NAFTA, ­tariffs, and trade -- oh my!

By John F. Sase, Ph.D. Gerard J. Senick, General Editor Julie Gale Sase, Copyeditor "The illiterate are not those who cannot read and write, but those who cannot learn, unlearn, and relearn." <*R>- Alvin Toffler, 20th Century ­American Writer, Futurist, and ­Businessman The economics of treaties and tariffs to regulate and balance trade are not the most difficult of topics in the field. However, anyone who believes that this multi-lateral issue does not require a significant amount of time to analyze and to understand runs the risk of making oversimplified assumptions and decisions. This view suggests that overly expedient solutions may cause severe damage to an economy. Such rash reactions rather than prudent responses can ripple through and tear apart critical threads of the fabrique internationale. A working understanding of treaties and tariffs requires knowledge, attention to detail, patience, and focus in order to engage in policy-making that does not result in ruinous micromanagement of a complex private-sector set of economic relationships. We intend that this introductory serves as a brief overview for further discussion about NAFTA and tariffs, and their effect on trade, job creation, and economic sustainability. Depending on the outcome of current events and proposals put forth by the current administration, we will delve deeper into these topics in forthcoming monthly columns. Motor Cities and Towns Let us consider an example close to home and to our pocketbooks and wallets: The North American automotive industry, with a core that straddles the U.S.-Canadian border along the waterway between Lakes Erie and Huron. Many of us recognize that most of the trade between the United States and Canada crosses the Ambassador and Bluewater Bridges and the adjacent railway tunnels under the straits at Windsor-Detroit and Sarnia-Port Huron. Furthermore, most of the traffic facilitates the operation of the automotive and related manufacturing industries that concentrate in Southeast Michigan and Essex County, Ontario. These industries stretch northeast past Toronto and Montreal toward the Atlantic Ocean deep-water port serving shipping-container vessels at Halifax, Nova Scotia, and southward along the multi-modal train and truck systems through Ohio, Indiana, and the other states before crossing into Mexico. Along these routes lay many towns, numerous facilities, and a multitude of industrial workers in a system that benefits the economies of multiple regions in the United States and beyond. The industrial structure that unites the economies of Southeast Michigan and Southwest Ontario is not new. During the first quarter of the Twentieth Century, this alliance developed following decisions to establish separate U.S. and Canadian branches of emerging major firms. The establishment of separate companies in the two sovereignties has helped firms to integrate with the legal and financial systems of their distinctive countries. These firms have continued to work together across international borders. Do any of us remember the Canadian-built "full-size" Pontiac Parisienne (renamed Safari) as being closely related to U.S. Chevrolets? General Motors Canada made use of the economical Chevrolet chassis and drivetrain along with the American Pontiac-styled exterior body-panels. Finally, the Canadian manufacturer assembled the components and placed the Parisienne nameplate on its vehicles. The close relationships between U.S. and Canadian counterparts come down to a matter of economies of scale. Suppose two companies separated by "nationality" build similar products by using many of the same parts and then assemble them in plants along the same supply chain. It makes sound business sense to achieve economies of scale by designing and producing parts and components for two separate markets in one set of plants rather than in two. NAFTA This long-established system of serving two separate markets provides a significant amount of quality employment in a pair of allied countries. The bi-market system relies on the economics provided by the North American Free-Trade Agreement (NAFTA) and on an absence of trade tariffs where appropriate. We should not take the long-standing alliances between countries lightly. Convenient infrastructures that develop during times of peace become necessities should the doves ever fly away again. Perhaps this history helps to explain why the CanadaUnited States Free Trade Agreement (the tongue-twisting CUSFTA) was signed into law by the two countries in 1988. The implementation of that agreement helped to phase out a wide range of trade restrictions over the following decade. As a result, cross-border trade increased greatly. However, revisions and additions have served businesses throughout the global market as it began to change dramatically. In 1994, the NAFTA superseded the CUSFTA in a change that added Mexico. Among the member nations, the CUSFTA and, subsequently, the NAFTA have focused on the elimination of barriers to trade and the facilitation of fair competition. Also, it focuses on the liberalization of conditions for investment, the establishment of procedures for joint administration of the Agreement and resolution of disputes, and provisions to encourage further bilateral and multilateral cooperation and expansion. The United States and its two adjacent neighbors signed the NAFTA agreement among twenty-four years ago. As with similar agreements, it should continue to be reviewed and updated in order to reflect global changes. However, a wholesale abandonment of the NAFTA would breed confusion and would result in costly economic deterioration. Let us consider a simple analogy: A family has accumulated holiday decorations over a period of decades and once again has put them up inside their home. Unfortunately, a raccoon chews its way into the house and goes on a rampage of destruction; not a pretty sight. Furthermore, finding and replacing all of the small pieces that get broken probably would be more expensive than preventing the raccoon from entering the family's home in the first place.Much