Globalization and NAFTA – The Bigger Picture
By Hugh Holland
Every week several of the world’s biggest cargo ships go from China to the USA with 15,000 full containers and return to China with 11,000 empty containers. The biggest US import from China is computers. The biggest US export to China is soybeans. How did this happen? As NAFTA negotiations unfold, it is helpful to understand how the current trade situation evolved and where it stands today.
During and after WW2, the USA became a manufacturing powerhouse and US citizens became accustomed to continuous GDP growth and relatively high incomes. With the help of the US, by 1975 Germany, Japan and South Korea had emerged from wartime devastation. Japan had 126 million people living on a small island that must import virtually all of its natural resources and energy. Japan was keenly aware that their main asset was the equality and teamwork that underpins the formidable productivity of their people. By 1975, their productivity was putting pressure on North American manufacturers.
Around 1979, China ended its isolationist policies and opened its doors to trade. As a natural consequence of having the world’s highest labour costs, US companies began to automate factories and began outsourcing lower-skilled manufacturing work to low-wage countries. The result was a growing trade deficit and also growing income inequality. US debt began to grow as aggregate worker’s income and resulting tax revenue decreased. Tax revenue from growing US investors’ incomes did not replace that lost from factory jobs.
Globalization is defined as the process of international integration arising from the interchange of products, ideas and culture. Globalization was started by Columbus in 1492 but as outlined, outsourcing to low wage countries accelerated globalization after 1975. Globalization makes countries more alike. Like making an omelette, it’s much easier to do, than to undo.
Globalization produces a tension between generosity and greed that can be positive or negative. The positive side of globalization is that if managed properly, it can be a levelling agent that lifts poor countries out of poverty, creating less of the desperation that causes crime, conflict and mass migration. The negative side is that higher-wage countries that are accustomed to a higher standard of living resent losing even the lower-skilled jobs that are the easiest to outsource.
The following data, which was compiled using various reputable sources, shows how some key G-20 countries are coping.
The US doesn’t have an income problem. It still has the G20’s highest GDP per capita. Fundamentally China’s huge trade surplus and America’s huge trade deficit stem from the same cause; double-digit inequality. Both domestic oligarchies refuse to share their wealth with the average people. China’s huge manufacturing capacity that was intended to build domestic consumption has instead resulted in huge surpluses that are exported at low prices. In America, people are buying huge amounts of cheap imports or expensive luxury imports rather than buying American-made products.
High US trade deficits are the natural consequence of over 300 US companies manufacturing in China to escape high US labour costs and boost the income of the top ten per cent. The growing US debt of $22 trillion is the result of ongoing trade deficits, budget deficits, and high military spending.
Why is Trump going after NAFTA when both Canada and Mexico import more from the US than China, Japan and Germany combined? The above figures are for goods only. When services are included, the US has a trade surplus with Canada. It is ironic that Trump wants to balance global steel production with consumption, while attacking that very concept in Canada’s sensible supply management of perishable agricultural products. He needs a success story and thinks we will be easier to crack.
The 300 US companies that make things in China, Mexico and Canada to access lower costs have billions invested there, and also sell billions in those markets. It stands to reason that those US companies and their consumers would be the most damaged by Trump’s tariffs. Canada would also be affected because the US is our biggest trading partner. We need to diversify our trade.
Trump’s economic nationalism cannot undo 40 years of globalization. The eggs have been scrambled. It would take billions in new investments to unscramble them. Experience in several countries shows that US trade deficits and debt are best remedied by measures to improve workforce competitiveness and mobility, such as equality in education, universal health care, and equitable tax rates. China is now pursuing that path. The United States is still a great country and the sane heads will eventually prevail.
Hugh Holland is a retired engineering and manufacturing executive now living in Huntsville, Ontario.
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Globalization and all its moving parts is so complicated and complex it really only works in a perfect world scenario. It’s really just a theory. Every country has its own goals and objectives. Governments will protect and exploit their comparative advantages any way they can; mainly through tariffs, quotas and currency devaluations.
Just because we have been doing something for a number of years is not a reason to keep doing it. It has not worked for the USA. Their trade deficit has increased every year since 1972. Trump will throw these eggs out if he has to and start cracking new eggs. Countries and markets will adapt and most will be better off.
Terrific articles as usual, Hugh! You definitely have a book (or 2 or 3) in you: Did you ever think of publishing?
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One can only hope that the Democrats take over the House in the mid-terms, and some subsequent intelligence is injected into US global policy.