Opinion: The NAFTA deal is pure baloney

Last Monday’s announcement of a revision of the 1994 North American Free Trade Agreement (NAFTA) was met with real skepticism. That’s a wholly appropriate response, as is the inevitable political fallout over the growing trade war. Let me explain.

There has long been some skepticism over NAFTA in Canada, Mexico and the United States. This skepticism has never come from a majority of Americans, who even today support free trade by a margin of 4 to 1. Rather, the worries have come from manufacturing unions who feared the competitive pressure of businesses in more southerly countries. Canada was worried about job losses to the US, and the US to Mexico. That isn’t what happened.

As it turned out, American factory jobs boomed for more than half a decade after NAFTA. They also grew in Canada and Mexico. This is precisely what economists said would happen, and wholly contrary to the fluff from NAFTA’s opponents. These facts ought to be powerful tools to mitigate unease about NAFTA. Evidently, not everyone cares about facts.

What NAFTA did was dramatically reduce tariffs on goods moving among the US, Canada and Mexico. Because tariffs are taxes, reducing them expanded the economy. However, by the late 1990s, productivity improvements began to reduce factory jobs at an accelerating rate. By the mid-2000s, the US, Canada and Mexico all saw factory production grow but factory employment stall or decline. The same people who think Elvis was abducted by aliens attributed this to NAFTA, using precisely the same evidence.

Today we are engaged in a great trade war, testing whether a nation conceived in liberty and reason can resist the urge to tax itself into a recession. In this trade war, President Trump declared NAFTA a bad trade deal, and so has now negotiated some changes to it. The proposed changes include an increase on the requirement for North American parts from 62.5 percent to 75 percent, an increase in the use of North American metals and the requirement that workers earning $16 an hour or more make almost half the parts to new cars. These sound like the sort of wonky technical details that voters don’t care about. Really, it’s not that at all, it’s just nonsense.

Companies that do not meet these requirements face a 2.5 percent border tax (or tariff). A little math illustrates the boloney surrounding this deal. In the US and Canada, labor costs comprise about 15 percent of car production. They are higher in Mexico, for the simple reason that labor there is less expensive, so businesses shift labor-intensive production to our ally to the south. The $16 per hour provision for half of workers would roughly double the labor costs for a company paying $4 an hour. The average wage for manufacturing workers in July was $2.3 per hour in Mexico. The wage provision alone would be several times more expensive than simply paying the tariffs.

President Trump’s big win in the NAFTA negotiation turns out to be nothing better than a tax increase on American car buyers, with an unexpected twist. Because companies would obviously opt to pay the tariff, they now have zero incentive to meet the current standards. This is likely to usher in a whole new wave of cheap Chinese auto parts. I am reminded of Professor von Hayek, who noted “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”

There are some in Congress and on Wall Street who think this deal reflects a turning point in the trade war. I hope they are right, but suspect this is a case of hope over evidence. Fortunately, with the US Constitution still being in force, no changes to NAFTA can occur until the US Senate votes on the treaty. That leads us to the politics of the issue.

Not only is the Mexican part of this negotiation hogwash, this process has been an intentional snub of Canada. You know the Canadians have been our allies in every war over the last century and are Indiana’s biggest trading partner. Each year we sell 3.5 percent of all the goods and services produced in Indiana to Canadians. Businesses and households in Indiana are already suffering from this trade war, but a serious interruption of trade with Canada will surely lead Indiana into a recession. That should prove sobering for candidates vying for the support from business groups and taxpayers.

Michael J. Hicks, PhD, is the director of the Center for Business and Economic Research and the George and Frances Ball distinguished professor of economics in the Miller College of Business at Ball State University. Hicks earned doctoral and master’s degrees in economics from the University of Tennessee and a bachelor’s degree in economics from Virginia Military Institute. He has authored two books and more than 60 scholarly works focusing on state and local public policy, including tax and expenditure policy and the impact of Wal-Mart on local economies.