of the present focus centers on imports of steel from Canada and the export of manufacturing jobs to Mexico. These complex issues may serve as discussion points in subsequent columns. Tariffs Tariffs as trade equalizers may work on occasion. However, implementation requires a large degree of insight, foresight, and detailed planning. The "one-size-fits-all" approach seldom works out well in the long run. Many of us have watched the comic film Ferris Bueller's Day Off (Paramount Pictures, 1986) by John Hughes. We still smile as we remember the scene in which actor Ben Stein, playing a high-school teacher of Economics, lectures boringly on the Smoot-Hawley Tariff Act of 1930 to his class (https://youtu.be/yUjhSBjxuXA). This act, which raised U.S. tariffs on over 20,000 imported goods, stood second only to the Tariff of 1828 that was designed to protect industry in the northern United States. However, the South depended on raw cotton as a trade commodity. Britain needed cotton to feed the vast mill system in northern England. They had manufactured goods to trade. However, these goods competed with those produced in the North of the United States. The U.S. government imposed a 38% tax on 92% of all imports in a Protectionist move. Commonly known as the Tariff of Abominations by its detractors due to the crippling effects that it had on the Southern antebellum economy, this tariff set the stage for the War Between the States that would occur three decades later. A century later, the passage of the SmootHawley Tariff that raised the import tax on more than 20,000 goods helped to bring on the Great Depression and the subsequent Second World War. Proceed Cautiously Recently, the banner for protection through high tariffs on steel and ­aluminum has been waving. If proposed as a blanket tariff on imports of these metals from all of our trading partners, this suicidal tariff would send us sliding into a burrow of beavers without a pair of Duluth Fire-Hose work pants. The historical response to such tariffs has been trade-wars that end up crippling the economies of all countries involved. A trend analysis of the worldwide production of steel and aluminum over the past three decades may provide us with some useful insights. For simplicity, we will measure time by using major economic events, presidential terms, and specific years. Next, we will address the production and imports of steel and aluminum through a series of graphs that clarify the underlying economic trends from 1990 through 2017. In order to achieve this clarification, we have smoothed the datasets for some analyses into three-period moving averages. The trends appear as broken lines passing through the squiggly smoothed lines of data. Let us commence by considering steel production and imports for the United States. Steel production in the U.S. has hovered around sixty million metric tons per year. Output rose consistently throughout the 1990s until peaking during the last couple of years of the Clinton administration. Following the bursting of the Tech Bubble around 2000, production dropped before beginning to recover during the first term of the Bush administration. However, steel output began to drop significantly after the Housing Bubble burst in 2006. Production fell to its lowest point at the close of the decade. This series of unfortunate events led to the Great Recession of 2009. Nevertheless, steel made a comeback during the first term of the Obama administration before taking a slower and less severe decline during his second term. Production has risen since Trump took office, perhaps because of normal fluctuation or speculative behavior. Pic 1 Though steel production in the U.S. has remained relatively steady for three decades, the glaring light in this picture is on our increased use of steel and our long-term growth of steel imports. Import-demand expressed in metric tons increased from nine million in 1990 to more than twenty-six million in 2014. However, import tonnage decreased by a couple of million per year during the final two years of the Obama administration. It dropped to twenty million in 2016 before rising again during Trump's first year as President. In the following chart that maps import tonnage as a percentage of total steel in the U.S., we can track the uphill rollercoaster ride that went from 15% to more than 25% during the 1990s. During a decade when steel production rose domestically, imports of steel rose more rapidly. The year 2001 was a benchmark, one in which we suffered through both a recession in March and 9/11 in September. After these events, imports hit their lowest tonnage and percentage in 2003 before doubling to twenty-six million tons, and 30% of total steel as the wars in Afghanistan and Iraq heated up into 2006. Wars demand steel to produce weapons. In 2009, imports lagged and dropped to half the tonnage in the year that marked the start of the Great Recession. Imports did not reach the same level again until 2014. In part, this happened due to cutbacks in demand by the building industry that uses steel reinforced concrete for high-rise office and residential construction projects. Many economists believe that a Protectionist Tariff on steel and aluminum would raise the cost and prices of goods that use these metals as inputs. In turn, such actions would make these domestic downstream industries would become less competitive in the global market. Pic 2 Next, let us consider the production and import of aluminum. On average over three decades, the total of aluminum produced and imported in the United States has been in the neighborhood of forty-six million metric tons, which is three-quarters that of steel. Production of domestic aluminum has taken an up and down ride. Output fell mildly during the early 1990s before rising from 1994 to 1999. However, the bursting Tech Bubble that began in late 1999 led to a sharper downward trend in our production of aluminum. This trend hit bottom in 2005/06 before beginning its next rise. In 2008, "the Big Short" of mortgage-backed securities put Lehman Brothers out of business and placed the entire banking