Focus 580; NAFTA - 10 Years After

While in this hour of focus 580 we will continue with the topic that we began in our number one. We're talking about the North American Free Trade Agreement naphtha which took effect on January 1st of 1994 so now it's been 10 years. As I mentioned at the beginning of the program at the time that naphtha was proposed and debated there was a lot of controversy from people who were arguing that it would be bad for the American economy it would be bad for American workers and other people arguing that in just the opposite that it would be good for the economy but it would boost trade. It would actually create jobs because it would add incentive for manufacturing for export. And now 10 years later the argument continues and people are still taking the same positions and saying that in fact yes it has been good it has been bad and what we wanted to do here having passed the ten year mark is to have some conversation about naphtha from a couple of different perspectives from somebody who is generally critical from somebody who is generally supportive. And in this part of the show we'll be hearing from Dan Chris Wald. He is the associate director of the Center for Trade Policy Studies at the Cato

Institute in Washington D.C. He specializes in the economic effects of international trade and immigration. He has contributed articles to variety of publications including The Wall Street Journal and The L.A. Times. He also has appeared on The NewsHour on PBS on C-SPAN on the BBC on The Voice of America he's also testified before the Senate Finance and Commerce committees the House Ways and Means and international relations trade subcommittees at others. He has a bachelor's degree in journalism from University of Wisconsin-Madison ad also a master's degree in the politics of world economy from the London School of Economics. And he's joining us by telephone from Washington as as was the case with the first hour questions comments are certainly welcome we do ask people however to try to be brief and we ask that so that we can get as many different people as possible and so that we can get in a lot of callers and keep the program moving so questions are welcome here in Champaign Urbana 3 3 3 9 4 5

5 we do also have a toll free line. And that's good anywhere that you can hear us and that is eight hundred two to two when I'm four five five so again here locally 3 3 3 9 4 5 5. That's for champagne Urbana. If you're listening around Illinois and Indiana or if you happen to be listening on the internet as long as you're in the United States you may use the toll free and that is 800 to 2 2 9 4 5 5. Mr. Griswold Hello. Good morning David. Thank you very much for talking with us sure. We certainly appreciate it. And I know that the U.N. and Mark Weisbrot who was on the first hour have have had this experience before although you've been together you have debated one another a lot. We decided we kind of like this format a little bit better. So it's it's kind of like a virtual debate I guess. So we really appreciate you giving some of your time. Let me ask just as a way of starting with the general question that I put to him at the beginning was can you talk about the fact that the naphtha has had on the economy of the United States.

I certainly can and and first now after it's kind of like that old in quad test you know if you don't like trait you tend to read all sorts of negative things and abaft if you think trade's a good thing you tend to emphasize the positive. I think the mistake that was made about me after it is is both sides exaggerated its impact. You know Ross Perot saying there's going to be this giant sucking sound of jobs and investment going to Mexico the advocates saying it was going to create hundreds of. And so jobs I think both sides somewhat missed the point. Naphtol was never going to have a large impact on the U.S. economy our economy is 17 20 times bigger than Mexico's. Our trade barriers were already down to an average of like 2 percent it was just not going to have much impact on this huge U.S. economy. The biggest impact was in Mexico and we can talk about that in a moment but basically if you look at the record here in the United States in the last 10 years since the enactment of naphtha none of the negative things that the opponents said would happen have happened in the first five or six

years after the passage and after we're actually some of the best years the U.S. economy's ever experience we had record low unemployment low inflation. We created millions of new jobs in fact in the first five years after the passage of naphtha we added half a million manufacturing jobs. Now we've been coming out of a recession but that had nothing to do with now after the recession started in 2000 years after naphtha passed it had to do with the dot.com bubble collapsing business investment falling through the floor. Corporate scandals these other things. And after didn't play any role in that so I think now after from the U.S. perspective there's been a modest success it's made. Sectors like the automobile industry more efficient were producing just as many cars and light trucks today as we were before and after. But we're doing a lot more efficiently reproducing parts in Canada and Mexico where they can do. Put them together more efficiently and bring it all together here in the United States. So I think naphtha has been a first and foremost a foreign

