals could affect both spending and revenues, some might result in net budgetary savings whereas others might result in net budgetary costs. However, assessing the net effect on the federal budget of changes in immigration policy is complicated by a variety of factors, including a lack of reliable data about the number of unauthorized residents currently in the country and the extent to which LPRs, temporary residents, and unauthorized residents use government programs. This report focuses on proposals that would change the status or composition of three populations of noncitizens: LPRs, temporary workers, and currently unauthorized residents. Changing the Criteria for Admitting Lawful Permanent Residents. According to government estimates, about 13 million people currently live in the country as LPRs. Changes to visa policies that broadly affected the characteristics of new LPRs—for example, by shifting the type of permanent visas awarded from family-based preferences to work-related or merit-based preferences— might have a significant impact on the demographic composition of LPRs and, as a result, on their use of federal programs and payment of taxes. Under current law, permanent residents who meet program requirements are generally eligible to receive benefits after a specified waiting period or period of employment; thus, an increase in the number of LPRs would ultimately increase spending for programs such as Social Security and Medicare. Whether those residents qualify for certain means-tested benefits (such as those provided by Medicaid and SNAP) is determined, in part, by their income. If the policy change resulted in more LPRs with sufficiently low income to qualify for benefits, costs for those federal programs also would increase. In the first five years, the biggest impact on spending would probably involve the health insurance subsidies; after that, changes in spending for other programs would have increased importance. Tax revenues also would change if the visa system was altered, though whether revenues increased or decreased would depend on the details of the policy. Changes that significantly increased the net flow of foreign-born workers into the United States, and therefore increased the total population, would lead to an increase in the supply of labor, which would have broad effects on the economy and the budget. The magnitude of those effects would depend on factors such as the new immigrants’ rate of participation in the labor force, their unemployment rate, the average number of hours they work, and their average wage.

Liberals who seriously want to defend liberal democracy should stop condemning those who disagree with them on immigration. Uncritical support for wide-open borders is a major reason for the collapse of social democracy in Europe, as traditional center-left voters have flocked to populist, anti-immigration parties, which are often the only ones offering reasonable limits on immigration. This has been the case in Germany, where the anti-immigrant Alternative for Germany is the biggest opposition party in parliament, and Italy, where voters flocked to parties promising to deport illegal immigrants. Voters don’t necessarily support these parties’ worrisome views on Russia, judicial independence, press freedom or NATO, but they tend to give much higher priority to concrete, migration-related issues (including crime and national identity). Addressing such concerns doesn’t mean that those of us who favor immigration must automatically approve sealing off all borders. It does mean that we need to make some serious concessions. For if every move to restrict immigration or strengthen borders or discourage further migratory waves is portrayed as a concession to fascism, then the only people who benefit will be fascists. Liberal democracy has enough enemies at the moment. Liberal democrats should stop making new ones.

According to the research, because Mexican-origin workers rely heavily on whatever social security benefits they might receive – either from Mexico or the U.S. — changes to that system will significantly affect the length of their careers.

“Given the impact of social security wealth in our analyses, we expect future changes in the U.S. social security system will strongly affect labor force participation and retirement decisions of Mexican-born immigrants,” the researchers say.

