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Suppose with free trade, the United States importing a backpack from Mexico costs $10, and the cost of importing a backpack from China costs $9, while a backpack produced in the US costs $14. Before NAFTA (members are US-Canada-Mexico), the US maintained a tariff of $60 against all backpack imports. Then under NAFTA, all tariffs between the US and Mexico are removed, while the tariff against China remains in effect. Assume that tariff does not affect the world price of a backpack.

1. Before NAFTA, the US imported backpack from:

a. China b. Both Mexico and china c. Mexico d. Neither Mexico nor China?

2. Under NAFTA, the US imports backpack from:

a. both Mexico and china b. neither Mexico nor china c. Mexico d. china?

3. As a result of NAFTA, consumers in the US (Loses- Gains - Neither Lose nor gain)? , and the US government (Loses -Gain -Neither gains nor loses) ? tariff revenue. Mexico (neither gain nor lose - gain- lose)? And china (gain - lose -neither gain nor lose)?

4. This is an example of trade (creation - diversion)? Resulting from a regional agreement.

 

 

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Anne Gillian Duero
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28 Sep 2019

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Mexico's automobile industry is booming. Bolstered by $19 billion in new investment from foreign carmakers, including Nissan, Honda, Volkswagen, and Mazda, vehicle production doubled between 2009 and 2014 to an estimated 3.2 million vehicles. This investment surge has transformed Mexico into the eighth-largest automaker in the world, and it's not over yet. In 2014 and 2015, Toyota, Mercedes-Benz, Hyundai-Kia, BMW, and Volkswagen all outlined plans to build new state-of-the-art factories in Mexico. Audi is also constructing a $1.3 billion factory that is slated for producing luxury sport-utility vehicles. The Audi factory is scheduled to open in 2016. Taken together, these new factories represent another $20 billion in investment that will push Mexico past Brazil and South Korea to become the sixth-largest car producer in the world by 2020 with an annual output of 4.7 million vehicles (for comparison, the U.S. industry makes some 11.5 million autos a year). The initial stimulus for the dramatic growth of the Mexican auto industry was the establishment of the North American Free Trade Agreement (NAFTA) in 1994. Prior to NAFTA, Mexico's auto industry was small and protected from foreign competition by high tariff barriers. Car prices in Mexico were two to three times higher than in the United States. Not only were cars in Mexico more expensive, exporting or importing cars and parts was also very tough. Shipments got delayed at the border and were difficult to move around because of poor infrastructure, which is a major problem in an industry in which tight logistics is critical. NAFTA removed most tariff and nontariff barriers to trade between Mexico, the United States, and Canada. This initially led to a flood of low-priced auto imports into Mexico from the United States, but it also gave auto manufacturers based in Mexico duty-free access to the large U.S. market next door. With labor costs in Mexico just a fraction of those in the United States, auto manufacturers now had to consider Mexico when planning new plants to serve the North American market. Mexico's shift to free trade didn't stop with NAFTA. Mexico spent much of the 2000s hammering out free trade deals with over 40 other countries, including the 28 states of the European Union, Japan, and Brazil. These deals give auto factories based in Mexico duty-free access to markets that contain 60 percent of the world's economic output, and they have helped transform Mexico into the fourth-largest auto exporter in the world. Eighty percent of the cars now produced in Mexico are exported to other countries, two-thirds of them to the United States. This unprecedented network of regional trade agreements has given Mexico an important edge when it comes to attracting new investment. For example, when BMW ships cars to Europe from its 20-year-old plant in South Carolina, it is hit with a 10 percent import duty. For a $50,000 car, that amounts to $5,000, which is a much bigger factor than differences in labor costs. A factory in Mexico can supply both the U.S. and the EU markets with duty-free automobiles. This was a major factor behind BMWs 2014 decision to build a new factory in central Mexico rather than the United States, far outweighing the $500 a car labor cost advantage that Mexico currently enjoys over the United States. The new BMW factory will supply the U.S. and EU markets, as well as Latin America. Indeed, because of differences in trade barriers, a car exported from the United States to Brazil costs 55 percent more than one exported from Mexico. As Mexico's auto industry has grown, auto-part suppliers have also followed manufacturers to Mexico. The large auto parts supplier Delphi, for example, has 30 factories in Mexico and generates revenues of $3 billion in the country. Employment at Delphi's facilities doubled to 24,000 between 2007 and 2014. Infrastructure has also improved dramatically, and customs clearance at the border is now quick and efficient. All of this bodes well for the future of the Mexican auto industry. However, not everyone is happy with what has happened. Some argue that growth in Mexico has come at the expense of factories in the United States, which has had a negative impact on employment growth in the U.S. auto industry. When BMW decided to build a factory in central Mexico, for example, it meant that it would not be expanding its South Carolina plant. The South Carolina plant will continue to operate, and no plants have been closed as a result of the growth of production in Mexico, but it is true that new plants are increasingly being located south of the border. Sources: Joann Muller, America's Car Capital Will Soon Be... Mexico,€ Forbes, July 20, 2014; Dudley Althaus and William Boston, Trade Pacts Give Mexico an Edge,” The Wall Street Journal, March 18, 2015; Sonari Glinton, How NAFTA Drove the Auto Industry South, National Public Radio, December 8, 2013; Serena Maria Daniels, Twenty Years after NAFTA, a Mini Detroit Rises in Mexico,” Bridge, September 25, 2014. CASE DISCUSSION QUESTIONS

