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Trump vs. NAFTA

Since the introduction of NAFTA in 1994, U.S. imports of goods from Mexico have increased significantly with the only drops occurring in correlation with the Great Recession around 2008. The Trump administration has centered economic rhetoric on removing NAFTA, and instead suggests implementing a tariff to protect domestic industries at home by lowering intention for relocations.

However, removing NAFTA would produce no benefit for the average American consumer for numerous reasons. First, trade between Canada, the U.S., and Mexico would be subject to the World Trade Organization’s tariff limits. Currently these are less than 3.5% for Mexico and around 7% for the U.S. American businesses would rather pay the tariff and relocate as doing so would still be cheaper than remaining in the U.S. considering that Mexican workers are on average $20,000 cheaper than their American counterparts.

How do the tariffs effect the average American consumer? How would relocation to Mexico make sense as far as comparative advantage and production are concerned? What does the increase in Mexican imports say about the American economy? Do imports help the economy? And if they do, then why is Trump trying to minimize them? Is it fair that companies can move to Mexico for the cheap labor?

Source: Bloomberg on Mexican wages

Sofia G. Cuadra, Kiely Hartigan, Annie Lentz

20 thoughts on “Trump vs. NAFTA

  1. hermana20

    The tariffs on imports coming from Mexico would indeed be subject to WTO limits, and these tariffs would be of no benefit to American consumers since they would end up paying more for goods imported from Mexico, that without the tariffs would be much cheaper. International trade and more specifically free trade benefit everyone because it allows countries to specialize in what they do best whether that is labor intensive industrial manufacturing or human capital intensive services. Relocation to Mexico for many industries makes sense given the lower taxes and cheaper labor in Mexico. Specifically, with farms in Southern California where low-wage immigrant labor is used as a factor of production, it becomes increasingly evident that we either import the labor (i.e. immigrants who are willing to pick tomatoes) or we export the industry of vegetable picking to Mexico where there is an abundant labor-intensive workforce that will do this work. For many companies, the decision of moving their business operations to Mexico comes down to a simple choice: remain in America and die, or adapt and move to Mexico to reduce costs so that they can stay competitive in their respective industries. In this sense, it seems only fair if companies are permitted to move their business operations from country to country, and in an increasingly globalized economy, companies often tend to have their headquarters in one country and numerous subsidiaries and branches across the world.

  2. johnsonj20

    Imports are good for the economy in that they help satisfy demand and transfer products from where their production is cheap to where their production would be expensive. However, imports decrease GDP in the importing country (although the net effect on GDP is zero if the imports are consumed). Exports, on the other hand, increase GDP and correspond to domestic jobs, which is why Trump is trying to decrease the trade deficit in the United States. I agree with Ayub that the relocation of companies to Mexico is fair based on the logic of a lower opportunity cost of labor-intensive production in Mexico than in America. Fair-labor practices should be implemented in these relocated companies so that they establish a decent reputation and the employees are motivated. I also agree with Ayub that tariffs would only eat into the incomes of American consumers. As the graph displays, the increase in American imports from Mexico is reflective of an American economy that is gravitating further away from labor-intensive production and more towards capital-intensive production.

    1. the prof

      Do imports decrease GDP? Is our economy inflexible, so that resources don't get reallocated? Our long history of growth, and our high average levels of income, suggest the answer to both is "NO"!

  3. yuy20

    Increased imports from Mexico means that the U.S. has specialized in specific industries that lean towards skilled work or other finished goods (evident in tables from one of the earliest blog posts). For the U.S. to produce the goods it imports, it would be taking resources away from producing other high skilled products. It shows that Mexico has a comparative advantage in production. In regards to the "fairness" of companies relocating, some will argue that it decreases domestic jobs. However, by relocating and finding the best option for production, companies are taking advantage of cheaper prices and therefore lower manufacturing costs. Trump has argued mainly that the US loses jobs and wants to update terms in the NAFTA agreement. However, jobs are also lost through other channels such as machines; additionally, there are jobs that depend on this foreign trade and would be hurt if the agreement is removed.

  4. perelk20

    From a business perspective, companies should move to Mexico for cheaper labor and lower taxes. As for who the imports benefit, it depends. The average consumer is happy to see these imports for their lower priced goods. However, if we look at our GDP model, we subtract our imports from total GDP painting a worse picture of our economy. Furthermore, the more imports the United States has, the more it shows other country's comparative advantage over us in the production of goods. The removal of NAFTA would hopefully increase jobs in the United States as well as level out the comparative advantage between the United States and countries like Mexico.

