WASHINGTON, May 14, 2017 — Almost all economists support free trade, and most support the North America Free Trade Agreement (NAFTA), which was passed with bipartisan support during the Clinton Administration.
There are, however, substantial adjustments that should be made to the almost 25-year-old agreement. Indeed, much has changed in the nearly 25 years since NAFTA became law.
Free trade means that trading countries remove barriers to trade between them. In principle they remove all import tariffs, quotas, and restrictive conditions on products produced by there trade partners. In reality, they usually leave some restrictions and special conditions in place in order to win domestic support for the free-trade pact.
NAFTA has a few of these special conditions, and they are now causing some imbalances.
The trading environment has changed. Twenty-five years ago there was almost no internet and digital flow of funds. Almost no one had a cell phone. Bryan Riley, writing in The Daily Signal, points out, “Much has changed since 1994. Google and Netflix did not exist.”
The US International Trade Commission estimates that digital trade increases GDP by more than $700 billion annually. NAFTA does not allow for some digital transactions to flow freely cross-border; it often mandates the use of a domestic server.
Riley notes that NAFTA does not allow completely free trade in the energy sector. Currently, the Mexican government can continue to control exploration and refining of crude oil and natural gas, although in 2013, these markets began to open slightly.
“Finally,” Riley writes, “renegotiating NAFTA provides an opportunity to fix its biggest flaw: The inclusion of non-trade issues such as environmental and labor regulations in politically motivated ‘side agreements’ that accompanied the trade deal.”
The side deals are really what doomed the Trans-Pacific Partnership, which added additional agreements that had nothing to do with free trade. There was, for instance, a minimum wage provision.
Considering these things, President Trump is right: It is time to renegotiate NAFTA. The principles Trump will follow will keep the agreement simple, free and without any side deals.
The benefits of free trade far outweigh the negatives. On the positive side, if each country specializes in what it can most efficiently produce and then trade for other goods, every country will end up with more. That means higher incomes and a higher standard of living.
On the negative side, by specializing where cost efficiencies exist and trading for other goods, the U.S. will stop manufacturing many goods while increasing the output of things like financial services or technology related software. This will result in some additional unemployment in the manufacturing sector.
A free trade agreement should produce a deal free from restrictions; adding protections for the manufacturing industry is counter-productive. Rather, the U.S. will have to use technology to drive low-cost manufacturing, mostly by using robots on the production line. Factory workers will no longer be “hands-on” but rather will control the robots that actually assemble the products.
Some politicians have suggested a different solution to protect manufacturing workers in certain industries: a tax on some imported goods to raise their price so that higher-cost, American made product can compete. This is contrary to the principles of a free trade agreement and results in consumers paying much higher prices for products.
Trump should take all of this into account when he renegotiates NAFTA. The goal should be an agreement that really does encourage free trade. That means no taxes, quotas or special restrictions on any imports from any participating country. It must also recognize that we live in a world where electronic commerce is growing both in the retail and wholesale sectors. Financial firms from each country must be able to freely transfer funds. And finally, the social issues should be resolved in a separate agreement.
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