Although my main focus on this site involves the financial markets and individual securities, at times like this it is difficult to ignore the massive structural changes that are taking place in the economy due to political action in Washington. I have many concerns about several proposed policies currently under discussion, but I am most bothered by the rise of protectionist sentiment in Washington and throughout the country.
In a two part series this weekend, I will discuss two particularly counterproductive policies. This post deals with the recent restrictions imposed on Mexican trucking. Tomorrow, I will write about the restrictions imposed on TARP recipients related to hiring workers on H1B visas.
Free Trade Consensus Builds in the early 1990s
In the early 1990s, many observers thought that the debate on trade had finally been settled. Conservatives may not have agreed with President Bill Clinton on many policies, but a firm consensus developed on free trade. This was symbolized by President Clinton signing the North American Free Trade Agreement (NAFTA) in late 1993. President Clinton signed the agreement despite fierce opposition from important constituencies within his own party due to his belief in the benefits of free trade. It seemed at the time that most economists of all political persuasions agreed that the benefits of comparative advantage could increase overall living standards in all countries when tariffs and other protectionist measures are eliminated.
NAFTA is a complicated agreement and I do not seek to go into all of the details of the agreement in this post, nor will I discuss the broader ramifications of the agreement other than to say that cross border trade has dramatically increased in the 15 years since the agreement went into effect. According to the Office of the United States Trade Representative, trade among the NAFTA nations tripled between 1993 and 2007. The link provided above is also useful for obtaining some key facts regarding the benefits of the agreement over the past fifteen years.
NAFTA and Mexican Trucking
The terms of NAFTA required the United States to permit a small number of Mexican trucking companies to carry cargo into the United States. NAFTA called for trucks from both the United States and Mexico to be able to operate on a cross border basis by 2000. This was opposed by the Teamsters union among others who claimed that Mexican trucks are unsafe and would pose a hazard if allowed to operate within the United States.
In 2001, a dispute resolution panel ruled that the United States was in violation of the agreement. Several years passed without progress on the issue, during which time Mexico did not retaliate with tariffs even though it would have been within its rights to do so. The limited pilot program was put in place in 2007 by the Bush Administration in an attempt to achieve some level of compliance with the agreement. The Economist recently ran an article with much more information on the history of the trucking dispute.
Pilot Program Scrapped
The Omnibus Appropriations bill recently signed into law by President Obama has eliminated the limited pilot program and Mexico has retaliated with tariffs of up to 45% on 90 American agricultural and industrial products. Mexico chose to target tariffs on products important to a number of key states to maximize political damage to those who supported the elimination of the program. While perhaps understandable, this will only increase the costs of consumer products in Mexico.
The argument that the trade opponents have used to block Mexican trucking is that the trucks are unsafe and not maintained properly. The Economist and many others have observed that this argument has little merit given that many of the Mexican firms in the pilot program have deployed new trucks and drivers have been trained as specified by the agreement. The Economist also reported that Mexican trucks operating in the United States during the first year of the pilot program had fewer safety problems than American trucks.
A Lose – Lose Proposition
What is the net impact of this situation? Mexican consumers will be spending more on products imported from the United States that were previously free of tariffs. American producers of these products will suffer as the demand for their products in Mexico declines. Many of these businesses are already hurting due to the recession. American consumers will suffer from higher prices since Mexican trucks will now have to unload at the border and reload onto American trucks. This is obviously a costly proposition and entirely wasteful from an economic perspective since the loading and unloading of trucks at the border is a perfect example of a deadweight loss.
Who wins? Perhaps some American trucking companies will have increased business, but the benefits that accrue to this small constituency pale in comparison to the overall economic costs of the protectionist move by Congress.
It should not be lost on any member of Congress that the Great Depression was deepened significantly by the infamous Smoot-Hawley Tariff Act of 1930. While it may be politically popular to bash trade during tough economic times, these types of actions will only serve to inflict more pain on the American people and will tarnish America’s reputation for honoring trade agreements.
No one wins except for some narrow special interests and politicians who are seeking support from uninformed voters who may think that protectionism will help them in some way. President Obama, who understands the benefits of free trade and has senior staff who perfectly understand the trade offs, should demand that Congress reverse this ill conceived move and honor America’s commitments to Mexico under the NAFTA agreement.
Tomorrow, I will write about another protectionist move related to restrictions on hiring H1B workers imposed on companies receiving TARP assistance.