The populist insurgency in Europe loomed large at the start of 2017, seeming to pose a threat to the future of the EU. Now it is suffering rout after unexpected rout. In the past week alone, Italy’s Five Star movement has been crushed at municipal elections, turnout for Marine Le Pen’s National Front more than halved in France between presidential and legislative polls, and in Britain, the UK Independence party’s share of the vote slumped to just 2 per cent, down from 13 per cent in 2015. Finland, where a power-sharing experiment with the far-right True Finns has been a test case for what happens to populists once saddled with the bureaucratic realities of office, also fits the trend. In the past 48 hours, True Finns were first booted out of government, having selected a hardline anti-immigration, anti-EU candidate as their leader. Then, yesterday, they split. More moderate members changed their name and saved the coalition government by retaining a power-sharing role. Both factions look greatly diminished. Of course, no two populist parties are the same, and although the rise of the far-right has been consistent across Europe in recent years, just as its decline has been so far this year, local circumstances differ greatly. Nonetheless, Finland has shown this: the far-right can be neutralised as effectively, or more so, inside the tent, as it can be when demonised on the outside as it is, for example, in Sweden. Having become the second-largest party in parliament with nearly 18 per cent of the vote, the True Finns joined a rightwing coalition in 2015. In government, party members had to temper their stance on a trio of tricky issues: the Greek bailout, the migrant crisis, and reforms to the anaemic economy. Frustrated that their message had thus been blunted, and their opinion ratings nearly halved, the party this week voted to sharpen its claws anew with a virulently Islamophobic leader. The move backfired. This year was forecast to be a turning point for the far-right. But the momentum is in the opposite direction from the one anticipated. Far from gaining a foothold via the ballot box, as many feared in the wake of Britain’s 2016 vote to exit the EU and the US’s vote to install Donald Trump in the White House, populists and nationalists have mostly been driven back to the margins. There is good cause for relief. Not everyone, however, has been as effective as the Finns in neutering the toxic blend of xenophobia and Europe bashing that has swept the continent in recent years. The UK, and the Netherlands, where the extremist Geert Wilders was also trounced in polls, offer counter points. In both countries populists have been held at bay from the point of view of the electoral arithmetic. But in both countries elements of their agenda have been absorbed into the mainstream. In the UK, the ruling Tory party has hardened its opposition to the EU after last June’s referendum and the implosion of Ukip. This may make a final deal with Brussels much harder. In the Netherlands, the centre-right has adopted at times fiercely anti-immigrant rhetoric along the path to power. This process of political osmosis may be natural but unhealthy if populists gain influence without responsibility. Nor is there cause for complacency even in Finland. As elsewhere in Europe, the far-right may be on the retreat. But the circumstances that provided fertile ground for its rise have changed only slightly. It would be foolish to think that one will disappear without the other.

The Western world desperately needs a more hardheaded approach to the issue of refugees. It is bound by laws and treaties written after World War II that have been rendered utterly irrelevant by a planet on the move. Tens of millions of people seek to exit the troubled regions of Central America, the Middle East, West Africa, and South Asia for better opportunities in Europe and North America. The relatively small portion of that number who have reached the rich North since 2013 have already up-ended the politics of the United States, the United Kingdom, and the European Union. German chancellor Angela Merkel’s August 2015 order to fling open Germany’s doors is the proximate cause of the de-democratization of Poland since September 2015, of the rise of Marine LePen in France, of the surge in support for Geert Wilders in the Netherlands, and—I would argue—of Britain’s vote to depart the European Union. The surge of border crossers from Central America into the United States in 2014, and Barack Obama’s executive amnesties, likewise strengthened Donald Trump. It’s understandable why people in the poor world would seek to relocate. It’s predictable that people in the destination nations would resist. Interpreting these indelible conflicts through the absurdly inapt analogy of German and Austrian Jews literally fleeing for their lives will lead to systematically erroneous conclusions. We need a new paradigm for a new time. The social trust and social cohesion that characterize an advanced society like the United States are slowly built and vulnerable to erosion. They are eroding. Trump is more the symptom of that erosion than the cause. Trump’s executive order has unleashed chaos, harmed lawful U.S. residents, and alienated potential friends in the Islamic world. Yet without the dreamy liberal refusal to recognize the reality of nationhood, the meaning of citizenship, and the differences between cultures, Trump would never have gained the power to issue that order. Liberalism and nationhood grew up together in the 19th century, mutually dependent. In the 21st century, they have grown apart—or more exactly, liberalism has recoiled from nationhood. The result has not been to abolish nationality, but to discredit liberalism. When liberals insist that only fascists will defend borders, then voters will hire fascists to do the job liberals won’t do. This weekend’s shameful chapter in the history of the United States is a reproach not only to Trump, although it is that too, but to the political culture that enabled him. Angela Merkel and Donald Trump may be temperamental opposites. They are also functional allies.

