National Review Online
Tuesday, October 17, 2017
President Donald Trump has ordered his trade
representative to renegotiate certain aspects of the North American Free Trade
Agreement, which is a good idea. He also has threatened to pull out of the
trade accord altogether, which is a terrible idea, a threat made in the service
of unreasonable and unrealistic demands that have more to do with posturing
than with seeing to the health of the U.S. economy.
There are a few aspects of NAFTA that are in need of
revisiting: Internet commerce was nonexistent when the agreement was
negotiated. NAFTA was signed in 1993, and Netscape released the first
commercial web browser in 1994. In 2017, the most valuable U.S. companies are
firms such as Apple, Alphabet, Microsoft, Amazon, and Facebook. There are
intellectual-property issues that need to be sorted out, along with a few other
issues related to digital commerce, telecom, and banking.
But the domestic dispute over NAFTA isn’t about America’s
leading companies. It’s about the firms that used to be America’s leading
companies. American manufacturing is doing just fine, despite constant reports
of its death. U.S. manufacturing output has, in fact, nearly doubled since the
1990s, when NAFTA was being negotiated. NAFTA is part of the reason for that:
Our biggest export markets are Canada and Mexico. What has declined is
manufacturing’s share of the work force, and NAFTA is part of the reason for
that, too, in ways that are obvious and ways that aren’t.
It is the case that a number of relatively low-wage and
low-value manufacturing jobs have moved to Mexico since NAFTA was adopted,
though it is likely that without NAFTA those jobs would have simply moved to
places such as China and Vietnam; the work that is being done in maquiladoras
is not going to Cleveland without NAFTA. That’s the obvious factor. The less
obvious effect of NAFTA is that by eliminating barriers to trade in services,
it contributed to the explosive growth of the services sector of the U.S.
economy, which has grown much more rapidly than manufacturing has and which now
employs many more people. For a sense of scale, consider that financial
services alone is a $1.4 trillion industry that accounts for more than 7
percent of U.S. economic output. That’s about twice the size of the automobile
industry. And NAFTA has been a boon for other service-sector industries, too,
from engineering to product design.
The Trump administration’s complaints about NAFTA are in
the main either antiquated or trivial. For example, the administration wants to
increase the required percentage of North American–origin parts in cars made in
the NAFTA zone, worried that those sneaky Koreans are providing General Motors
with low-cost electronic components. (Consumers must be protected from low
prices at any expense.) There is also a longstanding dispute over the way those
nefarious Canadians price timber, which is mainly taken from public land in
Canada but from private land in the United States. NAFTA has a
dispute-resolution panel designed to handle just such developments, but the
United States does not always get its way.
And so Trump proposes doing away with the
dispute-resolution panel. Here’s where things start to get silly. Canada and
Mexico probably will not agree to a NAFTA without a dispute-resolution
mechanism, and nor should they. (And it wouldn’t serve our interests, either.)
The Trump administration further complains that Mexico’s tax system gives its
exporters an unfair advantage. Mexico, like many countries, imposes a
value-added tax (VAT), but only on items destined for the domestic market. If a
product is sold outside of Mexico, the VAT is rebated. This ends up getting
complicated, because there are many products that are manufactured partly in
more than one country; most economists believe the tax has a negligible impact
on trade, being factored into the exchange rate. But like the Canadian timber
situation, the Mexican VAT isn’t really a question of trade policy — it is merely
a consequence of the fact that the United States, Mexico, and Canada are
different countries, with different ways of doing things. The United States
could replace its cumbrous corporate-income tax with a Mexican-style VAT if we
wanted to, but we don’t. Unlike the European Union, NAFTA does not seek to turn
a free-trade zone into a unitary transnational government. We challenged the
Canadians on their timber policy and lost. Get over it.
The Trump administration wants to make it easier for U.S.
companies to bid on Canadian and Mexican government contracts — while
increasing the use of “Buy American” provisions to make it harder for Canadian
and Mexican firms to win U.S. government contracts. The administration objects
to the way Mexico runs PEMEX, the state-owned oil company. Wilbur Ross, the
commerce secretary, has put forward a frankly preposterous proposal to sunset
NAFTA every five years, which would in effect keep the accord in a constant
state of renegotiation, depriving U.S. firms of the ability to make business
decisions based on settled and predictable rules. It is a shockingly
harebrained idea to be offered by the Commerce Department of the United States.
Pulling out of NAFTA would have immediate effects ranging from the disruptive
to the dire: Canada and Mexico are our largest and third-largest oil suppliers,
respectively, and inhibiting the free flow of crude to U.S. refineries would
surely send gasoline prices higher, with ripple effects throughout the economy.
U.S. exports to our largest overseas markets would be inhibited, with
disastrous results for American farmers. That means higher prices, fewer jobs,
and less growth.
And we cannot afford to give up any growth just at the
moment. Despite President Trump’s habitual boasting, U.S. GDP growth for 2017
is expected to come in at only 2.2 percent. Economists agree that NAFTA has
contributed substantially to annual GDP growth, meaning that absent the effects
of the free-trade regime, real GDP growth would be significantly lower. That’s
what’s at stake here. Absent some compelling national interest, the government
should not stand between Smith and Jones when they desire to transact business,
and neither should it stand between Smith and Martinez or Smith and Cloutier.
Free people do not have to ask the king’s permission to buy an avocado or sell
an iPhone; like freedom of speech, the right to engage in exchange is not the
government’s gift to give. We created government to enable commerce rather than
to prohibit it — or suffocate it with ridiculous regulation and sops to
well-connected corporate interests such as Boeing, which is what the Trump
administration’s war on Bombardier is all about.
NAFTA has been an extraordinary success, raising U.S.
economic growth, creating jobs, and lowering prices. The anti-trade disposition
is based largely in nostalgia about 1950s factory towns and the familiar bias
against economic interactions with foreigners. Trump fancies himself a master
negotiator, but it is not entirely clear that he or his administration
understands what actually is on the line when it comes to North American trade
and its underappreciated contributions to U.S. prosperity. NAFTA may need some
work, but it’s scalpel-work, not chainsaw-work.
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