Tag Archives: NAFTA

Memoirs of the Addams Administration 29.

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Unable to leave well enough alone, the Republican Senate leaders made yet another attempt to “repeal and replace” the Affordable Care Act.[1]  Without having any commonly-agreed plan, they managed to get a formal debate started.  First, the Senate voted down a broad plan to repeal and replace.  Then it voted down a plan to repeal and give Congress two year to replace it with something else.  Then it voted down a “skinny repeal” that just got rid of the mandate.[2]  Despite its flaws, the Affordable Care Act (ACA) helps—as well as vexes—many lower income Americans of both parties.  Opinion polls since the election have tended to show broad support for preservation of universal health insurance.  With a narrow 52-48 majority in the Senate, the Republican leadership cannot force through any legislation that would alienate more than two Republican senators.  Lisa Murkowski (Alaska) and Susan Collins (Maine) come from states that may have a substantial number of people who want to vote Republican, but who also live in marginal economic circumstances.  Their opposition alone isn’t enough to block “repeal and replace”: Vice President Pence can cast the tie breaker.  However, one more Republican dissident—like John McCain—and the measure loses.  In either case, Murkowski and Collins get covered for the next election for having done the right thing.  So, the question becomes: how to fix the problems with the ACA, rather than trying to roll it back?

Donald Trump campaigned against the North American Free Trade Agreement (NAFTA), calling it “the worst trade deal maybe ever signed anywhere.”  Once elected, he insisted on a renegotiation of the agreement.  This immediately became engulfed in the hysteria following Trump’s surprise election.  It also drew heat from Trump’s highly public spat with the president of Mexico.  Nevertheless, Mexico and Canada agreed to engage in a re-negotiation of NAFTA.  The negotiations are scheduled to begin on 16 August 2017.  Now the government has released a statement of its objectives for the negotiations.  Contrary to the worst fears of the immediate post-election Trump hysterics, the American objectives are solidly “mainstream ideas for furthering trade liberalization.”[3]  Generally speaking, NAFTA trade benefits the American economy even though it is often seen as the source of job-loss.  Reality proved more compelling than rhetoric.  Perhaps Trump and the Senate leadership should let Commerce Secretary Wilbur Ross (who oversees the NAFTA negotiations) run health-care reform?

Six months into his first term, President Trump began a major churning of his staff.  Sean Spicer had the reputation for being a decent guy.  Then he took the job as White House Press Secretary.  Six months of humiliating Hell followed.  Then, President Trump concluded that his image problems sprang from poor representation.  He hired Anthony Scaramucci as communications director.[4]  Spicer promptly resigned.[5]  Chief of Staff Reince Priebus, Trump’s direct connection to mainstream Republicans, then got the heave.

Donald Trump governing as a non-party mediator still has—theoretical—potential.

[1] “Senate Republicans grapple with Obamacare repeal,” The Week, 4 August 2017, p. 7.

[2] The Congressional Budget Office (CBO) estimated that ending the mandate would leave 15 million more people without insurance.  This can be taken as an official measure of the number of people who buy insurance under duress.  It can be added to whatever number just don’t buy it regardless of the mandate to get a total number of people who are opposed to the mandate.  On the other hand, it can be subtracted from the numbers of those estimated by the CBO to be left without insurance issued on other versions of “repeal and replace.”

[3] “Issue of the week: A softer U.S. line on NAFTA,” The Week, 4 August 2017, p. 42.

[4] Scaramucci deleted Twitter posts in favor of gun control, action on climate change,, legal abortions, and ending use of the death penalty.  “Noted,” The Week, 4 August 2017, p. 18.

[5] “White House: Spicer’s out, “The Mooch” is in,” The Week, 4 August 2017, p. 18.

The Buckle on the Rust Belt.

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From the 1890s to the 1970, you could travel from Rochester to Buffalo to Pittsburgh to Cleveland to Dayton to Gary to Chicago to Milwaukee to Detroit, and see the beating heart of American industrial power.  It helped win two World Wars and helped keep the Cold War cold.  It provided lots of jobs at increasingly good wages to millions of workers.  American manufactured goods dominated world markets.

