A Rejoinder on Free Trade

A Rejoinder on Free Trade

We now take a break from our weekly recap of dour economic news to talk about a more fundamental issue, but one relevant to the current political climate: free trade, more specifically, NAFTA. Now that signs of economic weakness have become more abundant, the Democratic Party's candidates have once again hauled out NAFTA as enemy #1 and have started a real modern-day beat down on the trade pact with Canada and Mexico (but at the same time allegedly reassuring Canadian officials that they need not worry about such threats). John McCain, reflecting his border state constituency, has stated that he supports the tenets of NAFTA and other free trade pacts.

If one is to blame NAFTA for ‘destroying' jobs, one also has to give the trade pact credit for creating jobs. For example, in the years since NAFTA's inception, a net loss of nearly 3 million manufacturing jobs has occurred. So obviously, you would have to conclude NAFTA caused all those jobs to disappear; however, as Lee Corso might quip on ESPN, "Not so fast, my friend". Most of these losses occurred between 2001 and 2003, a time period when virtually the entire U.S. economy was either in recession or struggling to emerge from it; meanwhile, the rate of job losses has been significantly smaller in recent years. In fact, in the years immediately following NAFTA's approval, manufacturing employment increased on net to the tune of almost half a million. See this piece for a more complete discussion of this argument.

And this gets to the heart of the issue, why even bother bringing up data from the first half of the decade now? Instead of the focus being solely on jobs, which have been on a downward trend for the past 30 years anyway, more attention should be given to other measures of the industrial sector. During 2007, preliminary data show that manufacturers recorded all-time highs in aggregate output and profits. Exports of manufactured goods also climbed to a record high last year, despite the rumored ‘de-industrialization' in the U.S.

Given the domestic economy's current malaise, exports are being counted upon as a buoy until the lingering effects of the housing market and credit crisis abate. Free trade agreements not only open up markets for U.S. manufacturers, but they have been vital to shore up commercial and diplomatic ties with nations. Cancelling or renegotiating previous trade agreements sets a bad precedent and could jeopardize more than just future economic growth. Besides, the Smoot-Hawley Tariff Act should be lesson enough to where protectionism can lead.

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