Withdrawing from North American Free Trade Agreement (NAFTA) has always been the pillar of Trump’s economic policy. While Canada is open to re-negotiating NAFTA, Trump is talking tough even before he formally takes office.
NAFTA has long been the subject of debate and many Americans believe it is costing them jobs. While its true that American middle class has shrunk from 61% to 49.9% (PEW research centre), thanks to decline in factory jobs, should NAFTA shoulder all the blame? We should not forget that American corporations were shifting jobs to lower wage countries even before NAFTA. Advances in technology had already made it more costly to manufacture goods in America.
Even if free NAFTA has shifted some jobs, it has more than made up for it by lowering prices of many products Americans buy. This has allowed consumers to spend money on other things like housing and education.
Countries that oppose free trade must be reminded about the bigger benefits of free trade. According to an old adage, the head of a family should not make at home what he can buy cheaper from the market. A lumberjack, for instance, may build a chair for himself but should not make his own shoes. He should buy shoes from a specialist who can do it cheaper and quicker. The specialist can do it cheaper because he has had time to study the market and may have access to the cheapest inputs. Lower wastage that comes with practice is another reason why he can do it cheaper. He can do it quicker is because he has spent hours practicing and perfecting his craft. As a rule of thumb, the more you do something, the better you get at it. This is because of the “learning curve” you go through. According to the learning curve principle, the speed at which you perform a task is essentially a function of time. As you progress through the curve, the unit cost declines against cumulative output.
So if a foreign country can supply a commodity cheaper than what you can make at home, isn’t it better to buy it from abroad? This will leave you free to employ your resources in areas you have advantage. A part of this produce can later be traded for other commodities.
Like families and individuals, countries vary in their ability to produce commodities. One country may produce a commodity cheaper or more effectively than others. Such a country is said to have an advantage over others in producing that good. The advantage can result from a slew of factors like cost of labor, cost of input, technology, soil, climate, and land.
If these advantages help you produce a commodity for less than what another nation can, and another nation a commodity for less than what you can, it is best for both countries to specialize in what they do best and trade the produce with each other. Resultantly, this will increase the total output at the global level, the bounties of which can be shared by every country.
Whatever results from the workings of nature is good. Government interference with free markets may be justified but it should not hinder competition. It should only be used to curb negative forces like monopoly and exploitation of labor. Economic competition is good in as far it pushes the human race forward and causes human progress. However, if governments were to interfere with every aspect of a free market using quotas and tariffs, it would inadvertently impede human progress.
In the bigger scheme of things, protecting local industry by discouraging imports will allow inefficiencies to creep in. It will plague the industry with rust, reluctance, and dormancy.
Competition will naturally weed out week firms and allow only the best and cheapest products to survive. People will be able to get more for less. People will be able to get better for less.