Trump’s promises have been so vague that it will be hard for him to disappoint. Nonetheless, many of his supporters will wake up to the fact that they have been duped, or realize the futility of voting for a wrecker out of a sense of alienated desperation. The progressives’ silver lining to the 2016 election is that, had Clinton won, the Trump constituency would have been back in four years’ time, probably with a more ruthless and ideological candidate. Better for plutocratic populism to fail early. But the damage inflicted in the interim could be terrible—even irredeemable if it were to include swinging a wrecking ball at the Paris Climate Agreement out of simple ignorant malice. Polanyi recounts how economic and financial crisis led to global calamity. Something similar could happen today. In fact we are already in a steady unpicking of the liberal peace that glowed at the turn of the millennium. Since approximately 2008, the historic decline in the number and lethality of wars appears to have been reversed. Today’s wars are not like World War I, with formal declarations of war, clear war zones, rules of engagement, and definite endings. But they are wars nonetheless. What does a world in global, generalized war look like? We have an unwinnable “war on terror” that is metastasizing with every escalation, and which has blurred the boundaries between war and everything else. We have deep states—built on a new oligarchy of generals, spies, and private-sector suppliers—that are strangling liberalism. We have emboldened middle powers (such as Saudi Arabia) and revanchist powers (such as Russia) rearming and taking unilateral military action across borders (Ukraine and Syria). We have massive profiteering from conflicts by the arms industry, as well as through the corruption and organized crime that follow in their wake (Afghanistan). We have impoverishment and starvation through economic warfare, the worst case being Yemen. We have “peacekeeping” forces fighting wars (Somalia). We have regional rivals threatening one another, some with nuclear weapons (India and Pakistan) and others with possibilities of acquiring them (Saudi Arabia and Iran). Above all, today’s generalized war is a conflict of destabilization, with big powers intervening in the domestic politics of others, buying influence in their security establishments, bribing their way to big commercial contracts and thereby corroding respect for government, and manipulating public opinion through the media. Washington, D.C., and Moscow each does this in its own way. Put the pieces together and a global political market of rival plutocracies comes into view. Add virulent reactionary populism to the mix and it resembles a war on democracy. What more might we see? Economic liberalism is a creed of optimism and abundance; reactionary protectionism feeds on pessimistic scarcity. If we see punitive trade wars and national leaders taking preemptive action to secure strategic resources within the walls of their garrison states, then old-fashioned territorial disputes along with accelerated state-commercial grabbing of land and minerals are in prospect. We could see mobilization against immigrants and minorities as a way of enflaming and rewarding a constituency that can police borders, enforce the new political rightness, and even become electoral vigilantes. Liberal multilateralism is a system of seeking common wins through peaceful negotiation; case-by-case power dealing is a zero-sum calculus. We may see regional arms races, nuclear proliferation, and opportunistic power coalitions to exploit the weak. In such a global political marketplace, we would see middle-ranking and junior states rewarded for the toughness of their bargaining, and foreign policy and security strategy delegated to the CEOs of oil companies, defense contractors, bankers, and real estate magnates. The United Nations system appeals to leaders to live up to the highest standards. The fact that they so often conceal their transgressions is the tribute that vice pays to virtue. A cabal of plutocratic populists would revel in the opposite: applauding one another’s readiness to tear up cosmopolitan liberalism and pursue a latter-day mercantilist naked self-interest. Garrison America could opportunistically collude with similarly constituted political-military business regimes in Russia, China, Turkey, and elsewhere for a new realpolitik global concert, redolent of the early nineteenth-century era of the Congress of Vienna, bringing a façade of stability for as long as they collude—and war when they fall out. And there is a danger that, in response to a terrorist outrage or an international political crisis, President Trump will do something stupid, just as Europe’s leaders so unthinkingly strolled into World War I. The multilateral security system is in poor health and may not be able to cope. Underpinning this is a simple truth: the plutocratic populist order is a future that does not work. If illustration were needed of the logic of hiding under the blanket rather than facing difficult realities, look no further than Trump’s readiness to deny climate change. We have been here before, more or less, and from history we can gather important lessons about what we must do now. The importance of defending civility with democratic deliberation, respecting human rights and values, and maintaining a commitment to public goods and the global commons—including the future of the planet—remain evergreen. We need to find our way to a new 1945—and the global political settlement for a tamed and humane capitalism—without having to suffer the catastrophic traumas of trying everything else first.

