The Trump administration’s demands in the current round of NAFTA discussions could kill the trade pact, Reuters and The Hill warn. The President’s political base in the “rust belt” states are pushing him in that direction. See, for example, today’s Toledo Blade.
If the administration’s demands kill NAFTA, trade, employment, and economic growth in the U.S. will shrink drastically. President Trump will have put itself in the position of President Herbert Hoover (1928-1932) and the Republican Congress that passed the Smoot-Hawley Tariff of 1930, which raised tariffs on 20,000 imported goods. The tariffs, together with a disastrously restrictive tightening of money by the Fed, deepened the Great Depression.
The political consequences for Hoover and the Republicans mirrored the economic consequences. In 1932 the Democrats and their presidential candidate Franklin Delano Roosevelt ran on a platform pledged to lower tariffs. He and the Democrats’ Congressional candidates won in a landslide. Republicans were shut out of all federal offices until 1947 and from the presidency until 1953. It was what political scientists call an electoral paradigm shift.
In a startling recent shift, the Democrats have now become the nation’s free trade party.
President Trump’s zero-sum (“I win, you lose”) stance toward NAFTA seems to have meanwhile inspired a similar intransigency in Canada’s Prime Minister Justin Trudeau.
For one thing, trade balance figures are misleading:
More than 40 percent of the U.S. trade deficit in goods was with China….Note that many of the imports are sold by American companies that ship raw materials to be assembled cheaply in China. They are counted as imports even though they create income and profit for these U.S. companies.
Also, the U.S. president doesn’t seem to understand that trade deficits by themselves aren’t necessarily a bad thing. Nor do he and his close associates seem to understand that the balance of trade figures they ventilate about are of lesser significance than the current account figures, which measure a nation’s debt to other countries and reflect not just the balance between exports and imports but also payments and cash transfers in and out of a country.
Yes, the U.S. is indeed running a current account deficit. “The current-account deficit was 2.5% of GDP in the first quarter, up slightly from 2.4% at the end of 2016. The gap is well below a peak of 6.3% in 2005,” Market Watch reports. But this deficit would almost certainly dwindle were the U.S. to:
- Accelerate scrapping the regulations President Obama and predecessors shackled the economy with,
- Pass a good tax reform bill to encourage new investment and entrepreneurship,
- Use the NAFTA round to expand North American trade, a win-win for all, rather than killing NAFTA.
We aren’t optimistic that either 2 or 3 above will happen (but we hope we are proven wrong).
Republicans and the Trump administration need to come to grips with the fact that the decline in U.S. manufacturing began well before before NAFTA, is significantly attributable to productivity increases in manufacturing, and will likely continue no matter what happens to NAFTA. This is because it mirrors the earlier U.S. shift out of agriculture. Productivity increases and the opening of new jobs in other sectors were the engines of relative employment decline for both.