Updated May 16, 2017
Today US Senator Charles Grassley said that he believes Trump is leaning towards a trilateral renegotiation of the North American Free Trade Agreement, between the US, Canada, and Mexico.
This would be a mistake—the economic asymmetries between the three countries are so profound that it’s impossible to craft a set of rules between them that will not privilege or disparage one against the other.
Bilateral negotiations would result in better all-around deals, both for the States, and its trading partners.
Here’s why Trump should withdraw from NAFTA.
Why Should Donald Trump Withdraw The US From the North American Free Trade Agreement?
It’s been reported that Donald Trump’s cabinet is in the final stages of drawing up an executive order to withdraw the US from the North American Free Trade Agreement (NAFTA).
This comes after the resurrection of the softwood lumber dispute with Canada, and Mexican resistance over the border wall.
But it shouldn’t come as surprise, renegotiating, and even scrapping NAFTA, have long been a centerpiece of Donald Trump’s economic policy.
On the campaign trail he described NAFTA as the “worst trade deal ever signed” by any nation, much less America.
There’s no doubt his criticisms were popular, especially with blue collar workers in the “rust belt” states, who’ve suffered tremendously under the NAFTA regime.
But this all begs the question: are those criticisms valid?
Is NAFTA a bad trade deal? Should the US scrap NAFTA and pursue independent deals with Canada and Mexico (provided it’s to our advantage to do so)?
Yes. Donald Trump should withdraw America from NAFTA. Here’s why.
1. NAFTA Costs America A Net 700,000 Jobs
Perhaps the most important point is that NAFTA costs America jobs. Lots of jobs.
Roughly 700,000 net jobs are lost to Mexico.
This number is calculated by looking at the number of jobs displaced by Mexican imports, vs the number of jobs created by exports and so-called “cheaper goods” that we import from Mexico. It’s a net loss in terms of jobs because we’re running a giant trade deficit with Mexico.
Basically, it means we’re importing more from them than they’re buying from us, thus boosting demand for Mexican products (and workers) at the expense of American products (and workers).
The end result means fewer American jobs.
But let’s be honest. Even if trade was balanced, American workers would still lose out.
Well, one of the primary costs for any business, particularly in manufacturing, is the cost of labor. People are expensive, especially in America. But, they’ll work for cheap in Mexico (because Mexico is a poorer nation).
This means that labor-intensive industries are the first to be offshored, while we tend to retain capital-intensive industries. This means that even if we exported just as much as we imported, we’d still lose more jobs than we’d gain.
The detriment to American workers alone is enough of a reason for Trump to scrap NAFTA, and fulfill his campaign promise.
2. NAFTA Lowers Wages For US Workers
There’s more to a sound economic policy than maximizing efficiency: we also have to look at its human and social impact.
When we sign deals like NAFTA, or KORUS (with South Korea), we put American workers out on their ass, and their options are limited.
Sure, lots of them get new jobs—but their new jobs tend to be in lower-paying service industries. This means they have less money to raise families, and do what they like.
Not only that, but it means that those workers are now competing with everyone else for those jobs: basically, as the labor pool expands, there are more people chasing fewer jobs. This shifts the bargaining power away from employees to employers, and therefore lowers wages.
For example, how likely are you to get a raise if your boss can threaten to move the factory to Mexico at a moment’s notice? Not very likely.
In fact, if we look at overall US wages, we find that wages have stagnated in real terms since 1973, when economic globalization (this includes offshoring, and mass immigration) began.
NAFTA is a drop in the bucket when it comes to trade with places like China, but its impact has been the same: foreign competition lowers wages for US workers.
Sure, maybe it increases our GDP: but all of those gains go to the top. For most Americans, life gets harder.
Let’s scrap NAFTA, and the rest of the bad trade deals, and get wages growing again.
3. NAFTA Led To Bigger Government & Higher Taxes
Once the factory moves to Mexico, lots of people get new jobs. But lots don’t.
In fact, unemployment in America has been growing steadily for decades, especially since 1994 (when NAFTA was signed) and 2001 (when China joined the WTO).
Right now, 23 million Americans are unemployed (the government says it’s 8.3 million, but that’s not even close).
NAFTA, and other trade deals, are the primary culprit.
But what does a large unemployed population have to do with big government?
