The Comparative Advantage Of The U.S. Economy

in Economics by
   

Recently, there has been a large amount of media attention focused on Donald Trump’s hatred of the North American Free Trade Agreement (NAFTA). This animosity has also been targeted at CEO Mark Fields’ to move parts of Ford’s manufacturing to Mexico. Sadly, logic and fact have taken a backseat in both of these discussions. Clichés from Trump dominate the media scene, including a recent quote highlighted on CNN, “NAFTA has destroyed our country.” This statement is far from the truth. No matter what clichés Trump or any other political candidate throw at NAFTA, the American people should not be fooled: NAFTA allows the U.S. to succeed in attracting higher-paying jobs, which is currently the country’s comparative advantage on the international market.

Trump’s main argument is that NAFTA allows for jobs to easily move from the United States to Mexico, thus hurting the U.S. economy. Trump’s proposed solution includes destroying the NAFTA pact and the implementation of a hefty 35% tax on all imported cars. Not only will Trump’s proposed solution harm the U.S. economy, he also has incorrect premises involving NAFTA. NAFTA encourages some manufacturers to leave the U.S., but this does not necessarily hurt our economy, especially if the U.S. is importing other jobs as well as increasing its consumption and investment through the open trade environment that NAFTA creates. Some honest, hard-working Americans will lose their jobs in the short run, but if a system of free trade is protected, the long-run will produce lower unemployment rates and an increase in the well-being of every consumer.

The law of supply and demand applies to the job market just as strongly as it applies to other economic goods. In the Ford case, the company has a demand for low-paying, unskilled labor, which Mexico can supply with ease. Therefore, it makes sense that Mark Fields would move some of his manufacturing plants to Mexico where Ford can make a larger profit and where workers are willing to work for less. This is one comparative advantage that the working class in Mexico has, the ability to work low-skilled jobs at a cheaper rate. Mexico’s lower cost of living allows for this comparative advantage to exist.

So what is the United States’ comparative advantage? The United States has one of the most educated populaces on the globe, a populace that is considerably more educated than Mexico’s. Additionally, the United States also has a relatively free economy and a high GDP per capita. Because of all of these factors, the United State’s comparative advantage lies in innovation and high-paying high-tech jobs. Ford alone is an example of this phenomena. Even though Ford is moving some of its manufacturing to Mexico, Ford will be using those now empty U.S. plants to produce higher end vehicles. This is a great example of U.S. workers using their comparative advantage at providing above minimum wage labor to companies. Mexico cannot provide this kind of labor, but the U.S. can. Therefore, as long as the U.S. continues to lower tariffs and other forms of taxes, higher paying jobs will continue to appear, especially when there are investors waiting in line to invest with their new capital.

NAFTA encourages countries like the United States to embrace their comparative advantage. When countries embrace their comparative advantage, incredible things can happen. The U.S. Trade Representative states that since NAFTA’s implementation, U.S. exports to Mexico have increased and now sit at 470 percent above pre-NAFTA levels. This 470 percent increase led to $236 billion in additional goods traded to Mexico last year alone. A good portion of the $236 billion exported to Mexico are upper end goods like machinery, a prime example of the U.S. embracing its comparative advantage through NAFTA. In addition, the U.S. can now use that extra $236 billion to invest in new projects and business.

Hopefully, whoever wins the office in November will look at NAFTA’s success and explore other ways to increase incentives for higher paying jobs to move to the U.S. instead of throwing around poorly thought out economic plans that could be devastating to our great nation’s future.

Stephen Strosko is a graduate student at George Mason University and a Young Voices advocate.

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