Memoirs of the Addams Administration 1.

From 1945 to the very recent past, the United States led the capitalist world toward negotiation of an open world economy.  In recent decades, that policy has come back to bite the United States as Asian countries became ferocious competitors.  Eighty percent of trade-related job losses can be attributed to Asian countries (China, Japan, South Korea).  However, public hostility has focused on the North America Free Trade Agreement (NAFTA), the least offending agreement.

In 1992, President George H. W. Bush completed the negotiations for NAFTA.[1]  The agreement ended tariffs and non-tariff barriers between Mexico, Canada, and the United States.  This would allow the free flow of assets across national borders.  Soon afterward, President Bill Clinton got the treaty passed by Congress.

“Comparative advantage” (a term in economics) suggests that low-wage, low-skill Mexican workers will manufacture one sort of product,[2] and high-wage, high-skill Canadian workers will manufacture another sort of product.  This seems to be the case under NAFTA, as Mexicans produce dashboards and Canadians produce transmissions for final assembly by Americans.  There’s nothing innovative about this.  Asian manufacturers have been doing the same diversification of the supply-chain thing for a while.  American manufacturers had to adapt to stay competitive.

Was NAFTA good deal for Americans?  Well, the United States now exports to Mexico goods worth 3.5 times as much as in 1993, even allowing for inflation.  On the other hand, Mexico still has run a trade surplus against the United States that amounts to $60 billion a year.  How many jobs—if any—did that amount to?  In the eyes of economists, NAFTA encouraged a migration of American “jobs” from lower-skilled and lower-paid to higher-skilled and higher-paid.  The political problem is that “jobs” are not the same thing as “workers.”  The “workers” who lost “jobs” didn’t shift into the new “jobs” that needed “workers.”  Instead, it seems somebody else—within the United States—got those new jobs.  This shift is not much discussed by political figures and media analysts.

So, trade experts and displaced American workers agree that it was a flawed deal.  It could be improved.  How and at what cost?  First, as is the case with “Brexit,” any country can withdraw from NAFTA by giving notice six months in advance.  Then further negotiations would define the new relationships between Canada, the United States, and Mexico.  However, what the Trump administration may be aiming at is a simple re-negotiation of terms.  Now Canada and Mexico have begun to establish positions for such talks.

The exact issues to be dealt with in any re-negotiation are complex, even if they become household words—in a small number of households—over the next several years.  “Country of origins,” “de minimus” exports, and Value Added Tax (VAT) rebates are all issues on which the Trump administration’s trade negotiators seek accommodation.  Conversely, the Mexican negotiators are going to claim equality-of-status with Canada when it comes to things like easy access to the United States for Mexican truckers and Mexican workers.

None of this is going to be painless.  Anything that comes out of the negotiations will be disruptive.  NAFTA itself has been painful and disruptive.  Then come the Asian economies.

[1] Neil Irwin, “Will NAFTA Be Attacked With Tweezers or a Hammer?” NYT, 26 January 2017.

[2] To further complicate matters, the basic components of the dash might have been manufactured in really-low-wage China (outside NAFTA), then exported to Mexico (inside NAFTA) for assembly for export to the United States for final assembly.  Thus, both Mexico and Canada serve as pass-throughs for counties not party to NAFTA.

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