1. What was the initial impact of NAFTA on the U.S. and Mexican automobile markets? Who benefited most from this?

2. How did the impact of NAFTA start to change location decisions by automobile manufacturers over the years? How did this start to impact automobile production in Mexico and the United States?

3. Mexico has been very proactive in signing regional free trade deals in addition to NAFTA. How has this strategy impacted automobile consumers and producers in Mexico? How has it impacted automobile consumers and producers in the United States?

4. What lessons can United States policymakers draw from the growing success of the Mexican automobile industry that can be applied to future free trade deals, such as the deal currently being negotiated between the United States and the European Union?

The difference between a free trade area and a customs union is, in brief, that the first is politically straightforward but an administrative headache, while the second is just the opposite.

Consider first the case of a customs union. Once such a union is established, tariff administration is relatively easy: Goods must pay tariffs when they cross the border of the union, but from then on can be shipped freely between countries. A cargo that is unloaded at Marseilles or Rotterdam must pay duties there, but will not face any additional charges if it then goes by truck to Munich.

To make this simple system work, however, the countries must agree on tariff rates: The duty must be the same whether the cargo is unloaded at Marseilles, Rotterdam, or for that matter Hamburg because otherwise, importers would choose the point of entry that minimized their fees. So a customs union requires that Germany, France, the Netherlands, and all the other countries agree to charge the same tariffs. This is not easily done: Countries are, in effect, ceding part of their sovereignty to a supranational entity, the European Union.

This has been possible in Europe for a variety of reasons, including the belief that economic unity would help cement the post-war political alliance between European democracies.

But elsewhere these conditions are lacking. The three nations that formed NAFTA would find it very difficult to cede control over tariffs to any supranational body; if nothing else, it would be hard to devise an arrangement that would give due weight to U.S. interests without effectively allowing the United States to dictate trade policy to Canada and Mexico. NAFTA, therefore, while it permits Mexican goods to enter the United States without tariffs and vice versa, does not require that Mexico and the United States adopt a common external tariff on goods they import from other countries.

This, however, raises a different problem. Under NAFTA, a shirt made by Mexican workers can be brought into the United States freely. But suppose that the United States wants to maintain high tariffs on shirts imported from other countries, while Mexico does not impose similar tariffs. What is to prevent someone from shipping a shirt from, say, Bangladesh to Mexico, then putting it on a truck bound for Chicago?

The answer is that even though the United States and Mexico may have free trade, goods shipped from Mexico to the United States must still pass through a customs inspection. And they can enter the United States without duty only if they have documents providing that they are in fact Mexican goods, not trans-shipped imports from third countries.

But what is a Mexican shirt? If a shirt comes from Bangladesh, but Mexicans sew on the buttons, does that make it Mexican? Probably not. But if everything except the button were made in Mexico, it probably should be considered Mexican. The point is that administering a free trade area that is not a customs union requires not only that the countries continue to check goods at the border, but that they specify an elaborate set of “rules of origin” that determine whether a good is eligible to cross the border without paying a tariff.

As a result, free trade agreements like NAFTA impose a large burden of paperwork, which may be a significant obstacle to trade even when such trade is in principle free.

