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The North American Unilateral Free Trade Agreement
Howard Richman, 1/5/2011

Free Trade Agreements are worthless unless they require that trade also be balanced. Take NAFTA for example. When President Obama announced that he would focus upon jobs in 2011, he forgot to mention that he was talking about jobs in Mexico. Under his watch, our trade deficit with Mexico has climbed rapidly as shown in the graph below:

TradeWithMexico20092010a.gif 

Mexico has turned the NAFTA highway into a one-way street. When President Obama refused to let Mexican trucks operate in the United States, Mexico began placing tariffs upon U.S. products. It now collects tariffs on 99 categories of U.S. products. These include a 25% duty on U.S. cheese, a 20% duty on U.S. wine, 15% duties on U.S. fruit and fruit juices, 15% duties on U.S. pencils and pens, 10% duties on U.S. shampoo, hair spray, tooth paste and deodorant, and 10% duties on U.S. dog and cat food.

Normally, when a country places barriers upon imports from another country, the relative values of the currencies change to a level that would balance trade. But Mexico recently adopted the Chinese strategy of manipulating the dollar's exchange rate with its currency. In a table that accompanied Federal Reserve Chairman Ben Bernanke's November 17 2010 speech in Frankfurt Germany, Bernanke reported that Mexico had spent 3.64% of its GDP on currency manipulations between September 2009 and September 2010.

The growing Mexican trade surplus with the United States proves that NAFTA is not working. The United States needs to counter Mexico's trade manipulations with a balancing scaled tariff designed to collect half of our trade deficit with Mexico as tariff revenue. Mexico could then lower our duty rate by taking down its barriers to American goods and by ceasing its currency manipulations.

Although one-way trade is worthless, balanced trade works magnificently. Each country produces goods with which it has a comparative advantage and trades them for goods with which the other country has a comparative advantage. Each country loses jobs in import-competing sectors while gaining better-paying jobs in export-competing sectors. But when trade is imbalanced, the trade surplus country gains jobs and the trade deficit country loses them.

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Comment by Bailey Armstrong, 1/6/2011:

I am completely against allowing Mexican trucks in the United States for a number of reasons. As for Mexico's tariffs on American products we as Americans should boycot Mexican products in response. NAFTA has not been a good thing for American workers and needs to be renegotiated or we need to drop out and develop a new trade agreement with Canada. This is just one more broken promise by Obama.

Response to this comment by Howard Richman, 1/6/2011:
I agree. I am definitely in favor of keeping our free trade agreement with Canada. I can't find any evidence whatsoever that Canada manipulates its trade with the United States. They don't charge tariffs and they don't manipulate currencies. Moreover, our trade with Canada is pretty close to balanced.
Response to this comment by Ron Lefman, 1/12/2011:
Bottom line if the US was serious about reducing deficits with other countries including Mexico I am pretty sure most of these countries would be unable to foot the bill. I agree with Bailey NAFTA has not been a good thing for the American worker.
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Comment by Sorensen, 1/6/2011:

The issue about safety is just a lie. In the 70's and 80's Mexican Trucks crossed the US without any major incident. Mexico imposed tariffs because for more than 10 years the US did not take care of business about Trucks.

Unlike China, the trade with Mexico create jobs in the US, and if you are thinking about blame Mexico for every problem that the US have, You must think twice.

The Mexicans are getting tired of the blame game by the USA.

 

PS. Take a look in the back of your new flat-screen TV. I would not be surprised if You find the legend "Made in Mexico".  Parts of those TV's were made in the USA by American workers, and the Mexicans made the assembly.

 

You can't say the same thing about China.

Response to this comment by Howard Richman, 1/6/2011:
Trade with Mexico has benefited both parties in the past and would benefit both parties again if it were balanced. But this business of Mexico accumulating currency reserves to keep trade out of balance definitely has me rankled. Neither Obama nor Bernanke has protested to Mexico, to my knowledge. We are led by people who think that U.S. stands for Uncle Sucker.


Comment by Hugh Campbell, 1/6/2011:

An America Lost in Squanderville

The United States’ trade gap is the proverbial “leak-in the-dike” with its de-simulative effect on our recovery. In November 2003, Warren Buffett in his Fortune, Squanderville versus Thriftville article recommended that America adopt a balanced trade model. The fact that advice advocating balance and sustainability, from a sage the caliber of Warren Buffett, could be virtually ignored for over seven years is unfathomable. Media coverage that China has kept it currency undervalued is a gross understatement, it has actually been keeping the U.S. dollar over-valued; which adversely affects all our trade with all our trading partners, not just trade with China. Until action is taken on Buffett’s or a similar balanced trade model, by the powers that be, America will continue to squander time, treasure and talent in pursuit of an illusionary recovery.


Comment by Daniel, 1/7/2011: The idea that something can be both free and administered — in this case to ensure “balance” — is gibberish at best. If you want something other than free trade, then just honestly say so. Don't wrap the symbolism of freedom around control. While it would be distinctly better for all trading partners to practice free trade than for some to do so and for others to continue to play the mercantilist game, the classical case for free trade never made a presumption that everyone would practice it; it argues that, even if just one economy did it in a world of mercantilists, that one economy would benefit. You might disagree with that classical case. Well, if so, then address it. Don't, instead, wale on a straw-man. That straw-man is the fabrication of various parties. One group are those who didn't really pay attention, and failed when they tried to reconstruct what it was that their professors had said about comparative advantage and what-not. Another group are those who indeed remembered the argument, but couldn't find a weakness in it, and so have wilfully misrepresented it. A large share of the latter group are politicians and wonks who want some of the benefits of free trade, but at the same time want mechanisms by which favored classes can continue to skim economic rents from their own economies.

Response to this comment by Howard Richman, 1/7/2011:
The classic case is wrong because it assumes balanced trade. According to the classic case, if Mexico puts up barriers to American products, Mexico's peso goes up in price in currency exchange markets, the dollar goes down, and then trade balances. But Mexico not only puts up barriers to U.S. products, but it also buys foreign exchange to prevent its currency from going up in price in currency exchange markets.  
Response to this comment by Daniel, 1/8/2011:
No, the classic argument does not assume balanced trade. The classic case is that differences in internal trade-offs create comparative advantages, so that each party does better to trade than to rely upon itself for all production. Within the ranges of prices bounded by respective comparative advantage, each party benefits from trade, even if one or both parties push things to one end or the other of the range. Outside of those ranges, it a party rigs things to what would otherwise be the disadvantage of the other, trade simply shuts down. The other way to rig things is self-defeating, subsidizing the other party. The classical argument was introduced during the era of a world silver standard; but, since, it neither assumed the existence nor non-existence of money, the argument remained valid as the world first moved to a gold standard, then a gold-exchange standard, and then various fiat-money systems, fixed, pegged, and floating. (What you described, BTW, involved floating exchange rates.) So you need to really study that classical argument; it's found in may elementary textbooks. And, again, since you don't want free trade, stop calling what you want "free trade".
Response to this comment by Daniel, 1/8/2011:
BTW, lest anyone misunderstand, even without money there are prices. The rate at which one good may be exchanged for another is a price. The prices of interest in the classical argument for free trade are the measures of goods and services from one country that must be given for measures of those from the other.


Comment by Dave S, 1/9/2011:

Nuts...Our trade deficit with Mexico is oil. Take out our oil imports and we probably have a surplus.




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