Then things went sour.[1]  Between 1979 and 1994, the U.S. lost half of its manufacturing jobs.  Improved technology and automation are part of the explanation.  The growth of international competition as foreign industry revived or started fresh after the Second World War offers another part of the explanation.  The domestic competition from new “mini-mills” in steel and other disruptive industries that targeted the low end of the market offers another part of the explanation.  JMO, and I come in peace, but the arthritic nature of much heavy industry offered another part of the explanation.  Bloated industrial bureaucracies and rigid work rules imposed by unions alike made American manufacturing slow to respond to challenges.

Then, in 1994, came the North American Free Trade Agreement (NAFTA); in 2001 China gained admission to the World Trade Organization (WTO).  Between 2000 and 2010, 5 million more manufacturing jobs disappeared.[2]

The human costs of successful business adaptation to changing conditions have been very high.  Old industrial cities and regions have lost jobs and incomes, and many of the businesses once supported by consumers.  Local and state governments have lost the tax revenues from these businesses, so they struggle to provide services to people in crisis.  Lots of people have lost hope.  Many younger people have moved away in search of a future that works.  Many of the displaced shifted into the ballooning service industries of health and education.  Not healing or teaching so much as filling out forms.  In some cases, however, the older people left behind with no future that works have turned to substance abuse.[3]  Much to the distress of the Democrats, the 2016 election demonstrated that these once-reliable voters could not be taken for granted.[4]

For reasons not immediately apparent to me, free trade, an open world economy, and “globalization” became the goat.  Free trade helps many American producers: 40 percent of corporate profits and 30 percent of agricultural revenue comes from foreign sales.  Also, the Gummint projects that 3.5 million jobs will be created in specialized manufacturing by 2025.  This means workers (presumably named Dave) who can run the robots.

There probably is no way of “saving” or “reviving” the “Rust Belt.”  Guys now in their 40s and 50s who walked off the high school graduation stage into a job at the plant aren’t likely to want to/be able to “retrain” as medical coders or McDonald’s imagineers.[5]  They’re close to the end of their working lives.  Soon enough, they’ll be on Social Security and Medicare.  Give them basic medical coverage and beer money.

That doesn’t mean that there isn’t room for improvement in the trade deals around the margins.  After an ugly early spat with Mexico, the NAFTA renegotiation has begun.  China is next, although there is the whole North Korea issue to tilt the scales.

[1] “Rescuing the Rust Belt,” The Week, 24 March 2017, p. 11.

[2] Economists estimate that 85 percent of these jobs were lost to automation of production.   It cuts labor costs: welders in the auto industry earn $25 an hour; spot-welding robots cost $8 an hour.  Take that coolies!

[3] Obviously, this latter issue is a much more complex story than is presented here.

[4] The recent passing of Norman Lear led to much revealing commentary in  the media.

[5] As in “imagine this is real food.”  Except, you know, those sausage biscuits (without egg) with a coffee and hash browns you get early on Sunday morning when you’re headed home?  Whole world feels fresh and new and clean.

Memoirs of the Addams Administration 1.

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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.

Semi Automated Weapons.

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Machines want your job!  Well, they would if they could feel desire.[1]  I guess I really mean that your employer wants your job.  Not for him/her self, or even for some idiot nephew/niece.  S/he wants it for a machine.  Liable to get it too.  Only about 13 percent (1/8-1/7) of job losses are the result of foreign competition.  The rest are the result of automation cutting the need for workers.[2]

Thus, in 1962, about 530,000 people worked in the American steel industry.  In 2005, about 130,000 people worked in the American steel industry.  That’s a 75 percent drop in employment.  However, steel production did not fall.  New technology of steel production just cut the need for workers.  More recently, computer and electronics manufacturing shed jobs thanks to automation.

However, in spite of the headlines in the New York Times, foreign competition really has taken away a lot of jobs from Americans.  China’s accession to the World Trade Organization (WTO) led to the loss of 2-2.4 million American jobs since 2000.  Apparel and textiles—the most basic products of any early-industrializing country—have suffered heavy inroads from foreign competition.

It isn’t likely to stop with manufacturing jobs, nor is it isolated to the United States.  In January 2016, one of those “we’re here to help” groups, the World Economic Forum, predicted that 5 million jobs in the top 15 economies world-wide will be lost to computer systems and robots by the end of 2020.  Two-thirds of the lost jobs will be in “office and administrative jobs.”  Already existing technologies could allow machines to do 45 percent of current work activities.  [NB: I don’t think that means 45 percent of jobs, just 45 percent of the work that many people do.  It wouldn’t be difficult to sell this as an improvement for anyone whose work includes a lot of drudgery that prevents them from doing higher-order work.]  “Work that requires creativity, management of people, and caregiving is least at risk.”

