Both free trade and immigration are hot topics in the United States these days. Senator McCain’s position on immigration has angered many conservative Republicans. On the other hand, the North American Free Trade Agreement (NAFTA) was enacted during the administration of Senator Hillary Clinton’s husband Bill, and anti-free traders oppose her nomination for that reason. Opposition to free trade is based largely on the idea that imports are harmful to Americans. While this may be true for some workers, it is not necessarily the case for either consumers or business owners.
Today, it is generally the Republicans who are the strongest supporters of free trade, but such was not always the case. For many years, the Republicans espoused the protectionist policies of Hamilton’s “American System” and a regime of high tariffs. One of the great high-tariff Republicans in the 19th and early 20th centuries was Henry Cabot Lodge of Massachusetts. Senator Lodge was an opponent of Chinese immigration, a big issue on the West Coast, and justified his position by asserting that letting Chinese workers into the United States was no different than allowing the free importation of Chinese goods.
This asserted equivalence of immigration and imports can be illustrated with a simple example. Let us suppose a manufacturer of pots and pans in Wisconsin employs 350 workers, all U. S. citizens, at $25.00 per hour. Then suppose that foreign immigrants are willing to do this work for $10.00 per hour. Moreover, foreign manufacturers are prepared to sell pots and pans in the United States at half the price charged by the Wisconsin firm. Now, if either imports or immigration is unrestricted, the effect on the workers in Wisconsin is the same: the company replaces them with foreign workers, or it goes out of business. In both cases American jobs are transferred to foreign workers.
Does this equivalence extend to consumers and business owners? If we allow free importation of the foreign pots and pans, then consumers will be able to buy them for much less than the domestic product. But if we allow free immigration, while restricting imports, manufacturers will be able to cut their labor costs and maintain their prices. So the consumer will only reap the benefits of lower labor costs if trade restrictions are also removed, thus creating a competitive environment in which prices will fall.
While the effects of free immigration and free trade are equivalent to the incumbent workers in domestic industries, from other points of view they are not equivalent at all. Free immigration offers manufacturers the benefit of a cheaper labor force. Consumers, on the other hand, will see that free trade leads to lower prices. Given the different effects of free trade and immigration on different groups in the society, it is little wonder that these have become important issues in the current election campaign.
Glenn A Knight
In my study
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NAFTA good, anti-NAFTA bad? Not So Fast
American workers are right to be upset with NAFTA as they see CEO’s enriched by shipping out production to cheap-labor countries, Mexico and China primarily. Since NAFTA, Mexico ships more cars to us than we now do to the rest of the world. Did Mexico suddenly develop an auto industry? What’s next, a car from China? Yep, coming in 2008 to America…the Chinese made Geely. Get your order in now; it’s what big business wants you to do. Even without the Geely, we now have the largest trade deficit ($273 billion) with China ever in our history thanks to NAFTA. Under the Bush administration, our trade deficit has doubled and 3 million manufacturing jobs have vanished.
The Clinton administration got the NAFTA ball rolling in 1994 promising the U.S. and her citizens a wonderful life through free trade. We were even told that NAFTA would end illegal immigration. The result? Illegal immigration has accelerated, with two-thirds of illegal immigrants here having arrived since 1995. How did that happen? The U.S. essentially destroyed the Mexican small farmers by crushing them with our subsidized agribusiness imports. NAFTA opened the door for a flood of U.S. investment dollars going into Mexico to finance the cheap labor factories we wanted them to build. Mexico, instead of investing its newfound wealth into infrastructure, housing, schools, and social improvements, transferred it to government officials and its business elite. Mexico was much more interested in encouraging its poor and displaced citizens to migrate to America for work, education, health care and services than investing to keep them at home. Our government was willing to allow it since it met the cheap labor sought by business here.
With a destroyed textile industry and a shrinking manufacturing base in North Carolina, we hear the free traders extol a claimed 30,000 net jobs increase due to NAFTA. What they don’t tell you is that those are not good paying manufacturing jobs with decent benefits that a worker can build a life and raise a family on. Instead, they are the type that puts a worker into direct competition for a job with their children and grandchildren…Wal Mart, Costco, retail and service industry type.
