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Evaluating NAFTA and TPP

Trade can help an economic growth; however, free trade can also undermine an economy.
Trade can help an economic growth; however, free trade can also undermine an economy.
Photo by Alex Wong/Getty Images

One of the main purposes of President Obama’s trip to Asia in April, 2014 was the pursuit of the Trans-Pacific Partnership Free Trade Agreement (TPP). At issue is increased access to foreign markets for American goods, e.g. American beef and trucks in Japan. At the same time, the American People are looking closely at the ripple effects of the 20-year-old NAFTA, which TPP is largely patterned after.

Opponents point to data on outsourcing, shrinking earnings, growing economic disparity, and other economic indicators that demonstrate the average American is losing ground to NAFTA. Proponents point to data on increased GDP, capital gains, and other macroscopic economic gains while they essentially argue average Americans would have done worse if NAFTA had not been implemented.

Given both sides have significant evidence supporting their positions, it is important to interpret the facts under a larger framework or worldview, i.e. numbers lack wisdom. Lowering trade barriers means foreign goods are no longer taxed. When domestic goods are taxed, unless business taxes are displaced onto individual taxpayers, free trade translates into domestic goods that are less competitive.

If a foreign country has an established, efficient industry, which does not cater to vital national interests, that can deliver an equivalent and/or superior product and there is a weak or nonexistent domestic industry, free trade can be beneficial as it can be used to remove trade barriers to our established industries in exchange for the same benefit. This can translates into lower priced goods with few economic disruptions to domestic industries, thus it is in a nation’s interests.

Absent this scenario, i.e. a clear coequal exchange of economic benefits, free trade is an industry killer, because it disadvantages the already mature, often more expensive, domestic industry and favors investment in cheaper options, especially when it comes to cheap foreign labor. Meanwhile, national interests change with time, thus treatises and treaty Law must be recalibrated to serve the shifting interests of allies.

Obviously, economic interests shift very rapidly. As such, trade agreements must be recalibrated regularly to reflect shifting economic interests. Unfortunately, NAFTA and TPP do not include maintenance provisions, thus they do not shift with national interests.

That said, the fact that America is the world’s wealthiest nation dictates labor costs and other operating costs will certainly be higher than those in poorer countries. After all, simply surviving in a developed country, let alone thriving, requires a higher income and access to modern amenities while American economic supremacy is dependent upon the ability of workers to maintain a higher standard of living, engage in higher cost consumption, invest for the future, and advance their financial standing.

As the US is both rich in labor and financial capital, America needs financial capital to generate jobs that support a massive workforce with a broad range of skills and technical knowledge. Beyond economics, outsourcing threatens a nation’s ability to regulate its industries, which is part of an overall loss of economic sovereignty that free trade encourages.

Given this context, those who support NAFTA and TPP have a less compelling argument than those who oppose untargeted, unfettered Free Trade. As such, the Obama Administration needs to seek a TPP deal that better serves the interests of the American People, or be willing to walk away. The same is true for all Asian nations, though the decisions of the US will determine what costs are paid for joining and rejecting the TPP.

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