Thursday, April 14, 2005

Comparative Advantage: Should we Hate NAFTA?

I grew up in Massachusetts, a lovely state dotted with old mill towns that no longer have mills. A lot of the mills were textile mills that turned southern cotton into fabric. This was a hot spot for the industrial revolution. Take cotton from the agrarian south and use it to produce goods in the industrialized north. Why not grow the cotton in Massachusetts? Because the land is not good for it, the weather is no good for it, and labor is too expensive. That's why.

Most of these stately old mills are gone now; but they did not go to Mexico or China. At least not right away. No, the much troubled American textile industry moved them to the Carolinas, for example. Why? Because it was cheaper to operate there. Maybe it was the cost of land in New England but a lot of it likely had to do with the cost of labor, benefits, union representation, etc. In other words, the south had a comparative advantage in agriculture while the north had one in manufacturing.

Where were the anti-globalization forces when the mills were moved from Massachusetts? Did people march in the streets of Framingham? Where were there organized anarchists with pierced cheeks and knickers? No doubt the folks in New England protested in one way or another. After all, their livelihood was being taken from them. But did anyone blame the corporations or argue on philosophical grounds that the move was immoral? Maybe. What do I know, I am not an economic historian? I'm just a lawyer.

But here's my point. Is there any difference between moving from Bedford, Mass. to Raleigh in 1950 and moving from Raleigh to Nuevo Laredo, Mexico in 2000? The thinking behind the move is exactly the same.

Now I know what you will say: But in Mexico, labor rates are kept artificially low through lax labor laws and production costs are artificially low because of poor environmental, safety, intellectual property and other regulations. Maybe. I don't know and my guess is that most of the rock throwers don't either. But, and trust me I hate to say this, isn't comparative advantage a fact of life that the company has a limited ability to control? And, doesn't it have a legal obligation to maximize shareholder value? The answer to that last question is "yes."

That sounds terrible. But you have to keep a couple things in mind.

  1. I am as quick to hug a tree as anybody. As an aside, I just read Michael Crichton's "State of Fear" and have to start checking his citations. I listen to NPR and read the NYT. OK, so don't get on my case.
  2. Free Trade Agreements like NAFTA provide some leverage to force partner countries to improve on these fronts. NAFTA contains specific provisions requiring the enforcement of intellectual property rights. It also has related side agreements on labor and the environment. I know there is not much there in the way of teeth to enforce labor and environmental controls, but there is more now than before NAFTA. And, the side agreements create a mechanism for bringing violations out into the light of day.
  3. Lots of stuff coming into the U.S. is duty-free anyway. That means the production companies would look to Mexico, Central America, Morocco and similar countries anyway. But most of these countries have high duties for U.S. goods entering their markets. On that front, we might be getting the better deal.
  4. Big companies are aware of the public relations impact poor factory conditions in low wage countries can have. Nike recently produced a report on its corporate social responsibility activities. So did BP. Starbucks is working on climate change issues. Some companies export their U.S. health, safety and pollution requirements to their foreign production facilities (although not necessarily to unrelated suppliers). Many don't, but there are companies out there trying to do the right thing.
  5. And, think about what NAFTA (and other trade agreements) does: it encourages the use of North American materials and labor. That keeps jobs and revenue in the neighborhood (if that really matters). Moreover, it helps to create markets in partner countries for U.S. exports and also services. That is some job protection here we would not have otherwise.

Maybe NAFTA is yesterday's news. Mexico is finding it hard to compete with China even though there is no trade agreement with the U.S. Someday, China will be too expensive or too unpredictable for business. When that happens, watch factories move to Vietnam. After that, who knows, maybe Nigeria. It all depends on who has the comparative advantage. These trade agreements the anti-globalization forces hate so much can't stop that. So, we should at least use them to protect what we can and encourage positive developments in our trade partners.

Now that I sound like a Bush Administration functionary, I need to go wash my virtual mouth out and renew my Amnesty International membership.

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