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Wednesday, April 26, 2017

The Daily Combover - April 26, 2017

Over the last week, Trump has been threatening to roll back 50 years of trade deals -- especially one in particular, NAFTA.
NAFTA, or the North American Free Trade Agreement, was negotiated and signed by President George H.W. Bush and later signed into law by President Bill Clinton. For 25 years, NAFTA has been the law of the land. Over the last two decades, trade between the US, Canada, and Mexico has quadrupled from under $300 billion combined to nearly $1.2 trillion -- the single largest trade area in the world. Fully one-third of US exports go to Canada and Mexico, and the two rank as our #1 and #2 trade partners respectively.

Collectively, we export $517B worth of US goods to Canada and Mexico and import back $590B for a net export deficit of $73B -- which hits us as a 0.4% GDP drop.

So what exactly do we import from our two besties? 24.4% of our imports are petroleum products. 6.7% are agricultural products. Of course, importing oil and food from Canada and Mexico offers a number of benefits:
1. It reduces our dependence on OPEC oil.
2. Via pipelines and short transports, the flow of oil is far more secure and stable; a repeat of the 1973 embargo is unlikely. Plus the added infrastructure has made it easier for us to produce our own oil and oil equivalents.

And as I mentioned back in January,
The biggest single driver of our trade deficit is oil imports. Last year alone we imported about 6.9 million barrels of oil per day -- and thanks to Obama's energy policies, that's actually at a 25 year low. Today on Twitter, I decided to quantify that a little:
3. US oil has a higher extraction cost but by reducing transportation and processing costs, our production is now so much more efficient that we are actually exporting petroleum. Guess who our biggest importer is? Mexico.

4. Food is now cheaper and fresher than ever before. As I mentioned in November,
Stop and think about that for a moment. How does that affect you personally? At $80 a box, the average retail price for a single avocado approaches $3. But what if we begin to restrict trade with Mexico? What if we impose a tariff on Mexican produce? The global average tariff on produce according to the USDA Economic Research Service is about 50%. Suddenly that $3 avocado is now $4.50. And in the winter, when almost all of our avocados are imported, that probably means fewer stores will stock avocados because that is a lot of money to spend on fruits that probably will not sell very well at retail given its exorbitant price. 
And what about our exports? It turns out that despite that 0.4% slowdown from the net export deficit, the net impact of NAFTA is a 0.5% growth factor on GDP thanks to increased economic production and decreased inflationary pressures. Hence, while we're losing 0.4% on the trade deficit, we are gaining 0.9% elsewhere -- or approximately $171 billion.

Despite Trump's claims to the contrary, our farmers benefit bigly from NAFTA.
Agricultural exports to Canada and Mexico amount to $39.4B -- exactly matching our level of agricultural imports (primarily fruits and veggies in the winter from Mexico), a 156% increase in exports. Compare that to the rest of the world in which our agricultural exports only increased 59% over the same 25 year period.

Want another surprising statistic? NAFTA actually increased US manufacturing jobs -- by 800,000 in just the first four years of its passage. While we lost several automobile factories, the increased demand for other US product rose, boosting US manufacturing by nearly half a trillion dollars.

Trump's attacks on NAFTA shouldn't be of any surprise to those of us who have been paying attention. But one has to wonder how much of it has to do with economics and how much has to do with xenophobic racism.

Catch you on the flip side.

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