Here's the long story about what's wrong with NAFTA and it's mostly about tax structure. In Mexico they have a VAT sales tax. This is a huge chunk of their federal budget. Most of the taxes are on the consumption side (point of sale), not the production side. Goods produced in Mexico but sold abroad avoid the VAT tax. However, goods produced outside Mexico but sold in Mexico get the same VAT tax as every other good sold. Now let's look at the US. We have no federal sales tax, all of our taxes are on the production side. Every good that leaves a factory has its price loaded up with basically all of our tax costs. It's the production side that's taxed, not the consumption. That means a product manufactured in the US already is loaded up with US taxes, and then gets shipped to Mexico where the VAT is added on top. Double-taxation. Goods produced in Mexico have no VAT, come to the US tariff free, and sold to US consumers where no federal tax is collected on the consumption end. No-tax. You don't need a Ph.D. in Economics to understand what the result of this will be over time.
The way I see it there's two potential solutions to this. One is to renegotiate NAFTA just like we elected Obama and Trump to do. Another would be to restructure our taxes to be more like Mexico and load the taxes on consumption rather than production. This was the signature campaign idea by Herman Cain during the 2012 election with his 9-9-9 plan, though he was laughed at at the time. https://en.wikipedia.org/wiki/9%E2%80%939%E2%80%939_Plan. I'm not suggesting that the 9-9-9 plan exactly is good, but only use it to point out that these solutions have been discussed in the mainstream. I remember Ross Perot's entire campaign against Bill Clinton in 1992 was about how much NAFTA would suck all our jobs to Mexico. But we elected Clinton anyways and look what happened.
The trade deficit with Mexico is a fluctuation amount in the trade deficit with China.
So it's somewhat incredible that people can continue this "just renegotiate NAFTA" farce. Mexico isn't "the problem", if you believe that balanced trade is a problem.
Jobs didn't go to Mexico. They went to China and automation, and when you were lucky the small remainder went to Mexico.
To put it another way, manufacturers move to Mexico to compete with China, so enjoy those few remaining sales and white collar jobs because the alternative was the company disappearing. If that isn't enough they automate. And now China is automating to ensure they can't be out-automated.
The US should embrace Mexico: the Mexican govt. is a close ally, its a source of low cost labor. US companies can continue their ownership/expertise and control over products manufactured in Mexico, while protecting their IP and such. Whereas with China it is a different story....
I'm sorry, its just not a question of what someone wants. Of course they want to have their low-skilled, highly-paid jobs. But labor doesn't automatically go from low to high skilled: you have to proactively engage in training programs, you have to learn the skills that are relevant to the high skilled jobs. Which most of these people, it turns out, have not. And therefore they are left behind.
Those that have embraced the new reality and economy are flourishing like never before. So the promises were true. The quality of life has increased, cost of commodities has decreased. Its just that these people have not managed to participate. Whose fault is that?
And please don't argue for tariffs and such. Trade must go on if only for the security of the current world order. When trade stops, war begins, as Jack Ma has put so astutely.
>And please don't argue for tariffs and such. Trade must go on if only for the security of the current world order. When trade stops, war begins, as Jack Ma has put so astutely.
I don't support tariffs, but there's no need to extend to the level of ridiculousness. Trade with Mexico was happening before NAFTA and it would have continued without it. But that's irrelevant because that's not what I was proposing. Worker and environmental protections could be added and enforced without ending free trade. And changing our tax structure to be more weighed towards consumption than production couldn't even possibly be twisted to sound like it was referring to a tariff.
You cannot force other countries to enforce environmental and worker protections against their will. The US didn't have these before it became a developed economy. So its mighty rich of you to expect other countries to do so right away. OTOH, China, long a country without environmental protection, has started enforcing more and more rules now that it has capital and knowhow and is rapidly moving into renewables. Your argument using these points is a weird strawman.