Immigration also has changed the employment landscape, increasing the supply of both skilled and unskilled labor and helping to reduce the costs of production. But these are secondary forces compared to automation. But empirical reality need not drive political perceptions and decisions (e.g., Sharot, Korn and Dolan, 2011; Bolsen, Druckman and Lomax Cook, 2014). What matters is that large numbers of working class people think foreign competition and offshoring of production are costing them jobs. One of the challenges of right-wing populism is that its anti-elitism extends to “experts” and academics, making it harder to educate people and get them to change their beliefs about the relationship between globalization and jobs and wages. Another sector which has experienced tremendous changes in labor and wages is the energy sector where there have been winners and losers. The winners have been primarily in natural gas and oil production (primarily in areas of the country using fracking to release small deposits of natural gas and oil such as North Dakota, Montana, Oklahoma, and Texas). Coal production has declined greatly, particularly in the Eastern half of the United States which has vast reserves of high sulfur-content, bituminous coal. Production of bituminous coal has decreased for two reasons. One, the increased production of cheaper natural gas has put the coal industry at a competitive price disadvantage in the production of electricity. Two, environmental regulations, implemented to reduce greenhouse gasses, have raised the costs and reduced the market for bituminous coal. The impact has been dramatic and rapid. An estimated 191,000 coal mining jobs were lost between 2014 and mid-2016, primarily in the Appalachian Mountain region crossing Kentucky, Tennessee, Pennsylvania, and West Virginia. The coal mining industry has lost 45% of the jobs that existed in 1981. These job losses are geographically concentrated, devastating entire communities where coal mining was the sole economic engine. The lack of a diversified economy is particularly important because the end of an industry means economic decline in these areas without realistic opportunities to find another job. Economic discontent is not limited to these economic sectors. Another major economic transformation has occurred in the structure of labor compensation that has reduced wages for millions of employees in white collar occupations. Corporations have moved from hourly wages with overtime compensation in the 1970s and 1980s, to salaries without overtime compensation in the 1990s, and over the last fifteen years to more “1099” contract employment which typically lack long term salary assurances or health and retirement benefits.13 Katz and Krueger (2016) estimate that by late 2015, 15% of the US workforce was working in these alternative work arrangements that do not provide benefits. Overall, fewer Americans are finding economic security even when they are employed, and more of those who are employed are experiencing stagnating or declining wages and benefits. Thus economic decline extends beyond rural America, Appalachia, and small towns and cities that have lost the factories that were the economic engine of the community. While employment and wages have stagnated for millions of people, most of the gains from growing productivity have gone to corporate management and ownership in the form of increasing compensation, dividends, and stock valuation. Not everyone has lost out in the new economy. Employment and wage growth have occurred in the economic sectors of technology, finance, and other services that leverage knowledge and technology. Employment in these sectors typically require a college degree. Since the 1970s, there has been a growing income gap between workers with a high school education or less and those gaining a college degree. That has cultural and social ramifications that transcend the economic impacts of these transformations. Lower education, working class people are losing jobs, their communities, and their “way of life.” Further, there is a geographic distribution of economic losers and economic winners may well be feeding the large urban – rural divide. Small cities and the small towns of rural areas have been hit hardest by the declines in agriculture, manufacturing, and mining. While urban areas have lost a larger absolute number of manufacturing jobs, most large urban areas have more diversified economies so that employment losses in one sector can be offset by gains in other areas. Workers losing jobs in urban area like Chicago can participate in worker retraining and education programs with a reasonable expectation of finding a job within or near their community. Education and job retraining programs do not help coal miners in Appalachia, factory workers in Beloit, Wisconsin, or the farmer whose small family farm operation is no