In this Let People Prosper episode, I'm interviewed by Josiah Neeley of R Street Institute and Doug McCullough of Lone Star Policy Institute on the Urbane Cowboys podcast about trade, NAFTA, Texas Model, and much more ("Ginn as in Gig").
You can listen to the podcast on Apple iTunes or wherever you get your podcasts.
In this #LetPeopleProsper episode, I discuss my last two very busy days.
With the proposed U.S.-Mexico trade deal yesterday, I was on multiple radio stations today across the nation talking about the costs and benefits of the deal and the implications for Americans. I'm still waiting to see all of the details and am lukewarm about it at this point because of the trade barriers imposed on the auto sector that will lead to higher auto prices for consumers and higher transportation prices for many businesses. However, I'm optimistic that much of NAFTA remained intact, e-commerce provisions were included to modernize the agreement, and the contract is for 16 years instead of the 5 years the Trump administration suggested. Here's my recent commentary at The Hill on this issue.
I testified today before the Texas Senate Business & Commerce on deregulating occupational licensing, which is the most onerous form of labor market regulation (here's my testimony). I discussed the high costs of these and made recommendations on taking a broad look at eliminating many of them or reducing their requirements along with moving towards having employers complete a registration or certification with the state government or a private association to signal that they are able to do the job, which signaling is about all many of these licenses are good for. I'll have a paper published on this soon with Dr. Ed Timmons of St. Francis University.
I also testified today before the Texas Senate Administration on the benefits of program-based budgeting and the need for zero-based budgeting. I explain this in detail in the episode, but basically our state budget today is organized by strategy that lacks transparency and makes it difficult to find granular data in the budget, especially to weed out unnecessary programs. By moving to a program-based budget that's been used in Texas before, this granular data would be available to add transparency for taxpayers and legislators while making it easier to start each program at zero and make decisions whether it should be included--otherwise known as zero-based budgeting.
Please watch the video for more. Don't forget to subscribe to my YouTube channel at "Vance Ginn Economics" and continue to share this with your friends and family. Thank you!
In this episode, I am interviewed by Liz Wheeler of One America News Network on the costs and benefits of the proposed trade deal between the U.S. and Mexico. While consumers will likely pay higher prices for autos, there are benefits of the deal as well. It's important that NAFTA continue as it supports abundant prosperity, especially in Texas.
Here's my press release today and recent research on how people prosper from trade, including NAFTA. A big part of the benefit of today's proposed bilateral trade deal is that it reduces the foreign trade uncertainty holding back economic activity. While tariffs may have contributed to a faster agreement, tariffs are nothing more than a tax and shouldn't be used in such a manner unless willing to increase taxes and raise more revenue to expand government, which isn't something I'm willing to do nor should Americans as it makes people poor.
Hopefully there will be lower trade barriers overall when the agreement is finalized between the U.S., Mexico, and Canada. If not, Texans and all Americans will lose in the process.
State of the U.S. Economy Including Strong Growth & Rising Compensation and Costly Tariffs & Budget Deficits: LPP EP 24
In this episode, I discuss the state of the U.S. economy, including the markets, rising compensation for Americans, Federal Reserve leaves target federal funds rate unchanged in the range of 1.75-2%, and costly federal budget deficits of nearly $1 trillion that will be a drag on economic growth unless government spending is reined in along with the cost of tax hikes from tariffs.
There is a clear path to more economic growth, job creation, and resulting prosperity: capitalism without government barriers to opportunity.
In other words, the federal government should uphold contracts through a justice system, provide a national defense, and deal with international commerce, but really not much more than that.
Let people prosper by letting them satisfy their desires within institutions of civil society that are the backbone of America's strength. Unfortunately, too many of those institutions are hindered because of excessive government intervention at every level.
Let's learn more about what we can do together.
Seven out of ten Americans consider foreign trade an economic opportunity, according to Gallup. You wouldn’t expect this given the protectionist rhetoric about “unfair” trade practices and “bad” trade deficits in the news regarding the North American Free Trade Agreement (NAFTA) and tariffs.
To avoid impoverishing Americans, trade uncertainty should quickly end by reducing trade barriers in NAFTA to maintain its net benefits and end tariffs to reap the benefits of the Trump tax cuts.
Let’s be clear: NAFTA isn’t a perfect agreement and other countries have poor trade practices.
