Trade Deals – Running Out of Time and Opportunities

When it’s working well, international trade allows a country to be paid for what it does best and to be supplied with imports at prices lower than its domestic producers may ask.

Advantages such as abundant natural resources, superior design or quality, efficient transportation and competitively priced labor skills are present in the US, and they usually allow us to offer attractively priced goods and services to international buyers.  Income from US exports pays our employers and the 40 million workers engaged in different aspects of our imports and exports.

Imports can be attractive to domestic buyers either because they are low priced or because they are of superior design or quality.  A consumer’s choice of imports directs purchasing power away from domestic employers and labor.  In 2016, US exports and imports were 12.7% and 15.6% of US GDP respectively, so trade has a significant, albeit unbalanced, impact on the US economy.

Unfortunately, what should happen in a well-behaved international marketplace is sometimes undercut by troublesome trade agreements.

Complex trade agreements, such as the North American Free Trade Agreement (NAFTA), make it difficult to gauge the Agreement’s benefit to the parties.  For example, while a car built in Mexico can be imported to the US under preferential tariffs, there are limits on the proportion of third country parts and assembly labor that Mexico can include in its “Made in Mexico” car.

We don’t want to compete against counties with ultra-low labor wages, especially if their cost advantage comes from skipping safety and environmental obligations that are imposed on us.  On the other hand, our consumers benefit from low cost cars.

When exporters are subsidized by government, labor and entrepreneurs in the importing nation are denied a chance to compete fairly.  When an exporter chooses to price its exports below its cost of production, it is “dumping.”  Dumping can be a rational tactic for the exporter to gain market share or to satisfy a political goal important to the exporting country.  From the perspective of the importing country, dumping is an unfair form of price competition.

Recently, the US found that some US imports of steel and aluminum were a result of low prices due to dumping.  The US has yet to choose a remedy for the dumping, but the US imposed “safeguard” tariffs on washing machines and solar panel imports because American manufacturers complained that “rising imports were eating into their sales”.  The import tariffs are expected to cost US workers up to 86,000 jobs and to increase retail prices for consumers.

In some instances, trade is used as a tool to improve cultural ties or military alignment. Those uses of trade often come with subsidies to sweeten the bonds between exporter and importer.  For decades, Venezuela and Russia exported manufactured goods and petroleum to Cuba at prices far below market. That charity was intended to help Cuba appear as a successful communist regime (an oxymoron).  When Venezuela and Russia could no longer afford the costly window dressing, Cuba sought economic ties with the US, and presumably for humanitarian reasons, the US complied.

A few years later, the US decided to halt the thaw in US-Cuba relations.  Cuban leaders had remained unrepentant autocratic communists, and their regulations allowed neither the Cuban people nor US business to prosper.  Cuba blocked freedom of speech, tightly controlled importing, and prevented US firms’ normal conduct of commerce in Cuba.

The North American Free Trade Agreement (NAFTA) between the US, Canada, and Mexico is being renegotiated, because over the years, some elements have disadvantaged the US.  The US is negotiating for it to include an 85% minimum required proportion of NAFTA-sourced auto products (up from 62.5%), and a revised dispute resolution process.  We also need modern trade treatment for three areas where we have a strong advantage — intellectual property, digital trade, and financial services.

Last November, a former Secretary of Commerce said a NAFTA dissolution would be “devastating,” and would undermine “all the good things that are happening today in the U.S. economy.”  Less hyperbolic was the Bank of Montreal’s President who said that the end of NAFTA would decrease Canada’s GDP by just 1% spread over 5 years, a modest economic penalty.  On the other hand, the US trade surplus with Canada may also disappear if NAFTA dissolves.

US disappointments with NAFTA are mainly related to manufacturing jobs.  Between NAFTA’s inception and 2010, “trade deficits with Mexico had eliminated 682,900 U.S. jobs, mostly (60.8%) in manufacturing.  But, if NAFTA had not been signed, the jobs would probably have gone to China or somewhere else.”  The US was destined to lose manufacturing jobs regardless of NAFTA.  Now that tax reform has happened, that will help reduce U.S. manufacturing costs and encourage production in the U.S.

NAFTA negotiations are more complex and carry more weight due to our inability to join in the Trans-Atlantic Trade and Investment Partnership and our refusal to join the Trans-Pacific Partnership trade deal.  The more venues for our exports, the better.  The more fairly-priced imports the better.  We need a plan for good seating arrangements when the trade deal music stops.

FacebooktwitterredditlinkedinFacebooktwitterredditlinkedin