    1. the prof

      Is Mexican labor as productive as labor in the US? If not, then low wages are not the same as cheaper. In fact, in some industries Mexican productivity is equal to that in the US. In others, not. But it is generally (though not always) safe to assume that if production moves from the US to Mexico, then the firms involved believe the net cost (inclusive of higher logistics costs) will be cheaper.

      As to taxes, that's probably not a factor. After all, many large firms structure themselves so they pay none. Think Apple and Google (I don't know about Amazon). IF corporate taxes are high in the US, THEN it's true only for small firms in the US, not for big ones. But the "if" is probably wrong – stated tax rates may be high, but not effective after-all-deductions effect tax rates. And in terms of GDP, the US is a nation of big firms.

  5. Juliana Kerper

    Trump wants to minimize imports from Mexico to lower the trade deficit, as was stated above, in part by instituting tariffs and eliminating unfair subsidies. He is also against American jobs moving to Mexico via the maquiladora program. I think it is fair for American companies to relocate to Mexico to avoid a value-added tax (VAT) and get cheaper labor. If Trump succeeds in implementing tariffs, the cost of imports would rise, leading American consumers to reduce their consumption of imports. Tariffs do not benefit the average American consumer. Inflation would also rise. The tariffs put in place could also decrease the US's exports to both Mexico and Canada. So though reducing the US's imports would increase GDP, putting tariffs in place would also cause exports to decrease, leading to a decrease in GDP. In other words, though imports take away from GDP, instituting a tariff is not the solution. International trade through NAFTA benefits all the countries involved, because countries can specialize in production and supply enough of a good or service to meet consumer demand.

  6. Chris Vogel

    Since US labor tends to be more specialized and skilled (large firms and transition to more service and less goods) than that of Mexico. According to the link below, we see that hourly compensation in manufacturing (in terms of US dollars) is significantly higher in the US than in Mexico ($35.53 vs. $6.48). Since Mexico is relatively close to the US, it is also relatively cheap to transport goods between the countries. This creates a scenario in which we could see the demand for lots of unskilled labor in the US decrease due to the transition of manufacturing work to Mexico (Mexico has the comparative advantage for manufacturing production). The increases in Mexican imports suggests that they are a "manufacturing" economy.
    It depends on the way in which people view "improving" the economy. Imports increase consumer surplus, but does not add to national GDP. Some of the money saved, consumer surplus, however will be spent on goods/services anyways. Trump is likely trying to minimize imports in order to create new jobs that would fill the void from the lessened imports, increasing the big title of "unemployment rate" which people put so much weight on. Since many common news sources use the unemployment rate to strictly determine the success of the economy, this will help Trump look better.
    https://www.bls.gov/news.release/pdf/ichcc.pdf

  7. liur20

    From previous chapters, we know that country will trade between each other because of comparative advantage and Mexico has a lot of comparative advantages in manufacturing jobs. When discussing manufacturing jobs, we have to take into hourly minimum wage into account because minimum wages is the important factor as to whether a company will open factory in a certain country or not. Currently Mexico's minimum wage is $3.95 an hour compared to $7.25 an hour in the U.S. and this significantly lowered the interest for other countries to open factories in the U.S.. By posing a tariffs on imported goods and open manufactories in the U.S. will significantly rise the prices of ordinary non-durable goods for consumers. Imports do help the U.S. economy also because of comparative advantage. The U.S. is at best for producing high end/high tech products or consumer services so if the U.S. focuses on this sector, then the benefits will out weight the cost for losing jobs for Americans.

  8. williamse19

    According to TIME, tariffs imposed on manufacturing imports would hit foreign competition but it would also hit American manufacturing as well. Truth is, there are few true farm-to-table American manufacturing companies. Many import parts that they put into their products which would increase even American manufactured products prices as well as imported ones. Additionally, the consumers would feel a greater affect of the tariff than anyone else in the economy. Also, according to TIME, countries often impose counter-tariffs on the goods that other counties produce when the country imposes a tariff on their imports. http://time.com/money/4282166/donald-trump-tariff-plan-cost/

  9. motturt20

    Profit maximizing firms certainly see the 20,000$ figure mentioned above as incredibly attractive, and to create an incentive strong enough to actually bring back significant quantities of jobs to the United States would likely involve a very high tariff to offset the benefit provided by employing relatively cheaper Mexican workers. Such a tariff in the absence of NAFTA would likely have many rippling effects on the American economy, including a higher trending CPI and reduced supply of any goods previously produced in neighboring countries.