For example, NAFTA would ideally be one sentence: “No trade barriers between the U.S., Mexico, and Canada.” Instead it’s more than 1,700 pages of exceptions and regulations that subjectively determine winners and losers. So, a renegotiated deal towards fewer trade barriers would help people benefit from trade.
Also, intellectual property rights and currency manipulation issues in other countries, particularly China, could be problems needing attention. However, tariffs are unlikely to solve those problems, especially when private U.S. firms do business in China knowing they’ll be forced to fork over ideas but do it anyway because of the profitability available from very affordable labor. Instead, the Trump administration should rejoin the Trans-Pacific Partnership talks that include many of China’s trading partners and use its negotiation prowess to benefits Americans.
Ultimately, these trade uncertainties plaguing entrepreneurs’ decisions defy the positive view that most Americans have of foreign trade and reduce many Americans opportunity to prosper.
What’s often lost in this discussion is that countries don’t trade with each other, people do when they mutually benefit. It’s a reason that considering trade deficits a bad deal is nonsense. What’s true is that raising trade barriers will hurt people mutually benefiting along with many others from higher prices and fewer job opportunities.
For instance, Texas has much to gain or lose from NAFTA renegotiations because of about $230 billion in imports and exports with its closest foreign neighbors and largest trade partners. NAFTA has helped Texas lead the nation in exports for 16 straight years and supported at least 300,000 jobs over five years. Not only would Texans suffer from a poor deal with our North American neighbors, but Americans would also hurt as Texas has created 24 percent of all civilian jobs added nationwide since the Great Recession.
While it’s easier to blame others instead of flawed domestic policies, past mercantilist attempts to dictate foreign trade have failed. Understanding that people, not countries, trade to satisfy their desires is why trade balances don’t matter much. Really, the cumulative value of imports and exports tells how much people benefit from trade across borders.
For instance, Americans import $2.9 trillion in goods and export $2.4 trillion for a trade deficit of about $500 billion in 2017. However, the real value of total trade is the cumulative $5.3 trillion because individuals across borders wouldn’t have traded had they not benefited. An estimate of this economic activity shows that NAFTA supports 14 million American jobs.
Passage of the Trump tax cuts last year helped to foster a more competitive domestic policy environment so individuals and businesses can flourish. Specifically, Americans have been winning within months after passage of the $1.5 trillion tax cut over a decade using a static analysis. But, given that the tax relief was, on average, $150 billion per year, the Trump tariffs could make a major cut into that relief.
The figure below notes that current tariffs are a small part of overall U.S. imports, however, if tariffs on autos and auto parts take effect then almost 20 percent of imports would be taxed.
With around a 10 percent tax on current imported goods, the $8.5 billion cost to Americans isn’t much. But add in the potential for a 25 percent tax on $360 billion in imported autos and auto parts, and the tax increase balloons to almost $100 billion per year. That could shave two-thirds annually from the Trump tax cuts thereby substantially reducing its expected benefits.
When you consider the costs of trade uncertainty from the lack of a NAFTA deal and the expectation of more tariffs to come, just think how much faster economic growth and job creation could be. Time is of the essence for more freedom by assuring NAFTA negotiations are towards freer trade and tariffs will soon end so people prosper.
In today's episode, I discuss the benefits of trade, both domestically and abroad. In particular, I note that trade with the Chinese, though imperfect, benefits Americans. Instead of resorting to tariffs, which are taxes on imports, we should seek to renegotiate the Trans-Pacific Partnership to deal with potential issues such as intellectual property and other concerns. The tit-for-tat tariffs in the fast brewing trade war with the U.S. and China is unlikely to lead to many policy changes by the Chinese government and will likely help only a few American producers at the expense of many American consumers (and producers).
We should first understand how the balance of trade payments matters. Americans import $505 B from the Chinese. Chinese import $130 B from Americans. This results in a $375 B current account deficit that's matched by a $375 B capital account surplus for America. In other words, we purchase a lot of goods from them relative to how much they purchase from us (current account deficit) but they send that money back to the U.S. in the form of financial investments (capital account surplus). Check out my recent paper on Texas and NAFTA and how people prosper from trade here.
