Trade Policy is not as Simple as we Think

There has been much debate about the benefits or costs associated with “free trade.” To some, foreign trade is the devil incarnate-it has cost America jobs and negatively impacted our economy. To others, it has raised our standard of living by reducing the price of goods and services and allowed many businesses to grow. Both are right and both are wrong.

 In theory, trade raises all boats. Each county produces according to its comparative advantage and the well-being of all is increased. However, the theory says nothing about what happens at the individual or community level. It really depends in which end of the boat you sit.

 An increase in the financial sector employment as a result of free flow of capital across the border to finance foreign projects is of little comfort to the factory worker who lost his job when the plant moved overseas. The new jobs may be in a different region and require a skill set he doesn’t possess. Likewise, the price of a cheaper car is of scant comfort when he doesn’t make enough to buy it.

 However, large multinational corporations have benefited hugely, as have their executives. For example, Ford did not suffer from moving its manufacturing facility to Mexico. For them, it is one expansive manufacturing system from which they benefit from lower cost of production and increased margins and sales.

 However, I am afraid that we do not even consider the fact that dislocations and hardships move as easily from here to there as they do in reverse. This is no more clearly seen than in the poster child for the trade debate, NAFTA (the North American Free Trade Agreement).

 President Trump has called NAFTA a “disaster.” Disaster or not, in addition to the benefits (which there are), it has caused or exacerbated problems for both the U.S. and Mexico (for some reason, the Canadians have largely been left out of the equation). Perhaps, it might be instructional to look at how this has worked and ponder the implications of this on our future policy.

 First, we must recognize that not all of America lost out. In addition to the large multinational corporations identified above, some segments benefited immensely. One recipient was the large agri-business sector. The Agreement opened a massive new market into which American agricultural products poured into Mexico.

 In the first decade of NAFTA, exports of products like corn, soybeans, wheat, pork and poultry all soared, some increasing by over 700%. The agricultural sector is one of the most heavily government-subsidized components of our economy. This allowed some of those goods to actually be sold below the cost of production. The dirty little secret is we are not entirely a “free trade” country ourselves.

This cost the Mexican economy almost $13 billion and effectively wiped out the small family farm in Mexico, dislocating more than 2 million people over the period.

 Where do you think those people went? Some became cheap labor for the factories that moved, costing America good-paying manufacturing jobs. But more insidiously, it tore apart the social fabric and set the environment for some of the problems we have faced for the past twenty years. Instability fueled the rise of drug cartels. The search for jobs drove economic refugees across our southern border, in large measure creating the illegal immigration problems we now so bemoan.

 We must also recognize that just as there were costs to implementing NAFTA, there will likewise be costs associated with changing or removing it. Trade generally lowers the price of products. If the cost of re-importing car parts and cars increases, so do our cost to buy them. This could actually benefit other countries. For example, a more expensive North American-made car may not mean more factory jobs in the US, however, it could make a Japanese import relatively more attractive.

 In Mexico, the cost of basic food staples would probably go up. Whether this would cause a re-birth of family farming is uncertain, but it would likely create some degree of hardship in the short run. An unstable Mexico is definitely not in our best interest.

 Any way you view it, prices of many goods will go up everywhere. This may be a fully acceptable side effect, if it results in increased job growth which is the hopeful expectation of many. However, we should not delude ourselves into thinking that rebalancing the trade accounts will be all one sided. Furthermore, just like the initiation of NAFTA affected different people differently, there will be winners and losers to the change.

 So in the end, is NAFTA good or bad? Honestly, there is much empirical data that would indicate the overall effect has been positive. There is also evidence that America has lost ground relative to our other trading partners. Interestingly, they may feel the same way. There is some indication that Canadians aren’t all that pleased with the results either.

 What track are we on now? I, for one, don’t view Trump as a policy guy; he’s a negotiator. If he is simply stating (an admittedly hardline) starting negotiating position, we may very well craft a better deal than we have. On the other hand, if he is dead set on creating absolutely one-sided trade policies, we may very well see an economic downturn. It depends on whether his is  willing to compromise, something all negotiators do in the end.

 Personally, I am willing to give the guy a chance. What we have had for the past decade hasn’t worked and we deserve better than we have gotten to date.