Ford: From Mexico to China

Ever since Donald Trump declared his intention to seek the Presidency of the United States, he has heavily criticized American firms that manufacture products in Mexico. One of those firms, for instance, has been the Ford Motor Company.

His criticism began in earnest more than a year ago, when Ford announced its intention to shift production of the subcompact Focus automobile from Wayne, Michigan to a new plant in San Luis Potosi, Mexico. But shortly after the Presidential election, Ford announced that it would reinvest in the Wayne production facility.

That produced celebrations in the American workforce, but astute observers noted that Ford didn’t actually announce that Focus automobile production would revert to Wayne. Instead, the firm declared that it would produce the subcompact at Hermosillio, a different location in Mexico, and would shift other vehicle production to Wayne.

And last week, less than six months later, Ford changed its plans again. Now it plans to shift the production of the Focus to China.

China? Whoa! The United States economy would undoubtedly be much better off with production of the Focus in Mexico, and not in China. After all, a Mexican final assembly factory would be sufficiently near the United States to purchase components from American suppliers.

And Mexican consumers, working in Mexican factories, are usually far more likely than Chinese consumers to purchase products that are manufactured in the United States. They’re also far more likely to use the online services of firms that are based in the U.S., considering that internet titans like Facebook and Google are banned from the Chinese mainland.

And what was President Trump’s response to Ford’s latest decision? Although he greeted Ford’s earlier decision by tweeting “Thank you to Ford for scrapping a new plant in Mexico …,” he hasn’t yet replied to the announcement of the shift to China.

Of course, it’s entirely possible that he might still comment on it. And it’s also quite possible that Ford will change its plans yet again.

But for the moment, it appears that Mexico’s loss is not the United States’ gain. It’s China’s gain, and thus the United States’ loss as well.

An Unintended Consequence

Throughout his Presidential campaign, candidate Donald Trump referred to the North American Free Trade Agreement (NAFTA) as “the worst trade deal ever” for the United States. He vowed to eliminate his nation’s trade deficit with its neighbor to the south.

Last week, though, the U.S. Commerce Department announced that the trade deficit between Mexico and the world’s largest economy had soared to its largest imbalance in almost a decade. And some economists believe that the worsening imbalance may be attributable, at least in part, to the verbal statements of one man:

President Trump himself.

How is this possible? Well, the President’s aggressive posture is believed to have generated fears of a trade war between the two NAFTA countries. Such a war would significantly reduce Mexico’s attractiveness as a place to do business within the global economy.

And the global financial markets sell any currency whenever they expect future events to reduce the allure of operating in its country. Trump’s tough talk, unsurprisingly, has helped drive down the value of the Mexican peso against the American dollar since he began running for office.

Nevertheless, when a nation’s currency declines in value, it becomes a less expensive location in which to manufacture products. That’s why a place like Bangladesh, which only ranks 106th among 138 countries in overall global competitiveness, continues to produce billions of dollars of ready-made garments annually for numerous global retailers.

Thus, when the President of the United States criticizes Mexico and drives down the value of its peso, he helps that nation become more cost competitive to firms around the world.

It’s an unintended consequence that illustrates the complex and intertwined nature of our global economy. As President Trump attempts to rebuild his nation’s manufacturing base, he’ll need to avoid driving down the value of his competitors’ currencies in order to achieve his goal.

NAFTA’s World Cup

After Presidential candidate Donald Trump repeatedly told the American people that the North American Free Trade Agreement is “the single worst trade deal ever approved in this country,” we might have presumed that it would be well on its way to extinction by now.

But guess what? NAFTA is alive! And it appears to be overwhelming all global competitors in a particular international endeavor.

That endeavor is the World Cup of global football, known as soccer in the United States. Apparently, the sport’s international governing body has placed its 2026 quadrennial championship tournament up for bid. And earlier this month, NAFTA partners Canada, Mexico, and the United States instantly became the overwhelming favorites to win the bid when they revealed their plan to jointly host the games.

So why is the soccer championship series such a popular target for NAFTA cooperation, when other economic targets — such as the automobile industry, for instance — generate such hostility between nations? One possible reason is that sovereign countries like the United States can easily produce quality automobiles without help from others, but cannot easily host World Cup tournaments on their own.

Naturally, critics may note that the United States did indeed host its own World Cup tournament more than two decades ago. But with the field of participating teams soon to expand to 48 competitors, many more host cities will be needed in 2026. And relatively few cities in the United States can match metropolises like Toronto, Vancouver and Mexico City for cosmopolitan glamour and passion for The Beautiful Game.

Is North America the only region where such an approach is beneficial? Could the bitter debates that now divide the European Union, for instance, be calmed by a pan-European World Cup? Perhaps any sporting event that is too large to be hosted by a single nation could help promote a spirit of globalism by adopting a multinational hosting strategy.

Unfortunately, it may be a very long time before the European Union can even consider such a venture. And thus, at the moment, the three nations of NAFTA possess a golden opportunity to lead the way.

Nike: 10,000 Jobs From The TPP?

