WHAT THE HELL IS NAFTA; A SHORT EXPLANATION OF FREE TRADE

Sarah,

Globalization is relentless.  A starting point in understanding globalization is to understand “free trade”.  NAFTA (North American Free Trade Agreement) is a classic example of a free trade agreement.

NAFTA:

The North American Free Trade Agreement was executed between Mexico, Canada, and the United States in 1994.  The basic idea of the agreement is to eliminate barriers to trade.  The most common barriers to trade are tariffs.  Tariffs are taxes on imports that often work to protect domestic companies from global competition. (An import will cost extra money if it is taxed and therefore the domestic product will be cheaper)  The idea of the agreement is that if two (or more) countries eliminate all tariffs, trade between those two countries will expand.

What Are The Arguments For And Against Free Trade?

There are several arguments in favor of free trade.  First, it lowers the price of goods and services.  For example, I just bought a laptop for $300.  I highly doubt I could find a laptop for that price that was made in America.  Second, companies can become more efficient.  Cheaper production costs created by importing cheap goods from overseas lead to higher profits.  Third, lower prices and more efficient companies bolster overall economic growth.

The main argument against free trade is simple: it screws American workers.  American workers cannot compete with their Chinese counterparts that are working for 75 cents an hour.  When Chinese workers are hired, the American workers that had been doing their jobs are fired. 

The second argument is that free trade hastens the destruction of the environment by creating more goods and shipping them around the world.

Could We Stop This Trend If We Wanted To?

Probably not.  By now, most companies have supply chains that are dependent on the system.  To stop free trade now would seriously short circuit their operations.

Are Politicians Doing Anything To Slow The Trend?

Definitely not.  Obama approved free trade deals with Panama, Colombia, and South Korea.  Despite all the grumbling about China’s unfair trade practices, the United States is yet to hit China with any significant tariffs.

Are American Workers Really Getting Screwed?

You could argue it.  Most Americans receive health care through their jobs so getting laid off hurts.  Further, our education system isn’t really preparing our workers to compete internationally.

The flip side of this argument is that our education and health systems are not the problem; our tax code is.  Santorum, for example, made the argument that if you stop taxing manufacturers in America, the cost of employing American workers will fall below that of employing workers overseas.

Further, some people argue that jobs lost in manufacturing are gained in other sectors of the economy.  For example, Apple computers are built in China but the growth of the company allows it to hire more Americans in America.

Lastly, some people argue that the lost jobs would be lost no matter what because businesses that didn’t cut costs would go out of business and be forced to lay off their entire staff.

Who is right?  I have no idea.

Bottom line: Globalization is inescapable.  We can try to soften its impact but cannot reverse the trend.