    President Trump has used a populist strategy to great effect when describing his policy plans and strategies, something that is evident with this policy in particular. Surely removing NAFTA seems like something that would bring jobs back to the US, and indeed it might. However, this is an organization that, according to the provided graphs, has helped spur on the objectively beneficial process of globalization while lowering prices for average Americans. To bring back jobs would require a negative incentive of exporting labor so significant as to compensate for the present advantages that cheap foreign labor provide. Such an incentive would hurt the U.S. economy more than it would help it.

    1. the prof

      Tariffs reverse comparative advantage, shifting labor (and capital) from sectors where we are efficient to ones where we are not. That lowers incomes.

      Narrow sectoral analysis of specific tariffs generally finds that they destroy jobs: more expensive vehicles lower incomes but also hurt contractors and others who use vehicles, make repairs more expensive (brake pads and other things that wear out are often labor-intensive goods) and make people hang onto clunkers longer, which has environmental and safety side effects (clunkers such as my pickup don't have safety devices other than seat belts).

  10. thaia19

    If companies have factories in Mexico, the benefit is greater to all involved. It provides a source of income for Mexican workers, goods are cheaper for American consumers, and the company can make larger profits. A frequent concern is the loss of American jobs, but in the end, both countries benefit from this. The increase in Mexican imports would lead us to believe the US dollar has appreciated, since countries will import more when their currency grows in value. From what we have learned in class, tariffs do not seem to impact the consumer very much, and typically only impact the producer.

  11. wilkinsonw20

    Increased tariffs would result in the average american consumer to pay more that they currently are. Even domestically produced goods would increase in price as they would no longer have to compete with the costs of imported goods and thus could charge more while still under pricing them. If tariffs were imposed, the effects would be felt by all. Additionally, a trade war is the last thing we would want to get into with countries like China or Mexico. The implementation of tariffs would hurt the US economy more than it would help it in my opinion. Would more jobs back home be more beneficiary than lower costs?

  12. Mac

    The reason for President Trump's motivation to end NAFTA is to increase local manufacturing in the United States versus Mexico and Canada. On the surface, this is a good idea in attempting to increase employment and creating new outputs of production and consumption. However, Americans and Mexicans are accustomed to the no tariff trade between each other. The main reason for imports from Mexico is because of comparative advantages that exist for manufacturers in Mexico. Economically, it makes since for companies to produce their goods as cheap as possible. Adding tariffs will halt trades between the two countries. Prices will go up since producers are having to pay more to import their goods to the consumers. As a whole, the free trade helps keep healthy relations economically and politically between the United States and Mexico.

  13. Lukas Campbell

    For the average consumer, tariffs only marginally affect prices per unit- we saw this in our discussion on the sugar tariff. However, the companies that buy massive amounts of the imported product are the most affected by the increase in prices. With a large enough tariff, imports may start to decrease, and both the US and Mexico would face adverse effects. Factories in Mexico, which provide jobs for many of Mexico's citizens, would have to lay off workers, and the U.S. would be affected by a decrease in efficiency, since both countries would not be able to make use of their respective comparative advantages.

    1. the prof

      No single tariff may have a big effect, but raising many tariffs a lot is a very different story. While there are substitutes for cane sugar, in the short run there are no substitutes for a particular part for a particular car model. They're often made in a single plant, sometimes even a single plant globally when economies of scale are large. That makes the impact of a tariff greater. You can't move a factory in a few months, if it's a large plant you may have a hard time finding a location with the combination of logistics and worker availability so the move can take far longer.

  14. Nate

    Companies who chose to move production facilities or plants to Mexico greatly benefit themselves and the average American consumer. Being able to pay less for an item because of its lower cost of production would obviously increase the amount of it sold, all else equal. The ability for corporations to use cross border trade and NAFTA to their advantage puts a burden on the American labor force who could have otherwise been employed in those production jobs, but benefits essentially all other parties and the economy as a whole. The current U.S. unemployment rate is not dire enough that a measure as radical as dropping out of NAFTA is required. Should unemployment skyrocket, however, creating policy to secure American jobs from outsourcing would become a larger concern.

  15. blaira19

    The companies should move to Mexico because it would be more profitable for them. It also benefits the American consumer because the products will be cheaper than if they were produced in the US. Although it may seem contrary to move to Mexico to benefit American economy with the loss of American jobs, the imports from Mexico should benefit and appreciate the American dollar. Donald Trump wants to eliminate NAFTA to bring jobs back to the United States even though it may be more profitable to work outside the US.

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