The New Cold War
America, China, and the Echoes of History
The administration of Donald Trump seems committed to weakening, if not ending, the North American Free Trade Agreement (NAFTA), citing the decline in the auto industry as an example of the deal’s supposed failure. As U.S. Secretary of Commerce Wilbur Ross noted in The Washington Post, the percentage of auto imports from Mexico that used inputs from the United States had actually dropped post-NAFTA, and therefore, he argued, the free-trade agreement is broken. The Trump administration has now proposed raising the “rules of origin” for vehicles under NAFTA from 62.5 to 85 percent. In other words, at least 85 percent of a car must be made in a NAFTA country for that car to qualify as duty-free.
This argument prompted no small debate about Ross’ methodology and data selection, but putting that aside, there are three fundamental reasons why Secretary Ross’ thesis is simply bad for the economy.
First, a focus on trade balance and the performance of one sector means the United States evaluates a trade deal based not on rules but on results. A rules-based approach allows governments to focus on standards, transparency, and enforcement to keep the trading environment fair. A results-based approach, on the other hand, signals that even if trade is fair, a government will thwart competition if it is not happy with the results. This is not a defense of the U.S. economy but a surrender. Instead of telling the world that the United States is interested in the best technology and ideas from around the world, a results-based approach announces an interest in purchasing foreign products and ideas only to the extent that it can sell the same value of goods elsewhere. The United States’ ability to grow its economy would be capped not by its aspiration or appetite, but by other countries’ appetites. It can only be smart to the degree that its trading partners are smart.
A belief in free and fair trade means policies are based on equivalent access, not equivalent results. There should be no requirement in a fair system that Mexico purchase precisely the same value of automobiles from the United States as the United States purchases from Mexico. The logic of the marketplace tells us that in a fair system, commercial preferences will likely favor certain businesses over others. Someone from Mexico might buy a luxury condominium in New York City because it fits his or her lifestyle and budget. Is the developer who sold the unit now obligated to purchase an equivalent value of construction materials from Mexico? There is at least one New York developer—Trump—who would likely disagree.
Ross equates the general idea of a “job” with the permanence of one particular kind of job; in this case, that of an automobile assembly worker. But fixating on one type of labor might undermine the creation of jobs overall. Japan provides a good lesson of how this might happen. In the 1960s, Tokyo decided to lock its economy into the employment pattern at the time. The logic was that everyone employed today would keep their job tomorrow. This works as long as there is no “tomorrow.” Japan never adopted the labor market flexibility that would allow workers to move to areas of the economy that were growing. Ross’ idea would put the United States in a similar position. He essentially thinks that American workers should keep producing hubcaps forever, even if those hubcaps are produced more efficiently elsewhere.
But the purpose of U.S. trade policy is not to ensure that every current American job is maintained in perpetuity, but to guarantee fair rules of trade. For the economy to grow, companies and workers must adapt to evolving labor practices, consumer tastes, and technology, and comparative advantage will shift as well. When jobs and industries move offshore, it is not necessarily a sign of a declining economy. The trend only becomes problematic if the U.S. economy is not simultaneously generating new jobs, fostering start-ups, and promoting business growth—or if another trading nation is competing unfairly. Indeed, every advanced economy in the world today has attained prosperity by allowing jobs to move offshore even as more jobs are created onshore. And if a country is violating trade rules, there are legal and policy responses to remedy those violations. That is why if Mexico makes more hubcaps to export to the United States and the United States makes more driverless vehicle systems to export to Mexico, both economies can come out ahead. But Secretary Ross seems to be considering only the former situation.
Second, a trend that follows a new policy does not mean that the policy caused the trend. The passing of NAFTA did not necessarily trigger the decline in auto employment just because one followed the other. It’s possible that NAFTA might have even helped the industry. Since the 1950s, auto production has increased faster outside the United States than inside. Why would NAFTA reverse this pattern? NAFTA might have very well slowed down the auto industry’s decline by providing extra value to those who integrate Mexico into their supply chain. So a U.S. company that shifts, say, ten percent of its production to Mexico ends up with lower costs and might enjoy a 15 percent increase in sales. Total employment increases in this case even as some positions move offshore.
Finally, Trump’s approach, à la Ross, has significant opportunity costs. Emphasizing results instead of rules takes the Commerce Department away from what it can do best: identify and remove trade barriers by improving and updating NAFTA, not weakening it. For example, Commerce could try to ensure that U.S. and Mexican firms sell solar energy into each other’s grids. It could help U.S. universities sell online courses to students in Mexico. And it could identify the barriers that prevent U.S. banks from offering financial products in Mexico.
Free trade will generate the best results when business has the appetite to enter new markets and government supports business growth. A government that is focused solely on today’s jobs potentially puts tomorrow’s at risk.