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February 20, 2017


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Quite interesting.

A few observations:

1. From the chart your reproduced from Novy's work (and it is an interesting paper - a good read), it suggests that NAFTA reduced total trade costs from around 45% to 33% rather than from 70% to 33%. Unilateral Mexican trade liberalization in 1985 reduced total trade costs from 70% to 45% by 1994 and the combination of unilateral Mexican trade liberalization and NAFTA seems to have reduced total trade costs from 70% to 33%. The chart raises some interesting questions (including the ever interesting counterfactuals) though, like -

(a) would total trade costs have continued to fall following unilateral Mexican trade liberalization in 1985 in the absence of NAFTA and if so by approximately how much?

(b) Trade costs were already falling from 1970 (it was around 96% in 1970) without NAFTA or Mexican trade liberalization, would trade costs have continued to fall absent both of those developments? If so, by approximately how much?

2. The charts in the paper show that US/Canadian trade costs have been consistently lower than US/Mexican trade costs. Novy notes that the trade cost measure he uses "captures not only trade costs in the narrow sense of transportation costs and tariffs but also trade cost components such as language barriers and currency barriers". I suspect this explains partly the difference between US/Canada and US/Mexico trade and also probably explains the difference between US/German and US/UK trade (the former went from 95% total trade costs down to 70% between 1970 and 2000 and the latter went from 96% down to 63% between 1970 and 2000). I'm curious now as to what extent the breaking down of currency barriers between (i) the USA and Canada, (ii) the USA and Mexico, (iii) the USA and UK (tongue in cheek here - if Brexit results in the pound crashing to parity with the dollar, why not establish an Anglo-American currency union based on the pound being pegged to the dollar? ;) ) would affect the total trade costs in those cases.

3. Just what would it take to reverse the fall in trade costs to pre-NAFTA levels (45%) and pre-Mexican liberalization levels (70%) on the part of Trump's America?

4. What would it take to move production back to the USA and not not have that production be done by automation but by flesh-and-blood workers? I'm assuming a significant rise in Mexican wages to match American and Canadian wage rates would by itself not be sufficient since that would probably encourage production to move elsewhere in Latin America and to China....

Agriculture tends to be generally more protected globally, so I am assuming that the trade costs in agriculture might not be as low specifically as the average trade costs outlined and that the loss of NAFTA would more easily undo the trade integration and lowered trade costs in agriculture.

(1) You're right!
(1a) We don't know. It's hard to believe that NAFTA had no effect, however.
(1b) We don't know. But not that much.

(2) Andrew Rose is the go-to guy on this issue. He used to think that currency unions had huge effects. Then along came EMU, and his result didn't hold up that well: http://www.frbsf.org/economic-research/files/wp2015-11.pdf.

(3) Tariffs (not a BAT!) in the 20%+ range. It would take a while to disentangle the supply chains, however. Jobs would move slowly.

(4) Probably nothing. We aren't quite yet in the age of the fully-automated factory, but even if all Mexican auto and autoparts migration moved back to the USA, it would not create 700,000 jobs here.

Moreover, the jobs that would move will not be the UAW jobs of yore. Go to page 11 here. Autoparts wages in the USA are around $16 an hour, down 14% from 2003. Those wages could fall further. We won't see jobs paying $2.40 an hour (the autoparts wage in Mexico), but even $15 is optimistic.

(1a) Yes, I'm sure NAFTA did have an effect. One interesting thing to note is that the trade costs had gone sideways around 1977-1985 until Mexican liberalization. I suspect that without NAFTA something similar would have happened in the 1990s where the trade costs might have fallen a bit further from say 45% to maybe 40% but then gone sideways after that instead of continuing to fall to 33%

(1b) I suspected so too given the sideways movement between the late 1970s and 1985. It would be fascinating to know just why the fall in trade costs had stalled around that period.

(2) I don't know if the advent of the EMU means his results didn't hold up that well....after all Europe was essentially in a de facto monetary union from long before the formal EMU process. From 1945 to 1971 the European currencies were pegged to the dollar/gold standard and thus essentially in a monetary union. That collapsed and there was briefly an attempt to keep things in place with the Smithsonian Agreement and the Basel Agreement's "snake in a tunnel", but that too collapsed in 1973 and we had a period of floating currencies briefly in the 1970s (basically 1973-1979 apart from an effective D-Mark zone of Denmark, West Germany, Austria, the Netherlands, Belgium and Luxembourg). Then the European Monetary System and its Exchange Rate Mechanism came along in 1979 and re-established that de facto currency union which eventually lead to the euro. Rose's result may not have held up so well, perhaps because the time frame is wrong?

(3) Ah, I see.

(4) Confirming that the Trump-led move to bring jobs back is kind of quixotic since the type of action being pursued would be disruptive to trade, bring back less jobs than assumed (setting the stage for more angst and disappointment) and likely those returned jobs will be temporary given the long term trends in automation. I've been wondering if a better approach by Trump or an equivalent figure wouldn't be to rail against the "unfair" wages being paid in Mexico by the "greedy corporations" which "shifts jobs out of America" and "does nothing for the workers in Mexico". Pressing for Mexican wage rates to go from say $2.40 per hour in the autoparts industry to say $10 per hour, while quietly introducing a BAT to remove the bias against domestic production and bring some jobs back slowly might well work for both traditional Trump supporters and Mexicans. If I was working $2.40 per hour in the Mexican car industry and Trump came along saying I should be paid more, it would be hard to argue with him given I would indeed desire to be paid more.

What about agriculture though?

Any other interest in agriculture?

Yeah, please do.

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