policy success for the United States but also a a modest positive economic success. Let me ask you specifically a question about job loss because there are people who do make the argument that there has been a loss of jobs directly attributable to now and people different people have different numbers some people say that that it's at least a half a million and others make the argument that it's more maybe like more over 800000 and then some people say that it's even more and that how do you respond to numbers like that and what do you think it did it is possible to say yes some jobs have been lost as a result of NAFTA. Well of course trade will eliminate some jobs as it creates other jobs and in some ways that's the idea of trade we do more of what we do best and less of what we don't do as well. Technology. Does that too doesn't it. You know think of all the jobs that the computer has eliminated and yet it's created to other jobs. But I would just say take those figures

with a grain of salt. About four hundred thousand people have applied since naphtha passed about 400000 people have applied for trade adjustment assistance claiming that they were displaced because of a snapped. Even if you take that figure at face value that's about 40000 workers a year. You know David. Four hundred thousand people apply for unemployment insurance every week in the United States even when the economy is is performing well. And so the jobs that were turned over because of now are just a drop in the bucket compared to the changes in the U.S. economy in healthy times. Let me have you address a very fundamental point that Mark Weisbrot made in the first hour and I think other people would Macon and see what your response is and perhaps goes to this issue that you know sometimes economic policies eliminate some jobs and create others. But his his argument to other people is that what naphtha has done is that it

has contributed to a trend that we can't say this is just naphtha alone but it has contributed to a trend that perhaps we haven't so much lost jobs as the quality of jobs that people have. When you look at their their wages and their benefits has declined. So in fact maybe we have it what we have done is we have eliminated jobs in manufacturing that were the jobs that paid well paid a living wage people could support their families and we have replaced them with jobs in the service sector where the wages are lower and the benefits are much much less bearable if there are benefits at all and and again I think other people would say you can't blame the ethics Glu civilly for that but what they have to has done is simply made that worse you know. A seductive argument when we're in times of recession and you notice whenever the US goes through a recession and they always seem to happen every five or ten years people come out of the woodwork and all say oh it's trade with Japan or it's trade with Mexico or it's trade with China that's doing all this

when in fact one. I think it's really hard to argue that Americans have suffered a sustained reduction in their standard of living over the past 10 or 15 years. Americans in many ways we're living better than ever. And you look at the current climate if you're one of the Ninety four percent of the people in the workforce who have jobs you know mortgage rates are at record lows inflation is quiet. So I think it's hard to argue that we're suffering some sort of sustained decline in our living standards and secondly it is a myth that only manufacturing jobs are primarily manufacturing jobs provide a middle class living in fact today the typical service job pays as well as the typical manufacturing jobs. Think of the millions and millions of jobs middle class jobs in the service sector. You know teachers accountants real estate agents firefighters policemen

managers you know it. Not that we're not manufacturing anything anymore. In fact some snap manufacturing output in the United States is up 40 percent. We're producing twice as much stuff in real value than we were in the 1970s. We're just doing it with fewer people because they're so much more productive. We've had these leaps in productivity worker productivity and that is the essence of long term prosperity. Well let's bring in some people who are listening in to the conversation we have couple people have been here on hold already since we started so let's go to southern Illinois for the first on our toll free line line for. Hello I'm home. Yes OK. I am from the country I came on my profession. I speak from that sad but also from they have a 5 am skilled worker. The program created by the United States of America and we now know that

Mr. Bush and he 3M which almost are their age people and in fact I happen to noice family is it for and I am not really but the family are friends of Mr Bush but are very very rich people in France are rich. Do you thank Mr Bush and his friends. Go a little money little power. No I'll get the other issues. Job of all. Not while I'm on Larry. We're bringing skill and MSK you will work for all countries. I'm not going to go very long on these so don't think I'm going to take over and I'm not it will be yours. We're bringing people from other countries. Cruel and kill they screw work or I am one. I was mike my bachelor degree was from my country. My master's degree I took it here are through

scholarship Well I don't know how to add it. Thankful that but. And I'm doing well. No but one can never take that long their skilled job and they regret only nationality background. My daughters are American grades here are that we're not. Thank God our job then not that I got a factory job. No they wouldn't. Then the university children. Fortunately the bottom line I want to say now that is a pretty big tool for the United States of America. I am an American. The poor are to continue to stay in power in the world that is the bottom line that I want to say what the U.S. How do you feel about that.

