NAFTA according to Trump!

Trade disputes have marked Trump’s behavior in such patent way, that when America and Mexico announced they had agreed on changes to the North American Free Trade Agreement the markets and everyone else had a sigh of relief. Nonetheless, the pompous announcement by Trump who is now starving for a win on trade agreed to a NAFTA new deal: Trump will stop saying that Mexico brings drugs and rapists to the US and abolish the law of supply and demand in exchange Mexico will stop making Trump piñatas.

But in all seriousness the relief may be short-lived because of its chaotic nature. If Canada ends up joining the so called modifications, the foundations of NAFTA would remain intact with adjustments to the rules of origin and national content mainly to car manufacturing. Trump wants workers on both side of the border to be paid $16 an hour because the average wage of Mexican manufacturing workers is $2.30 which will remove the benefit for firms to move south of the border and stay at home ignoring supply and demand for labor and capital.

By imposing arbitrary rules above the free market, these changes is a joke of the administration’s supposed opposition to invasive regulation that will not only result in decrease productivity, but higher costs and a less competitive car manufacturing in North America’s free trade area, that has to compete with producers from Europe and Asia bringing uncertainty to the market.

According to Trump, the purpose of trade is to maximize exports and minimize imports when in reality a trade deficit only means that Americans are exchanging printed paper for goods as long as the dollar remains a reserve currency.

America under Trump likes to throw her weight around the world trying to impose new rules of behavior in general and making this new attitude uniquely reckless. In short, Trump has bullied his way to what he perceives as a weaker partner when negotiating with Mexico and Canada. Moreover, he is using the stupid pretext of national security to justify his tariffs on steel and aluminum in order to circumvent the rules of the World Trade Organization which he would prefer to disavow with a stroke of his. In this atmosphere, the rules-based system of global trade, which relies on goodwill between countries, which the US helped write, may prove to be more fragile than expected in our western values doctrine of civil behavior among nations.

Is the new deal between Mexico and the U.S. a better deal than NAFTA? 

Trump said he’s “ending” NAFTA and replacing it with the “largest trade deal ever made.”

The reality is that Trump cannot unilaterally end NAFTA in a constant lying, we now expect from a president who doesn’t understand treaties or could care less about telling the truth.

The fact that NAFTA didn’t address major industries that struggled to existed in the 1990’s it also left out new technologies but additionally ignoring labor and environmental standards.

The Trans-Pacific Partnership negotiated by Obama ultimately addressed these pending NAFTA issues. “The 12-country trade pact included Canada and Mexico among its signatories, it contained detailed language modernizing trade rules including information technology and raising labor and environmental standards. Nevertheless, one of Trump’s first acts was to inexplicably to pull out of TPP perhaps because he had not been involved in the negotiations that Obama had completed. Moreover Trump has now declared war on world trade by imposing tariffs on our allies as well as the Chinese with a consequent damage not only to foreign policy but also harming US businesses.

The fact is that there is still no signed Mexico deal which must also include Canada under the original agreement ratified by Congress which makes NAFTA implementation by statue and that does not give Trump the authority to separate the agreement in two parts.

Trump believes that negotiating bilateral agreements gives him the edge because of the size and power of the US economy thus being able to bully the weaker side and extract concessions, however he is learning that legislative restrictions won’t allow him to play dirty. The bottom line is that no matter what Trump says or wants to do most of NAFTA’s provisions will be active unless Congress passes a new trade law.

Besides, Congress is not the only deterrent to dumping NAFTA in favor of separate bilateral trade agreements. Canada and Mexico have each had to run the process through their respective legislator, therefore, any new trade agreement must involve all three countries. Mexican President Enrique Peña Nieto expressed during his telecom with Trump that he expected Canada to be part of any final agreement.

So, what is Trump talking about hammering “the best trade agreement ever made.”

Based on the scarce details these new requirements more likely than not require enlargement of the administrative state which will result in higher cost of cars and perhaps reduce the number of cars assembled in North America resulting in a negative effect of unintended consequences.

Apparently Trump is a slow learner for he should know by now that he is better served by telling the truth rather than lying and then getting caught on the lie. He did not negotiate a new trade agreement for he has no authority to do so and all three countries must agree to any modifications of the agreement!

Why does President Trump take strong action on trade deficits by imposing tariffs, but completely ignores budget deficits, which are significantly more dangerous to the US economy?

Budget deficits are an enormous can of worms if open for inspection, especially, now days with more heterodox theories, such as Modern Monetary Theory (MMT) influencing policy makers not to tame budget deficits. The argument of MMT is that because modern governments control their own currencies, they can never “run out of money.” (However, the qualifier is as long as said government controls a reserved currency)

Notwithstanding, the effect of deficits and money printing to pay bills has had many national economies collapsed from excessive leveraging. The collapse of Germany in 1930’s is a well-documented case that led to World War ll. In the 1960s, Lyndon Johnson refused to raise taxes to pay for the Vietnam War and his Great Society, when the private sector economy was booming. The result was reflected on rising inflation in the 1970s, which resulted in the election of Ronald Reagan.