Good news! Nike is promising to create ten thousand jobs in the United States if America ratifies the Trade Promotion Authority and the Trans-Pacific Partnership. But do you believe it?

The TPA / TPP is the proposed free trade agreement that will integrate the Western Hemisphere economies of the United States, Canada, Chile, Mexico, and Peru with seven nations in the Asian-Australian Pacific region. Similar to NAFTA, the North American Free Trade Agreement that links the United States to its northern and southern neighbors, proponents claim that its establishment will lead to regional prosperity.

President Obama has been urgently supporting its ratification as a key component of his vaunted “pivot to Asia” global strategy. In advance of his visit to Nike headquarters last week, Nike executives issued its bold job creation promise.

In the two decades since NAFTA was first ratified, though, its overall effect on the American economy remains unclear. Although many economists believe that its benefits outweigh its drawbacks, others charge that that the removal of trade barriers with Mexico has decimated many American and Canadian industries.

Nevertheless, today President Obama is declaring that the TPA / TPP will support the American economy. Do you believe his claim? And do you believe Nike’s promise of 10,000 new American jobs?

One reason for skepticism about the job claim is that Nike hasn’t explained where it will actually find those new positions. Will they transfer manufacturing jobs back to America from Asia? Or will they create new positions to manufacture products for export to TPA / TPP member nations? Nike hasn’t answered such questions, which leads one to suspect that the firm can’t (or won’t) guarantee its own job creation promise.

Another reason for skepticism is that New Balance, the only American athletic footwear firm that is still operating significant manufacturing facilities in the United States, is not fully supporting the agreement. Instead, it has continued to advocate for trade tariffs on Vietnam, as well as for similar legislation that contradicts principles of free trade.

In other words, a major American manufacturer with virtually no remaining factories in the United States is supporting this free trade agreement. And its rival American manufacturer, one with significant domestic factories, is lining up against the agreement. Are these positions consistent with the presumption that the TPA / TPP will boost America’s economy?

It is always possible, of course, that the benefits of such an agreement will ultimately outweigh its costs and risks. Nevertheless, it would certainly be reasonable to be skeptical about any claims that a failure to ratify the TPA / TPP would necessarily be “catastrophic for our country and for the world.”

The Cyprus Crisis: Was It Inevitable?

For a while, it appeared that the political leaders of the European Union were beginning to solve their monetary problems. Despite fiscal crises and social unrest in Greece, Spain, Italy, and other member nations, the union of sovereign states had survived one crisis after another without splitting apart at the seams.

But who could have anticipated that tiny Cyprus would have precipitated the most significant monetary crisis yet? As the island nation teeters through a banking crisis that may plunge it into bankruptcy, many have concluded that the Euro zone itself is heading towards a breakup.

Some economists are now concluding that the fundamental design of the European Union is flawed, and is thus exacerbating these economic challenges. Is it possible that such flaws actually made a crisis inevitable?

Remember The ECU!

The European Union, of course, wasn’t created in its current form. Although visionary founder Jean Monnet spoke wistfully of a United States of Europe, the entity was originally founded as a trade bloc for the coal and steel industries in France, Germany, Italy, and the Benelux nations of Belgium, Luxembourg, and the Netherlands.

It later evolved into the European Economic Community (EEC), a free trade association of the same six sovereign nations, with each maintaining its own currency and monetary policy. And later, a basket currency known as the European Currency Unit (or ECU) emerged in virtual form.

A virtual basket currency? How did that work? Well, let’s assume that a firm was owed a certain amount of French francs. Instead of receiving its entire payment in francs, it could choose to receive an equivalent collection of French francs, German marks, Dutch gilders, etc.

It was a useful policy that permitted firms to diversify their currency holdings while operating throughout the EEC. In essence, it created a pan-European common currency, without forcing nations to incur the risk of merging their incompatible monetary systems and currencies.

Truly Necessary?

In retrospect, the incompatibilities between national economies and systems appear to be strikingly obvious. After all, why would any one have expected the German and Cypriot economic systems to have blended into a single unified entity? Or the Spanish and Estonian systems, for that matter? Or the Irish and Greek systems? Yet all of these states committed to utilizing a common European currency.

Let’s take a moment to think about this commitment. Germany, after all, is an immensely wealthy industrial powerhouse that exports advanced technological products around the world. Cyprus, on the other hand, is a Mediterranean island that is primarily known as an offshore banking haven for Russian business people and other global residents.

Was it truly necessary for all of these nations to adopt the same currency? What long term benefits could such a union have possibly conferred on these parties? Although the decision may have generated a fair amount of short term pan-European pride and international goodwill, such feelings might have continued to develop under the structure of the EEC and the ECU any way.

NAFTA: A Case In Contrast

For a comparable case of a trade bloc of members that never chose (and, in fact, never even discussed) the possibility of evolving into a monetary union, consider the North American Free Trade Association (NAFTA). From the time of its initial formation in 1994, NAFTA’s trio of member nations (Canada, Mexico, and the United States) have been content to eliminate trade barriers and coordinate economic policies without blending their independent monetary systems.

