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Renegotiating NAFTA won't bring back many jobs, say some economists

May 21, 2017

Credit automotiveauto.info

President Trump followed up on a key campaign promise last week and formally notified Congress of his intent to renegotiate the North American Free Trade Agreement.

Some economists say there's more of a downside than an upside to opening up the landmark deal, especially for Michigan.

Charles Ballard is an economist at Michigan State University. "My advice to anybody talking about renegotiating NAFTA, if you have to use a scalpel, use a scalpel.  Please don't use a meat ax," Ballard said.

Ballard says NAFTA's bad image is largely undeserved.  He says everyone talks about the bad parts, in particular, people in certain industries like auto manufacturing losing jobs - but not the good parts. 

While he would like to see more done for people who have lost their jobs, such as greater income supports and job retraining opportunities, he says other Americans have benefited from NAFTA because of lower costs for goods in the U.S., as well as increased U.S. exports to Mexico and Canada.

Ballard says for Michigan manufacturers, auto parts and cars often cross the border with Canada many times.  Imposing a tariff on each exchange will make goods more expensive, and that could hurt Michigan's auto industry-heavy economy.

His big fear is that a NAFTA renegotiation is just the beginning of imposing tariffs on imports from other countries.  That could spark a trade war, and a recession.

University of Michigan economist Donald Grimes says it's simply a pipe dream if the government thinks renegotiating NAFTA will bring back all the lost high-paying auto jobs.

"There are a lot of people that believe that fairy tale that it would be an easy fix, and American greatness will be restored," Grimes said.

But Grimes says even if the U.S. ultimately imposed very large tariffs on Mexican imports of things like cars and auto parts, it would take a long time for companies to shut down their Mexican factories. And if they did do that, there's no guarantee those factories would return to the U.S., he says.  Companies could respond by transplanting factories to other low-wage countries like the Philippines.  That could start a destructive "whack-a-mole" response by the U.S. of imposing tariffs on those countries. 

But Grimes thinks what would be more likely to happen is some highly automated factories would eventually move back to Michigan, or they would be relocated to places where auto jobs are not high-paying, like southern states.

His estimate is only about 50,000 jobs would eventually move back to the US.

Grimes says if the U.S. is truly concerned about trade deficits because of free trade deals, a better way to go about addressing it is figuring out how to get Americans to save more. 

Right now, he says, we have a big trade deficit with Mexico, China, and other countries because we consume more than we produce. 

Just adding jobs and producing more wouldn't solve the problem, because the people who get the new jobs would also consume more.

The only sustainable way to make trade more balanced, Grimes believes, is slow-but-steady policies of encouraging Americans to save more money.   A lot of that money would be invested, leading to job growth and higher productivity, leading to a better balance of trade.