DO TRADE AGREEMENTS REALLY MAKE SENSE?

Our Trade Policy has been one of the primary focuses in the Republican “Debates”, and to a lesser extent, for the Democrats.  There has been enough said about the Automotive Industry, and the loss of American jobs, to narrow this discussion, and even include a few actual facts.  The difference between Imports and Exports among countries is often of primary concern. But there are many more things involved.  Consider the following:

Industrial jobs can disappear from a city for various reasons, not just a shift overseas.  Heavy industry plants are normally located near where the consumer demand is; so, GM’s auto plants in China build cars primarily for the Chinese market. And, Japanese auto makers, that were the scourge of American industry some thirty-five years ago, now operate 21 automotive plants in the U. S.  At the same time, the American auto industry, which was much too concentrated around the Detroit, Michigan area, moved a number of plants to other regions within the U. S.  And, of course many automotive jobs have been taken over by robots.  Therefore, much of the loss of automotive jobs, in any one locale, is not necessarily due to their being outsourced to foreign plants!

GOP Presidential Candidate Donald Trump has vowed that, if elected, he would eliminate all Trade Agreements, and then he went on to attack the Ford Motor Company.  He claimed that he would slap a 35% tariff on the Ford Focus, which is made in Mexico, and sells for $25,000 in the U. S.  Keep in mind that many of the components in those cars are actually manufactured in the U. S. by American workers.  So, if a President Trump were to impose such a tariff, it would create three major problems:

1. The demand for those higher-priced $33,750 (post tariff) autos would decline, thus jeopardizing American jobs at the component manufacturer(s) locations, back in the U. S.

2. Tariff’s are often a two-way street.  If the U. S. slaps a tariff on cars assembled in Mexico, then our southern neighbor could, in turn, impose a tariff on American exports into Mexico.  The Net impact of Imports, deducting for the included Exports of such U. S. components, always seems to get lost in the political posturing.

3. An important historical concern should be that a Trade War, caused by similar Tariffs, is considered to have been one of the primary causes of The Great Depression. Less than one year after the Stock Market Crash of 1929, President Herbert Hoover signed the Smoot-Hawley Tariff Act into law, in 1930.  That law imposed high tariffs on imported goods, and overseas markets then reciprocated.  

There are several other points that are often left out of the political rhetoric, regarding Trade Agreements:

1. When the Agreements are among nations that are relative economic equals, the respective trade imbalance is generally manageable. But, in comparing the Net Export versus Import statistics between a developed nation and a developing one, the statistics will generally always be out of whack.  Remember that  companies outsource low-end manufacturing to less developed countries in order to take advantage of their lower pay-scales.  In return, those nations often just don’t have the financial resources to afford importing, seemingly luxury items (for them), from their more-advanced trading partners.

2. In Europe, one of the primary reasons for the formation of the Common Market, back in the 1950s, was that trade partners are generally less-inclined to go to war with each other.  That trade pact eventually evolved into today’s European Union.  Additionally, trade pacts enable each member nation to take advantage of a broader trade market, as well as the much more efficient economies-of-scale.

3. Trade Agreements with less-developed nations also enable them to improve their Standard of Living.  And, when an economy advances, if governed properly, that reduces the potential for domestic crime, civil war and insurgency.

4. Trade Agreements need to be negotiated fairly, all provisions should be clearly understood by all parties involved, and the pacts should be up-dated, from time-to-time, when appropriate.

Just look at the many more primitive societies in today’s world for examples of previous lost opportunities in establishing Trade Agreements for all of the right reasons. By not bending a little to give lesser-developed nations a leg-up; however, the more-advanced nations will, time and again, be called upon to provide various forms of assistance and support.

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  1. #1 by Shrey Srivastava on March 20, 2016 - 7:30 AM

    Thanks for this blog post regarding if trade agreements make sense; I really enjoyed it and am definitely recommending this blog to my friends and family. I’m a 15 year old with a blog on finance and economics at shreysfinanceblog.com, and would really appreciate it if you could read and comment on some of my articles, and perhaps follow, reblog and share some of my posts on social media. Thanks again for this fantastic post.

  2. #4 by cheekos on March 21, 2016 - 3:58 PM

    The linked column, from the Washington Post, provides some good insight into the Trade Agreement argument: https://www.washingtonpost.com/opinions/trade-myths-and-realities/2016/03/20/9f6d9d30-ed1e-11e5-b0fd-073d5930a7b7_story.html

  3. #5 by cheekos on March 27, 2016 - 6:22 PM

    The linked article from the NY Times provides a good explanation of Trade Deficits, as follows: http://www.nytimes.com/2016/03/28/upshot/the-trade-deficit-isnt-a-scorecard-and-cutting-it-wont-make-america-great-again.html?ref=business

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