President Trump has been criticized as being anti-free trade for backing out of multi-lateral free trade agreements such as the Trans-Pacific Partnership and renegotiated the North American Free Trade Agreement (NAFTA), between the United States, Canada and Mexico. The critics are right.
But being anti-free trade is not necessarily a bad thing, or even un-American. One of the first acts of the new American Congress in 1789 was to use tariffs to protect American companies from British Mercantilism. Tariff’s aren’t always good, but then again, nor is free trade.
Free Trade Good in Theory
For free trade advocates, the idea is quite an enticing one. It certainly sounds very American. Freedom is what we’re all about.An Idea Whose Time Has Passed
Comparative advantage is the idea that countries – or people – will operate at their most efficient levels by producing what they’re best at, and sell the surplus in exchange for needed goods and services produced by others more efficiently. This will lead to a rise in the wealth and productivity of all participants.The reason is that comparative advantage and “free” trade are both subject to a variety caveats and distortions. Currency manipulation, slave labor wage levels in backward nations, price subsidies, state-owned enterprises that are market share-driven rather than profit-dependent, corrupt legal systems, technology theft and other “cheats” all give the nations using them an unfair comparative advantage in the market place.
The Tragedy – and Warning - of NAFTA
A good example of these distortions in action is NAFTA, which went into effect in 1994. It was supposed to expand markets, create more than 200,000 American manufacturing jobs in the first five years, and improve the economies and lives of workers in all three countries. Mexico was supposed to have become a “relatively high-income country” on par with Greece or Portugal, if not better.But just the opposite occurred.
Under NAFTA, thousands of American companies moved their factories out of the United States and into Mexico. Over the course of two decades, many states in the central United States lost much of their economic viability and tax base. Today, we call that region the rust belt.
NAFTA Made Mexico Worse-off, Too
But did Mexico’s comparative advantage in labor costs and wages combined with NAFTA raise Mexicans’ living standards? Was the Mexican economy transformed into a much wealthier and more vibrant one?No.
A Free Trade Zone for Drug Traffickers
And finally, one other hugely negative impact of NAFTA has been the expanded flow illegal drugs into America. As Jorge G. Casteneda, former Mexican Foreign Minister said in 2015: “NAFTA brought [none of] the huge gains its proponents promised. Still, NAFTA contributed significantly to one market in particular: the illicit drug trade.”As the experience with NAFTA clearly shows, large legal, developmental and cultural gaps between trading partners can have disastrous outcomes for participants. Free trade that is abused can often lead to commoditization and exploitation of human beings, without delivering the promised benefits.