Realist, not conformist analysis of the latest financial, business and political news

Just Call It Free Trade

There is no scam more delicious than restricting trade by devising “modernizations” of a “free trade agreement.”

The only intrinsic problem with the North American Free Trade Agreement is that it is 1000 pages longer than the single sentence that would proclaim free trade. These 1000 pages are transition rules toward free trade, plus hoops to jump through before one can benefit from free trade. And the only evolved problem with NAFTA is that it was designed assuming symmetry between Mexico’s value-added tax and the US’s state sales taxes, both of which hit imports and don’t hit exports. Mexico jacked up its value-added tax, as Mexico tends to do, and broke the symmetry. U.S. Speaker of the House Paul Ryan bogged down Trump’s first 100 days proposing new tax rules to restore the symmetry, while avoiding the clear impression that it amounted to a national sales tax.

Now Donald Trump is at the table, and he wants jobs (which our publisher frequently notes are costs, not benefits, except to politicians). And Ford is at the table, and it doesn’t want free trade but a tighter racket that benefits it alone: More complex rules, given that there is no such thing as a purely “American-made” car any more, which only Ford can meet. And now activists are at the table and they want to Do Good Works Globally.

The benefit to free trade with Canada is that the US and Canada are very similar, and there is synergy when we remove barriers to cross-border business deals. The huge benefit to free trade with Mexico is that it is so dissimilar. It is a country with dirt-cheap labor costs, which can still assemble a decent car when combined with North American management. That is, both sides contribute comparative advantage, and producers and consumers benefit when we remove barriers to this combination.

This benefit is now somehow a problem, as Reuters gives us a glimpse into the negotiations. A current demand is for Mexican autoworkers to get $16 per hour rather than the typical $3.

The wage demands, pushed by U.S. Trade Representative Robert Lighthizer during talks in Washington last week on modernizing the North American Free Tree Agreement, are aimed at preserving U.S. and Canadian auto production and applying pressure to raise Mexico’s low auto wages.

Neither of Lighthizer’s “aims” are Free Trade. There is no better way to snuff out Mexican participation in a three-country bloc, and the allure of having Mexico at the table, than demanding that Mexico quintuple its wages.

NAFTA was ratified by the required two-thirds vote in the U.S. Senate. The scandal of the day was that Democrats attached “labor and environmental side agreements,” passed with a simple majority, a precursor to the Obama days, when we call treaties Accords and Joint Agreements and don’t send them to the Senate at all.

The favor-trading continues, thirty years later. The only affront is that the result will be referred to as Free Trade.

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