As Americans import $505 B from Chinese, current tariffs (taxes!) on imports of $34 B of goods, soon $16 B, & potential $200 B total $250 B in tariffs, which would be half of all imports from Chinese. At a 10% tax rate, that would mean a tax hike of $25 billion on Americans, limiting the average annual $150 billion tax cut passed last year. This would slow growth compared to what it otherwise could be, meaning fewer jobs for those potentially hurt by trade with China and counter to the tariff game.
Here's how tariffs/taxes on imports from Chinese could influence Americans. Rather than hurt Americans, Trump administration should re-enter Trans-Pacific Partnership discussions to pressure Chinese on intellectual property rights and reduce trade barriers.
While some say that if we have a trade deficit we win or if we have a trade surplus we lose, that's the wrong way to think about trade when everyone benefits from the exchanges that result in higher productivity and lower prices. Watch to learn more. Read my paper when you have a chance as well.
These are tough times for newspapers, particularly local papers that are still an integral part of their communities. They serve many vital functions, because no 24-hour news channel and no national political website will likely keep track of the varsity boys’ basketball scores or the proposed teachers’ raise that the school board is discussing.
What’s more, most local papers continue to shine as beacons of civility and reliability in an increasingly politicized media environment. And that’s why we should wish them well instead of forcing additional costs on them that their budgets can’t bear.
Yet that’s what a new trade dispute at the Canadian border is doing. New tariffs on newsprint — which are typically a newspaper’s second biggest expense, after personnel — have caused the commodity to spike in price by about 30 percent, according to CNN. That has already meant layoffs, and will mean many more.
But isn’t the whole point of tariffs to protect American jobs? Well, yes — but there are always unintended consequences.
The newsprint tariffs were because one small company in the state of Washington — Northern Pacific Paper, or NORPAC — with about 300 workers complained that Canada is dumping “uncoated groundwood paper,” or newsprint, on American markets. The truth is that low demand for newsprint in the age of the internet has resulted in many American manufacturers closing down or changing their operations (demand for cardboard boxes for Amazon and other online retailers is booming, for example).
And local newspapers are caught in the middle.
The Beaumont Enterprise expressed it well in a recent editorial: “There simply aren’t enough mills on this side of the border to meet the demand for newsprint in the U.S., and no company is going to invest tens of millions of dollars for new mills in a shaky market. Even if they did, it would take years for them to ramp up production. ... We’re not asking for a handout or a free ride, just the opportunity to compete as best we can. If these tariffs are removed, we’ll have a better chance.”
Which brings us to the real point here — free trade matters. As the Texas Public Policy Foundation’s new paper explains, people prosper from free trade, and the North American Free Trade Agreement, which is being renegotiated now.
NAFTA has always been controversial, but its positive effects have become evident in the decades since it was passed. The U.S. economy expanded and millions of jobs were created after NAFTA. The U.S. Chamber of Commerce estimates trade among people in the agreement — the U.S., Mexico and Canada — supports 14 million U.S. jobs with 5 million of those jobs related to the boost in trade since NAFTA.
What’s often missing from the discussions about NAFTA is the fact that countries don’t trade, people do. In this case, Americans, Canadians and Mexicans trade with each other.
Americans trade with the rest of the world for the same reasons that they trade with each other. They trade because it allows them to satisfy their desires while focusing their efforts on what they do best, which in turn raises productivity, incomes, and standards of living.
On the other hand, trade barriers mean higher prices for consumers, fewer jobs for workers, and less prosperity for all.
Opponents of free trade — who often call for subjectively determined “fair trade” — cite trade deficits as a reason to oppose NAFTA. But that’s a misunderstanding of a basic economic principle: comparative advantage.
Take the auto industry. Yes, the U.S. saw economic declines in the auto manufacturing sector (declines that would largely have occurred anyway, due to automation and costly domestic policy), as some production moved to Mexico because of lower costs for capital and labor.
But at the same time, the U.S. energy sector boomed, due to American innovation and expertise. The result is that Mexico sells us car parts and some cars — but we sell Mexico (and the world) gasoline and other petroleum products. That’s comparative advantage — both industries produce more of their respective products that they’re relatively more productive in and make both products more accessible to domestic and international populations, growing the economic pie and creating more net jobs over time.
Newspapers have it tough already. If this trade dispute over newsprint continues, the losers will be the local communities that see their newspapers decline in size and substance, or fold altogether.
We’ll still have our 24-hour cable news channels, but we probably won’t have the box scores from last night’s high school playoff game — or the kind of governmental accountability that only comes from having a reporter at a city council meeting. That would be a real loss.
