Rants & Raves

(Don Chance)

Free Trade Agreements, Economic Alliances, and Brexit


Call me a free market person.  I love the notion of free trade.  There is nothing like borderless commerce to raise the welfare of everyone. Countries that cannot produce enough of something they want at a reasonable cost can benefit from countries that can produce that product at a lower cost.  And the producing countries get jobs. What could be better.

The United States claims it is for free trade, but it really isn’t.  If you don’t believe that, then go overseas and do some shopping.  If you bring back more than $800 of goods, you will have to pay a tax on the excess.  Why do you think there are duty-free stores in airports?  First, please understand that they are not really duty free.  If you exceed your $800 allowance, you will still have to pay a duty.  They are duty free in that they sell goods that are designated for consumption outside of the country in which they are purchased.  As such, they avoid an import tax.  The system is set up so that you cannot buy these goods unless you have a foreign passport and a ticket out of the country.  With a huge amount of illegal effort, you could take them out of the country, then fly back in with them, and sell them to a resident, but that is unlikely to be worth the effort.

 Countries like the U. S. that claim to be for free trade are really not for free trade.  They will tax the living daylights out of various items.  Instead of live and let live, countries like the U. S. go to great lengths to make foreign goods more expensive.  That means when Apple imports iPhones made in China, it has to pay a tax that it passes on to the consumer.

 “Free trade” is simply a political euphemism for a trade policy that might have nothing to do with being free.  It might mean just an adjustment to tariffs.  It might permit workers to cross borders more easily.  But it really has nothing to do with free trade.

If you are old enough or have studied it, in 1992 Ross Perot ran for President on an independent ticket against Bill Clinton of the Democrats and the incumbent George Bush, often called Bush 41.  A highly visible issue in the campaign was the proposed North American Free Trade Agreement, a pact between the U. S., Canada, and Mexico, often called NAFTA.  Clinton and Bush supported it.  Perot disapproved of it, characterizing it as having “that great sucking sound,” a reference to job loss from the U. S. to Mexico.  Well, Clinton won and NAFTA was passed.  Did the U. S. lose out to Mexico?  In 1992, the U. S. had a $5.3 billion surplus with Mexico.  In 2016, it had a $59 billion deficit. 


In 1992, the U. S. had an $8 billion deficit with Canada, and in 2016, it had a $9 billion deficit, but that number has been as high as $78 billion.


I have not been able to get the corresponding figures for those exact dates for Canada’s balance of trade with Mexico, but given Figure 1 in the article below, Canada’s deficit with the Mexico has mushroomed over the last 20 years.


Ross Perot was right.  NAFTA primarily benefitted Mexico.  Free trade agreements are a lot like corporate mergers.  The empirical evidence is pretty strong that corporate mergers primarily benefit the stronger of the two companies.  As such, free trade agreements primarily benefit weaker countries.

Free trade agreements are just one form of economic alliances.  Let’s talk about the European Union.  This monstrous bureaucratic entity should be illegal.  Of course, who would there be to declare it illegal?  There is no global governing body.  But I know that when competing corporations decide to work together, it is almost never good for consumers.  After all, we want companies to try to outdo each other, not carve up the market and agree on what prices they’ll charge.  These activities are almost always viewed as illegal when done within a country.  But let countries agree, and these pacts are viewed as wonderful achievements of diplomacy and economic cooperation.  The European countries compete with each other.  When they join forces, competition is reduced.  Moreover, the strong help out the weak, resulting in the weak countries benefitting at the expense of the taxpayers of the strong countries.  Germany, the strongest economy in the EU, effectively subsidizes the weaker economies of Greece, Spain, Portugal, and Italy.  If it gets bad enough, as in the case of Greece, the stronger economies either directly or indirectly bail out the weaker.

It is no wonder that British citizens rejected the EU with their famous Brexit vote last summer.  Some people thought the world must be coming to an end.  I, however, thought this move was the smartest thing the Brits had done since they sent the troops to Waterloo.  Why would the Brits want to be dragged down by the weaker EU economies?  I commend the British citizens, who are smarter than their leaders. 

Yes, the pound collapsed.  And what exactly is the problem with that?  A weaker currency makes buying the country’s goods and services more attractive.  Britain has long been an expensive country to visit, with expensive goods to buy.  With the pound much more attractive, foreigners are dying to go there.  In the six months since the Brexit vote, Britain had the strongest economic growth in the world.

And if anyone thinks Brexit was a bad move, think Switzerland and Norway.  Years ago they chose not to be members of the EU.  If you think British voters are stupid, then call the Swiss and the Norwegians stupid as well, but I do not think anyone would believe you.  These two countries are fiercely independent and have solid economies.  They simply do not want to be dragged down by weaker economies.

As for the euro, I am indifferent.  The alignment of currencies certainly does have some efficiencies.  Now if I take a trip to Europe, I can get by with one currency, provided of course I do not go to Britain, Denmark, Norway, Sweden, Switzerland, Poland, Croatia, Iceland, and the Czech Republic, among other places.  Come to think of it, maybe a single currency really didn’t save me much time and effort.

Virtually no one ever questions economic alliances, except of course, Ross Perot.  Now we are facing the Trans-Pacific Partnership, where the U.S., Australia, Japan, Brunei, Canada, Chile, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam have agreed on some tariff-cutting and a number of other matters such as human rights and the environment, which have little to do with trade and would normally be handle with other types of treaties.  As with most trade agreements, there is much controversy.  And there ought to be.



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Last updated:  January 17, 2017