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Obama's NAFTA hoax

By Jesse Richman, Howard Richman and Raymond Richman
web posted March 3, 2008

Senator Obama has staked out the most radical position of any candidate on NAFTA. At a recent Democratic campaign debate in Ohio, he promised to tell Canada and Mexico "that he will opt out [of NAFTA] unless we renegotiate the core labor and environmental standards." According to Canadian television reports, at the same time that Obama was taking this position, one of his economic advisors (Austin Goolsbee) was calling the Canadian consulate in Chicago to tell them that Obama's anti-NAFTA stance was mere campaign rhetoric.

Barack ObamaEven if Obama really meant what he said, renegotiating labor and environmental standards with Canada and Mexico would do little to fix America's huge trade deficits. U.S. trade with North America is a two-way street; U.S. trade with Asia is not.

For decades, American industry has seen Asian industry, mostly Japanese and Chinese, steal market share through their governments' currency manipulations and restrictions upon U.S. imports. As a result, the United States has lost industry after industry with former manufacturing workers becoming burger-flippers, causing median family income to stagnate.

Last year China sterilized a whopping $462 billion worth of western currencies from trade in order to keep those currencies from being used by Chinese to buy western products. This enabled them to increase their trade surplus with the United States and Europe. Their trade surplus with the United States rose from $233 billion in 2006 to $256 billion 2007.  Over the last decade, more and more Asian countries have been practicing the old mercantilist scheme of increasing exports while holding down imports in order to steal market share from the industries of their competitors.

Political elites in the United States have offered workers nothing better than pandering on the trade issue for decades.  Their ears are closed to the real problems workers face by a simple and misleading story found in every introductory economics text.  Why is trade good? The example illustrates two countries producing two goods, say corn and cloth.  The example shows that so long as there are differences in the relative efficiency with which the countries produce the goods, both will be better off if they specialize in producing the good they can make more efficiently and trade the surplus for the other good.

In 2003 Warren Buffett told a contrasting story that better resembles the way international trade works for the United States today.  Buffett ought to know something about the economy -- his skill as an investor has made him the the third richest man in the world.   This is the story of two islands: Thriftville and Squanderville.  The citizens of Thriftville work hard to produce twice as much as they consume and export the rest to Squanderville in return for Squanderville's IOU's.  For a time, Squanderville residents live on the fat of the land, hardly working at all, but eventually, they become share croppers working long hours for little pay to service their enormous debt to Thriftville.

The work of a leading Chinese economist bears Buffett out. In 1997 Peking University economics professor Heng-Fu Zou, a Senior Research Economist for the World Bank's Development Research Group showed that a predilection for saving money and loaning it abroad makes a country better off. Accumulating foreign assets by running a trade surplus leads to long term positive outcomes. "A nation with strong mercantilist sentiment ends up with large foreign asset accumulation and high consumption in the long run."  Turn this around: living on borrowed cash from abroad and consuming more than it produces leads a nation down the road to debt and poverty.

A number of countries, most dramatically China and Japan, have taken this insight to heart.  China sterilizes hundreds of billions of U.S. dollars from trade so that those dollars won't be used to buy U.S. products. Most of these dollars go to buy U.S. bonds, but an increasing amount is also being used to purchase U.S. companies. Chinese factories boom, U.S. factories close... and we will be paying interest and dividends to China for decades to come.

The United States is Squanderville, accustomed to living on borrowed money from abroad.  American personal savings are near zero.  In 2006 business investment in U.S. manufacturing barely exceeded depreciation allowances.  The United States imported over 700 billion dollars more in goods and services than it exported in both 2006 and 2007.  And U.S. workers earn less money as a result. If our exports had equaled our imports last year, millions of additional manufacturing workers would have been required.  The U.S. economy would be very different if these jobs existed. 

Like the chronic borrowers we have become, the United States eagerly accepts any and all credit offers.  Beginning in 1984, the United States abolished the withholding tax on interest earned by foreigners in the United States.  The consequence: Americans loaning their savings pay income taxes but foreigners loaning money pay no tax at all. This gives foreigners an advantage, and that advantage has translated into the total elimination of U.S. savings, and chronic U.S. deficits.  The withholding tax should be reinstated.

U.S. companies have become accustomed to a world of soaring trade deficits.  They have learned that trade will be out of balance and that new production facilities should be based abroad if at all possible.  But there is no reason why we must tolerate imbalanced trade.  Under World Trade Organization rules, countries running threatening trade deficits are permitted to restrict trade in order to move towards balance.  Tariffs are not the answer, as these would merely invite counter-tariffs and make the world poorer.  Instead of tariffs, the U.S. Treasury should auction (or issue to exporters) value-based Import Certificates.  Because the number of Import Certificates would be tied to the volume of exports, they would move trade towards balance without triggering tariff wars.  Eventually, the value the Import Certificates issued for Chinese goods would equal the value of United States exports to China.  If China wanted to sustain its exports to the United States, it would be forced to increase its imports.

Americans know something is wrong.  Recent polls show that Americans have the most negative attitudes towards international trade in the world.  But U.S. voters have no idea what to do, and so they fall for cheap demagoguery like Obama's NAFTA hoax.  Instead of just another "fair trade" proposal that will not work, the candidates should be proposing serious solutions that would reduce the trade deficit while increasing U.S. exports. ESR

Dr. Jesse Richman is assistant professor of Political Science at Old Dominion University. Dr. Howard Richman is executive director of a nonprofit (Pennsylvania Homeschoolers Accreditation Agency) and an Internet economics teacher. Dr. Raymond Richman  is professor emeritus of public and international affairs at the University of Pittsburgh with a Ph.D. in economics from the University of Chicago. They are the authors of Ideal Tax Association's forthcoming book, due out March 15: Trading Away Our Future: How to Fix Our Government-Driven Trade Deficits and Faulty Tax System Before it's Too Late which lays out a comprehensive program to end the trade deficit while strengthening the U.S. economy.

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