Home » Donald Trump » Is NAFTA a ‘Bad Deal’ for America?

Is NAFTA a ‘Bad Deal’ for America?

by John Brian Shannon

There seems to be only one man in all of America who thinks the NAFTA agreement between the three North American economies is a bad deal for the United States. Which would be a very ordinary thing except that man happens to be the president of the United States of America. At least for now.

The one great thing about the American electoral system is that U.S. presidents can serve only two concurrent terms in office, so no matter how bad or popular a U.S. president is, he or she can stay in office for a maximum of 8 years. Although nothing prevents them from running for their old job once another president has served, other than the fact that American voters have never returned a previous two-term president to office.

That law is a tiny part of what makes the United States exceptional in the world. The most meritorious or most popular presidential candidates rise to the top — but unlike other countries where leaders can serve several terms in office — the American system is refreshed by new leadership every 4 or 8 years. And that’s what makes America great.

‘New blood’, a ‘new vision’, a ‘breath of fresh air’, or however you wish to describe it, occurs at regular intervals. No wonder America is exceptional! It’s too bad they don’t do the same thing with members of the Senate and Congress — and yes, even the office of Mayor in every U.S. city. If they did, the United States would be twice as exceptional on account of all that new blood and fresh enthusiasm.

Alas, because only one office in the land is refreshed regularly, America is great from the top down only — not up and down and in the middle — at least where governance is concerned.


Where Donald Trump is Wrong

President Trump arrived on the scene 13 months ago and with no particular government experience behind him, declared that many things are wrong with America and he’s just the man to fix it. And he may be that man, but only time will tell.

Yet, we’re seeing a man who sees symptoms and sincerely wants to treat the symptoms instead of wanting to solve the underlying condition that created the symptoms in the first place.

Certainly no one can fault Donald Trump for being enthusiastic about America, about America’s history in the world, and no one can deny he’s a breath of fresh air to the Oval Office.

But we need to have a conversation about the present symptoms in order to ascertain what the underlying condition may be in present-day America, and for that, we must travel back in time to see how America lost its way.


When Henry Ford was right: Creating the American middle class by filling a transportation need

Henry thought that ‘everyman’ should own an automobile, instead of only railway barons with their obscene personal wealth able to afford motorized transportation. During a downturn in Ford company fortunes, Henry decided to increase the pay of his workers to $5.00 per day, and was thereafter able to cherry-pick whatever workers he wanted from Louis Chevrolet, Buick, General Motors, Cord, Packard, and others.

Once Henry had created a whole new economic classification which later came to be called ‘the American middle class’ so many people bought Ford vehicles that 16.5 million Model T’s were produced in less than 20 years of production.


The moral of this story? Paying higher wages created ‘the middle class’ — a growing cohort of workers earning good wages and able to afford a car, which catapulted Ford’s fortunes into the stratosphere.


The Post-war Boom

Early in the 20th-century, the U.S. became the most powerful manufacturing nation in the world and surpassed even longtime patent leader Germany as the country that received the most annual patent applications.

This occurred only because of strong patent law in the United States. Any inventor with a worthwhile invention brought their idea to America for one reason — because out of all the countries in the world only the U.S. offered the maximum level of legal protection for their idea, design, system, or machine.

Even German scientists brought their ideas to America to have them registered with the U.S. Patent Office!

For countries other than America, the existence of a strong U.S. Patent Office created a ‘brain drain’ in their own countries, meaning that all their scientists and inventors headed to America instead of registering their contraptions in their home country.

Having received their patent protection in the United States, it was a natural step to have their inventions manufactured in America. Although not its primary mandate, the U.S. Patent Office was often excellent at matching inventors with such suppliers or manufacturers as they required.

It was a clear case of the American government passing the right legislation at the right time to attract the best and brightest in the world.


The moral of this story? Not a tariff in sight!


Because the postwar economy was booming and expectations were high, the Baby Boom generation went on a buying spree that is unparalleled in history

All of which worked to make all those patent-holders and their manufacturing companies obscenely rich. And good for them! When you work hard, you should see a positive return for your effort.

