Saturday, August 19, 2017

"America First" and NAFTA

If you read the U.S. trade representative's introduction to the much-touted "renegotiation of NAFTA"[1], you find a number of assertions such as:

  • "Since the deal came into force in 1994, trade deficits have exploded, thousands of factories have closed, and millions of Americans have found themselves stranded, no longer able to utilize the skills for which they had been trained. For years, politicians promising to renegotiate the deal gave American workers hope that they would stop the bleeding. But none followed up. In June 2016, then-candidate Donald J. Trump made a promise to the American people: he would renegotiate NAFTA or take us out of the agreement."
  • "On May 18th, President Trump became the first American president to begin renegotiating a comprehensive free trade agreement like NAFTA. At the direction of the President, and following more than three months of Administration consultations with Congress, U.S. Trade Representative Robert E. Lighthizer announced the Administration’s intention to renegotiate the deal."

After reading through the document, we concluded they they represent incremental improvements to NAFTA along lines which have already been discussed in prior administrations. Athough the administration has quoted enormous numbers of jobs "lost" because of NAFTA:

“The numbers are clear. The U.S. government has certified that at least 700,000 Americans have lost their jobs due to changing trade flows resulting from NAFTA. Many people believe that the number is much, much bigger than that.”

— United States Trade Representative Robert E. Lighthizer, remarks on NAFTA renegotiation, Aug. 16

this assertion is misleading regarding the net effect of NAFTA on U.S. jobs, and wrongly blames NAFTA for the effect of globalization on specific industries.

Decline in U.S. textiles and garments

The "loss" of American jobs has very little to do with NAFTA, or, indeed, any trade agreement. U.S. companies can take their manufacturing anywhere they like. They can keep their cash reserves offshore to not be subject to tax. They can merge with a small foreign company and move their "headquarters" offshore, further insulating them from U.S. taxes. Even the President and his daughter manufacture all their merchandise items outside the U.S. The only exception is Trump's "Make America Great Again" caps, manufactured in southern California. NAFTA affects none of this.

North, toward Canada, auto manufacturing now spans both countries — some car components cross the border multiple times until they are fully assembled. South, toward Mexico, agriculture has been the primary beneficiary. Jobs have not been lost. Jobs have changed, but only as they would have with or without NAFTA. The textile and garment industries, for example, have been in a decline not just since the 1990's but for nearly half a century.

What is the NAFTA renegotiation supposed to achieve?

The new NAFTA must continue to break down barriers to American exports. This includes the elimination of unfair subsidies, market-distorting practices by state owned enterprises, and burdensome restrictions of intellectual property. The new NAFTA will be modernized to reflect 21st century standards and will reflect a fairer deal, addressing America’s persistent trade imbalances in North America. It will ensure that the United States obtains more open, equitable, secure, and reciprocal market access, and that our trade agreement with our two largest export markets is effectively implemented and enforced.

Under these objectives, a new NAFTA will give our farmers, ranchers, service providers, and other businesses new opportunities to grow their exports and reclaim American prosperity. But most importantly, the new NAFTA will promote a market system that functions more efficiently, leading to reciprocal and balanced trade among the parties.

Those involved in NAFTA have stated that if the best trade agreement for the U.S. was "100%," then the existing NFTA agreement, as is, is a "92%." Some adjustments — which were already in progress, and bringing some subsequent agreements into the main treaty to make them enforceable are likely to get that to a "94%."

There is nothing to "renegotiate." Contentions that NAFTA has been destructive to the U.S. are simply false. Dropping trade barriers has enhanced and integrated the Mexican, American, and Canadian economies to the net benefit of all, growing from $290 billion in trade in 1993 to more than $1.1 trillion. The integration of our North American economies cannot be undone. And to what benefit, even if possible? Twenty-five cents of every dollar of value of goods imported from Canada is "made in U.S.A.". The figure for much-maligned Mexico? Forty cents of every dollar's worth of imported goods is "made in the U.S.A." As one trade representative put it, a scrambled egg cannot be unscrambled no matter how hard you try.

The Trump administration's touting of NAFTA renegotiation as a cure for America's manufacturing sector and trade deficit woes is unfounded and falsely demonizes our closest neighbors. As with the Carrier deal at the outset of the Trump administration, companies moving their manufacturing abroad has little to do with NAFTA when they can hire workers for the U.S. equivalent of $5/hour with no paid holidays, vacation, benefits, or retirement.

The contention that there's anything to renegotiate in NAFTA that can in any way restore American industry holds out false hope. If manufacturing is to be revived, it will be through robotics — which require a completely different set of skills than those in traditional — no, extinct — manufacturing.

"Reciprocal and balanced trade"

We cannot leave without calling out the biggest lie of the NAFTA renegotiation, that of needing to balance trade with Mexico and Canada, as if they are taking advantage of us.

Looking at our top ten trading partners, figures are for goods—agriculture, manufacturing,... Figures in $millions:

Rank Country/District Exports Imports Total Trade Trade Balance
- World 1,454,624 2,188,940 3,643,564 -734,316
- EU[2] 270,325 416,666 686,991 -146,340
1 People's Republic of China 115,775 462,813 578,588 -347,038
2 Canada 266,827 278,067 544,894 -11,240
3 Mexico 230,959 294,151 525,110 -63,192
4 Japan 63,264 132,202 195,466 -68,938
5 Germany 49,362 114,227 163,589 -64,865
6 South Korea 42,266 69,932 112,198 -27,666
7 United Kingdom 55,396 54,326 109,722 +1,070
8 France 30,941 46,765 77,706 -15,824
9 India 21,689 45,998 67,687 -24,309
10 Taiwan 26,045 39,313 65,358 -13,268

our trade with both Mexico and Canada is not only nearly as large as that with China, over half a billion dollars each, but also balanced. NAFTA works. Instead, it is China which represents our greatest trade imbalance with a single country. President Trump's indictment of NAFTA only deflects our attention from the elephant in the room.


[1]https://ustr.gov/sites/default/files/files/Press/Releases/NAFTAObjectives.pdf
[2]2016 : U.S. trade in goods with European Union, United States Census Bureau, accessed 20 March 2017. LINK
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