Question:

1. From this case, what is the main difference between a free-trade area and a customs union?

2. Why are rules of origin needed for a free-trade area? How might they be protectionist?

Background When you look at news reports of any kind, there can be a tendency to take them at face value, accepting what they tell us as the truth. This is usually a grave mistake. News typically moves quickly, with tight deadlines to get information and there is almost always a bias at play. Numbers are an easy way to manipulate the truth--and truth itself can be pretty flexible when it comes to human relationships. The value of the truth can also be flexible depending on your point of view. For example, in the second quarter of 2015, the U.S. dollar is strong--meaning it has a high value against foreign currency. Is this a good thing or a bad thing? If you're a consumer, it's generally a good thing in the short-term. It means items imported to the U.S. cost us less to buy. Go us! If you are a growing business that exports, it's a bad thing because your costs make it difficult to compete with locally produced goods in foreign markets. If you're traveling out of the country, it's good because the dollar goes farther. If you have a business that benefits from foreign tourism, it's bad because visitors have less money and may chose to go to other places where their money gives them more buying power.

find an article (you might try MSN Money or CNN Money or something similar) and then write at least 600 words. how strong the position the article takes is. Questions to consider include: What are the weaknesses to the article? How are numbers used effectively? What's missing? How are the numbers being used to disguise something?

ARTIcle

President Obama slapped a stiff 35% tariff on Chinese tires in 2009 after American companies complained about unfair competition. They said China was flooding America with tires at low prices making it tough for U.S. companies to compete. The tire tariff gradually waned, and finally ended in 2012. The tariff saved 1,200 U.S. tire jobs, which had been in sharp decline. And U.S. tire production rose after a major decline. "Over a thousand Americans are working today because we stopped a surge in Chinese tires," Obama said in his 2012 State of the Union address. But a study from the Peterson Institute of International Economics found that the tariffs cost Americans in many other ways. Americans paid more for tires. Some Chinese-made tires cost as much as 26% more -- rising on average to $39 per tire, from about $31. And U.S. tire makers, facing less competition from China, also raised prices on American-made tires 3.2%. According to Peterson's model, higher prices from the tire tariff cost Americans an extra $1.1 billion, which translated to an estimated 3,731 retail jobs lost. Plus, China fought back by imposing penalties on U.S. shipments of chicken parts. The Peterson study estimates that China's retaliation cost American chicken producers $1 billion in sales. "Tire safeguards did not change Chinese policies in a helpful way, nor did they boost U.S. employment," wrote Gary Hufbauer, a trade expert at Peterson, who authored the report. Indeed, the tariffs didn't bring the tire-making jobs back to previous levels -- a similar trend that's played out for the rest of U.S. manufacturing. But they did help to stem the job losses. In 2008, there were about 60,000 American workers making tires. Now, there are about 55,000. That's better than the low point reached in 2010 but not back to pre-tariff levels. Related: Trump's 35% tariff on companies: Easier said than done An Obama administration official, who requested anonymity, disputed some of the calculations and assumptions in the Peterson study. For instance, the official claimed tire prices did not go up by as much as the study claims. Hufbauer said no one until now had contested any of his analysis in the four years since it was published. He noted that the administration official didn't provide an alternative estimate for price changes. Republican presidential nominee Mitt Romney criticized Obama for the tariffs in his 2010 book "No Apology." "President Obama's action to defend American tire companies from foreign competition may make good politics by repaying unions for their support of his campaign, but it is decidedly bad for the nation and our workers," Romney said. U.S. tire makers still applaud Obama's tariffs. Morry Taylor, CEO of Titan International, a U.S.-based tire company, is one of them. "He did what he should have done and he should have done more of it," says Taylor, who voted for Trump. His company has plants in Ohio, Wisconsin and Illinois (they also have operations in Brazil and Russia). Related: 3 ways Trump can go after China and Mexico Taylor argues that if the tariffs weren't put in place he might not have any business today to speak of. By 2012, Taylor still had 1,800 tire-making workers, about the same amount as before the tariffs. Today, however, his firm only has a little more than 900 workers. His problem today is what he describes as unfair competition from India, where firms make cheap tires and sell in the U.S. at prices he can't afford to sell at. He hopes Trump considers higher tariffs on tires, saying it would save jobs. To be clear, Obama wasn't trying to "bring back jobs" so much as protect the ones already in America, which he accomplished. Trump wants to bring manufacturing jobs back from other countries. Some trade experts believe that would be difficult task, since many of jobs overseas are low-skill positions and many U.S. manufacturing firms now want highly skilled employees. In any case, U.S. tire production recovered but didn't surge. Instead, U.S. tire imports from all other countries excluding China rose dramatically, Hufbauer found. In other words, the Chinese tire jobs didn't come to the U.S. -- they went to the next cheapest countries. In the end, Hufbauer argues the tariffs didn't make a difference. "The best thing about the tire tariffs is that they expire," Hufbauer wrote in 2012. CNNMoney (New York) First published January 3, 2017: 3:41 PM ET

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