To simplify Godley’s theories, modern economics considers two major sectors: the private sector and the public or government sector. “When the government spends more than it taxes, it runs a deficit. And that deficit in the public sector inevitably means a surplus for the private sector.” Basically, the private sector does the work required to achieve the government development goals, for instance if the government pays $100 for work and then taxes back $90, it leaves $10 in the private sector’s hands which results in the government running a deficit or spending more than it receives back in taxes. But the private sector has $10 it didn’t have before.” The theory continues that In order to accumulate money, the private sector needs a government deficit that runs in two cycles. Writers refer to a temporary deficit as a deficit that is related to the business or economic cycle, which, is the period of time it takes for an economy to move from expansion to contraction to expansion and so on. This cycle can last for several months or many years, and it follows an unpredictable random pattern.

The overall government budget balance is determined by the sum of the cyclical deficit and the structural deficit. Therefore, a cyclical surplus could mask an underlying structural deficit, as the overall budget may appear to be in surplus if the cyclical surplus is greater than the structural deficit. Australia was a case in point when its structural deficit was caused by a mining boom leading to extremely high revenues and large surpluses for several consecutive years, which the “Howard Government used to fuel spending and tax cuts, rather than saving or investing them to cover future cyclical downturns.”

Nevertheless, the economic consensus is that a structural or permanent deficit is not the same as a cyclical deficit in that it exists regardless of the point in the business cycle due to an underlying imbalance in government revenues and expenditures as is presently the case in the US economy. It follows that even at the apex of the business cycle when revenues are high the country's economy may still be in deficit. Thus, the total budget deficit is equal to the sum of the structural deficit and the cyclical deficit.

Keynesian economics, dictates that when the government changes the levels of taxation and government spending, in order to influences aggregate demand and the level of economic activity. Changes in the level and composition of taxation and government spending can affect macroeconomic variables that are managed by fiscal and monetary policy.

Fiscal policy deals with taxation and government spending and is often under an executive governed by laws of a legislative branch of government, whereas, monetary policy determines the money supply and interest rates and more often than not it is administered by a central bank. Fiscal policy and monetary policy are the two tools used by the state to achieve its macroeconomic goals. The most commonly used tool is the IS/LM model which is used to depict the effect of policy interactions on aggregate output and interest rates. In market economies fiscal policies have a direct impact on the goods market and monetary policies have a direct impact on the asset markets; since the two markets are connected by the two macro variables-- output and interest rates--the policies interact while influencing output and interest rates. This model, was first published in 1937, and it seeks to explain the relationship between interest rates on one hand and output, in goods and services and money markets, on the other. Hicks’ IS-LM model as an Alfred Marshall and Irving Fisher formalized the quantity theory of money nearly a hundred years ago. The quantity theory of money predicts that an increase in the supply of money will cause a proportional increase in the price level.”

The explanation of our economic condition today lays in the assumption that a floating exchange rate regime is in use, which would indicate the domestic interest rate must be equal to the world real interest rate, in order to bring equilibrium to goods and money market.

The United States debt ceiling is a legislative limit on the amount of national debt that can be incurred by the US Treasury but the new argument is that the executive branch can choose to prioritize interest payments on bonds, which would avoid a default on sovereign debt.

The Washington Post reported that during the debt ceiling crisis of 2011, Treasury Secretary Timothy Geitner argued that prioritization of interest payments would not help since government expenditures would have needed to be cut by an unrealistic 40% if the debt ceiling is not raised. Furthermore, the CBO notes that prioritization would not avoid the technical definition found in Black's Law Dictionary where default is defined as “the failure to make a payment when due.” Therefore, for any type of debt, one cannot simply calculate an absolute amount of debt, but rather the ratio of debt to income capacity or capacity to repay. In economics of finance the measurements come as debt to income ratio— debt to assets ratio— debt to profits ratio—debt to short-term assets ratio, and debt to long-term assets ratio for businesses and corporations. For the government, this is consider— debt to revenue ratio— and debt to GDP ratio. Also, it is important to assess sustainability of debt in the case of a debt-servicing payments as a proportion of income. Financial collapse, is set when debt is so high relative to the size of repayment capacity and all assets are represented in the banking system and to investors. “Modern Monetary Theory” states that in this situation, the debt burden leads to widespread default" however, a heterodox school of monetary policy has emerged to peddle the line that the US can never suffer a debt crisis because the US government can always print more dollars-- which as a as a reserve currency it can-- to cover its budget deficits. In contrast with this policy the financial crisis in Iceland banks were so highly leveraged that it made impossible for a government to rescue them. Venezuela is currently another case in point where and printing money only exacerbates the level of inflation for the Bolivar is not recognized as a reserve currency.

