NAFTA And The Benefits Of Free Trade [Mackinac Center]
The North American Free Trade Agreement (NAFTA) has fostered a raging battle for the
hearts and minds of the American people. Do they favor closer commercial ties with friendly
nations, or do they believe that prosperity stems from economic isolation?
To all but a few economists, the battle was decided long ago by a basic principle of
economics: it pays to trade. Keeping artificial trade barriers high to penalize people for
trading across borders makes no economic sense.
No one argues that the people of Michigan would be better off if we passed laws to keep
Louisiana sugar out of this state. And fortunately, our Founding Fathers made sure that sort
of thing would be unconstitutional. They knew that America would prosper if it were one
giant free trade zone, the bigger the better.
Being able to buy sugar from Louisiana (or any other state that produces it, for that matter)
does mean that the Michigan sugar industry is smaller than it might be if we did have tariffs
on other states. That doesn't make us poorer as a whole. In fact, it releases labor and capital
for the production of other things in Michigan, some of which we can trade for the things we
want from other states and countries.
We could stimulate employment in the candle and light bulb businesses by passing a law
requiring everyone to paint their windows black. As it is, we accept all the sunlight we can
get, feel all the wealthier for it, and devote the savings to the production of other things. We
don't lament any "loss of jobs" in making candles and light bulbs.
These common sense observations seem lost on protectionists who oppose NAFTA in
general and free trade with Mexico in particular. In a supposedly free country, they want to
punish American citizens for engaging in free and voluntary commerce with our neighbor to
the south. Their reasoning is seductive, superficial, and dead wrong.
Mexico's tariffs are still higher on average than those in the U.S. By bringing them down,
NAFTA will open up many new markets for goods made here. Since Mexico began
unilaterally cutting its tariffs in 1986, U.S. exports to that country have tripled--making
Mexico our Number 3 trading partner already.
Virtually every U.S. industry has benefited directly or indirectly from this expansion of
trade. When we let Mexico sell us goods so they can earn dollars in the process, we benefit:
no less than 70 cents of every dollar Mexicans spend on imports goes for goods made in
America. Since 1987, Michigan's exports to Mexico have grown more than 50 percent and,
as Professor Raymond Tanter of the University of Michigan points out, export-related jobs
generally pay 17 percent more per hour than the average U.S. wage.
Jeffrey P. Gannon, CEO of General Electric de Mexico, wrote in The Wall Street Journal
recently that lower Mexican tariffs have made it possible for General Electic sales in Mexico
to rise five-fold in the past five years. Using U.S. Commerce Department numbers showing
that every $1 billion in U.S. exports supports 20,000 domestic jobs, he says that GE's $750
million in exports to Mexico last year supported 15,000 U.S. jobs.
Wage comparisons between the U.S. and Mexico--a bone of contention in the NAFTA
debate--only tell part of the story when they are expressed in dollars per hour. The fact is,
Mexican workers do earn less in hourly wages, but they also produce far less. Mexican
workers on average are one-fifth as productive as U.S. workers, meaning that to yield the
same output as in the U.S., a company must hire more workers. The competitive advantage
Mexico is supposed to have in wages doesn't appear nearly as substantial when this crucial
factor is taken into account.
Why in any event, we should ask, are protectionists so afraid of a prosperous Mexico? We
have nothing to fear and everything to gain from a richer neighbor because it means the
creation of new jobs and income here to serve a larger market, as well as political stability in
Mexico and fewer problems associated with illegal immigration to the U.S.
Some environmentalists express concern that NAFTA would promote pollution, as American
companies would scramble south to enjoy lax environmental standards in Mexico. In reality,
all new investments in Mexico must comply with a tough 1988 law that has some
environmental standards even tougher than ours. This anti-NAFTA argument is sometimes a
smokescreen to cover the fact that many U.S. regulations are themselves counterproductive,
needlessly expensive, and in need of change.
There are indeed problems with NAFTA, but they relate not to its freer trade provisions, but
to its lesser-known protectionist features. The agreement, for instance, foolishly requires
Mexico to raise its tariffs on non-North American sugar imports to the much higher U.S.
level. So-called "domestic content" requirements included to satisfy automobile, textile and
computer interests are blatantly anti-consumer and anti-free trade. Mackinac Center analyst
James Sheehan argues persuasively that President Clinton could change NAFTA for the
better if he would "remove such regulations and make trade with our neighbors truly free."
The benefits of genuinely free trade are enshrined in the lessons of history and economics:
broadened consumer choice, increased investment opportunities, expanded trade and job
creation, and more goods available to everyone at lower cost.
Free and voluntary commerce shouldn't be a punishable offense. It should be a route to
mutual prosperity. Michiganians ought to be wary of the Chicken Littles who think the sky
will fall if Americans are allowed to trade freely with the people of Mexico or Canada.
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