In the same way, if NAFTA isn’t renegotiated with an eye for fewer — not more — barriers to trade, the losers will be Americans. That, too, would be a real loss.
In each episode, I will discuss how we act to satisfy our desires given scarce resources around us withing a number of institutions. This episode is on how trade between people, whether domestically or abroad, supports prosperity and how barriers to trade, such as tariffs, reduce prosperity.
Review my paper on the topic here.
The North American Free Trade Agreement (NAFTA) has contributed to economic prosperity for Texans and all Americans, which is why any renegotiation should be toward freer trade.
I was quoted in this Houston Chronicle article.
I had the honor of presenting at the @SMUONeilCenter's event: “#Trump & the Texas Economy.” Watch my presentation (first presenter) along with others as we discuss #Texas, taxes, spending, #NAFTA, #tariffs, & #energy.
This originally appeared on the WND website.
President Trump’s embrace of new tariffs on steel and aluminum imports is largely believed to be behind the exit of his top economic adviser, and one free-market advocate is concerned that it could hurt American consumers and stunt the nation’s economic growth spurt.
Last week, during a meeting with executives from America’s leading steel and aluminum manufacturers, President Trump announced his new policy.
“We’ll be imposing tariffs on steel imports and tariffs on aluminum imports. Pretty much all of you will be immediately expanding if we give you that level playing field, if we give you that help,” said Trump in announcing 25 percent tariffs on steel imports and a 10 percent surcharge on foreign aluminum.
The policy comes as little surprise, since Trump routinely condemned what he characterized as terrible trade policies with the likes of China and Japan and vowed to revive American manufacturing by addressing America’s trade posture.
However, Texas Public Policy Foundation senior economist Vance Ginn believes tariffs are the wrong policy for Trump to pursue.
“I think this would be bad for Americans overall and reduce our economic potential over time, which had been boosted by the tax cuts last year and the regulatory reforms that were made,” Ginn told WND and Radio America. “I’d rather see those sorts of things boosted instead of tariffs and trade practices such as this.”
Ginn said the simple fact is that charging more for imports means higher prices for all of us.
“If you raise the cost of doing business, that hurts business. And it hurts American consumers,” he said. “Whenever you look at raising steel prices and aluminum prices, those are in the cars that we drive and the buildings where we work and in many other aspects of capital throughout our economy.”
He also said Americans were reminded just last decade in the George W. Bush administration that steel tariffs don’t necessarily get the intended results.
“Some estimates show that cost us about 200,000 jobs,” Ginn said. “I would hate to see more Americans not have a job when we’ve had an expanding economy.”
Commerce Secretary Wilbur Ross estimates that the steel tariffs would result in a bump of one-half of one percent to three-quarters of one percent, an average of about $700. He said the difference is “trivial.”
Ginn said that approach badly undermines the administration’s defense of the tax cuts.
“If $1,000 is just crumbs, according to Nancy Pelosi, but a big deal according to those in favor of the tax cuts, $700 is also a big deal,” he said. “That takes away a lot of the potential from those bonuses that they had before to [add income].”
But with significant trade deficits and China dumping steel into this country in violation of World Trade Organization protocols, the U.S. stands at a tactical disadvantage.
Ginn said that doesn’t explain why the tariffs apply to everyone.
“The proposal so far would be a global tariff on steel and aluminum,” he said. “It wouldn’t just hit China. So if there are those issues with China, let’s deal with those, not necessarily make it for everyone to pay these higher costs.”
Ginn also said the effort to reduce America’s trade deficits starts with a tough look in the mirror.
“Let’s look at what we’re doing here at home that’s also maybe raising the cost of living and raising the cost of doing business such that China and other countries are having a competitive advantage in the global market,” he said.
“Let’s look at the cost of unions and what they’re doing to the cost of labor over time. Let’s look at our minimum wage and what that’s doing over time. Retirement pensions. There are a number of factors that are raising the cost here that are putting us at a disadvantage compared to other countries.”
Ginn believes America’s position on the global trading stage is already on the upswing, thanks to the tax-reform bill.
“That helps to reduce the cost of doing business,” he said. “It allows us to be more competitive on a global playing field. I think we should look at more of those things, along with regulatory reforms.”