What are some of the implications of these changes?  They are both social and political.

Workers cast aside as a result of Chinese competition have had a difficult time adjusting.  As a group, they have a higher unemployment rate and reduced real income for the rest of their lives.  Also, apparently, they feel an impulse to vote for Donald Trump so as to send a wake-up call to the two mainstream political parties.  Trump and others have pandered to this by blaming immigration, and out-sourcing, and foreign competition for huge job losses.

In the past, workers flowed from declining sectors to growing sectors.  This didn’t go seamlessly: new workers who saw their parents displaced chose other lines of work, but the displaced parents had a hard time getting jobs in the “new” economy of that era.  In the past, economic change created new forms of manual labor for those without a lot of education.  This time, however, new jobs for men without college degrees have not arrived to help those displaced by change.

Perhaps more importantly, it isn’t clear that displaced workers want to adapt to new conditions and there is a policy interest in some quarters that wants to facilitate not adapting.  Thus, a story in the NYT says of one displaced worker that      “Many of the new jobs at factories require technical skills, but he doesn’t own a computer and doesn’t want to.”  [NB: That is, he doesn’t want to adapt.]  The policy proposals of many labor economists would accommodate this resistance to adaptation: strengthen unions (so that they can obstruct employer efforts to modernize production until foreign competition does what automation was not allowed to do); create more public-sector jobs (regardless of need); raise the minimum-wage (although this seems to contribute to the search for more automation); and increase the earned-income tax credit (essentially a form of welfare for the unadaptive).  Basically pay people to be unadaptive.  That is, create a market for people who resist change.  “If you build it, they will come.”

[1] “The bottom line,” The Week, 29 January 2016, p. 32.

[2] Claire Cain Miller, “What’s Really Killing Jobs?  It’s Automation, Not China,” NYT, 22 December 2016.

NAFTA You.

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Most economists hold that “past major trade deals [NAFTA, Chinese entry to the WTO] have benefitted most Americans.”[1]  Now we’re facing the Trans-Pacific Partnership (TPP).  There is no doubt that this is true.  Still, lots of working people think that an open world economy has turned into a disaster.  Naturally, in an election year, all sorts of candidates—from Donald Trump to Hillary Clinton to Boris Johnson—are having road to Damascus experiences.  It’s how you get ahead in a competitive environment.

How is this possible?  On the one hand, there is a certain gap between quantitative-based reality and perception-based reality.  While economists calculate that “trade deals benefited most Americans,” most Americans (55 percent) calculate that they did not.[2]  Who is right?

On the other hand, Economics is the greatest of the “social sciences” that arose at the end of the 19th Century.  Those social sciences (Economics, Sociology, Psychology, Political Science, Marketing) all study the behavior of people in the aggregate to discover “laws” of human behavior.  The thing is, people don’t live their lives in the aggregate.  They live their lives individually and for themselves.  “Most” people can be doing really well, while a minority are doing badly.  The minority takes no consolation from the happy situation of the majority; apparently, the fortunate majority gives little thought to the hardships of the minority.

However, some research indicates that this is too simple an answer.  Lots of people who oppose free trade are not individually harmed by it, but they believe that the country as a whole is harmed by it.  It has been suggested that isolationism plays a role; that nationalist feelings of “cultural superiority” plays a role; and that racism (couched as “ethnocentrism”) plays a role.  People who have less education are more likely to be isolationist, nationalistic, and “ethnocentrist” than are the better educated.  Gregory Mankiw has a funny coda to this story: once people have more education, this nonsense will pass.[3]

There is another possible explanation.  Many people recognize that America is still a racially segregated society, but not many people recognize that America is still a class segregated society.  My father taught people to drive and eventually bought the business[4]; his brother had some experience in construction and some training as an engineer in the US Army, and then became a consulting engineer[5]; their brothers-in-law were a mill-hand at Weyerhauser, a ship-wright at Vic Foss Boatyard, and a salesman-turned-entrepreneur.  My beloved[6] in-laws graduated from Ivy League colleges, often went to grad school or law school, are “professionals,” and have lovely summer homes on the Eastern Shore, in New Jersey, and in Nova Scotia.  All the same, if the people losing from globalization mostly come from one social group, then maybe their extended families and friends intuitively or out of human sympathy push back.  Their own family and friends also suffer from economic change.  They recognize that they themselves may suffer in the future.  Class solidarity trumps [NPI] economic “rationality.”