> I don't support tariffs, but there's no need to extend to the level of ridiculousness. Trade with Mexico was happening before NAFTA and it would have continued without it. But that's irrelevant because that's not what I was proposing. Worker and environmental protections could be added and enforced without ending free trade. And changing our tax structure to be more weighed towards consumption than production couldn't even possibly be twisted to sound like it was referring to a tariff.
Your argument for this has already been debunked by Lazare. Please stop spreading your dangerous misinformation.
>Your argument for this has already been debunked by Lazare.
No, Lazare did the same thing you did which is to play a game of bait and switch by arguing against a point I didn't make. I don't support tariffs, which you falsely accused me of, nor do I believe that putting economic pressure on Mexico to enforce worker and environmental protections would increase US GDP or other silly notions.
This gets brought up and debunked periodically, the first result Google returns for me is http://www.aei.org/publication/keynes-at-the-border/ which looks as good as any.
> You don't need a Ph.D. in Economics to understand what the result of this will be over time.
True enough, but it can still be a little confusing, as you've discovered. :)
Mexico having a VAT does not do this. The US not having a VAT does not do this. The results of the US adding a VAT would not do this. VATs do not work the way you think they do.
> The discussion isn't about boosting GDP, but about where manufacturing labor takes place.
Where manufacturing labor takes place is not impacted by who does and does not have a VAT.
Quite the reverse. A VAT is an efficient tax, and in particular is more efficient than income or capital taxes with lower deadweight losses. And in fact, if the US reduced capitals gains and corporate tax rates, and introduced a VAT, keeping its total tax take the same, I'd expect the US to become more economically efficient and employment to rise. (...not that I'd expect the US to introduce a VAT in this way of course.)
But that's neither here nor there. Your original comment was about international trade, trade deficits, and NAFTA, and none of it is true. A VAT does not subsidize exports, nor penalize imports, and 0% of the US balance of trade can be explained by its decision to not have a VAT, or the decision of many of its trading partners to have a VAT. If you want to argue that US economic policy is wrong headed and costing jobs then...yeah, it is. And a VAT is probably a key step on the path towards making major improvements. But that's got nothing to do with NAFTA.
VAT is regressive imho, because poorer people are affected by it more then richer people (in which you'd have to set up exemptions for food etc to balance it back). Capital gains tax ought to be the heaviest, wage tax ought to be the lowest, do that tax burden is held by those most able to hold it with out loss of quality of life.
In this context of optimal tax theory, it'd be referring to the "deadweight loss" of the tax (how much economic activity is reduced per dollar of revenue), and to how much it distorts behaviour. (When viewed another way, it's a measure of how easy the tax is to dodge.) Generally speaking, land taxes are the most efficient, followed by consumption taxes, income taxes, and finally taxes on capital are the most distorting.
> VAT is regressive imho
Correct. However as a general rule income redistribution is achieved much more effectively via spending than taxation. The most efficient, effective welfare states have relatively regressive taxes skewed towards consumption taxes (which as above are efficient and hard to dodge), and then use the revenue to fund programs targeted at the poor. By contrast the US uses very progressive taxes to fund programs largely targeted at the middle class. Empirically, this model doesn't work very well. :)
> Capital gains tax ought to be the heaviest
Capital gains is the least effective tax. It distorts behaviour, has high deadweight taxes, is the easiest tax to dodge, the economic burden is seldom felt by the intended targets. It's not good at redistributing income, and it's not good at raising revenue.
I live in a social democratic country with a strong welfare state funded by a fairly high VAT, with no capital gains taxes at all. It works quite well.
The US, in my view, has managed to get itself into a state where it tries to use the tax code to solve all social and economic problems. Instead of universal health care we have tax deductions for employee provided insurance, and subidies and penalties for individual insurance, handed out via the tax code. instead of welfare payments we have EITC. And when it comes time to look at at inequality, the discussion starts (and stops) with an argument about how progressive the US tax system is. At this point almost any reform will make the US tax code more regressive; the trick is to realise that's okay. Social democratic states work best when you use the tax code to raise revenue, not bring about utopia. But that's a rant for another time. :)
Yes, we're in agreement that China and Mexico have benefitted from our trade policies at the expense of millions of Americans losing their high paying union jobs where they had a stake in the value of production. Of course the financiers on Wall Street were happy to send those good jobs to desperate people in poorer countries. But maybe we could find a better balance between benefitting Wall Street and benefitting Main Street.