According to Ginn, the way to help an economy flourish is not to add more complications but to remove as many as possible. He said it’s led to a booming economy in Texas.
“The ability for us to focus on freedom and free markets has allowed us to be a powerhouse,” Ginn said. “As an independent nation, we would be the 10th largest economy in the world and continue to create a lot of jobs. In fact, over the last decade, we created 26 percent of all new jobs that were added in the United States.”
President Trump’s negotiating tactics often show him throwing out an idea, watching his critics set their hair on fire, and then finding common ground with a less severe approach. Ginn suspects that is Trump’s approach here, as well as an effort to put the heat on officials renegotiating the North American Free Trade Agreement, or NAFTA.
“He’s even talked to the Mexicans and the Canadians and said, ‘Look, if we don’t get something done with NAFTA, then I’m definitely going through with these tariffs.’ That puts pressure on the NAFTA renegotiation process as well,” he said. “I’m hopeful this is not where we’ll be at the end of the day.”
Ginn contends NAFTA could be much better but it’s not as destructive to the U.S. economy as its critics suggest. He says free trade ought to be the ultimate goal.
“What would be a perfect trade agreement?” he asked. “It would be no trade barriers between the countries that are involved. Instead, we have a 1,700-page trade agreement with NAFTA.
“So what does that do? That picks winners and losers throughout the whole economy. There’s a lot of ways to renegotiate to make this more of a free-trade agreement. I’m just a little concerned that’s not where we’re going to go if we start picking out even more winners and losers in the process.”
Just as Americans mutually benefit from voluntary exchange domestically, so can individuals in different countries within the rule of law. A perfect trade agreement would be one sentence that provides no more than a contractual obligation: “There shall be no trade barriers among countries X, Y, and Z.”
The Texas Public Policy Foundation (TPPF) recently held an event co-sponsored with The Heritage Foundation that discussed whether Texans gain or lose from the 1994 North American Free Trade Agreement (NAFTA). Panelists included Texas Comptroller Glenn Hegar, Dr. David Kreutzer of the Heritage Foundation, and Dr. Vance Ginn of TPPF, with moderator Drew White of TPPF.
NAFTA is an agreement among the U.S., Mexico, and Canada designed to reduce costs of exchange among Americans, Mexicans, and Canadians. While it’s far from a perfect agreement, as more than 1,700 pages pick government winners and losers, data indicates it at least benefits Texas and the energy sector.
In 2016, Texas exports totaled $231.1 billion and imports were $229.3 billion, giving a trade surplus of $1.8 billion. Instead of evaluating a trade deficit versus surplus, consider that people agreeing to each transaction benefit from more than $460 billion in foreign trade.
Texas’ trade total with Mexico resulted in a $10.8 billion trade surplus and with Canada a $4.7 billion trade surplus, so NAFTA contributes to a $15.5 billion trade surplus in a $1.4 trillion economy.
Texans prosper from each individual transaction through overall lower prices and a growing economic pie. Research finds that fewer trade impediments among NAFTA countries helped Texas become economically diversified and more resilient to oil price fluctuations over time.
Moreover, a Texas industry that should support NAFTA is the energy sector. In 2016, Texas exported $37.1 billion in petroleum and coal products, the majority of that sum going to Mexico and Canada.
Critics of NAFTA point to trade imbalances as a reason for dissolving the agreement. This reason can be discounted in the context of the energy sector: the U.S. energy sector had a positive trade surplus with Mexico of $11.5 billion.
The agreement is also credited as a driving force in the North American resurgence in energy production.
North American economies produced a total of 22 million barrels of oil a day in 2016, with the majority produced in the U.S. Although the U.S. is the leading producer of petroleum in the world, we demand six million barrels of oil and related products per day more than we produce. Canadian producers who export about three million barrels a day to the U.S. satisfy the bulk of this excess demand.
NAFTA benefits the construction of natural gas pipelines stretching from the U.S. to Mexico. This helps expand the market for excess natural gas production in the U.S. while allowing Mexicans to convert to cleaner-burning energy production.
Members of the energy sector should support the continuation of NAFTA as well as an updating of the section of the agreement dealing with energy production toward freer trade. If U.S. producers could more freely operate in Mexico, the U.S. energy sector, Texans, and Americans, could prosper more.