longer economically viable in capital intensive agricultural production. Companies in the technology, finance, and other knowledge industries generally are not locating their offices the 15 areas that are losing jobs. They are locating in large urban areas, primarily on the East and West Coasts and in a few cities in between. People losing jobs in rural areas and small cities have to relocate to obtain employment. While older populations often remain, younger generations tend to move in search of jobs—resulting in older and impoverished population living in rural areas and small cities that have lost their primary economic engine. As such, the losses are devastating not only to workers in these areas, but to their entire communities. Interestingly, it is the community that may be more consequential unit of analysis for measuring economic discontent compared to individual pocketbook voting. Rothwell and Rosell (2016) find that it is selfemployed people who are relatively better off than others in their community who were drawn to Trump during first half of 2016. The economic condition of the local community is a significant predictor of Trump’s support in the daily Gallup tracking polls. These socioeconomic and geographic changes in American society have coincided with considerable demographic changes that have political effects (e.g., Cohn and Caumont, 2016; Holbrook, 2016). These changes matter because demographic change and immigration has been shown to produce a substantial cultural backlash even in Northern European countries that have progressive political traditions (Inglehart and Norris, 2016). Clearly, most of the attention has been given to immigration, particularly of Hispanics and Middle Eastern Muslims who are more visible by skin tone, language, and cultural differences. Hispanic immigration increased substantially since 1991 before leveling off during the Obama years, but the geographic footprint of the Hispanic population expanded to almost all parts of the United States including rural America.14 It does not seem to matter for many that Mexican unauthorized immigration has declined since 2009 according to the PEW Research Center.15 Interestingly, people who live in communities with a growing Hispanic population were not more supportive of Trump; rather it is people who live in homogenous white communities that were more supportive of Trump (Rothwell, 2016). Polling has shown that racial antagonism has been rising in battle ground states since the election of Barack Obama (Belcher, 2016; Iyengar and Westwood, 2015). The reaction, particularly among whites in battle ground states, combined with growing diversity of the population has produced a considerable increase in racial antagonism and cultural backlash. This racial antagonism is reflected in the growth of hate groups, which has been rising steadily from 1999 to 2012 before declining somewhat (see Figure 5). According to the Southern Poverty Law Center (SPLC), anti-middle Eastern/Muslim sentiment accounts for a large part of the rise of hate groups after 9/11. This aggregate trend masks some differences, with a recent decline in the number of white supremacy and Neo-Nazi groups but an increase in the number of KKK (from 72 to 190) and Neo-Confederate groups. The SPLC attributes the growth of KKK and NeoConfederate groups to the pro-Confederate battle flag rallies that took place after South Carolina took down the battle flag from its Capitol grounds following the June massacre of nine black churchgoers by a white supremacist flag enthusiast in Charleston. Racial antagonisms go both ways, as there has been an increase of black separatist groups from 113 in 2014 to 180 in 2015, growing in response to the killing of unarmed black men by police officers (Southern Poverty Law Center, 2016). The antipathy among large numbers of white voters toward diversity and cultural inclusivity has grown over the past two decades in response to the diversifying population, the presidency of Barack Obama, and events that have heightened racial tensions. The result is a more racially polarized electorate than in many years, if ever. Iyengar and Westwood (2015) find that the psychological effects of partisanship are as great as that of race in dividing American society. In addition to increased Hispanic, Middle Eastern Muslim, and Asian populations, a couple of other demographic changes are relevant to understanding the rise of right-wing populism in the US. Another fundamental change that has been occurring throughout the country owes to internal migration. Thomas Holbrook (2016) has identified internal migration as a factor that is impacting partisan patterns across states. Rural Southern states, upper-midwest states, and high-plains states have witnessed a net migration out of these states as people move in search of jobs or upon graduating college. Sunbelt states, West