NAFTA

    Much is being said this election season about the North American Free Trade Agreement (NAFTA). The Democratic candidates have been all too quick to promise to withdraw from the treaty if our trading partners, Canada and Mexico, do not renegotiate NAFTA on our—new—terms. The positions of Obama and Clinton expose political pandering at its most audacious. What must our allies, and enemies, think of a putative leader of the free world eager to breech an international agreement for political gain?
    Many Democrats, and some protectionist Republicans, blame NAFTA and other free trade policies for the demise of American industry and competitiveness. That is like a football team blaming the NFL because they are not ready to play in the Super Bowl. A growing and global economy presupposes free trade, a case made by the 18th century economists Adam Smith and David Ricardo. Ricardo argued that free trade fosters a nation’s "comparative advantage": each country producing according to its expertise and trading for goods and services produced best by other countries. The resulting benefits of affordable products and highest wages accrue to consumers and workers in each country respectively. Modern economists elaborated on this and provided the theoretical underpinning.
    The trouble with talking about trade between nations in these terms is the illusion that nations actually trade with one another. This is merely economist-speak. Companies and individuals trade across borders, and governments, well ... they just get in the way. By imposing tariffs, taxes, trade quotas, and unnecessary regulations, governments unwittingly either protect inefficient businesses or shackle otherwise competitive ones. Sheltering an industry in the illusory redoubt behind our borders could hurt others by artificially distorting markets.
    There will be occasional, transient dislocations of business and jobs, which are no doubt painful. Yet, what, besides national pride, distinguishes changes due to the worldwide economy from changes issuing from domestic forces alone? Trade is not one way and jobs don’t just leave without opportunity being created elsewhere in our country. These dislocations present a precarious allure for Congress to dabble in economic planning because of political forces.
    Consider for example the case of the Boeing 787. Major sections of this aircraft are being built in Australia, France, Italy, Japan, Korea, Sweden, and the UK¹. Who among our politicians would venture to stand at the Boeing final assembly factory and decry the multinational content of the pride of the fleet?  And yet we hear these grumblings in another deal for the Air Force supertanker recently awarded to the team of Northrop Grumman and EADS, the European aerospace consortium that builds Airbus, in spite of the projection that 59% of the content will be US based and thousands of jobs will be created². Should we allow Congress to  decide the relative domestic and overseas content of products? Economic policy making at the business or industry levels supplants free market dynamics and ultimately hurts someone.
    Proponents of free economies should be celebrating the irreversibility and growth of global markets and sources of supply. Succumbing to the temptation to fine tune microeconomic policy or, worse, erecting trade barriers or scuttling free trade agreements ultimately results in self-inflicted harm. We can instead strengthen our competitive stature with tax and regulatory systems that remove burdens and encourage innovation, and by building a reinvigorated education system that trains our work force for world competition from the first job to the last. On this point the Democrats are correct: we should negotiate equitability in the underlying infrastructure costs of our trading partners so our businesses can compete on inherent advantages alone, enforcing for example consumer protection laws and safety standards on imported products. Trade should be free, and it should be fair. We should discourage the unfair advantage that government subsidies abroad give their indigenous industries and we ought to be vigilant that wealth of foreign governments themselves (sovereign wealth funds) not upset an American economy founded on freedom from government influence of any kind. We should, above all, be true to that fundamental principle of a private and free economy.
    To borrow an idea from Jack Kemp, if the entire country were a giant enterprise zone, American ingenuity will take care of the rest.

1 - The Wall Street Journal, 12 December 2007
2 - ibid., 5 March 2008 

Comments

[Factrue]

Nice post, really informative, I like this para more then others "Consider for example the case of the Boeing 787....." this is really awesome para define the Boeing 787, really informative... Thanks for sharing with us such a great post...

[brain teasers oz]

NAFTA is playing important role during election season.