NAFTA Under Trump

Last week I spoke at the Economic Development Council in Brownsville, TX about the urgent need to bring manufacturing back to America. Brownsville is a somewhat economically depressed area with 7% unemployment rate. The city is anxious to attract new manufacturers to the area and is working very hard to do so.

But the current economy in Brownsville is dependent on the Mexico-US border crossing that separates the city from Matamoros on the Mexico side. The cross-border trade provides many jobs in Brownsville for import brokers and their staff, truckers, warehousing and distribution services.

On the Mexico side of the border are huge manufacturing sites in Matamoros and further south to the industrial areas of Monterrey. In this region, Mexicans make everything from apparel to electronics to automotive parts. Companies move to Mexico of course, to take advantage of low-cost labor and operating environments. In addition, NAFTA adds to the economic appeal of manufacturing in Mexico by eliminating import tariffs between the three signatory countries: Canada, US, and Mexico.

So what might happen in Brownsville, and all along the Rio Grande Valley border areas if NAFTA is renegotiated or the US withdraws from the treaty as Donald Trump has promised? There are certainly two sides to this story. About half of the residents in the area voted for Trump and half for Clinton and they will readily offer their opinions.

No matter what your political party, and even if NAFTA is modified or ended, all of the jobs are not likely to come back.

If the NAFTA treaty ended, the US would be free to increase tariff rates on imports, presumably to make manufacturing in the US look more cost-effective. But imports tariffs mask the problem and allow companies to get lazy about getting cost-competitive.

Tariffs protect companies from foreign competition. Meanwhile, these same companies are not getting more efficient and ultimately the goods they produce will become more expensive for US consumers. If US consumers continue to buy imported goods, they too, will become more expensive. The consumer loses either way.

Cities along the border would suffer mightily if NAFTA is ended. Many people have come to depend on border trade jobs over the past 25 years. If trade stops or slows significantly, many of these jobs will be eliminated.

On the other hand, there are economists who say NAFTA has already caused the loss of so many jobs to the lower-cost environments in Mexico. They argue that instead of doing nothing, we should take every opportunity to raise tariffs, eliminate NAFTA and close our borders to immigrants and trade. But we have gone down this pathway before with the Smoot-Hawley Tariff Act of 1930, which raised tariffs on about 900 products. Historians blame Smoot-Hawley for triggering the Great Depression of the 1930s.

For sure, NAFTA has its problems. The import/export paperwork to keep track of goods moving across the borders can be onerous. And the special rules for truckers from Mexico have taken a toll on American truckers. But overall, most economists think NAFTA has had a net positive effect on the US economy.
I hope we have learned our lesson from American history

SC
MR