Free Trade Agreements Are Worthless Unless They Require That Trade Be Balanced

Includes: EWW, UDN, UUP
by: Howard Richman

Free Trade Agreements are worthless unless they require that trade also be balanced. Take NAFTA for example. When President Obama announced that he would focus upon jobs in 2011, he forgot to mention that he was talking about jobs in Mexico. Under his watch, our trade deficit with Mexico has climbed rapidly as shown in the graph below:


Mexico has turned the NAFTA highway into a one-way street. When President Obama refused to let Mexican trucks operate in the United States, Mexico began placing tariffs upon U.S. products. It now collects tariffs on 99 categories of U.S. products (.pdf). These include a 25% duty on U.S. cheese, a 20% duty on U.S. wine, 15% duties on U.S. fruit and fruit juices, 15% duties on U.S. pencils and pens, 10% duties on U.S. shampoo, hair spray, tooth paste and deodorant, and 10% duties on U.S. dog and cat food.

Normally, when a country places barriers upon imports from another country, the relative values of the currencies change to a level that would balance trade. But Mexico recently adopted the Chinese strategy of manipulating the dollar's exchange rate with its currency. In a table that accompanied Federal Reserve Chairman Ben Bernanke's November 17 2010 speech in Frankfurt Germany, Bernanke reported that Mexico had spent 3.64% of its GDP on currency manipulations between September 2009 and September 2010.

The growing Mexican trade surplus with the United States proves that NAFTA is not working. The United States needs to counter Mexico's trade manipulations with a balancing scaled tariff designed to collect half of our trade deficit with Mexico as tariff revenue. Mexico could then lower our duty rate by taking down its barriers to American goods and by ceasing its currency manipulations.

Although one-way trade is worthless, balanced trade works magnificently. Each country produces goods with which it has a comparative advantage and trades them for goods with which the other country has a comparative advantage. Each country loses jobs in import-competing sectors while gaining better-paying jobs in export-competing sectors. But when trade is imbalanced, the trade surplus country gains jobs and the trade deficit country loses them.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.