Free trade is one the polarizing issues magnified during the Presidential race. It is viewed as one of the pillars of capitalism. Ironically, the first meaningful free trade agreement signed by the U.S. and an impoverished nation was the North American Free Trade Agreement (NAFTA). NAFTA was signed by President Clinton with Mexico and Canada in 1993[i].
The dilemma posed by such agreements is that they pit the vitality of an economy against its workers, who face the prospects of being replaced by cheaper off-shore labor. Economists such as Paul Krugman suggest that knowledge workers prosper as a result of free trade, at the expense of non-skilled workers. While Median Household Income for high school educated workers has dropped since 1980 (when adjusted for inflation and before recent minimum wage increases), income for college-educated workers have risen about 10%.
In effect, the U.S. has engaged in exporting our knowledge and technology, in exchange for the right to import cheap labor. Within five years of NAFTA, the U.S. built a $23 Billion trade imbalance with Mexico. The collapse of the Peso and other foreign currencies has exacerbated our trade deficits.
On its face, there is an argument to be made that free trade stimulates wage inflation more abroad than at home. Chinese wages are on the rise, at a time when U.S. wages have stagnated. And if these issues are not controversial enough, the loss of U.S. manufacturing jobs puts people in a tizzy, even though the US decline in manufacturing jobs is on par with a global reduction in manufacturing labor spending.
Economists cannot seem to agree on the net gain of free trade. But as we debate the merits of free trade, we need to view the economy as a whole, and not focus on one class or income level. Most economists agree that such agreements add to our GNP. Are we to sacrifice momentum in the economy to protect the unskilled, or should we be working to provide them new opportunities to acquire new skills? Wouldn’t it be better if everybody participated in greater economic output?
A recent Gallup poll revealed that 58% of Americans view free trade as an opportunity while 33% see it as a threat. But two-thirds would like more “restrictions” on trade and 82% would pay “a little more” for products made in the U.S.A.[ii] Some of our clients who had off-shored to China are seeing the benefit of manufacturing close to home.
So perhaps the debate should not focus on whether we should engage in such agreements or not, but under what circumstances we are willing to trade with partners (such as China), who may not share our values, or may not be trusted to execute their part of the deal. If countries are going to manipulate their currency, or take part in deceptive practices, there should be consequences.
The most important part of any negotiation is your willingness to walk away. Are we?
[i] Trade at what price? The Economist April 2, 2016
[ii] An Inconvenient Truth About…. by Peter Coy Bloomberg Businessweek