In our eagerness to keep trade flowing, we are missing something
I think that with some exceptions, the problems are mostly internal, specifically very high corporate taxes, too much regulation, and an insufficient supply of workers with the right skills. When these are fixed, and Trump is working on all of them, I think most of our problems will be solved.
The problem with existing "free" trade agreements, and NAFTA is no exception, is that instead of actually freeing up trade they consist of volumes and volumes of regulations regulating hundreds of products, in the case of Mexico notably rules of origin for all of the raw materials in a product. That's not free trade. That's managed trade.
I can understand Trump's frustration with Mexico's trade problems. I hesitate to call them policies because they are more of an experience dealing with a bureaucracy and culture than policies.
Mexicans are absolutely charming and cooperative, with the only flaw that they want to negotiate every little detail. That results in volumes of special rules for individual products, which I understand is the case for rules of origin for the raw materials for products that are duty free under NAFTA.
That then makes it an absolute nightmare at the operational level and is rife for corruption opportunities. That was exactly my experience as operations manager.
Trump is right that we don't really have "free" trade with Mexico, except for large companies with large government relations departments, as mine had.
I agree that “yelling” in anger is not good for relations but believe me that it can be extremely frustrating when you have a large manufacturing facility with hundreds of workers about to shut down because of a raw material stuck at the border owing to some new idiotic requirement thought up by a lowly customs agent to blackmail you for a bribe. I bet Trump has heard about such problems, especially from American companies with managers that can be thrown in jail in this country if they bribe anyone in Mexico.
I've feared Trump's rhetoric myself but recently I begun to ask myself whether in our eagerness to keep trade flowing we are missing something. Here is what I mean.
Trade allows us to benefit from costs and prices being lowered as a result of Ricardian comparative advantage, which is supposed to be good for everyone. On the other hand, it has troubled me that we are not replacing the jobs lost in this country with new well-paying jobs but I have attributed that to slow economic growth owing to excessive regulation, the decline of education and the skills necessary for higher technology, and a parallel decay of the work ethic, including the drive to better oneself.
Then I recalled a bit of history and it got me thinking about whether we are diagnosing the problem correctly. While the more obvious reasons for there not being more high paying job replacement are probably right, I am beginning to wonder whether there is something else we are missing.
I recalled the fall of the Roman Empire, which among other things declined because of a decline in values and morals, and tellingly because the government could no longer afford the freebies its population had become used to, including their equivalent to our food stamps. The government had been able to provide free food because it was getting it at very low cost from its newly acquired territories, like, for instance, in North Africa and what is now central Western Europe. That lower cost supply and the freebies also led to the population becoming softer and losing some of its work ethic. When that supply became difficult to maintain the government could no longer keep the Romans happy with freebies and things went downhill.
Now look at the parallels with our foreign trade today.
We can produce our own food but just like the Romans, we are increasingly becoming used to and dependent on cheaper goods produced abroad, for sure gadgets and toys, and even cars and airplanes. In the meantime, and just like the Romans, we are growing soft. We are not taking advantage of any kind of Ricardian comparative advantage. We are not keeping up with the replacements necessary for Schumpeterian creative destruction to work, not even in technology because our education and skills development are not keeping up with the rapidly changing needs.
I don't think closing borders and trade wars are the answer but frankly we are going downhill just like the Romans and nobody is coming up with good solutions. Having traveled both roads myself, I do know that the school of hard-knocks, the school of actually having had to deal with and solve real world problems like Trump has, is far more likely to come up with good solutions than the abstract academic thinking world that policy wonks, politicians and academics live in.
Many of our problems are the result of the abstract world of make believe that politicians have created for themselves and live in, a world in which they believe they know better, and that their knowing better happens just because they say so. Take the immensely complex healthcare industry that represents one-sixth of our entire economy, by far the largest in the history of the world. Those clowns believe that a few bureaucrats sitting in Washington can understand and make that immensely complex industry work better than market forces.
If we don’t tryst someone who like Trump has solved real world problems, soon we may suffer the fate of the Romans.