Trade: Winners and Losers

 

The other day a friend started a back and forth, on Facebook, about subsidies and American farm policy. It came up that most people don’t realize that farmers are a heavily subsidized group. It’s always tough to know what people understand and don’t about the economy. I’m surprised nearly every day at how little I know. I do understand that subsidies create distortions in the price of a thing. For example, what does an MRI actually cost? After the insurance pays its portion we get a bill. How much of that is distorted by the hospital? If just this one sector of the US economy is so distorted, how bad is it for trade deals?

Trade between two countries is tricky enough to manage. It gets trickier when you factor in other countries for group deals. I get the impulse to collectivize (sorry, bad word) “unionize” into a large trading bloc and take advantage of lower pricing. That’s the whole point of trade anyway, get the best rate. The size of the community determines the size of the deal.

It’s the same reason you get better health care plans with a national company like Target instead of a mom and pop retailer. But who can keep up with these big deals and how can we really determine who the winners and losers are? I think going back 20 years or more gives a clearer picture on how a deal turned out.

Trump and Co just rewrote the original NAFTA (North American Free Trade Agreement) deal that stood since the early nineties among the US, Mexico and Canada. No one seems to know if the original deal was good or bad though. Like everything else encompassing such varied interests, it depends on who you ask. Trump didn’t like it, we know that, and the new deal he signed (United States Mexico Canada Agreement or USMCA) did add some extra concessions from Canada on milk subsidies, opening up that market to US dairy. They added some incentives for car and truck makers too, while beefing up the intellectual property laws.

No I didn’t read it, I just scanned through a few summaries.

NAFTA was much maligned for sending American jobs to Mexico. Trump’s biggest bugaboo about NAFTA, and the thing everyone complained about, is the loss of manufacturing. Companies moved south of the border for the lower wages, many of them just threatened to in order to keep the unions at bay. But the argument from big business and government was that tariffs will go away and American consumers will have lower prices.

All of that turned out to be true, but it is only one side of the argument. Trade increased overall, and the cost of producing, selling, shipping and taxing fell. That was the main point of NAFTA--get the best deal for American consumers.

Automobile manufacturing didn't do a well under NAFTA. Factory workers couldn’t rake in loot like they did in the eighties making Chrysler LeBarons and doing 65 hours a week. The unions had a large part in making it tough for younger workers to make the same money. Steep legacy costs practically ensured that no one would get the sweet deal the old timers had. Eventually the ones on the golf course and in the retirement community outnumber the ones actually building the cars. No industry can carry on like this forever. It’s like a bad welfare scheme but instead the many supporting the few, the few support the many. 

Bernie Sanders might love it but most of us know it won’t work for long.

So the auto industry was in trouble before NAFTA came along but international trade was already heading in this direction. The goal of every company that builds and buys is to reduce the cost of doing so. The most direct way is to make deals with companies we already trade with a lot, Canada and Mexico. I think trade deals are the future of business but I don’t think every deal is beneficial.

So for my question at the beginning, who wins and who losses? Consumers win in both NAFTA and the new USMCA. I can’t say for sure that manufacturing will win, or rather that workers in factories will win. I’m all for keeping jobs in this country but the wages from the eighties were artificially high. The US was king in both domestic and international sales but the Japanese started making headway. In other words, few countries could compete on a big level.

I’d prefer a totally free market in which we didn’t use subsidies or need international trade deals. Free markets are messy though and big business and government always want to tweak the market one way or another. It’s the way things are until we can figure out a way to fix the whole mess. 

When I have an answer I’ll be sure to share it on Facebook.