VIDEO of event "#NAFTA and #FreeTrade: Gain or Loss to Texans?" hosted by @TPPF & @Heritage here: https://t.co/U5cwxTjrXV. Panelists include @Glenn_Hegar, @dwkreutzer, and me, with @DrewWhiteTX moderating. I hope you'll watch and share it with others.
Here are other publications of mine on NAFTA and international trade:
1) Texans Support, Prosper from Free Trade
2) Renegotiating NAFTA Without Favoritism Supports Prosperity
3) NAFTA Contributes to Texas Model's Success (Overview of my academic research)
4) Trade Deficits Can Be a Good Sign
5) Fast Track to Free Trade Prosperity
This commentary originally appeared in The Houston Chronicle on October 15, 2017 and updated on January 18, 2018.
Criticism of the North American Free Trade Agreement is nothing new. In 1992, U.S. presidential candidate Ross Perot notoriously implied that if NAFTA passed there would be a “giant sucking sound” as jobs and wealth left the country. Recently, there’s discussion of adding sunset clauses and other measures that could weaken the agreement because of similar fears.
Examining free trade agreements before and after inception is wise. But, 23 years after inception of NAFTA, critics must consider the vast data noting the benefits to Americans, especially for those in Texas. Instead of trashing the agreement, renegotiation should include encouraging freer trade.
While today some applaud changes to NAFTA, a recent Gallup poll shows that 72 percent of Americans believe foreign trade increases economic opportunity. This support across the political spectrum is on the rise since 2011, with 80 percent of Democrats, 71 percent of independents, and 66 percent of Republicans now favoring foreign trade.
Often headlining the free trade debate is the notion that one country is pitted against another. But Gallup’s data suggest the economic benefits are widely understood wherein individuals voluntarily trading with one another mutually prosper.
In other words, America doesn’t trade with Mexico, Americans trade with Mexicans and both see benefit from it.
As voluntary exchange within a legal framework benefits people in U.S. states, an optimal free foreign trade agreement would allow movement of goods among countries while respecting each countries’ laws. Unfortunately, politics picks winners and losers, evidenced by NAFTA’s 1,700 pages of carve outs for privileged sectors.
Regardless, evidence indicates Americans benefit from NAFTA, particularly in states like Texas.
In 2016, Texas exports totaled $231.1 billion and imports were $229.3 billion, for a foreign trade surplus of $1.8 billion. Instead of thinking about trade deficits as bad and trade surpluses as good, consider that people benefit by a remarkable total of more than $460 billion through trade.
Texas’ trade with Mexico is almost 40 percent of total exports and 35 percent of imports, resulting in a $10.8 billion trade surplus. Exports to Canada are 8.6 percent of total exports and 6.6 percent of imports, for a $4.7 billion trade surplus.
While NAFTA partially contributes to a $15.5 billion trade surplus in a $1.4 trillion economy, Texans prosper from each individual transaction through overall lower prices and a growing economic pie. Research finds that fewer trade impediments among NAFTA countries helped Texas become economically diversified and more resilient to oil price shocks over time.
In the early 1980s, Texas’ mining industry, comprised mostly of oil and natural gas activity, was 21 percent of the state’s private economy. While the oil price collapse in 1986 reshaped Texas’ economy, there was a steady decline in mining’s share after the passage of NAFTA. Mining is now only 8 percent of Texas’ private economy as expansions in sectors like healthcare, technology, and retail outpaced that of oil and gas activity.
Result: More Texans have prospered from trade with Canadians and Mexicans. However, foreign trade alone is not wholly responsible for this growth. Pro-growth policies in Texas have also provided the institutional framework for Texans to thrive.
The Fraser Institute’s measures of economic freedom, which compares entities based on government spending, taxes, and regulation, ranks Texas as the third best nationwide, while the U.S. now ranks a multi-decade low of 16th worldwide.
Policy makers would be wise to consider the evidence of increased economic prosperity from foreign trade agreements despite their imperfections and focus on reducing government’s influence on Americans.
Rolling back needless regulations, cutting individual income taxes and the developed world’s highest corporate income tax rate, and slashing excessive government spending would support greater economic growth.
Meanwhile, reductions of existing trade barriers and expansion of foreign trade should be a priority.
We must also be honest that free trade doesn’t necessarily create a net number of new jobs and often the economic benefits are diffuse while the tradeoffs can be acute. Ultimately, though, free trade benefits everyone by lowering the general price level, opening up previously inaccessible markets, and creating new industries providing more opportunities for more people to flourish.