The favourable consequence of powerful U.S. patent protection combined with a huge and growing manufacturing base, created a booming economy and concomitant high consumer confidence which provided an unexpected result — usually about 9 months later.

Yes, during the boom times when one family member earned enough to support an entire family, the birthrate in America skyrocketed, creating even more demand as Americans began to have more children per fertile woman.


The moral of this story? When one breadwinner could support a spouse and up to 4 children, afford a new car every 3 years, a couple could own their own home via a 10-year mortgage and enjoy a refreshing vacation every year, the American economy was operating at full output!


American Foreign Policy in the Postwar Era

In the 41 years leading up to 1974, the Saudi government had been selling their oil to America for only the price of production (sans profit) as their contribution to the Cold War effort.

Interestingly, they were allowed to reinvest their cost of production payments in crude oil deliveries and refined oil products — so although they made zero profit on the crude oil as it came out of the ground — they were able to amass considerable wealth by speculating on oil stocks.

But that ended when it was perceived by the Saudis in 1973 that America was favouring Israel, a country that had never delivered billions of barrels of free oil to America.

When America’s oil supplier felt slighted, they decided that they wanted to get paid for their oil after all. ‘Oh, and, we’re pulling back on our Cold War commitment too.’

Which is why the Soviets thought they could successfully invade Afghanistan and tone the world’s opium supply down to almost zero.

When the Saudis suddenly wanted to be paid for their oil and they simultaneously lowered their Cold War commitment to America, the U.S. economy slowed.

With 20/20 hindsight, the ensuing economic disaster was only a symptom of a bungled foreign policy that caused a dramatic increase in new car registrations of foreign cars (with their better gas mileage) moving from 4% of all U.S. new car registrations in 1970 to 65% of new car registrations by 2017. Not only that, but up to 75% of the parts used in today’s American cars are made in Asia.

Therefore, the problem clearly isn’t NAFTA which came into effect in January 1994.

Here’s how that looks expressed as a math equation:
America -10 trillion dollars Japan +10 trillion dollars
(If you’re not into math, the symbol means ‘therefore’)

It could be argued that the United States took a highly principled stand on account of the people of Israel, but it was America’s decision alone, and it cost America 10 trillion dollars and poisoned relations with their oil-producing and Cold War ally, Saudi Arabia.


The moral of this story? The problem of offshoring American manufacturing jobs began in 1973 due to an American foreign policy decision which took place long before NAFTA had been created. Blaming Japan for American capital flight since 1974, or blaming NAFTA (which wouldn’t be created for 20-years) is disingenuous.


Social problems in 1960’s and 1970’s America: Racism, weak civil rights for women, and the Vietnam War worked to reverse America’s earlier gains

A lost generation occurred in the 1960’s where The People lost faith in their elected representatives, but they didn’t lose faith in the institutions of government.

President Carter worked to restore the faith the American people felt toward the executive branch of government by working on some very noble causes and meeting with some success. President Reagan moved things forward by strengthening the U.S. economy, infusing Americans with newfound confidence by offering loan guarantees to struggling American automobile manufacturers and dramatically increasing military spending.


The moral of this story? President Carter and President Reagan didn’t fix America by blaming other countries — they did it by empowering American citizens with tax changes and supporting American industry with loan guarantees to at-risk corporations, with huge defense spending increases, and plenty of positive exhortations about what made America great in the first place.


Every American, Canadian, or Mexican captain of industry wanted NAFTA back in 1994

If NAFTA was so grievous to be borne, why did almost every CEO in North America want NAFTA?

GDP growth Since 1993 - NAFTA enacted January 1, 1994

GDP growth in NAFTA countries since 1993 – NAFTA enacted January 1, 1994. OECD.

But some American Congressmen and Senators were nervous on account of the many U.S. job losses since 1974 and were concerned that even NAFTA could go wrong. And let’s face it, some members created a negative stir so that new U.S. president Bill Clinton would feel compelled to direct more federal funding to their districts in case NAFTA failed.