Coast states, Nevada, Southeastern states have all witnessed substantial increases in migration from other states. These migrations have potential to change the complexion of political parties in states—potentially moderating politics. However, there is a great deal of adaptation and assimilation that occurs as people acclimate to the culture and politics of their new home. However, one aspect is particularly important. The states that have experienced net declines in population have moved 18 toward the Republican Party, while those gaining population have been moving more toward the Democratic Party. Migratory patterns across states largely reflects economic opportunities, and the states that are losing population are, as a result, older, less-educated, more white, and more traditional in their cultural values. These demographic changes likely contributed to the rise of populist sentiment in these states. These trends have been abetted by the political world by both political parties. On the Republican side, the Reagan era transformation of the Republican Party’s fiscal policy from neoliberalism to supply-side economics has played a role, though secondary to economic trends, in the growing economic inequities in America. The dominant economic theory of the Republican Party is no longer neo-liberal economics, but rather it has become the Republican variation of supply-side economics, which has at its theoretical core, the reduction of the costs of production (supply) to lessen prices and thus increase both production and consumption. It has been successful in reducing real prices in a great number of areas including technology, transportation, food, textiles, and other consumer goods. The pillars of supply-side economics overlap with neoliberal economics in several areas: low inflation monetary policy (which benefits investors), free trade, deregulation of production and finance, low taxes, and anti-union policies to give producers greater flexibility in labor. The US government has played roles in supporting these transformations—pursuing free trade agreements; deregulating financial, transportation, and manufacturing processes (prior to Obama, see below); and reducing taxes on high income earners and lowering taxes on wealth (by cutting the top rates of a progressive income tax structure, capital gains, and estate taxes) (Steger 2016a). While cutting taxes that impacted the wealthiest segments of the population, the Federal government sought to cover the growing costs of the main social safety net in the United States (i.e, Social Security and Medicare) by a 19 dramatic increase in payroll taxes in 1983. The result of these tax policies were to: 1) make federal revenues less dependent on income and investment taxes and more dependent on payroll (labor taxes), and 2) shift the burden of federal spending from the rich to the middle class which saw tax bills grown considerably (mainly because of the increase from 4% to 7.65 percent; doubled for individuals paying the Federal Self-Employment tax). At the same time, there has been concerted efforts to reduce welfare safety-nets, raising retirement ages (1983), restricting various welfare programs (1996), and efforts to narrow the eligibility for food stamps and other direct payments (early 2000s). At the presidential level since 1932, both political parties have nominated candidates who have been defenders if not promoters of free trade. Free-trade thus is a source of resentment against some of the elites in both political parties. Donald Trump is the first presidential candidate since 1928 to be nominated and elected on anti-free trade pledges (his various rhetorical promises probably do not rise to the level of concreteness to be called a policy platform). That gave Trump a great deal of cross-over appeal to working class voters who increasingly have identified as Republicans and those remaining as Democratic-leaners. A final note on context must include reference to the Obama Administration’s use of regulatory policy to attain a variety of policy goals, particularly in regard to the environment and the financial industries. Growing federal regulations have been a driver of antipathy toward the federal government, particularly among Republicans. The Obama Administration vigorously pursued administrative regulation of the environmental impacts of agriculture, manufacturing, transportation, and energy production. Environmental regulations, in particular, are politically problematic because they have an imbalanced distribution of costs and benefits. The benefits of a cleaner environment and a reduction in the pace of global warming are diffuse, benefitting hundreds of millions of people, while the costs are borne almost entirely by those in the 20 regulated industries--coal mining most notably, but also agriculture, energy, and manufacturing production in older facilities that