As the Trans-Pacific Partnership, a proposed free-trade agreement among 12 Pacific Rim countries, moves forward in Congress, it is time to pause and reflect. Some are getting caught up in the excitement of the moment; optimism abounds in supporters and doom is around every corner for those opposed. The truth lies somewhere in the middle. Let’s pause and reflect.
Supporters of the new agreement believe that removing tariffs and restrictions will increase the amount of goods and services produced by the US and sold elsewhere. They say employment will increase with the increased demand, as will profits.
Why should we be interested in an increase in corporate profits? There are two reasons.
Increased profits, when reinvested in the company, fuel company growth
As profits increase, there is normally a corresponding increase in stock prices
The amount of corporate America owned by the working class, either directly or via retirement options, is increasing. The value of your 401k rises when stock prices rise. That is a good thing.
A look at past agreements may provide a clearer indication of the future effects of this one. The North American Free Trade Agreement (NAFTA) was passed in 1993 and has been in place long enough to evaluate its success or failure.
Determining whether NAFTA has succeeded or failed depends on your point of view. NAFTA proponents also projected that freer markets would generate more U.S. jobs. That did not happen; there was a net job loss, with American industry moving many operations to Mexico.
The agreement was intended to increase U.S. exports to Mexico. This did happen, but the net effect was to create a trade deficit with Mexico. On these two key points, the agreement produced negative results. But there are other areas that provided positive results.
For the Mexican middle class, that section of society that drives the economy, NAFTA has provided good news. The middle class in Mexico expanded by 11.4 points from 1994 to 2010, rising from 27.8% of the total population to 39.2%.
The primary benefit is in the urban areas, where approximately 50% of the population is middle class. Rural areas still lag behind, with only 25% of the population attaining middle-class status.
With the rise of the middle-class, there have been political reforms. An area of great promise is the effort to attack corruption. Corruption is the largest tax on economic growth.
The outlook moving forward is good. The Mexican government is allowing foreign partners in the oil fields, and there is large untapped shale reserve on the Mexico-Texas border. Natural resources, such as oil and gas production, are expected to increase. With more economic opportunities in Mexico, the flight of its citizens to the U.S. should lessen.
Now the Trans-Pacific Partnership is in front of Congress and being sold using the NAFTA formula. The results should be the same: U.S. job losses, a reversal in the balance of trade, and a growing middle class in our trading partners. But, pause to consider.
Might some of the trade imbalance be a transfer of amounts that now go to the Chinese?
Are the job losses in industries that would leave to another market anyway?
The primary focus of our trade policy is commerce, as it should be. However, given that prosperous societies are typically peaceful, could helping to ignite prosperity with less than favorable trade agreement terms have added benefits? I invite your comments.