In conclusion the real danger to the US economy is Trump’s drunken sailor spending behavior and giving money away to his cronies and judging from his past business record will probably chose to default on the debt than pay obligations which would be similar than he bankrupted his casino.

Just talking about sovereign default can cause international turmoil and a collapse of world financial markets. Countries like China holding over 2 trillion dollars of US obligations could decide to dump part or all of it in the world financial markets generating a snowballing currency panic. However, Trump might see this as an advantageous opportunity to buy back US obligations at a deeply discounted price. This action would be disastrous to say the least as one derivative of a trade war leading perhaps to another derivative of kinetic war. This might be considered an alarmist scenario but we’ll know for sure when the big guns start firing.

What is the purpose of custom duty?

Functions of Tariffs by Definition

Tariffs are considered to have three primary functions: to serve as a source of revenue, to protect domestic industries, and to remedy trade distortions (punitive function for product dumping). The revenue function income from tariffs provides governments with a source of funding. In the past this was the main function and reason for applying tariffs, but economic development and the creation of systematic domestic for instance it only accounts for about 2% of tax revenue. Nevertheless, revenue may still be an important tariff function in underdeveloped countries. In our time tariffs are more of a trade policy tool to protect domestic industries by altering the conditions under which goods compete. A case in point are “tariff quotas” that are used to strike a balance between market access and protecting domestic industry. Tariff quotas normally work by applying low or no duties to imports up to a certain volume and then higher rates to imports that exceed that the quota level.

The short answer from US Customs:

“Customs Duty is a tariff or tax imposed on goods when transported across international borders. The purpose of Customs Duty is to protect each country's economy, residents, jobs, environment, etc., by controlling the flow of goods, especially restrictive and prohibited goods, into and out of the country.

The Anti-subsidy Duty

The anti-subsidy duty, also known as the countervailing duty, is a kind of import surtax levied to countervail the bonus or subsidy received directly or indirectly at the manufacture, production and output stage of the imported commodities.

Tax-free imports might relate to other things as follows:

· Imports of goods used in the manufacture of other goods for local consumption,

· Imports of goods used in the manufacture of other goods for export,

· Imports of goods which are only temporarily in the country for adjustments, repair, etc which is then re-exported.

· Imports of goods for local consumption

There are vast differences in the rules that apply to each of these refunds and importers will not automatically receive the refunds. Instead importers have to apply for these refunds, preferably before the goods were imported, in order to receive these refunds.”

What effect do tariffs have on a given economy? It depends mainly on two broad issues:

1. Its traded volume

2. Its trade-price

There are however many secondary issues that can effectively affect the performance of a given economy.

· Its protective effect: import duty raises the price of imported goods. This increase in the price of imports reduces imports and increases the demand for domestic goods.

· Its consumption effect: increase in price of the taxed commodity reduces the consumption capacity of the country

· Its distribution effect: an increase in the price of domestically produced goods amounts to redistribution of income between the consumers and producers in favor of the producers.

· Its revenue effect: an import duty means increased revenue of the government

· Its income and substitution effects: the duty may cause a switch over from spending on foreign goods to spending on domestic goods which should result in higher domestic income and employment.

· Its competitive effect: overprotecting the domestic industries from foreign competition may enable the domestic producers to become a monopoly in the domestic industry.

· Its terms of trade effect: in order to maintain previous levels of sales to the duty imposing country exporter will reduce prices making imports to be purchased at a lower price.

· Its balance of payment effect: reducing the volume of imports helps the imposing country improve its balance of payment position.

In conclusion, tariffs can have multiple functions that have marked effect on pricing for any economy which will also affect terms of trade, employment, income, government revenue, balance of payments and so on.

If the US wants to challenge Chinese dominance of Asia, then why did Trump insist on the US leaving TPP (Trans-Pacific Partnership), since TPP was designed to limit China's influence in Asia?

In 2016 the Atlantic published an article that interprets Trump’s line of thinking in a very telling account for pulling out of TPP. Here is an excerpt of that article:

“If the U.S. does not want to hold other countries accountable for better labor standards, another way to attract corporations to hire Americans would be to lower labor or regulatory standards at home. This is something Trump and the GOP have pledged to do. They say getting rid of some regulations, which include occupational safety rules and environmental laws, will make it cheaper to do business here. But that’s not something that is going to purely benefit U.S. workers, even if it does result in more jobs. It will make workplaces more dangerous and the environment more polluted.

The U.S. needs to figure out how to entice businesses to set up shop here and employ thousands of American workers. This is a daunting challenge. Republicans seem to be going down the path of making labor even cheaper here, a route that may bring jobs but not ones that can provide for a secure middle-class life. The alternative path—making foreign workers more expensive—has just been closed.”

Trump is contradicting 3,000 years of mankind progress towards the betterment of societies and trying to outsmart the collective mind’s knowledge and experience cultivated during this developmental period which only reveals his ignorance and stupidity as he’s trying to erase history in his attempt to fly the overflown Phoenix again!