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. https://www.texaspolicy.com/blog/detail/why-texas-and-the-energy-sector-should-support-nafta
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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 info@texaspolicy.com. Any Renegotiation of NAFTA Should Reduce Trade Barriers & End Favoritism to Support More Prosperity9/22/2017 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. https://www.texaspolicy.com/blog/detail/renegotiating-nafta-without-favoritism-supports-prosperity |
Vance Ginn, Ph.D.
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