In reality, the only U.S. and Canadian companies that lived in fear of NAFTA were ones that didn’t keep up with the times. In the booming 1980’s and 1990’s economy, some companies decided they wouldn’t modernize and consequently continued to spend millions per month on electricity costs (for example) instead of reinvesting their (then record) profits in newer, energy-efficient factories or foundries.

For other corporations in the mergers era, it seemed a time to slow capital spending in order to maintain high profit margins and pay record-high dividends to their shareholders. But when the bull market finally came to its end, many businesses were suddenly cash poor and couldn’t afford a new, energy-efficient factory or foundry. Which was brilliant tactical thinking, but abysmal strategic thinking.

So… the question is; If corporations employ poor strategic thinking, should taxpayers be forced to bail them out?


Why should U.S. taxpayers bail out industries that choose high shareholder returns over sound financial management?

In the 1970’s and 1980’s, some American automakers needed the federal government to subsidize them with billions of taxpayer dollars to save them from implosion. That’s only one example out of thousands of U.S. companies that accepted or have lobbied for federal subsidies. Canada is just as bad as the United States on this point. Governments in both countries spend more on corporate welfare than they do on citizen welfare — times two!

Now in 2018, President Trump wants American taxpayers to pay even more for their cars (and anything else made of steel or aluminum) via a 25% tariff on steel imports and a 10% tariff on aluminum.

For one example, Trans Canada Pipeline will be forced to pay the tariff on the steel pipe for the proposed Keystone XL pipeline. Although steel is a small part of the overall cost of building a pipeline, the cost of the multi-billion dollar project will now rise by 5% or more. Just for comparison, 5% on 10 dollars is 20 cents — but 5% on 5.4 billion dollars adds 270 million dollars to the overall project cost.


The moral of this story? While Donald Trump’s motives are obviously ultra-pure, tariffs are simply a de facto form of taxation that U.S. citizens will pay because a few American corporations preferred high profits/high shareholder returns over competitiveness


Is there ever a good case for tariffs?

In a word, yes. Everything that’s imported into the U.S. (or any country) should face a globally standardized 5% tariff because every government needs money to improve port facilities, to streamline customs, and to maintain the transportation corridors that are essential to trade flows.

Even countries with free trade agreements like the NAFTA countries should institute a standardized 5% tariff on every good that crosses their border — and be required by legislation to use that money to improve transportation corridors and border security.

Consumers would find that presently high tariff items would drop in price, and zero tariff items would rise by 5%, but the trade-off would be astonishingly better roads, bridges, tunnels, rail links, airports and seaports, complete with better security. Every citizen would like to spend fewer hours per week stuck on congested highways, in airports, and enjoy faster and more secure delivery of goods.

Suddenly we wouldn’t be talking about ‘trade wars’ we’d be talking about improved trade, improved infrastructure, and a complete standardization and levelization of tariffs between every country.

And instead of heated rhetoric from politicians, we’d become more efficient throughout our countries and less efficient corporations wouldn’t continue getting rewarded for not re-investing in their businesses.


16 Comments

  1. […] Reposted at ArabianGazette.com […]

  2. Tim Walker says:

    Salvatore Babones has a theory that the world is dominated by three regional economies: North America; the European Union; East Asia

    An introductory YouTube video has the title “The Regional Structure of the Global Economy”.

    For North America, think of the NAFTA countries.

    Babones suggests that England may become a premiere part of the North American economy.

    If Trump should wreck NAFTA, I expect that all three countries-including the U.S.-will end up with a big mess.

  3. Tim Walker says:

    Peter Zeihan (Zeihan.com) pointed out that, due to rising wages in China, Mexican labor is now both cheaper and more skilled than Chinese labor. An implication being that Mexico can out compete China in the U.S. market.

    Why is that important? Without raising tariffs-without an overt trade war-the USA could start to disengage from the Chinese economy.

    I have become wary of the Chinese.

  4. kleef&co says:

    […] Reposted at kleef.asia […]

  5. Tim Walker says:

    I have looked at various web site. I looks like the USA has been doing well with those Latin American countries with which it has trade deals:

    CAFTA-DR (Central America + the Dominican Republic)

    Colombia

    Chile

    Paraguay

    Of course, Colombia and Chile are among the founding members of the Pacific Alliance.

