NAFTA issue? (2019).

Other than replacing NAFTA acronym an unpronounceable letter soup as U.S.M.C.A., Trump only made cosmetic changes in order to put his own stamp of success on the agreement.

But in order to understand the issues address by the NAFTA agreement some economic principles need to be introduced.

1- Labor-intensive mass manufacturing used to be profitable in the U.S., but technological improvements and rising labor productivity combined with higher wages decreases the bottom line of many firms. These firms then adopt capital-intensive production technologies such as robotics or outsourcing jobs to other countries with cheaper labor cost of production.

2- Outsourcing also occurs when manufacturers use obsolete or older technologies that requires finding domestic workers at low wages or make the choice of either go out of business or find a profitable location to move its business.

These are the two burning issues that manufacturers together with policy makers are facing in today’s economic reality and must find a balance among interests. Trying to stop capital from finding safe heaven for profit domestically or abroad is counter-intuitive for a market economy.

Take Trump’s most visited argument against international trade—Trade Deficits—which, he uses as an illusion of the facts that blur the underlying issues.

As a reserve currency the U.S. can purchase goods from the world market simply by printing money or printing treasury obligations that are sold mainly to Asian countries, particularly, China and Japan. This exercise is an exchange of printed paper for goods which are destined to be accounted as trade deficits. However this issue is not new for after the end of the Bretton Woods system, the U.S. surged as stable preferred reserve currency. Financial trade markets as well as in manufactured goods markets begun to show a growing trade deficits that continue today and recognized among other reasons, in the poor saving rates of Americans.

A glance at macroeconomic theory reveals that in simple terms a trade deficit occurs when a country's imports exceeds its exports, in other words, an outflow of domestic currency to foreign markets. Economist use international trade balance among other factors to measure current account surplus or deficit. Net capital outflows are related to net exports, therefore, related to gross domestic production. The equation used to show the relationship between the current account, savings and investment is:

S = I + NX = I + NCO

S = savings

I = domestic investment

NX = net exports

NCO = net capital outflows

“The current account includes net income, such as interest and dividends, and transfers, such as foreign aid, although these components make up only a small percentage of the total current account. The current account represents a country’s foreign transactions and, like the capital account, is a component of a country’s balance of payments.”

The current thinking in trade economics is a choice for a company that has labor intensive manufacturing to either go out of business, or migrate to developing nations in order to shift its comparative advantage.

As a result advance economies like the U.S. experience de-industrialization and enter into a service-oriented welfare state that offers new jobs in technological evolution like healthcare, insurance and financial services that need to adopt advanced information technologies and hire highly skilled workers from a pool of well educated work force.

A trade war with China cannot stop the decline of American manufacturing and employment when it is driven mainly by “rapid technology progress, such as automation, robots and artificial intelligence.” The unintended consequences of such strife with creditor nations may significantly reduce American’s welfare and cause the U.S. to lose its leadership in free trade and its status as reserve currency. The result could mean a sell off by creditor nations or just dump U.S. securities bringing chaos to financial markets.

Walking out of WTO, renaming NAFTA or starting trade wars is not going to change basic economic principles of the financial or manufactured markets but could instead provoked a world recession as insecurity In the money market triggers run away inflation.