Can you imagine the chaos, disorder, and controversy that would ensue if Mexico were to abandon the peso and adopt the United States dollar? Or if Canada were to consider “bailing out” the American government’s $16.7 trillion accumulated deficit? It’s difficult to even visualize a scenario where any of these nations might wish to do so.

Furthermore, although all three NAFTA members have also signed free trade agreements with other nations, NAFTA itself has remained a bloc of only three sovereign states. Representatives of the three countries agree that the bloc would become unwieldy if it were to expand and encompass other nations.

The End Game

Although encountering noteworthy political opposition, European leaders are continuing to insist that the European Union and the common currency zone will survive this latest crisis. It remains to be seen whether they can manage to achieve this goal; furthermore, it is even appropriate to wonder whether it would be beneficial for any one to do so.

It is, in fact, quite possible that an inevitable fracturing of the European Union has already begun. Reportedly, the level of uneasiness about the very existence of the Union itself continues to rise among the citizens of the member nations.

In other words, an “end game” may have already begun to play out throughout the capital cities of Europe. And with it may emerge the unwinding of the Euro zone, accompanied by the re-emergence of the Cypriot pound, followed by the Greek drachma, the Spanish peso, and the Italian lira.

The Dangers of the Global Economy

Eighteen years have passed since a youthful Al Gore successfully defended the fledgling North American Free Trade Agreement (NAFTA) on live television in a spirited debate against Ross Perot. Shortly afterwards, the pact was voted in law, and the free trade union between Canada, Mexico, and the United States began its highly successful run.

Or did it? Many critics complain that its track record over the past two decades has been anything but successful. Although NAFTA has indeed encouraged cross-border trade between the three nations, its original proponents promised that American manufacturers would move their plants from the fifty states to northern Mexico, which would then export their finished goods back across the border to American consumers.

In other words, although the United States would lose its “low technology” manufacturing industry, it would do so to a neighboring nation with close economic ties. Mexican consumers, rising into the middle class, would grow progressively wealthier and then purchase more expensive goods and services from the United States. In addition, as a result of their increasingly home-grown affluence, Mexicans would be less tempted to cross the border of the Rio Grande as illegal aliens in search of employment opportunities.

For a while, this vision appeared to come to fruition in accordance with the original plan. Maquiladora factories sprung up in Mexico, within easy trucking distance of the American border, and contributed to an emerging Mexican middle class. And the southwestern regions of the United States experienced an economic boom as well.

From China to Greece

So how did this vision go awry? Why aren’t American firms still manufacturing everything from toys to textiles within North America? And why does illegal immigration remain a challenge for the United States and Mexico?

Why? The reason is global interconnectivity. American buyers realized that the geographical proximity of Canada and Mexico isn’t very much of a economic advantage any longer, now that communication and transportation systems have made the world a smaller place. If goods can be manufactured more cheaply in China than in Mexico, despite the fact that China is half a world away, then factories can just as easily serve the American market from Asia as from Latin America.

For similar reasons, an economic meltdown in Greece — of all places — is now depressing the stock market values of American firms and exacerbating economic risks for American communities. Oddly enough, the path of economic danger that runs from Greece to the United States appears to be passing through — to reiterate, of all places — France.

It’s The Banking System!

Why Greece … and why France? This “strange but true” tale begins with the federal government of Greece, a culturally rich but economically small nation on the southeastern periphery of the European Union (EU). The government ran up a huge public debt, engaged in fiscal shenanigans to hide it from their fellow EU nations, and then turned to those same nations to finance a bail-out when faced with the prospect of imminent default.

The German leader Angela Merkel, head of the largest and most prosperous economy in the EU, initially balked at the cost of the bail-out. But French leader Nicholas Sarkozy, prompted by the pleas of the three largest French banks that invested heavily in Greek government bonds, convinced his EU partners that a bail-out would be required to prevent the economic chaos that would result from a governmental default of an EU member.

How does this European intrigue affect the United States? Apparently, the global ambitions of major American banks have exacerbated the risks facing firms and taxpayers in the United States. Unfortunately, American banks have sold securities to the French banks to insure them against losses in the event of non-payment by the Greek government. And a Belgian-French bank called Dexia SA, taking advantage of free trade laws with the United States, entered the American municipal loan market a few years ago, and is now raising interest rates on strapped American cities to compensate for its own loss exposure to Greek debt.

A Two Edged Sword

It is, of course, undeniable that the globalization of business and the economy has drastically improved the lives of countless millions of people. Within two generations, China has progressed from a nation beset by rural poverty to one boasting the second largest economy in the world. Its fellow BRIC nations of Brazil, Russia, and India have made similar strides as well, and various African nations are now hoping to follow the same path to prosperity.

Nevertheless, although the historically wealthy nations of the G-7 have certainly not slid into poverty during this time, they have learned that globalization can be a two edged sword. This is apparently why the United States Congress is now hesitating to ratify new free trade agreements with Colombia, Panama, and South Korea, and is looking warily at requests to continue pursuing new pacts through the World Trade Organization.