NAFTA Showed What We Don't Know About Economics

November 28, 1993|By BRIAN SULLAM

Organized labor was not the only loser in the debate over the North American Free Trade Agreement. Economics principles got quite a beating as well.

The public debate over NAFTA affirms the numerous studies that show that most Americans have a very poor understanding of economics and economic principles.

But what was more surprising was that some of the main opponents and proponents of the treaty -- who should have known better -- relied more on economic fiction than fact to make their points.

The issue is not the numerous computer-driven econometric studies that purported to predict NAFTA's impact on job creation or loss on both sides of the border or on the gross national product of the United States, Mexico or Canada.

The conclusions of these studies varied widely because their assumptions about future growth, income, interest rates and currency exchange rates varied widely as well.

We have come to expect these studies to have conclusions that are tailored to fit the points of view of their sponsors.

What was more disturbing was the deliberate misrepresentation economic reality.

The assumption behind the anti-NAFTA arguments was that any increase in Mexican production will come at the expense of the United States.

Any basic understanding of trade theory or history shows that trade is not a zero-sum game (one person's gain is another one's loss).

On the contrary, theory and history show trade between two countries is a mutually beneficial activity where both countries grow richer together.

As each of the countries grows more prosperous, it becomes a bigger market for goods they all produce. Post-World War II trade between the United States and the vanquished Germany and Japan is ample evidence of this economic fact.

In market economies, resources are continually moving from relatively unproductive uses to productive ones as long as there are no artificial impediments such as tariffs or quotas.

In a sense, the United States has been one free trade zone. The American economy has thrived and prospered because capital and labor have not been frozen in unproductive and inefficient industries. Now the boundaries are being expanded to include Mexico and Canada.

During his debate with Vice President Al Gore, Ross Perot repeatedly said that low-paid Mexicans could not afford to buy American goods. A person doesn't have to be schooled in economics to know that there is no logical basis for this statement.

If the United States could only sell to countries with similar standards of living, this country would have minimal trade with the rest of the world because most countries don't have incomes close to ours.

Income levels alone don't determine trade. Prices play a much more important role. If the price of an imported good is less than the price of a comparable domestic good, people will buy the imported good.

While the average Mexican family may not be able to purchase a Ford Taurus, they are consumers nonetheless. They can afford American-made processed food, building materials and paper products, for example.

If tariffs on these items were to be reduced, they would be more affordable and more Mexicans would be able to buy them.

In addition, Mr. Perot ignored the fact that consumer goods are only one component of the usual mix of U.S. exports to developing nations.

These countries need capital equipment to improve their transportation, communication and industrial infrastructure.

Power turbines, telephone switching centers, earth movers, locomotives and computers are not bought by average Mexicans, but by government agencies or large corporations. Per capita incomes don't figure directly in the purchase of these goods.

NAFTA's opponents argued that many American factories would pack up and move to Mexico because of the low wage rates. But absolute wage rates don't determine the location of factories. If they did, Bangladesh and Mozambique would be industrial giants.

Wage rates are not the only component that determines the cost of a good. Raw materials, transportation, overhead, taxes and interest costs also contribute to the cost of a manufactured good.

Even when labor is a large component of the cost, labor costs are not the most deciding factor in determining factory location. Productivity plays a much more important role.

Even if the wage rate in the U.S. is eight times that of a Mexican worker, a U.S. worker might be 12 times as productive because of his education, skill and attitude.

Few manufacturers will accept low wages if they get lower productivity in return.

In some industries where U.S. and Mexican plants have similar productivity, the plants, and the jobs, will migrate to Mexico.

In many industries, American plants and their workers are the most productive in the world. Even with the low Mexican wages, it wouldn't make economic or business sense to move to Mexico.

Mr. Perot and his supporters also ignored the fact that wage rates are not static. If more jobs move to Mexico, the competition for labor will increase the wage rates.

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