    I noticed that, in reference to Brexit, there is some interest in the UK for expanding trade with Latin America.

    • Hi Tim,

      I couldn’t agree more.

      As a historic sea-power, the UK must be one of the biggest promoters of free and fair trade with all continents, political blocs and individual countries.

      I feel that as closely as possible, the UK should try to follow the Japanese (or Swedish, or German) model whereby the economy of the country is highly receptive and highly geared to exports.

      The huge advantage that the UK has is that it has a (practically) captive audience in that it’s a Commonwealth member and all of those Commonwealth member nations are at the beginning of a huge growth spurt and now is the time to take advantage of that opportunity, which, frankly, is a golden opportunity for every Commonwealth nation to supply each other’s growing economies.

      I’ll be writing about this in the next few weeks.

      Thanks again for your insights! JBS

  6. Tim Walker says:

    Countries are seeking exemptions to Trump’s tariffs.

    The Express web site has this article-“EU FURY: Brussels threatens to SUE Britain if Fox secures exemption from US steel tariffs.” Liam Fox is working to get British industry exempted from Trump’s steel tariff.

    • Hi Tim,

      If the UK joins NAFTA and therefore isn’t required to pay U.S. steel tariffs, that’s the business of the UK and the other NAFTA partner nations.

      If the EU feels upset about this, that is just too bad IMHO, and although I love the continental Europeans dearly, they must realize they aren’t Britain’s colonial masters and never were.

      As always, very best regards, JBS

  7. Tim Walker says:

    JBS, a few years ago I started to notice online comments comparing the EU to the Holy Roman Empire. Perhaps the mandarins of the EU view Britain as a renegade province?

    • Hi Tim,

      Although there is no logical reason for some continental Europeans to view the UK as a renegade province of a quasi-Holy Roman Empire, the kind of lazy intellectualism you rightly allude to can take hold in the absence of proper checks and balances in the media, in government and in non-governmental institutions.

      In addition to that, the UK government has shot itself in the feet many times with the EU due to multiple and contradictory messaging since 1972.

      The UK’s weakness in this doesn’t excuse the wrong thinking of EU citizens, but it does cause the blame for it to be shared 50/50, IMHO.

      Cheers, always! JBS

  8. Tim Walker says:

    In the USA we are seeing a backlash against globalization. As I recall, back in the ’90s there was some suspicion regarding NAFTA. Though at this late date, wrecking NAFTA would backfire for the USA.

  9. Tim Walker says:

    I was looking at an online article, dated Feb. 3, 2017-“Opinion: Trump’s trade policy is more predictable and less isolationist than critics think” by Peter K. Wu.

    Wu has studied Trump’s background. In terms of trade, Trump has consistently shown certain preferences:

    Preference for bilateral, rather than multi-lateral, agreements.
    No regional emphasis. Trump’s version of trade is opportunistic.
    Hard bargaining. Ultimatums. Expect saber rattling.

    • Hi Tim,

      I agree all your points.

      It seems clearly in the American interest to want a trade deal with UK & Commonwealth nations — and the UK should be making certain they are the first of all those Commonwealth countries to sign free trade (or even low-tariff trade) agreements with the United States.

      Cheers! JBS

  10. Tim Walker says:

    Peter Zeihan (Zeihan.com) has been gung ho regarding the prospects of NAFTA. However, he has commented in his online newsletter the effect that Trump has had on the Mexicans:

    “…the bilateral political relationship is now so poisoned that it will lead to the election of…Andres Manuel Lopez Obrador-who has campaigned on a promise to cease all cooperation with the Americans.”

    Good bye NAFTA. Instead, we will have an anti-American Mexico on our southern border. Wonderful. 😦

    • Hi Tim,

      Yes, Trump lacks experience in governance and he may have set a chain of events in motion that he may later regret.

      The President of Mexico, Enrique Peña Nieto has shown exceptional patience and has been a true NAFTA partner to both Canada and the U.S. in every respect.

      It would be a shame for the U.S. / Mexico relationship to fall any further than has happened over the past 24 months.

      Best regards, JBS

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