December 17, 2013    Volume 20, No. 16

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20 Years Of Spin For America's Failed Trade Model; Nafta Has Helped Put The United States In The Poorhouse


By Dr. Charles McMillion
cwmcmillion@gmail.com

Twenty years ago, global bankers, President Bill Clinton, Republicans in Congress and a few economists insisted that the North American Free Trade Agreement's unprecedented "free" trade model of radical property protection and trade deregulation would be an economic and political win-win for both the United States and Mexico. Now, despite its utter and worsening failures on virtually every measure, bankers and their retainers are still inventing new claims to spin this model as positive or at least neutral.

In 1993, the broadest assurance by those selling the Nafta trade model -- including almost all Republicans and President Clinton -- was that it would create American jobs by expanding the trade surplus the United States then enjoyed with Mexico. Statistically a trade surplus adds to domestic production, jobs, incomes and tax revenues whereas a deficit cuts production, jobs, incomes and tax revenues.

Two former Treasury Department officials, Gary Hufbauer and Jeffrey Schott, supported by AIG and other financial interests as Fellows in the Institute for International Economics (renamed the "Peterson Institute for International Economics" after the private equity CEO) provided the key Nafta sales "analysis" in 1993 in their report "Nafta: An Assessment." They wrote: "Our job projections reflect a judgment that, with Nafta, U.S. exports to Mexico will continue to outstrip Mexican exports to the United States, leading to a U.S. trade surplus with Mexico of about $7 billion to $9 billion annually by 1995." They predicted the U.S.-Mexico trade surplus would then remain between $9 billion and $12 billion per year.

In fact, the U.S. trade surplus with Mexico vanished within months of Nafta's implementation and worsened rapidly despite an almost immediate financial bailout of Mexico's global bankers by the United States and other governments. While bankers were made whole, the Mexican people were forced to repay the debt.

Now, the United States suffers chronic $60 billion to $70 billion annual trade deficits with Mexico and by next summer the accumulated U.S. current account losses with Mexico under Nafta will pass $1 trillion. This "judgment" of Nafta's promoters was off not only in direction, but by over $1 trillion with Mexico in just the first 20 years.

Nafta's promoters also claimed that the trade agreement would be a huge benefit to Mexico, stemming immigration to the United States and reducing drug trafficking and corruption. (How is that working out?) But even with Mexico's $1 trillion Nafta surplus with the United States, Mexico still suffers a chronic global trade deficit as China and other countries use it as a back door to the U.S. market. Last year, Mexico paid $60 billion for imports of mostly manufactured goods from China while earning only $6 billion from exports of mostly mineral and agricultural commodities to China. (Remember this the next time a bankers' "retainer" in a Washington think tank claims that U.S. trade data overstates deficits with China.)

Promoters also insisted that Nafta with Mexico would provide cost-cutting efficiencies that would lower if not eliminate the then annual U.S. global $100 billion deficit for both merchandise and the full current accounts -- usually less than 1 percent of GDP. And yet, as the Nafta and its less formal PNTR model quickly was applied worldwide, annual U.S. merchandise deficits soared to $700 billion to $850 billion with current account losses of $400 billion to $800 billion or -3 percent to -6 percent of GDP. Since implementing Nafta with Mexico, the United States now has accumulated over $10.5 trillion in global merchandise deficits -- $7.1 trillion in lost manufacturing production alone -- with $8.5 trillion in overall current account losses.

Of course, these multi-trillion dollar trade losses -- net imports -- force the United States to produce vastly less even than its weakened "aggregate demand" growth for consumption and investment. But even this massive production loss understates the cancerous effects of 20 years of Nafta trade deficits as U.S. businesses do all they can to avoid being a trade statistic by cutting cost corners on health and safety, taxes, wages, jobs, investment, small business profits, moving production abroad and much more.

One of the strongest incentives for federal, state and local tax cuts and meager spending that spurred a quadrupling of public debt over the past 20 years has been to bolster after-tax incomes and to lower production costs to hold off imports. Likewise, a major reason for the tripling of household debt in the last 20 years has been stagnant real wages and a shift to individuals of the costs for health care, education and retirement. Yet, unlike government and household deficits that exist in almost all countries, including China and Japan, trillions of dollars in U.S. trade losses by definition require offsetting borrowing or selling assets to foreign interests, undermining U.S. business and financial independence.

Finally, promoters of the Nafta model also claimed that low-wage countries cannot threaten good U.S. jobs or wages because, they insisted, higher average U.S. productivity offsets higher U.S. costs. The auto sector was a constant example of an industry that would certainly enjoy production and job growth from a widening trade surplus (then) with Mexico and reduced deficits worldwide.

Of course, Nafta's radical property protection clauses (anti-environment, anti-workers' rights, anti-zoning, anti-liability) immediately led to a massive shift of U.S. and world auto production to Mexico. In virtually every year since 1998 -- including each of the last 10 years -- Mexico exported more cars just to the United States than the United States exported to the entire world.

Lost in the current celebration of the revitalized U.S. auto industry (and the literal bankruptcy of Detroit) is that the auto/truck/parts sector is suffering worsening, record trade losses and a two-to-one imbalance between imports and exports. The sector's record worldwide deficit in 2012 was $148 billion and the 2013 deficit will set another record, bringing total losses since 2000 to over $1.7 trillion. The U.S. auto sector's 2012 deficit with Mexico was a record $48.5 billion and the 2013 deficit will be about $54 billion to bring total auto sector trade losses with Mexico just since 2000 to about $395 billion.

Of course, none of this matters to today's media where a recent National Public Radio story nicely presents the bankers' latest spin. A consultant who works to help transnational corporations expand their operations framed NPR's evaluation of Nafta's first 20 years by asserting that what is most important is that adding together exports and imports between the U.S. and Mexico shows total trade has grown rapidly -- like if you have stagnant income but soaring spending that shows robust success.

Apparently the tag line changes throughout the day but when I read the NPR story online it helpfully noted that "Support Comes from Charles Schwab" (www.npr.org/2013/12/08/249079453/economists-toast-20-years-of-Nafta-critics-sit-out-the-party).

-- Charles W. McMillion is the recently retired president of MBG Information Services, a former Associate Director of the Johns Hopkins University policy institute, former Contributing Editor of the Harvard Business Review and a founder of the once meaningful Congressional Competitiveness Caucus.


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