Americans trade with the rest of the world for the same reasons that they trade with each other. They trade because it allows them to satisfy their desires while focusing their efforts on what they do best, which in turn raises productivity, incomes, and standards of living.
A free enterprise system with government institutions preserving liberty best supports individual prosperity, even between countries.
Vance Ginn, Ph.D., is director of the Center for Economic Prosperity and senior economist and Dayal Rajagopalan is a research associate at the Texas Public Policy Foundation, a nonprofit, free-market research institute based in Austin. They may be reached at email@example.com.
This commentary was originally featured in The Hill on September 22, 2017.
Though not perfect, NAFTA has increased prosperity and improved the lives of millions of
Americans through greater competition, affordable products, and wealth and job creation. Potential renegotiations of NAFTA could deter these gains if the deal doesn’t include reducing both trade barriers and government favoritism for certain industries.
Consider that Mexico has long maintained state control of natural resources, including natural gas, coal, and oil, resulting in only one petroleum company — the 75-year-old state-run Pemex. As with most government-created monopolies, Pemex has been plagued by corruption and inefficiency, ultimately forfeiting its incentive to take risk and prospect for sub-surface resources.
These developments led to a surprisingly beneficial move in 2013 by Mexican President Enrique Peña Nieto to gradually privatize the energy sector. While initially unpopular, the constitutional changes were in place a year later, opening the gates for foreign investment in Mexico’s energy sector.
Steve Hanson, the CEO of International Frontier Resources Corp., stated, “In short, it is the largest energy opportunity in the world today — and the door has just been opened.” His optimism is largely due to the unprecedented amounts of Mexico’s untouched natural resources.
Texas energy companies are poised to capitalize on this new open market, especially because Texas is the leader of the North American energy industry. When this industry grows, Texas, and America, prosper. With only nine percent of the U.S. population, Texas created 25 percent of all new American jobs since the last U.S. recession began in December 2007, which is around the time the shale revolution began.
Thanks to NAFTA, proximity and profit motives, Texas refineries are intertwined with Mexico’s energy sector. Increased production of Mexico’s crude oil and natural gas often results in more business for Texas refineries, contributing to greater wealth and job creation here at home.
However, there’s no guarantee these economic benefits will continue.
An outright exit from NAFTA might nullify these opportunities and economic gains. In addition, there are regulatory barriers that bar full realization of energy business with Mexico, the majority of which were erected in the wake of the denationalization process.
An amendment to the energy chapter of NAFTA currently allows for these regulatory barriers by granting Mexico unilateral regulatory power in the energy sector. While this specific concession is not typical for free trade agreements, favoritism far too often plagues international trade and should be eliminated.
The Trump administration’s pressure on NAFTA has recently picked up momentum is in accordance with a wider shift from free trade to so-called fair trade with stated goals of shrinking U.S. trade deficits and preventing job losses.
While these goals sound good in theory, U.S. exports and imports contribute to a growing economic pie and job creation with mixed effects on specific industries.
For example, the U.S. International Trade Administration notes that 11.5 million jobs were supported by U.S. exports in 2015, with 10 percent of those in the Lone Star State. Unfortunately, these data account for only part of the job creation supported by foreign trade.
While imports get a bad rap, individuals voluntarily trading in those exchanges benefit or they wouldn’t agree to the transaction. Imports often result in lower prices, higher productivity, and more business investment such that people have more money in their pocket, higher wages, and more job opportunities.
In short, the focus shouldn’t be on reducing trade deficits and risk increased poverty, but rather how to make the U.S. more economically competitive.
Renegotiating NAFTA could serve as a valuable opportunity to promote prosperity, but only by reducing trade barriers and government privilege so individuals in different countries can mutually benefit. In addition, the U.S. can help keep businesses from fleeing and support more job creation at home by cutting excessive government spending, passing pro-growth tax reform, and rolling back onerous regulations.
This is a proven path to human flourishing.
Vance Ginn, Ph.D.
Free market economist with leanings towards Chicago/Austrian schools of economics. Hard rock drummer. Classical liberal. First generation college graduate at Texas Tech University. Hometown: Houston. Recovering academic. Work at the Texas Public Policy Foundation in Austin to research ways to #LetPeopleProsper. Live the dad life in Round Rock, TX. Views=mine.