Free trade must end. Instead, it must be replaced with fair and balanced trade where we insist on reciprocity from our trading partners. Over 200 years ago, Thomas Jefferson wrote, “Merchants have no country. The mere spot they stand on does not constitute so strong an attachment as that from which they draw their gains.” These words still ring true today, as such merchants are the driving force behind NAFTA.
A fundamental question you must ask; Is an American worker just a unit of labor, or a member of our national family? If you answer the latter, then you are not in favor of NAFTA.
Zeezil’s essay is a capable criticism of the North American Free Trade Agreement (NAFTA); it may be as good an argument against NAFTA as could be made. There are a number of problems with this essay, however, and several of them are important enough to be pointed out. Here, I will consider the logical structure of Zeezil’s argument, which contains a major weakness of the sort known as post hoc, ergo propter hoc.
It is clear that causes precede effects. An event must be the result of another action earlier than itself, and cannot be caused by something that only occurs later. It is not, however, sufficient proof of a causal relationship that event A precedes event B in time. The assumption that a later event has been caused by an earlier one is known as the fallacy of post hoc, ergo propter hoc: “after this, therefore because of this.” In this particular case, Zeezil is attributing to NAFTA a number of putatively evil effects, without providing sufficient justification to establish a causal relationship.
It is true that the United States has been running record trade deficits since the passage of NAFTA. However, trade deficits have been a staple of the United States economy for many years. I recall complaints about the negative balance of trade in the Johnson and Nixon administrations. At various times these deficits have been blamed upon the Europeans, the Japanese, and the Chinese, both before and after the negotiation of NAFTA. The reasons for trade deficits are complex, and they include factors internal to the American economy, and not just our trade agreements or the machinations of “evil” foreigners. Zeezil points out that NAFTA has let to increased exports of American food crops, and not only to increased imports. At this point, I think it sufficient to note that a trade agreement, providing for equal relaxation of existing restrictions on both sides, is unlikely to be the cause of increased trade deficits on the part of only one party. Zeezil points out that NAFTA has let to increased exports of American food crops, and not only to increased imports.
It is also true that manufacturing jobs, as a percentage of all jobs, and in absolute numbers, have been declining in the United States. This, too, may be a secular trend, in which foreign trade plays only a marginal role. Since the United States is a major exporter of capital goods, industrial supplies, and vehicles and parts, as well as an importer, many manufacturing jobs depend on exports. Foreign trade has created many American jobs, while it has destroyed others. As just one example, we might note the vital, growing, automobile sector in the United States – the part of that sector, that is, owned by Germans, Swedes and Japanese corporations. Those corporations, and other successful manufacturers, have taken advantage of new technologies to reduce the amount of labor required to product their goods. Automation and increased efficiencies in manufacturing processes have been major factors in making manufacturing jobs redundant. Again, manufacturing jobs were declining in numbers long before NAFTA was ratified, so that it is hard to blame that treaty for the continuation of the trend.
It may well be the case that NAFTA has caused some manufacturing jobs to move overseas. However, I think it is clear that there are two logical weaknesses in this argument. First, the mere fact that NAFTA preceded some of the adverse events cited by Zeezil does not demonstrate the treaty’s responsibility for those events. Second, since some of those events were continuations of trends that predated NAFTA, the argument fails to demonstrate even the temporal precedence needed to establish a case for causation.
Glenn, you may be guilty of the same thing you assert Zeezil is; you certainly have not conclusively proven your assertions either. I think the difficulty is that people are seeing a massive drop in manufacturing jobs and an increase in what is called the "services" sector. These jobs often do not pay as well as the ones they are replacing.
In addition you say, "... a trade agreement, providing for equal relaxation of existing restrictions on both sides, is unlikely to be the cause of increased trade deficits on the part of only one party." This would certainly be true if both parties were negotiating fairly with their own interest in mind. I think a large portion of Americans no longer believe that the people representing us in these conferences are necessarily worried about our best interests. There is a sense that many elites feel Americans enjoy too much of the good life and that it comes at the expense of the rest of the world. These same people often feel that we can give some advantages in agreements to second and third world countries because America can "afford" it. Perhaps this is not valid, but it is a feeling that I have heard expressed in more than one place.
Now for the point of my post. I have a question that I'm hoping Glenn, Sean, or someone else can answer. I often read articles that indicate that we do not in fact have free trade with other countries such as China and the EU due to things like the VAT tax (EU) and currency manipulation (China). Could someone explain to me how these things could or are used to manipulate trade or product prices?
