Fixing NAFTA

Trade has raised its lovely head. So, what is the fuss all about anyway, you ask??

An objective observer who looks at trade deals will see some obvious things.

First, while some merchants who can take advantage of foreign markets are making a fortune, many of us are losing jobs to foreign companies which can make things cheaper than we can.

Second, our standard of living is going down as the costs of everything go up while our wages stay the same or go down.

Third, the same thing is happening everywhere, not just here.

Fourth, our politicians seem to be so completely mesmerized by the potential positive effects of foreign trade that they ignore what is happening to us every day.

What should we do about it?

We should ask our politicians to look out for us first. If an agreement will help the world's markets but will hurt workers in our country, then it is a bad deal and should be rejected.

It is that simple.

Look at NAFTA this way, then decide whether to keep it, change it or scrap it based on the net positive job gain to the US.

For any new trade agreements, the trade agreement proponents should be asked to calculate how many jobs will be lost and gained in the home economy from the new trade deal. If there is a positive job gain, then it's a good deal.

Can we put labor standards and environmental safeguards into trade deals so we won't be hurt?

No, we can't.

If an agreement hurts workers in our country, then it is a bad deal.

What about consumers who are able to buy cheaper goods from foreign countries than they can buy from our own companies? Won't they be hurt?

In the short run prices will go up a little. But in the not so distant future, we will all be better off because we will have more jobs and be able to afford more things.

Besides, prices are going up anyway because of the world oil crisis. Protecting jobs at home will hardly be noticed.

This is especially true in the USA because trade is still a small part of our economy. Despite what we think, products from China are only about 2% of our economy.

Why is it that so many politicians sell these deals so hard if there will be negative effects on our economy?

To fully understand the trade debate about NAFTA and the other trade agreements, we need to look at two things: Economic theory and economic reality, or the dollars lost and gained by vested interests.

Looking directly at the bottom line of economic theory we see some theories about markets and trade. These theories provide the base rationalizations for the Free Trade Agreements the US and other nations enter.

The first theory we see is called Comparative Advantage. This theory was written in about 1776 by David Ricardo. Basically it says that merchants in any country can make a profit from trading with merchants in other countries even if their costs are higher in the home country. Home country merchants will buy products made in the home country which are comparatively cheaper than other products made in the home country even though these products are more expensive than world prices; then the merchants will sell the home country products at world prices taking a loss and use the money to buy world products at world prices which they can sell in the home country at a huge profit.

So, the reasoning goes, all the merchants in the home country will specialize in making products which have the relative, comparative advantage in the home market and sell those products in world markets.

When every country's merchants do this, the consumers in all countries will be better off because the merchants in all countries who specialize will create more goods in total.

This is a really wonderful idea even if it doesn't work. It is such a wonderful idea, and also so difficult to understand, that merchants who benefit from trade use this idea to argue against any interference with their trading rights. After all, any taxes on trade (which are called tariffs) will interfere with specialization and reduce the total amount of goods and services produced in the world.

Here is an argument which promises the best of all possible worlds for everyone and is very hard to understand. Is it any wonder that people who gain from agreements based on this idea will defend them tooth and nail?

Second, the twin ideas of Free Markets and Free Trade sound so very good, they must be essentially American. Who can argue with the idea that a free market economy with free trade will bring us the best possible world? And indeed, it has already, hasn't it?

In fact, the USA does not actually have Free Markets or Free Trade. Most markets are regulated very highly today. Most of our complaints about markets happens when government regulators do a bad job, not when a market fails.

The reason for the mortgage crisis we are in now is that we loosened banking regulation on commercial banks and did not regulate the mortgage markets at all. Our crisis today is a failure of regulation, not a failure of markets.

Is there a way out of this mess?

Yes, there is. The federal government needs to manage trade so the harmful effects of trade agreements are minimized. To see how to do that, go to my essay on Balanced Trade here: http://www.mkeever.com/essay.html

For further background see: GLOBAL TRADE AND CONFLICTING NATIONAL INTEREST, Ralph E. Gomory and William J. Baumol, MIT Press, Cambridge, Mass. 2000 ISBN -10: 0-262-07209-2

Copyright, 2008 by Mike P. McKeever, Santa Rosa, CA. This text can be posted in any electronic forum or quoted with attribution in any printed media. For publication in printed form please request permission from the author: email: mpmckeever@earthlink.net.