international trade and NAFTA

There has been a lot of talk lately about NAFTA being put at risk – either the US wanting to pull out of the deal or to significantly re-negotiate its terms. Industries that either benefit from NAFTA or feel that they do not benefit are lining up to express their positions – the latest being the auto industry, which has generally benefited significantly from NAFTA's country of origin rules
(Shepardson, 2018).

This discussion makes one reflect on the objectives of trade policy in general. The entire point of trade policy is to expand the economy by leveraging comparative advantages. While there are high profile instances where Mexico has comparative advantage, and has therefore won some trade away from the United States, the US has the most number of products in which it has a comparative advantage, with Mexico the least (Mzumara, Chingarande & Karambakuwa, 2012). The authors note, however, that Mexico has developed trade surpluses despite having the fewest number of products with comparative advantage. They conclude that this means that Mexico benefits, but that is not quite right. The objective of global free trade isn't to "win" each pairing by way of having a surplus over a country. The objective is to deliver greater economic efficiency, in terms of greater availability of goods at a lower cost. Persistent trade deficits are something that should be avoided, of course, but a nation is not expected to only have free trade agreements with one or two countries.

Indeed, when one juxtaposes the rhetoric of the Trump Administration – and not to put all the blame on them but other administrations in the past on particular issues – US trade policy has struggled to accept the reality of what global free trade is supposed to be. The Canadian government has demonstrated a much stronger sense of this to date. Canada does not view free trade as just NAFTA, but NAFTA is one trade agreement among many. If Canada "loses" a pairing, so be it, the country is committed to the global trading system.

This of course raises the interesting issue of politicians being in charge of trade policy. They are advised, of course, by bodies that specialize in trade and trade analysis, but ultimately political leaders set the direction for trade policy, and lawmakers have to ratify trade deals. This creates an odd situation where politicians may be influenced by particular lobby groups, and these groups will of course have limited interests. Even without lobbyists, politicians are elected to serve the interests of their constituents. Aside from the fact that most constituents are hopelessly ignorant of economics, and certainly of international trade, the reality is that the positive and negative consequences of trade will tend to be clustered, not dispersed evenly. If all the benefits go to a handful of congressional districts, the rest of the districts will oppose that trade. Ultimately, what is good for politicians might be bad for the economy (Lowenstein, 2017).

So where does that leave us with respect to the future of free trade? Well, first it creates a need for a greater degree of economics education. Comparative advantage may be beginner's stuff, but it's still beyond most people. So public discourse is littered with arguments about "winning" and "losing", as if that is the point, or even a reasonable measure of free trade effects. But more than that, there might be a need to untether politics from economics. Good luck – economics drive elections, so politicians are going to pay attention to it, and at the local level. So what does this mean going forward? I’m not sure. The US has benefitted substantially from free trade, and would benefit more from having a greater commitment to it. Trade with EU, Mercosur, ASEAN, and other blocs or large nations would open up the US economy to more opportunities, both for cheaper goods but also opportunities for the high-value output of American companies. Whether that is what we get from politicians, or whether we get something regressive in terms of trade policy, or even just misguided, would be to the detriment of the US economy, but it might happen anyway, because of the poor fit between the drivers of politics and the drivers of the economy.