CEPR - Center for Economic and Policy Research

Multimedia

En Español

Em Português

Other Languages

Home Publications Blogs Beat the Press NAFTA and Free Trade Do Not Belong in the Same Sentence

NAFTA and Free Trade Do Not Belong in the Same Sentence

Print
Tuesday, 17 April 2012 16:17

[Note: Adam Ozimek wrote to tell me that the headline, "4 politically controversial issues where all economists agree," was not his. Without this headline, the blogpost is not especially objectionable.]

Megan MaCardle turned over her blog to Adam Ozimek to spread some misinformation about NAFTA and trade policy. Ozimek headlines the piece, "4 politically controversial issues where all economists agree." While I'm pretty comfortable with three of the four, the claim that all economists agree that, "the benefits of free trade and NAFTA far outweigh the costs" is highly misleading.

First, NAFTA was not about free trade. First and foremost, it was about reducing barriers that made U.S. companies reluctant to invest in Mexico. This meant prohibiting Mexico from expropriating factories and outlawing any restrictions on the repatriation of profits to the United States.

The agreement did little to loosen the obstacles facing highly-educated professionals in Mexico, like doctors and lawyers, from working in the United States. If the agreement had freed up trade in this area, it could have led to gains to consumers in the tens of billions of dollars a year.

In other areas, like patents and copyrights, NAFTA increased protection by extending the length and scope of these government granted monopolies. Mexico was forced to develop a U.S. type patent system for prescription drugs which led to considerably higher drug prices.

It is easy to see why someone who might in general support free trade would oppose NAFTA. The winners are the businesses that are in a position to take advantage of access to cheap labor in Mexico. The losers are the manufacturing workers in the United States who will now have to accept lower wages or lose their job.

It is entirely possible that an economist could agree that NAFTA did lead to net gains to the country as a whole, even if most people end up as losers (e.g. every worker loses $100 in wages, but Mitt Romney's clique pocketed an additional $50 billion in profit). In this case, she might say the policy was bad in spite of the net gains. (Several of the economists questioned raised exactly this concern.)

The higher costs imposed by higher prices for drugs and other products in Mexico could mean that a full assessment of costs would show Mexico to be a net loser from NAFTA. While tariffs are rarely more than 20-30 percent of a product's price, patents can raise the price of a drug by several hundred or even several thousand percent. The cost to Mexico's consumers in the form of higher drug prices can easily outstrip the small gains that showed up elsewhere. Of course this will lead to higher profits to U.S. drug companies.

Given the predicted distribution of gains, it is entirely possible that a fully informed economist could believe that the losses from NAFTA to the poor and middle class easily swamp the gains to the rich and for that reason oppose the policy. This is not bad economics as the discussion seems to imply.

Or, to put in terms that even an economist could understand, suppose there was a trade deal that completely opened up doctors, lawyers, and economists to international competition, but maintained the protection for everyone else, and hugely increased the protection for autoworkers. It is entirely possible that many economists would oppose this deal. They certainly would not call it a "free trade" agreement.

There is one final point worth making about this exercise. The line "all economists agree" carries much less weight these days because almost the entire economics profession somehow failed to see the $8 trillion housing bubble, the collapse of which wrecked the economy. Tens of millions of people continue to suffer with the loss of their jobs, their homes, and/or their savings as a result of this incredible incompetence.

In the wake of this momentous failure it is understandable that the public would be reluctant to take the advice of economists on economic policy. (Best question to ask an economist: when did you stop being wrong about the economy?) This is unfortunate, since economists really have learned some things from their studies that may not be apparent to everyone.

However, economists will have to earn back the public's trust. As long as economists pay no price in their careers for even the most disastrous failures, this may prove difficult. After all, if there are no consequences to getting things wrong, why would the public believe that economists will get things right? That is a point on which all economists should agree.

Comments (11)Add Comment
...
written by JSeydl, April 18, 2012 7:26
The line "all economists agree" carries much less weight these days because almost the entire economics profession somehow failed to see the $8 trillion housing bubble, the collapse of which wrecked the economy.


The irony of this fact is that these are the same economists who are now telling us that all of the unemployed construction workers are unemployed because they don't have the skills to compete in the labor market. This would be like a homeowner lighting off a firework in his garage, subsequently burning his house down, and then suing the fireworks company for not manufacturing fireworks that are safe to ignite in garages -- and then winning the lawsuit.
Blame the economists?
written by John L, April 18, 2012 8:41
To lay the housing bubble implosion at the feet of the profession of economics is a bit much. While many economists failed to understand what was going on, there were plenty of others that did. It's not clear that even universal agreement that there was a bubble would have made a difference. Economists are routinely ignored by our elected leaders and our free press. Our purchased press simply presents the views that it finds to dovetail with its (usually short-term) interests. There's no shortage of intellectual whores in any profession who are willing to say what the buyer wants to hear. Long story short: this was a failure of competence by our political system; those few leaders who aren't driven by personal avarice are hopeless outgunned by those who are, and the collective ignorance, know-nothingism, and xenophobia of the electorate doesn't give much hope for the future.
Competence
written by David, April 18, 2012 9:36
While many economists failed to understand what was going on, there were plenty of others that did.


Plenty? "Some few voices" says Perry Mehrling of Columbia; elsewhere a list was made of those, such as Dean Baker, Steve Keen, Nouriel Roubini, et al., who recognized the bubble for what it was. Less than 1% of all economists, for sure. That is vast incompetence. George Soros helped found an institute devoted to correcting the mistakes of the profession, of which a large part was (and still is) conceptual, with another large part due to the social and political aspects of the profession (the vast political bubble will burst soon). But it wasn't just political, economists on the whole were woefully incompetent, yet some (such as Minkiw and many of the UChicago school) and remain in denial that they got duped by their political leanings, money, and subconscious (instead of relying on their intellect). Competent economists weren't duped, but that's less than 1%.

