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Aside from a few industries like textiles and auto assembly, NAFTA didn’t create the “giant sucking sound” famously promised by then-presidential candidate Ross Perot. According to a World Bank study (see #99), NAFTA did as much to strengthen exports out of the entire bloc as it did to increase American imports from Mexico. At the risk of gross oversimplification, NAFTA is a classic microcosm of globalization, where the comparative advantages of Mexico (abundant semiskilled labor), America (know-how), and Canada (resources) are combined to produce efficiencies and a more competitive larger player on the world stage.
NAFTA and its Central American sister CAFTA roll right off the tongue, but they are by no means our only major agreements. The United States has free trade agreements with twenty other countries, and is party to many bilateral and multilateral agreements. There are more than thirty operating trade agreements worldwide covering major regions of the world: Southeast Asia (ASEAN), the Middle East (GAFTA), and South America (Mercosur) serving as examples.
Why You Should Care
Trade agreements between countries or regions create economic efficiencies that usually result in lower prices for goods and services, and open new markets for businesses already located in member countries. These are both good things for you—so long as you aren’t in a job or profession vulnerable to dislocation to one of the trading partners. In a larger sense, a rising tide of more competitive production lifts all boats, for the economies involved become more productive and more competitive on the world stage.
When one starts to see Mexican-made bars of soap on American store shelves, it could be time to step back—why can’t that soap, a simple product, be made in America? Is the manufacturing cost so much lower that it overcomes transportation and all the administrative costs of moving it two thousand miles across a border? When economic dislocations become excessive one must examine the reasons why. Is Mexican labor cheaper or better, or is it simply that the cost of doing business in the United States—driven in part by health care costs—is too high? Free trade agreements can mask real problems in member economies—or make them worse than need be. As an individual, you should take advantage of less expensive goods and expanded markets but also be aware of the reasons driving the trade agreement in the first place. Nobody wants to hear a “giant sucking sound.”
98. PROTECTIONISM
Let’s say you’re a U.S. company in the business of making baseball gloves. You make a pretty good glove, have a good brand, and good relationships with the stores that sell your gloves. You make a decent living at it, not a ton of money, but a decent living despite the fact that your business costs are on the upswing—higher labor costs, health care costs, energy prices, you name it.
Then, suddenly, a new Asian manufacturer hits the market with good gloves—not much of a brand, but a much lower price, because of lower labor costs, health care costs, and so forth. You want to compete, but you can’t. So if you had good friends in high places, you might ask the federal government to impose a tariff on the import of baseball gloves. That’s an example of protectionism.
What You Should Know
Protectionism is a deliberate economic policy implemented to guide or restrain trade between countries, mainly through protective tariffs, or taxes, on imported goods, but sometimes through import quotas or some other tactic. The goal may be to collect tax revenue, but is more likely to protect the fortunes of specific businesses or industries within the country imposing the protective measures.
Protectionism has led to numerous battles and debates through history. Recent policy has leaned away from protectionism as more economists and policymakers embrace the benefits of globalization. Protectionism has been looked on less favorably since the disastrous protectionist initiative during the Great Depression as part of the Smoot-Hawley Tariff Act of 1930. That act tried to support U.S. businesses by protecting them from imports, but all it did was hurt foreign economies, which then spent less on U.S. goods, prolonging the Depression. That experience is the cornerstone of most economists’ feelings today: that protectionism ultimately hurts those it is trying to help, and prolongs the life of inefficient businesses and industries to the long-term detriment of everyone.
Protectionist sentiment and activity often leads to the slippery slope known as a trade war. Country A slaps a duty on a product from Country B, so Country B slaps a duty on a product from Country A. And so it goes, until trade between the two nations is all but choked off. Both sides have certain industries that gain from the protection and certain other industries that lose because their export markets are cut off. In the end, nobody wins.
Some argue that protectionism only levels the playing field; that is, foreign goods hitting U.S. shores aren’t taxed, while domestic producers are. The argument gains strength when looking at many overseas businesses operating with overt or covert government subsidies. But still the prevailing opinion is that outright protectionism in most cases does more harm than good.
Why You Should Care
Why you should care about protectionism is really the flip side of why you should care about trade agreements and free trade. Protectionism might help you save a job, but you need to ask yourself whether you should be engaged in that activity anyway if there are lower-cost producers elsewhere. And protectionism is a two-way street—sure, your job can be protected. But suppose you work in an industry that exports to other countries, and they decide to enact trade barriers on the products you produce? You would lose on that one.
If you think it through, you should prefer natural competition and evolution of comparative advantage. Protectionism and especially trade wars can get really nasty. Even if you work for a protected industry, supporting such an idea may hurt you in the long run.
99. INTERNATIONAL MONETARY FUND (IMF) AND WORLD BANK
The International Monetary Fund and World Bank are household names for most who watch the evening news, yet most don’t understand their roles in the world economy. And their roles are not without controversy on the world stage.
What You Should Know
The International Monetary Fund is kind of a United Nations of money and monetary policy. Originally created at the end of World War II, its purpose and goal was to stabilize exchange rates and create world policies for monetary exchange by influencing the macroeconomic policies of member countries. It conducts economic research, acts to advise and help member nations with financial policy, and has also assumed a role as lender of last resort in economic crises, mainly to the benefit of underdeveloped nations.
Originally chartered with forty-four countries, today’s IMF has 188 countries, and with a few exceptions, maps the membership in the United Nations almost exactly. It is located in Washington, D.C. Funding and government are complicated, but not surprisingly the United States is both the largest provider of funds and also carries the greatest voting weight on decisions. Some countries bristle at the power of larger members (referred to as the “imperial power of the north” by the late Venezuelan president Hugo Chavez) but maintain membership because it is a condition to be able to borrow funds on the world stage.
The IMF has met some criticism over the years for funding “military dictatorships,” and more recently for suggesting dubious economic policy, which got Argentina in trouble in 2001. Many of its critics consider its policies and recommendations to be overly rooted in Keynesian policies of taxation and government intervention, not the more recently stylish monetary policies (see #57 and #56). Still, over the years, IMF activities have done a lot to stabilize international economics, foster globalization, and help countries make informed economic decisions.