And the difference in costs wrt China is so large that even adding the 12% difference won't change things (12% = 17% VAT in China - 5.5% VAT where I live in the US).
C'mon stop whining and start competing. This is what you signed up for, the thing called global economy.
I own mostly cheap furniture because good stuff is a very expensive commitment, for example.
And there are far more consumers than there are factory workers, so outsourcing is more of a benefit than a negative in an economy.
Give manufacturing to the cheapest foreign labor. It's a good thing. This is why things like NAFTA are a net benefit to the US economy.
The obvious solution for the secondary problems this creates is to increase local industries for local jobs. What can someone do here that absolutely must be done here, instead of by a person in China?
Things like construction works well, where you need someone local to build something since it can't be outsourced - you need to be here. Other traditionally conservative jobs like farming and mining would also be included, but also things like teaching and retail and other service jobs.
The long-term solution is higher-skill jobs, pushing the state-of-the art since US has the top universities.
The only equitable free trade agreements include the right to follow the jobs, such as the EU.
It's why you had people like Hillary pushing for open borders in her speeches to Goldman Sachs.
Significantly increasing the earned income tax credit.
Warren Buffett has been pushing this for a long time as a superior alternative to increasing the minimum wage. We can push to $15 / hour equivalent without punishing businesses that can't afford the minimum wage at that level. Few people on either side are listening to him however; Democrats in Congress are mindlessly latched onto the minimum wage as the only solution, and Republicans dislike expanding such benefits in general. It can be done without changing much about how the system works and it would immediately begin boosting the standard of living for the bottom 1/2 of workers. The EITC is superior to the universal basic income, as it doesn't needlessly give money to the well-off (ie it isn't inherently regressive) and the US could actually implement a higher and broader EITC system immediately.
https://www.wsj.com/articles/better-than-raising-the-minimum...
Except that universal incomes are basically adult allowances provided by Daddy Government. So they are regressive in the sense that they're an idealistic childhood notion that immature adults keep trying to carry forward into adulthood.
"Because that's the way it has always been" doesn't satisfy. The same was true for a whole lot of things throughout history that suddenly . . . weren't.
This is why [head taxes](https://en.wikipedia.org/wiki/Poll_tax) are the textbook example of regressive taxation.
And it's why giving out a UBI [a head rebate?] is inherently & unambiguously progressive.
EITC is more complicated.
By nature of being a tax credit, any EITC must phase in as taxable income increases. In the current system, you get more money from the EITC if you earn $16K than if you earn $10K. The more you expand it, the larger the phase-in section needs to be.
The current system also phases out with higher income levels, so if you earn $200K, you're won't get anything from the EITC. This makes it 'more progressive' than UBI, when considered in isolation for the appropriate income range.
But this aspect of the EITC is already in the machinery for income tax. The phase out window roughly corresponds to moving the 25% tax threshold half-way into the 15% one.
A UBI wouldn't be implemented without a change to income tax, and most advocates would largely pay for UBI with additional income taxes.
At the lowest income levels, a system with a UBI is by definition more progressive than one with an EITC. Everything else is up to the implementation.
When things like gas and international trade are heavily subsidized (either directly or indirectly using preferential trade agreements) we create a world where this is the norm. When this is the local maxima of capital growth in these areas, this is where capital will invest.
It's certainly not a small town, blue-collar occupation issue but it does affect them disproportionately.
This recent NYTimes piece was an eye-opening read for me in that regard. [https://www.nytimes.com/2017/10/14/us/union-jobs-mexico-rexn.... Not that I didn't know this but to have it be made so vivid, it was hard to digest stuff.
I'm not even sure if there's a good solution in sight. Basic income and all that is fine but people still need to be and feel productive and busy for us to stay a sane society.