The Contrarian

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nafta

Killing NAFTA

Our observations over the past several decades has been that any policies out of Washington formulated by economists are very likely to be ‘very bad ideas.’ In fact, throughout history, the follies of economists have created crises and depressions.

Remember the Smoot-Hawley Trade bill in the early 1930’s? Many say that this converted a recession to a 10 year depression as other countries retaliated against the protectionism of the US.

The last time we used the term of “very bad idea,” was when the White House (WH) announced a possible BAT (border adjustment tax).

Now the economists advising President Trump seem to have talked him into an Executive Order withdrawing from NAFTA. It’s not just bad, but terrible.

Below is an excellent article from Mish Shedlock on the subject.

Trump Considers Executive Order Withdrawing From NAFTA: Majorly Stupid

“It’s been very, very bad for our companies and for our workers, and we’re going to make some very big changes or we are going to get rid of NAFTA once and for all,” President Donald Trump said in a speech last week.

Today, White House readies order on withdrawing from NAFTA.

The Trump administration is considering an executive order on withdrawing the U.S. from NAFTA, according to two White House officials.

A draft order has been submitted for the final stages of review and could be unveiled late this week or early next week, the officials said. The effort, which still could change in the coming days as more officials weigh in, would indicate the administration’s intent to withdraw from the sweeping pact by triggering the timeline set forth in the deal.

Peter Navarro, the head of Trump’s National Trade Council, drafted the executive order in close cooperation with White House chief strategist Steve Bannon. The executive order was submitted this week to the staff secretary for the final stages of review, according to one of the White House officials.

The draft executive order could be a hardball negotiating tactic designed to bring Mexico and Canada to the table to renegotiate NAFTA. But once Trump sets the withdrawal process in motion, the prospects for the U.S. pulling out of one of the largest trade deals on the globe become very real.

Some internally see the drafting of the executive order as a win for the “nationalist” faction within the White House led by Bannon, who has been sidelined in recent weeks since he was removed from the National Security Council.

NAFTA Running Out of Time

CNNMoney reports Trump’s NAFTA is Already Running Out of Time

President Trump wants a new trade deal with Mexico and Canada soon. But he’s running out of time.

Trump has said he wants a deal that benefits US workers, but hasn’t said exactly what he wants in a new deal.
If Trump decides to stay in and renegotiate, time isn’t on his side.

His trade team, led by Commerce Secretary Wilbur Ross, must trigger a 90-day consultation period before trade talks can begin. At the earliest, talks could start in August.

Edward Alden, a senior fellow at the Council on Foreign Relations, said “it’s completely unrealistic” to get a deal done this year.

“The notion that you’re going to have a negotiation that’s both fast and productive is just an illusion,” Alden added.

It’s also worth noting that the original NAFTA agreement, which became law in 1994, took years to put together.

Mexican leaders want negotiations done by early 2018 because Mexico has presidential elections in July of next year. There’s no telling whether the next Mexican president will cooperate with Trump on NAFTA.

Very Bad Idea

Killing NAFTA is a terrible idea. I have talked about this before but here are some pictures of the allegedly “terrible trade deal”

Manufacturing Employment

Trump and Navarro moan about NAFTA causing a loss of US manufacturing jobs. If anything, NAFTA stabilized or increased US manufacturing jobs for six or seven years thanks to an increase in bilateral trade.

The demise of US manufacturing jobs started in June of 1979, long before anyone could blame either Mexico or China.

US Balance of Trade in Goods with Mexico

Goods Trade with Mexico

It’s impossible to make a realistic case that NAFTA hurt the US.

Explaining Balance of Trade

The seeds of trade imbalances were sewn in 1971 when Nixon closed the gold window. The trade deficit rose, then skyrocketed.

Total Credit Market Debt Owed

Following Nixon closing the gold window on August 15, 1971, credit soared out of sight to the benefit of the banks, CEOs, the already wealthy, and the politically connected.

Scapegoating

  • Trump blames Mexico and China.
  • Larry Summers blames “Secular Stagnation”.
  • Ben Bernanke blames a “Savings Glut”.

Scapegoating Mexico and China helped get Trump elected. Scapegoating also allows the Fed and central banks to blame anything and everything but lack of a gold standard.

Ready, Willing, Able

So far, Trump has backed away, reversed positions, or failed in nearly everything he has tried to do or stood for in the election: Russia policy, Syria, getting Mexico to pay for a wall, and labeling China a currency manipulator are key examples.

Perhaps this is another negotiation ploy, but Trump fired a warning shot yesterday that he is ready, willing, and able to do something majorly stupid.

For the complete article: https://mishtalk.com/2017/04/26/trump-considers-executive-order-withdrawing-from-nafta-majorly-stupid/

Our View: we can’t expect other nations to stand still and not retaliate. And that creates trade wars, which always end badly. The main reason for declining manufacturing in the US is not foreign competition, but greater efficiencies. Many auto assembly plants, especially in other countries where they are not restricted by labor unions, are totally robotized. That’s the type of advance that has caused a decline in manufacturing employment. Don’t the advisors to the President know that?

On the positive side, the outline of tax reform just announced is very positive. If it can be made into law, it would give the economy a big boost. That’s where the WH should focus its energies. Forget Syria, forget NAFTA, Canadian lumber, and non essential issues. Tariffs only make the goods Americans buy more expensive. And guess who will get the blame.

Focus on what Americans really want: lower taxes, fewer regulations, and less interference by big brother.

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