do not meet new environmental standards. Federal regulations of environment, finance, labor, transportation, and trade have raised costs of production and greatly increased costs of compliance in companies. The trend toward greater regulation preceded Obama, but increased during his administration as legislative options for attaining policy goals were choked off by Republican gains in Congress (See Figure 6). Given that Obama implemented numerous regulations through administrative strategies without the approval of Congress, Obama became the focus of intense anger among farmers, miners, small business owners, real estate, and the financial industry. More generally, 21 The degree of dissatisfaction with federal regulations, however, has a very strong partisan bias. Anti-regulatory attitudes are very strong among self-identified Republicans and Republican-leaners (see Figure 8). Republican opposition to federal regulations of business and industry have increased from 47% in 2007 (last year pre-recession) to 76% in 2014. Democrats, by contrast, have shown greater support for federal regulations. As with perceptions of economic conditions, these trends appear to be driven at least in part by partisan control of government. Republicans, when they are out of power, use criticisms of federal regulatory policy as a political weapon against Democrats and against Obama in particular. Thus, Republicans are more upset about federal regulations during the Obama years than they were during the Bush years; while Democrats have become more acceptant. Republicans have vigorously criticized the expansion of federal regulations during the Obama years, while being more subdued in their criticisms during the Bush years despite growing regulation during that Administration. The expansion of federal regulation has not been popular among the general public (see Figure 7). As with race, the degree of extreme anti-government antagonism is reflected in the growth of extremist groups like militias, anti-government groups, and others under the label of “Patriot Groups.” These groups expanded considerably since 9/11 and the resulting growth of federal government police authority under the Patriot Act, government surveillance, and the extensive increase in federal regulations. But more than a reaction to actual events, the patterns of growth among extremist patriot groups is highly linked to partisan control of government (see Figure 9). The number of extremist, right wing patriot groups has been much higher when Democrats have controlled the White House and Congress, and has declined considerably when Republicans controlled Congress and especially the White House. The SPLC, which is considered to be an authority on the number, memberships and activities of hate groups, estimates that these figures under-estimate the size of the radical right because the rise of digital media sites that are mainstreaming extremist anti-racial and anti-government sentiment. In sum, the matter of increasing economic inequality over the past 40 years is not just about economic class, it also has social, cultural, geographic, and cultural dimensions that matter. The economic patterns of the declining of agriculture, manufacturing, and mining and coinciding rise of technology, finance, and knowledge services have produced different winners and losers. The winners are disproportionately college-educated individuals located in urban areas that are culturally and economically more diverse, especially urban areas more closely connected to the global management of manufacturing, energy, finance, transportation and technology. The losers have been less educated individuals living in rural areas, small cities with non-diversified economies that depend(ed) on manufacturing, and the Appalachian region. Rural and small city working class people (of all races and ethnicities) associated with the “blue collar” and farming communities have experienced the greatest economic decline. These areas tend to be 24 predominantly white, which will be a matter we will revisit below. The sense of decline and despair, however, is not just economic but also has overlapping cultural, educational, and racial/ethnic dimensions that cannot be ignored. Further, changing demographics with increased immigration of Hispanics and Asians since 1990, along with the backlash to President Obama and recent, polarizing violence between blacks and police or other white supremacists, have contributed to a broader backlash among white Americans. This can be found in polling data on racial antagonism (Belcher 2016) as well as the growth of extremist white identity and black separatist groups (Southern Poverty Law Center, 2016). Rather than ushering in a new era of post-racial politics, the election of Barack Obama in conjunction with an increasingly diverse population, has increased racial polarization and antagonism.