David R. Henderson  

How NAFTA Facilitates Supply Chains

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When I teach about gains from trade, I start with two people and two goods on a desert island and work from there. Then I graduate to multiple people and multiple goods in two cities, then states, and, finally countries. I point out that the fact of borders does not change the fact that both sides gain from trade and that trade facilitates an incredibly extensive division of labor.

It seems relatively easy for people to understand that trade within a country facilitates specialization. What happens when you "insert" a border? Nothing changes, except that the border can hobble, if only slightly, the degree of specialization.

That's why deals like NAFTA are so important. They make borders less important.

And over at Bloomberg, Thomas Black, Jeremy Scott Diamond, and Dave Merrill lay it out beautifully with a true story in which they "follow the meandering path of a single lowly capacitor, a pinkie tip-sized component that stores electrical energy." I can't do justice to their story, and their beautiful graphics, so go here to see more. The article is titled "One Tiny Widget's Dizzying Journey Shows Just How Critical Nafta Has Become."

It's facts like these that make me very concerned when I read about Trump trade advisor Peter Navarro saying "We need to manufacture those components in a robust domestic supply chain that will spur job and wage growth."

HT2 David Levey.


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CATEGORIES: International Trade




COMMENTS (5 to date)
MikeP writes:

Donald J. Trump: Make America Make Socks Again!

"Free trade" I note is two words. In contrast the NAFTA bill before congress was 1000 pages (if I recall correctly from the 90s).

I have not read even one page of NAFTA. But why does it need 1000 pages? I suspect it goes like this.

We proclaim free trade, except in these cases ... (1000 pages).
How do you add it up, to know if the total effect is really in the direction of free trade?

David R. Henderson writes:

@Richard O. Hammer,
In contrast the NAFTA bill before congress was 1000 pages (if I recall correctly from the 90s).
IIRC, it was closer to 2,000 pages.
How do you add it up, to know if the total effect is really in the direction of free trade?
By seeing if tariff rates or any other trade barriers were raised. I’m pretty sure they weren’t. It was all in the direction of fewer or lower trade barriers.

James H. Murphy writes:

[Comment removed pending confirmation of email address. Email the webmaster@econlib.org to request restoring this comment. A valid email address is required to post comments on EconLog and EconTalk.--Econlib Ed.]

AlanG writes:

Two points - my new Honda HR-V was assembled in a plant outside of Mexico City with parts sourced from all over the place. fit and finish is just the same as the other Hondas we have owned that have been made in the US and Japan.

Regarding Congressional legislation, the number of pages in a bill is hugely misleading. there can be a lot of descriptive language which takes up space. If the legislation is either referring to or modifying existing statute, those section need to be written in. While 'free trade' is in fact two words, the necessary legislation to achieve that is often not simple.

Every five years when I was still working at PhRMA we would go through the reauthorization of the Prescription Drug User Fee Act and the new versions were always as long or longer than the original because of the referential sections of the Food and Drug Act.

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