NAFTA Gets The Shafta

Scratch NAFTA and welcome in the United States-Mexico-Canada Agreement.

The Best Deal In History

Once again, sure to be spun as the “greatest trade deal in the history of the world,”  by both sides, for that matter,  but will not move the needle one iota in bringing jobs back to the United States.

Trade deals between countries by their very nature do not do that.  They destroy jobs in one sector and create jobs in others, while boosting real incomes for the population as a whole with cheaper imported goods from the country with lower production costs.

The higher real incomes of the importing nation increases demand for domestic goods and services, which drives economic growth higher.

For example,  if I used to pay $5K for a Dell desktop computer and now pay only $1K for the same imported Dell computer (real world example), my real income increases $4K that I can now spend on other goods and services.  Such as, going out to the theatre and local diner, and leaving a bigger tip for the waitress.   

The U.S. workers who lost their jobs at the local Dell plant are hurt, and should receive compensation, either through income support and/or retraining, optimally paid by a tax on the gains from trade — i.e., the $4k saved. 

The U.S. does have a Trade Adjustment Assistance program but it falls woefully short with only about $600 million in annual expenditures.  Freaking peanuts.   

It makes no sense as the government is now offering farmers hurt by the trade war $12 billion in compensation.  Totally absurd.    

Sure, it’s good business practice to haggle over various tariffs, taxes,  and trade barriers, which are more often driven by domestic special interests, and we do commend the administration for trying.

But, let’s get real, folks, you either support free trade or you are  a mercantilist with the purpose to protect local industry from foreign competition.  The term “fair trade” is nothing more often a straw man.

We have no doubt the administration is driven by the latter.  Moreover, the nation’s trade deficit, which the president considers a rip-off by our trading partners is nothing more than a simple accounting identity driven by America’s savings deficit.

(S-I) + (T-G) = Current Account/Trade Balance (Foreign Savings)

 (S-I) is the ‘private savings balance’ or the difference between private sector savings (S) and investment (I); (T-G) is the ‘government balance’ or the difference between tax receipts (T) and all government expenditure (G); (X-M) is the difference between exports (X) and imports (M) and is usually called the simple ‘current account balance’.  – George Irvin

Our politicians, on both sides of the aisle, have failed those who have been hurt by trade, and it is one major reason why the nation is in the political mess it now stews.  President Trump and his base are not free traders, and we doubt they even understand the basis for trade among nations.

 

Unfair 

What’s unfair, is to offer false hopes to those struggling in the rust belt by announcing a few cosmetic tweaks to the trade deals and then declaring victory.

Globalists Will Love Trump’s New Nafta Deal

Despite the fanfare, the agreement doesn’t change much.

…an emerging playbook for the Trump administration’s trade agreements. As with the revised U.S.-South Korea deal announced last week, the achievement is declared to be historic while the changes made are cosmetic. That dynamic bodes rather well for the U.S.-Japan bilateral talks announced last week, not to mention the simmering trade war with China. For the globalists so often bashed in Trump-era rhetoric – and this columnist would count himself among them – that’s good news.  — Bloomberg 

The rust belt needs a new Marshall Plan — more education,  and more opportunities provided by intense vocational retraining programs, coupled with income support for older workers who have little chance of recapturing their income and regaining new employment.

In addition, begin new, or bolster existing programs to deal with the opioid crisis ripping through the communities, which have been left behind by the global economy.  All these programs, in the form of beefed Trade Adjustment Assistance should be financed by taxes earmarked from the gains from trade as outlined above.

United States-Mexico-Canada Agreement

What we hear is the deal includes some badly needed updates and upgrades on some issues that needed updating, such IP, for example.  Sources also tell us  Chapter 19 remains “word for word” in the deal.  Justin also made the same concessions on dairy as Canada made in the TPP.    Milk products are a very small share of the trade between the two countries, about $360 million, or 0.06 percent of the two-way trade flows.

More Potemkin than real beef.  Or, as they say in Texas, “big hat, no cattle.”

At first glance, with our limited information,  our conclusions are the negotiations were a huge waste of time, energy, and diplomatic capital resulting in a nugacity of a new agreement.   High drama all for naught, in our opinion.

We reserve the right to be wrong, and to eat humble pie, if our first impressions are incorrect.   Still breaking.

Relief

Nevertheless, we are relieved and satisfied to let the administration declare another trade victory as the economic outcome could have been much worse.

Now on to China, where some real, and bigger issues need to be resolved.

Update.  Click here for latest on the USMCA.

Smoke And Mirrors

Dana Rodrik, the Harvard economist, confirms our first impression,

Trump’s New Nafta Pact Looks More Like a Rebranding Than a Revolution

Dani Rodrik, a Harvard University economist who has frequently railed against the same march of globalization that Trump has targeted, sees an elaborate illusion in the new Nafta.

“Trump is more interested in smoke and mirrors — the optics of striking a deal that seems advantageous to him — than in real changes in trade agreements,’’ Rodrik wrote in an email.

No revision to Nafta “will bring jobs back and restore health to those communities that were adversely affected,” he said. “The amount of political and negotiating capital that has been spent on it does not justify any of it,’’ he wrote.  – Bloomberg