community on notice. The production of aluminum dropped sharply to its lowest point until it began to recover again in 2010. Over the ups and downs of two decades, production dropped from a high of fifty-eight million tons to half of that at thirty. The tonnage produced rose sharply from 2010 to another high at fifty-six million in 2013 before declining again. Pic 3 During the ups and downs of domestic aluminum-production, something interesting was happening with the importation of this metal. During the two-decade decline in domestic production, the importing of aluminum rose. After 2005, the percentage of total aluminum that came by way of import trended downward. Initially, it moved concurrently with domestic production until the Great Recession. As domestic production rose, import as a percentage of the total fell. Then, the import percentage rose as domestic output declined. Let us take a closer look. During the decade and a half leading up to 2005, the tonnage of imported aluminum increased from fifteen million metric tons to fifty-five million. The growth constitutes an increase of forty-million tons. Meanwhile, domestic production dropped by twenty million. By examining the total tonnage for U.S. aluminum, we see that it fluctuated above and below eighty-million tons up through 2008. This tonnage dropped below sixty-seven with the deepening of the Great Recession in 2010. However, a rapid recovery in overall use raised the tonnage above one-hundred and four by 2013. It has remained at this position since then. Import aluminum constituted 21% of our total in 1991. However, the import tonnage has tripled to 61% of the total. Pic 4 These long-term trends for steel and aluminum make a lot of grist for the mill on both sides of the Congressional aisle. If one could make a clear takeaway from this analysis, it may be that business fluctuations, especially in respect to the demand for primary manufacturing inputs, has been and remains a phenomenon that does not follow the two-party political cycles. The fluctuations appear to move as much out of phase as in phase with our bipartisan electoral shifts and the common beliefs of one party benefiting the economy more than the other. However, there remain some deeper intrigues that we have not addressed. The World Stage When we examine the worldwide production of steel and aluminum, we discover that most countries and global regions have remained relatively consistent in their production of these metals. The World Steel Association cites that World Crude Steel Production has increased from 770 million tons (mt) in 1990 to 1630 mt in 2016. The United States (79 mt) is the fourth-largest steel-producing country behind China (808 mt), Japan (105 mt), and India (96 mt). In other words, one country-not the U.S.-produces half of the crude steel in the world (www.worldsteel.org). In 1990, China produced 9% of the steel. Currently, it leads global production with 49% of the total. However, the U.S. gets the bulk of our imported steel from our Canada, our economic allies. Furthermore, many economists have voiced that the proposed tariffs would not lead to China attempting to enter through by the backdoor through Canada because of our laws that block dumping. The terms dumping applies to situations in which the price charged in the exporter's domestic market is higher than the price in the foreign importing market. Pic 5 World Aluminum Production has increased from 20 million tons (mt) in 1990 to 63 mt in 2017. Current data is available by region. North America (4 mt) is the fifth-largest aluminum-producing region behind China (36 mt), GCC (5 mt), Asia-not-China (4 mt), and East and Central Europe (4 mt) (www.world-aluminium.org). No data is available for China before 1999. However, China produced 11% of total aluminum in 1999. Currently, it leads global production with 57% of the total. Pic 6 Finis The discussion between opposing points of view on the NAFTA and Protectionist Tariffs is complicated at best and destructively befuddling at worst. It remains a mastodon that we can eat best in smaller bites. Depending on the vacillating national debate of the day, we will chew upon these issues separately and in more detail. Hopefully, the preceding analysis offers some big-picture background and insight for Attorneys, Economists, and others. Much of the global economy joins at the hip with International Law. Individual business firms in their respective countries help to integrate the Law and Economics found in the NAFTA and other trade agreements. The recent promulgation of universal tariffs flies in the face of the Law and Economics communities that understand the need for detailed scrutiny and fact-checking before embarking on a dangerous path, one taken previously by the Tariff Act of 1828 and the Smoot-Hawley Tariff Act of 1930 that led to tragic outcomes. As Attorneys and Economists looking down the tracks of our current administration, we foresee a crash if the denigration of NAFTA and the flailing tariffs proposed do not stop immediately. -------- For any part interested, one can access the high-def slide show of the preceding graphs at https://youtu.be/F9T3oDvRCjU. -------- Dr. John F. Sase teaches Economics at Wayne State University and has practiced Forensic and Investigative Economics for twenty years. He earned a combined M.A. in Economics and an MBA at the University of Detroit, followed by a Ph.D. in Economics from Wayne State University. He is a graduate of the University of Detroit Jesuit High School (www.saseassociates.com). Gerard J. Senick is a freelance writer, editor, and musician. He earned his degree in English at the University of Detroit and was a supervisory editor at Gale Research Company (now Cengage) for over twenty years. Currently, he edits books for publication (www.senick-editing.com). Julie G. Sase is a copyeditor, parent coach, and empath. She earned her degree in English at Marygrove College and her graduate certificate in Parent Coaching from Seattle Pacific University. Ms. Sase coaches clients, writes articles, and edits copy (royaloakparentcoaching.com). Published: Wed, Mar 21, 2018