Wednesday, September 6, 2017

no serious economist would argue that mexico has a comparative advantage in slave labour. it's a contradiction in terms to use low labour standards as a comparative advantage in the context of free trade; you would need to have that discussion in the context of mercantilism, which is indeed what nafta was designed as.

so, what the article is actually arguing is that labour standards threaten to allow for an even playing field which may allow for actual free trade - which is not what the publication wants.

what is a comparative advantage? it's when a country can make more profit trading for a good than it can producing it, so it focuses on producing something else in order to trade for that good. i know that sounds like a weird definition, but it's how the term is used in actual parlance. there's less focus on what you have a comparative advantage in, and more focus on what you have a comparative disadvantage in.

and, what is free trade? it's when we all acknowledge these comparative advantages, and recognize the logic in abolishing the anarchy in production that comes from ignoring them. free trade is actually fundamentally a decision to not compete in markets you have a disadvantage in, and rather forfeit it to those that have the advantage.

mexico has a comparative advantage in lots of things, in the nafta context. one would be bananas. so, it should trade bananas to countries like canada, in exchange for things it can't produce as well, like maple syrup. then, we all have bananas and we all have maple syrup and we're all able to afford it because it's all produced at it's maximum efficiency.

the other option is canadians cursing the weather when their banana crops fail, and mexicans doing snow dances in august.

if you're building a car and want to determine which location has a comparative advantage, you're not supposed to look at wages but at inputs like the cost of steel, the cost of electricty or the abundance of fresh water.

if you reduce the issue solely to labour costs, which are artificially kept low by an oppressive government, you're not talking about comparative advantage but about absolute advantage. and, it is true: mexico has an absolute advantage in the cost of labour, right now. but, what that means is that you shouldn't trade with them at all!

you need something close to common labour standards to even have this discussion. otherwise, you're in an orwellian fantasy, where every day is opposites day - which is what we've all been living in for 30 years.

http://business.financialpost.com/opinion/trudeau-and-trump-both-agree-the-new-nafta-should-screw-over-poor-workers