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Is this the new NAFTA?

The Ins and Outs of Free Trade between the US and EU

Written by Briton Ryle
Posted February 10, 2014

The rich and powerful nations of the world are conspiring to join forces and form a trading block to consolidate their power, multiply their wealth, and further solidify their dominance over the rest of the world.US EU Flags

“The United States and the European Union are seeking to seal a trade deal encompassing half the world's economic output, hoping it can bring economic gains of around $100 billion dollars a year for both sides,” Reuters recently reported.

Activists are sounding the alarm that the consolidation of economic power in the West will only widen the gulf that separates the wealthy Western nations from the poorer developing ones. Rich countries will get richer, while poor countries will get poorer.

But we have good reason to believe it won’t turn out that way, as explained some 255 years ago by one of the founders of modern economics, Adam Smith. Basically he’s telling us to just relax. The free-market has a way of working itself out.

Negotiations that will Change the World

“The European Union will offer to lift tariffs on nearly all goods imported from the United States as part of negotiations towards the world's largest free-trade deal,” Reuters elaborates.

This is pretty good for the U.S., since the cancelling of import tariffs on American-made products makes them cheaper for Europeans to import, increasing American production and creating more American jobs.

96% of American products will have their tariffs cancelled, with the exception of certain products including beef, poultry and pork due to contamination risks. For its part, the U.S. is expected to reciprocate tariff cancellations on European-made goods, making European products cheaper to import into the U.S.

While the deal is great for companies producing unique products, it is not so great for companies that make things the other side is also producing.

For example, an American company that produces unique brand products – such as autos, designer clothes, name-brand electronics, etc - will benefit from the removal of import tariffs in Europe. But an American maker of common products such as mechanical parts or even basic resources will see increased competition from

European-made goods of the same type entering the U.S. under zero tariffs.

It is estimated the free-trade agreement will increase total GDP on both sides of the Atlantic by more than $250 billion annually – or a relatively small 0.9% of their combined GDP of $27.9 trillion (U.S. = $15.7 trillion; Euro Area = $12.2 trillion).

Yet the biggest benefit will undoubtedly be the increase in jobs, which could amount to hundreds of thousands, according to the Center for European Policy Analysis.

Blatant Self-Interest

Some critics of the deal, however, warn that this free-trade deal will subject developing economies to greater economic hardship as they lose untold jobs and revenue when Western companies bring production back home.

During the 1980’s, 1990’s, and early 2000’s, numerous American and European companies outsourced their production to developing nations, where labor and other production costs were dramatically less than in the West.

As the elimination of import tariffs this year will lower the cost of production and increase sales, American and European companies could afford to move production back to their homelands, resulting in a dramatic loss of jobs in developing nations which could trigger a severe recession straight across the developing world. The West gets richer, and the rest get poorer.

Critics Divided Over Jobs Displacement

The camp is entirely divided on the issue of job displacement. Protectionists, for their part, fear losing jobs in the other direction – out of America to developing nations. They believe the Trans-Atlantic agreement between the U.S. and Europe - as well as the Trans-Pacific agreement involving 12 Pacific rim nations – would “destroy U.S. jobs and wages”.

Clearly, critics of these deals are confused as to their impact, each group expecting the opposite to happen.
To get to the real impact of these new free-trade deals, we need only look at an existing one – NAFTA, the North American Free Trade Agreement, among the U.S., Canada and Mexico.

Although NAFTA prompted some American companies to build factories in Mexico and Canada to take advantage of cheaper wages, these companies also gained access to new markets in which to sell their products. And since products sold to Mexico needed to be cheap enough for lower-paid Mexicans to afford, it only made sense to manufacture them in Mexico to keep costs down.

Yet such job displacement occurs only in industries that have direct competition from products produced in the other country. Products that have no direct competition – such as autos and other unique brands as noted above – will see increased production and new jobs created right here at home as the direct result of the elimination of tariffs.

Self-Interest Serves All

But aren’t these free-trade pacts just helping the corporations rake in more money for themselves? The answer to that is yes. It is totally self-serving.

But as Adam Smith explained in his book “In The Theory of Moral Sentiments”, way back in 1759, the market’s pursuit of profit actually has a stabilizing effect on entire economies and nations:

“The rich only select from the heap what is most precious and agreeable… and in spite of their natural selfishness and rapacity… [and] the gratification of their own vain and insatiable desires, they divide with the poor the produce of all their improvements [farms, buildings, companies].”

In order for today’s rich business owners to generate their corporate profits, they are “obliged to distribute among those who prepare… those who provide… which are employed in the economy.” Corporations can’t accomplish anything without workers, “whom thus derive from [the owners’] luxury and caprice [their] share of the necessaries of life”.

When the free-market works properly, workers “are in no respect inferior to those who would seem so much above them. In ease of body and peace of mind, all the different ranks of life are nearly [at the same] level, and the beggar who suns himself by the side of the highway possesses that security which kings are fighting for.”

Note that last part… where the beggar possesses the same security which kings are fighting for. Even the “lowest” members of society benefit from the policies, laws, projects and provisions secured by governments – or in this discussion, corporations.

Unfairness Cannot Last

Of course, Adam Smith was very well aware of unfair “collusion” among masters and owners to “sink” the level of wages, as he noted in his book “The Wealth of Nations” published in 1776:

“Whoever imagines, upon this account, that masters rarely combine [or collude], is as ignorant of the world as of the subject. Masters are always and everywhere in a sort of tacit, but constant and uniform combination… to sink the wages of labour.”

Smith warned about the exploitation of workers, which destroys their dignity and capacities, and causes them to “become as stupid and ignorant as it is possible for a human creature to become… This is the state into which the labouring poor, that is, the great body of the people, must necessarily fall, unless government takes some pains to prevent it.”

The rights of both sides – “masters” and “slaves” alike – must be protected by international law, so that “such combinations [by masters] are frequently resisted by a contrary defensive combination of the workmen [which we call “strikes” today] who sometimes… combine of their own accord to raise the price of their labour.”

Yet a freely functioning market has a way of resolving even wage disputes through normal market forces, as Smith describes:

“There is, however, a certain rate below which it seems impossible to reduce, for any considerable time, the ordinary wages even of the lowest species of labour. A man must always live by his work, and his wages must at least be sufficient to maintain him. They must even upon most occasions be somewhat more; otherwise it would be impossible for him to bring up a family, and the race of such workmen could not last beyond the first generation.”

Rest assured, corporations understand that if they want their businesses to last beyond the first few years, their workers must be taken care of.

Thus, while free trade pacts allow corporations to expand into new markets and even rebuild their own production activities back home, international labor laws which are being updated across all nations (a little at a time, but getting there) will act as an opposing force keeping corporate expansion fair for both “masters” and “slaves” alike.
In fact, they can even result in wage hikes, as Smith noted:

“There are certain circumstances, however, which sometimes give the labourers an advantage, and enable them to raise their wages considerably above this rate… when in any country the demand for… labourers, journeymen, servants of every kind, is continually increasing. The scarcity of hands occasions a competition among masters, who bid against one another, in order to get workmen.”

This latter effect will likely be the prevailing result of lowering import tariffs across the Atlantic and Pacific, as production increases, jobs are created, and wages rise through such demand.

Joseph Cafariello

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