Before we get into the possibilities of exchange rate manipulations by governments or businesses, let's just look at how exchange rates, and changes in exchange rates, affect the terms of trade between countries. The simplest way to put it is that the cheaper one's currency is, relative to other currencies, the cheaper goods priced in that currency are in the other countries.
For example, if a Chevrolet sedan costs US$20,000 delivered in Munich, Germany, and the US dollar and the Euro are at par (US$1.00 = Euro $1.00), the German buyer will have to pay E$20,000 for it. For the same amount of money, he might be able to buy a comparable model of Renault or Volkswagen. If the exchange rate were US$1.00 = E$2.00, then the Chevrolet would cost E$40,000, or twice as much as the Renault or Volkswagen. If, on the other hand, the exchange rate were US$1.00 = E$0.50, the Chevrolet would cost E$10,000, or half as much as the European cars.
We might like to think of the effect of exchange rates as setting breakeven points for potential exporters. If the price difference is at point A, American cars are so competitive (i.e., cheap), that it is worthwhile for American makers to export cars to Europe, and not worthwhile for European makers to ship comparable cars to the U.S.. At a point B, where the Euro is somewhat weaker, American cars are no longer competitive in Europe, because transportation and other costs make them too much more expensive than comparable European models. At a third point C, where the dollar is even stronger, European cars are competitive in the United States, because the exchange rate lowers the price enough to make up for transportation costs, customs duties, taxes, and other export costs.
Obviously, sometimes the exchange rate is in a range such that other factors are more important - transportation costs, for example. Thus, a number of European and Japanese car makers have built plants in the U.S., where they assemble their cars from a combination of imported and U.S.-made parts. In such a case, a rising U.S. dollar could make it worthwhile for manufacturers to import a greater proportion of the content of each car, while a falling U.S. dollar could make acquiring more U.S. components advantageous.
At various times, U.S. firms have built cars overseas - Ford in England, GM in Germany, and so on, while foreign firms have built cars in the U.S. - Volkswagen, Toyota, Nissan, Honda, and Volvo all have manufacturing facilities in America. At various times, U.S. firms have imported parts from overseas; I had a Plymouth Voyager mini-van with a Mitsubishi engine, for example.
I'm feeling that this answer is getting too discursive. If I were a good boy, I'd print it out, revise it, and then post it. I think I'll just close it out instead, and then follow up later. Exchange rates, along with transportation costs, taxes, import duties, quotas, safety regulations, and a number of other factors - including whether anyone in country A wants to buy a given product of country B - may make it easier or more difficult either to export to a given country, or to compete with imports from that country. The Chinese have been accused of keeping their currency artificially cheap, which would advantage their exports and inhibit imports. I have seen analyses, mostly in the Economist, which show that so little of the price differential is due to the exchange rate, that no conceivable increase in the yuan would make a big difference in U.S. - China trade.
I don't know enough about how VAT is administered to know if it advantages European imports vis-a-vis American products. I do know that the VAT is rebated to manufacturers if the goods are exported, so it encourages makers to export rather than to sell at home. However, because of the way the VAT works, I would think that imports from the United States would sell VAT-free, and, thus, be advantaged versus domestic products.
(Interestingly, it appears that both GM and Ford are making profits from their overseas operations, while losing money in their U.S. operations. Meanwhile, Toyota and Honda have profitable U.S. operations. It is hard to reconcile this situation with any theory of unfair foreign competition.)
Glenn,
That's an interesting post. I'll look forward to any more economic education you have to offer. I had the same thought about VAT but am not 100% sure how it works. It certainly seems imports would not suffer from the VAT since no value is added in importing, but I'm far from an expert.
The currency manipulation thing is an issue as well, though I have seen no solid analysis on it. The other one that comes to mind that I see sometimes is predatory pricing practices by foreign (or even domestic) manufacturers. Where they take a loss in a new market such as the US to drive out competition, and then make up the difference later by raising their prices to a more competitive level but where they now have a much larger market share. Meanwhile they use their home (or offshore) markets or other product lines to offset the loss in the area they are attempting to gain marketshare in. The very large Japanese multinationals are often accused of this sort of behavior.
It's still not clear to me exactly how "fair" and "free" free trade is.
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