Simple. Unemployed people collect government welfare, be it subsidized housing, food stamps, or welfare checks. Many collect disability (even though they’re not disabled) etc. A man needs to eat, after all.
And when the government takes the bread from his mouth by allowing America’s industries to be offshored to Mexico via NAFTA, he doesn’t really have a choice but to go on the dole. This is why offshoring leads to big government.
And what does big government lead to? Higher taxes. The people who benefit from offshoring end up paying more taxes to care for the millions of displaced workers. So are the goods really that much cheaper? Not really.
In total, some 10 million Americans have lost their jobs due to offshoring (and 700,000 are directly due to NAFTA).
All in all, this situation isn’t good for anyone. The government should focus on getting people working, rather than picking up the pieces that bad trade deals like NAFTA leave in their wake.
This is perhaps the most compelling reason for withdrawing from NAFTA.
4. NAFTA Eroded America’s Manufacturing Industry
America’s manufacturing industry has been gutted, and NAFTA’s done its fair share of damage.
Many US companies simply picked up and moved their factories to Mexico, and then imported the products tax-free. After all, labor in Mexico is significantly cheaper than in America, and there was no penalty in place for doing so.
And for those who want to blame robotics rather than offshoring, you’re wrong. Automation doesn’t cost us jobs.
Why? Because productivity is only one side of the equation: yes, jobs are lost when we automate, but not if we also make more stuff. To fully understand what happened to US manufacturing employment, we need to look at both productivity and output.
As it happens, NAFTA led to offshoring to Mexico: basically, new output was made in Mexico rather than the US. This meant that output grew relatively slower than the pace of productivity, which led to job loss—people mistakenly blame automation because it’s the proximate cause, without looking deeper.
For example, since NAFTA was signed, US manufacturing grew more productive by about 3.9% per year; however, output only grew by only 1.2% (one third what it grew in the pre-NAFTA era).
Sure, it’s not all due to NAFTA, but free trade with Mexico didn’t help.
5. NAFTA Was A Bad Trade Deal, Even In Theory
Anyone with a working brain could’ve seen the disastrous impact that NAFTA would have on American industry, particularly in the Mid-West.
Wealth is a lot like water: if flows to the lowest point, until all plains are eventually equal. This happens because people with money like to save said money, and tend to chase higher returns in cheaper jurisdictions—money flows into the poorer area until it eventually catches up with the wealthy one.
An equilibrium point is reached.
This is what happened between the US and Japan in the post-war era: US dollars flowed into Japan until it wasn’t profitable anymore (because Japan caught up). Then they started flowing into China.
It’s also one of the main reasons why the wealth distribution between regions within a nation is far less volatile than the distribution between regions on a global level (not individuals, regions). Just consider how the difference between the poorest and richest US state is nothing compared to the poorest US state and countries like Gabon, or Chad.
This observation generally hold true across the board (consider Canada’s provinces, or Australia’s). The reason for it is that most country have domestic free trade, but place various restrictions on international trade. This ensures that a domestic equilibrium is reached.
However, once said restrictions are removed on the international level, this basically expands the domestic market: wealth will flow from the richer region into the poorer one, until the level is equal.
This is why an enormous amount of money has flowed from the US to Mexico sign NAFTA was signed: both in terms of a growing trade deficit, and in terms of foreign direct investment (FDI).
Of course, this didn’t really happen with Canada when the Canada United States Free Trade Agreement was signed in 1988, because Canada and the US are economies of comparable wealth and development.
The below graph illustrates all you need to know: it shows America’s trade deficit (red) or surplus (blue) with its top 20 trading partners, according to whether they’re developed or developing.
As you can see, trade with developed countries is pretty balanced on the whole, whereas trade with developing countries is nothing but parasitic—Mexico is one such developing country.
The US should withdraw from NAFTA, and all the other agreements with developing countries.
Donald Trump Should Scrap NAFTA, Just Like He Did TPP
President Donald Trump’s been making good on his word to pull America out of bad trade deals.
First he scrapped TPP, which would’ve been the worst one yet, and now he’s on the verge of withdrawing the US from NAFTA.
He should do it—and while he’s at it, he should withdraw from the Trade in Services Agreement too (which is a back door for TPP).
We need to start putting America first, and recognize that free trade doesn’t always work (especially when we’re the only ones playing by the rules.
And don’t forget to get your copy of America Betrayed to help support the fight against economic globalism.