14 May 2008

The Convenient NAFTA Scapegoat

All too often trade agreements like the (NAFTA) are used to explain the job losses in manufacturing. It is politically convenient to blame one thing (i.e., NAFTA) when there are really many issues at play. I hear Hillary Clinton and Barrack Obama bemoan free trade agreements on the campaign trail.

There is still manufacturing here, it is just not at the same scale as we have seen in the past. I see many small manufacturing companies in the most unlikely places throughout the Midwest. I have worked in towns like Pella, Iowa which hosts companies like Pella and Vermeer. I have worked in towns like Columbus, Nebraska which hosts companies like BD Medical, Behlen, Flexcon, and Vishay. Among the larger manufactures in these towns there are typically numerous smaller ones.

While there has been a decline in United States manufacturing, these declines cannot be solely attributed to NAFTA and other free trade agreements. Detroit and the Big Three auto manufacturers have been hit hard, but there have been plants built in other areas of the United States by Subaru, Toyota, Honda, and BMW. The Big Three are in decline, not because of trade agreements like NAFTA, but because they have been stubborn when it comes to their products, not embracing quality that leads to consumer loyalty, and have been burdened by the union system among other things. When looking at a decline in manufacturing jobs you also have to consider productivity gains and the continued automation of manufacturing. If a company is going to survive, grow and provide more jobs it needs to cut costs.

Let's be honest about wages, health care costs and corporate taxes. The standard of living continues to go up and with it the cost of living. Cost of living and inflation pressures wages to go up which makes it more expensive to make things. Health care costs are increasingly a larger share of doing business in the United States, but companies in other countries do not necessarily have to shoulder this burden because they are in a country with a nationalized health care system. Finally, the United States has the highest corporate tax rate in the world. A company wants to make money and not break even or lose money. They need to make money to also invest a portion of that money back into their company to develop new products to keep competing, keep making money, and keep employing. The higher the taxes the less profit and can go to innovation and the less motivation to grow your business. If that company cannot do those things there is no incentive to keep their doors open. Companies under such pressures will close doors, cut back, or simply leave for somewhere that provides a more conducive environment to do their business. First and foremost, a company is there to make money and not be a government job service program.

Free trade agreements break down the barriers erected by tariffs. And trade often goes both ways. Before complaining about something try and look at the total picture and not just a one sided politically influenced view. The majority of issues are not black and white, but rather gray through and through.
Photo by KCThinker, Roman ruins in the middle of town.

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