Making a mistake (once) is forgivable; failure to learn from a mistake is not.
jseydl: Obama agrees with (some) economists on structural issues
written by pete, April 18, 2012 3:21
The irony of this fact is that these are the same economists who are now telling us that all of the unemployed construction workers are unemployed because they don't have the skills to compete in the labor market.

I know DeLong, Krugman and Baker all argue its lack of demand not structural...but...

Just heard Obama say this exact thing ion Ohio, that plenty of companies are trying to hire and cannot find workers with the right skills...hence the need for job training.
Cheap labor nothing more
written by MG, April 18, 2012 4:06
When I here the term 'free trade' espoused, I laugh. There is no such thing as 'free trade' and there never has been unless you get at economy at a very localized level with people exchanging good/services.

NAFTA was about large US multinationals (and to a lesser degree Canadian firms) getting access to much cheaper Mexican labor that is not unionized, easier Mexican environmental laws, and several other factors to drive down input costs. Nothing more. With the end of the Cold War in '91, US multinationals saw a golden opportunity to break the long-standing compact between labor and capital & increase their cut of the profits.
money flows up
written by David, April 18, 2012 4:59
This (somewhat recent paper) gives evidence that these agreements always favor the wealthier nation(s) in the pact (and the current Euro debacle provides more empirical evidence of the same). http://www.uh.edu/~bsorense/out_inc_oct13d_08.pdf

For similar reasons (aka government rules) (see Dean's points about patents and wage protections) the upper 1% have been the the nearly-sole beneficiaries of the the GDP increases of the past 30 years.
in other words ...
written by David, April 18, 2012 5:04
the moral of the last post was supposed to be that the friction is induced by rule-makers in order to benefit the already-wealthy.
MG....
written by pete, April 18, 2012 5:05
"When I here the term 'free trade' espoused, I laugh. There is no such thing as 'free trade' and there never has been unless you get at economy at a very localized level with people exchanging good/services."

Consider 50 states...no tariffs, it is unconstitutional for a state to tax goods coming from another state, and there is free labor movement. I think this is pretty apt version of a free trade zone. Differences arise when states offer tax incentives and things like that.

Or consider the European Common Market. Started with a NAFTA like agreement, no tariffs on goods, then they added labor too.

Artificially (i.e., with national borders) separating resources is simply inefficient in economics text. Separating people by using nationalism is a very deadly game...saw this in the mid 20th century. Anyway Dean knows the gains from trade, he wants free labor movement too, so that Mexican nurses and doctors could lower our health care costs. These 1r; doctors ( and our high costs nurses) are the main difference between health care costs in U.S. and Europe.
...
written by JSeydl, April 18, 2012 5:45
Just heard Obama say this exact thing ion Ohio, that plenty of companies are trying to hire and cannot find workers with the right skills...hence the need for job training.


pete, just because business managers say that they can't find workers with the right skills doesn't mean it's true. If there were large skill mismatches in the labor market, then we should be seeing hours worked and earnings accelerating in the sectors in which the skill mismatches are occuring. But we are not seeing this. Here's a scatter plot of the year-over-year growth rate in hours worked and real weekly wages for all of the NAICS three-digit subsectors for which data are available:



Most of the subsectors are concentrated in the -2% to 2% range. In fact, there are only 6 subsectors in which hours worked and real earnings have both grown by more than 3% over the past year. They are: oil & gas extraction, petro and coal mfg., mining support,textile mfg., elec. retail trade, and clothing retail trade. Collectively, these 6 subsectors make up only 2.8% of the overall labor market. Not a whole lot of evidence for widespread skill mismatches.
who's to blame?
written by mel in oregon, April 18, 2012 6:40
probably the most blame should fall on greenspan, bernanke, & paulson. the repeal of glass-steagall, along with the repeal of mark to market accounting rules, & the enactment of the commodities modernization act laid the framework for the unsolvable mess we are in today. okay, gw bush, clinton, obama & reagan also as much to blame as the 3 rascals above. also the ratings agencies such as moody's, standard & poors & best buy who were giving aaa ratings to wallstreet cos the very week they collapsed. yes there are some terrific economists around like stiglitz, krugman & baker, but as a general rule they stink. the reason they stink is not because they are incompetent (although many are), it's mostly because they make money by lying. they make used car salesmen & realtors look honest.
WSJ
written by Stephen, April 18, 2012 10:15
Great piece of meat in the opinion section of the WSJ today on inequality, "Income inequality could be a sign of real pathology in authoritarian societies where entrenched groups use government-granted privileges to protect themselves from competition. By and large, that's not the case in the U.S., where most see the market actually increasing the competitive advantages of the educated, skilled, hardworking, and talented."

WOW! What a great nugget of misleading, pollyannaish poppycock. Holman Jenkins Jr. must not be a reader of your blog. He fails to provide any numbers or evidence for any of his claims, but resorts to classic falsehoods like competition always produces equal outcomes! The market solves all problems! Create the impression that all outcomes are just as things stand, claim that government intervention ("redistribution") is inherently wrong and only punishes the "hardworking, educated and talented", then attack. It's a great obfuscating tool Repubs like to whip out.

Write comment

(Only one link allowed per comment)

This content has been locked. You can no longer post any comments.

busy
 

CEPR.net
Support this blog, donate
Combined Federal Campaign #79613

About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

Archives