James Goldsmith: A Prescient View of Free Trade

A discussion on the General Agreement on Trade with Sir James Goldsmith and Laura D’Andrea Tyson.

Tuesday 11/15/1994

Trump’s Trade Disaster

In the second year of his presidency, Donald Trump has doubled down on his “America First” brand of economic nationalism, by making impossible demands of US allies and escalating a multi-front trade war of his own making. In doing so, however, he has all but guaranteed that Americans themselves will bear the costs.

President Donald Trump may fancy himself a builder, but when it comes to international treaties and norms, he has proved to be a one-man wrecking crew. And now, the chaos appears to be spreading and deepening.

.. THE TRUTH ABOUT NAFTA

For decades after World War II, Mexico pursued many of the same disastrous economic policies as other developing countries. It maintained high protectionist barriers for manufactured goods, and relied heavily on commodity exports, particularly oil. As a result, it experienced recurrent stop-go cycles, whereby accelerating inflation and ballooning balance-of-payments deficits would force a round of austerity, only for the process to repeat itself after increases in commodity prices, but at a slower rate of growth each time. Not surprisingly, the growth rate during these years waxed and waned dramatically, and by the start of 1989, Mexico’s per capita income was around $2,393 – about 11% that of the US.

.. at the time, the average US tariff on manufactured imports was around 2%, while Mexico’s average tariff on US exports was around 10%. It was clear from the start that the US would gain more from improved access to the Mexican market than vice versa.

.. Ross Perot famously warned that an FTA with Mexico would result in “a giant sucking sound going south.” Of course, nothing of the sort happened.

NAFTA entered into force on January 1, 1994, and between 1993 and 2000, US unemployment fell from 6.9% to 4%. Today, it stands at 3.8% – its lowest point in almost two decades.

.. Some of the demands directed at Mexico, in particular, are so outrageous that no country could ever accept them. Others, such as the US proposal for more stringent rules of origin (which require that a certain percentage of an imported article be fabricated within the NAFTA trade bloc), are very problematic, but a compromise can probably be reached.

.. One of the US’s most disruptive tactics has been to demand that Mexico bring its auto workers’ pay up to the level of their US counterparts. The minimum wage in Mexico is currently around $4 per day, and around $6 per day in manufacturing industries. But the wage floor US negotiators have reportedly demanded is $16 per hour – 21 times the average wage in Mexican manufacturing.

..  it is inconceivable that the Mexican electorate would stand for one segment of workers earning $128 per day while everyone else still earned an average of $4-6 per day.

.. the Trump administration’s demand is so absurd that even the US auto industry opposes it , not least for what it would do to US producers’ value chain.

.. Another impossible US demand, which would affect Canada as much as Mexico, is a sunset clause that would force each government to renew the renegotiated NAFTA every five years. The fact that the entire deal could potentially expire every five years would create a permanent state of uncertainty

.. The Trump administration has justified the tariffs on national-security grounds, which makes absolutely no sense when one considers that US allies are bearing the brunt of the costs.

.. The Trump administration’s approach to both allies and adversaries represents the worst kind of “managed trade,” which the US and other countries with market-based economies have long condemned.

South Korea did not achieve strong, sustained growth until it liberalized its trade and other economic policies, starting around 1960, with the encouragement of the US.

.. South Korea must now create an administrative apparatus to limit its steel producers’ exports to the US. That means tracking 52 different categories of steel to ensure that exports remain at or below 70% of their 2014-2017 levels.

.. there is a need to monitor and regulate the inflow of steel and aluminum, whether by the US, South Korea, or both. For the US, expanding its own customs service to perform this task would carry enormous administrative costs

.. the new dispensation will likely lead to all manner of influence peddling as firms try to win scarce licenses from customs officials

.. There are around 80,000 jobs in the US steel industry, more than 900,000 jobs in the US auto industry, and millions more in other industries that use steel or aluminum.

.. by protecting domestic producers, the Trump administration is raising steel and aluminum prices within the US, while reducing them in the rest of the world. In essence, Trump is conceding even more cost advantages to non-US producers, for no good reason.

.. After World War II, the US led the way in establishing a rules-based trading system, first with the General Agreement on Trade and Tariffs, and then with its successor, the World Trade Organization. The past 73 years have shown that when there are legitimate grievances between trading partners on issues such as high-tech secrets, bilateral efforts to resolve them often prove ineffective, whereas action taken through the WTO has a strong track record. Unless and until the Trump administration recognizes this fact, Americans themselves will bear the costs of its disastrous trade policies.