Maybe, shock absorbers against the impact of trade deals are best?  Or maybe not.

[1] N. Gregory Mankiw, “Trade Is Good, But Voters Aren’t Buying It,” NYT, 31 July 2016.

[2] This may be an example of what Marxism terms “false consciousness.”  People think that they are something different from what people in authority tell them they are.  Alas.

[3] Arthur Koestler, Darkness at Noon, has a funny coda to Mankiw.  People always suffer from relative lack of development

[4] My Dad taught me how to tie a necktie and had a couple of suits, but he didn’t wear a jacket or tie to work.

[5] Basically a burr under the saddle of construction companies trying to cut corners on jobs that they had bid.

[6] I’m not being arch here.  They’re wonderful and incredibly generous human beings with a Hell of a lot more social conscience than I possess.

The International Trade in Jobs and Workers

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It is an article of faith among most economists and businessmen that barriers to trade between nations create inefficiencies and lower standards of living.[1] What kinds of barriers to trade exist? Tariffs are taxes on imported goods that raise the sales price to a level that makes the import uncompetitive with a domestic product. Government subsidies (payments) to domestic producers of some goods allow them to hold down prices compared to imports. Government regulations and standards for goods which vary from one country to another can force adaptation costs onto foreign producers, thus raising the price of their goods to a point where it isn’t worth the trouble to sell in a foreign market. The effect of these barriers is to reduce competition, efficiency, and specialization, while raising the cost of living for consumers.

So, trade barriers are bad. In 1994 businessmen won passage of the international treaty called the North American Free Trade Agreement (NAFTA). This treaty abolished tariffs and other barriers to trade on 70 percent of the goods produced and consumed in Mexico, the United States, and Canada. What is the up-side of this agreement? Trade between Mexico and the US tripled during the decade and a half after passage of the treaty; Canadian exports also tripled. What is the down-side of the agreement? Wages haven’t gone up in either Mexico or the US.

In the United States the response to NAFTA is ambivalent. The normal line of development in an advanced economy is that low-wage foreign competitors in low-skill sectors take jobs from the advanced economy, while the advanced economy creates jobs in high-skill and high-wage sectors. That is one of the things that seem to be happening in the United States. By 2008, three million American manufacturing jobs had been lost since the passage of NAFTA. This doesn’t count the many more jobs lost during the “Great Recession.” On the other hand, more jobs were created in those years than in the fourteen years before passage of the treaty. Similarly, highly-mechanized North American farming is far more productive and cheaper than is much Mexican farming, so agricultural exports to Mexico have also greatly increased. However, neither American politicians nor American media have been very good about pointing out the realities of the situation. Job-loss and displacement normally gets a lot more media attention than does job creation. “If it bleeds, it leads.” Those three million manufacturing jobs that went up in smoke since 1994? Mostly they went to China and India, not to Mexico.

In Mexico the response has been profoundly hostile. Mexicans dislike NAFTA by about two-to-one. Why is that? About forty percent of Mexicans still live in poverty. Small and inefficient Mexican farms have been unable to compete with low-cost imports from North America, so many Mexican farmers have been driven to the wall. There was been a huge increase in illegal immigration to the United States, until the “Great Recession” hit. Eight million of the twelve million Mexican illegal immigrants in the United States have come since the passage of NAFTA. Is NAFTA solely or even principally to blame for the flood of illegal immigrants? Not necessarily. One Mexican observer argues that the upper classes have creamed off all the rewards of expanded trade. This has kept the benefits of increased trade from flowing downward in society through higher taxes on the well-off, better services for ordinary people, and higher wages for most workers.

This raises the possibility that the Mexican upper-class is intentionally exporting much of its population to the United States in order to defend an inequitable social order at home.

[1] “Coming to terms with NAFTA,” The Week, 30 May 2008, p. 13.