Well Mr. Grizzle all you want to respond go chea. She brought up a number of issues there but. It was Mexico that actually originally approached the United States back in the late 1980s to broach the idea of a free trade agreement and that is because Mexico as you know used to have a very closed centrally planned economy. All that came crashing down in the 1980s with the debt crisis. Basically spent a whole decade trying to dig itself out of that hole from that old failed system of trying to go along. And so now after was really part of a broader strategy in Mexico to open themselves up to the global economy they finally joined the gap. The General Agreement on Tariffs and Trade in 1986. And they wanted to join the modern world and naphtha was part of that so it wasn't something you know it takes two to sign an agreement it wasn't something the United States foisted on Mexico. And and this is where I think naphtha was most important for the United States as a foreign policy

instrument. It brought help to bring Mexico into the modern era. It was not a coincidence that within 70. Years after passage of naff to Mexico had its first competitive presidential fair presidential election and elected a opposition party candidate to set a fox after 71 years of one party rule by the PR Ryback to help to break the monopoly on power of the PRR in Mexico and Usher Mexico into an era of modern I would oriented free market development well and Bush manages to FOX Look whichever way he wants out stuff that he manages to break room just like he manages any country in the army and went out of the power we have the power in the world and nothing that is to to stay in power. That's my that's my opinion.

All right well I thank you for the call let's go to another person here our next caller is in Bloomington Indiana and that would be line number one I don't have a map to does for labor it seems to me that it should be good for the consumer the American consumer. Close because of consumer goods are made where wages are lower but the selling price for those goods will go down and the American consumer will benefit. That's one thing I'd like you to confirm if that's true it seems to me it would be true however what concerns me is that in some of these low labor countries some of the labor conditions might be quite exploitive. In fact I've even heard of slave slave labor conditions. What can we do or what doesn't have to do to not allow export laborers to be exploited or slave labor to exist. Both good questions about who the first is one of those things that when people have have arguments in favor of now after they've said all this is one of the benefits.

That's right and that's why sometimes trade can be a hard thing to argue for because you see you see the job losses. There are people displaced by trade that gets on the nightly news what you don't see are the benefits that working families realize tens of millions of working families realize you know we we can buy better cars today because the process is more efficient bringing Mexico into the process. Television sets are more affordable today. Things like that so families realize savings every day from now have to it's like a tax cut for working families. About the exploited labor you know working conditions in less developed countries can be appalling. The question is are we would we do them any good by refusing to do business with them. And by closing off opportunities they would have to make products for exports you know the best paying jobs and poor countries tend to be either multinational investments in those countries or companies that are producing for

the export market. We have a little leverage we could lean on them if they're really exploiting their labors. We could lean on them to to improve their labor conditions calmly. Well you have. Be careful how you do that you can end up punishing poor countries for being poor. You know if we said we're not going to allow any goods to come in from countries that have labor conditions that we don't accept in a sense you'd be locking them into poverty and the pattern that has happened around the world when you look where the real progress has been made against poverty it has been in those poor countries that have opened themselves up to the global economy. China Vietnam India Uganda Chile These are the success stories. On the other hand it is it pretty much impossible to find a single poor country that has made genuine progress against poverty by keeping our markets closed by being hostile to foreign investment. So if we want one just from a humanitarian point of view help lift people out of poverty. We should do business with poor countries but also

how are the people of China and India going to become consumers of U.S. products if we don't allow them to participate in the global economy and in fact China is now our fastest growing major export market for U.S. goods. OK. Thank you very much. Thanks. Thank you let me pick up again. Take that question of the call a bit further because at the time the naphtha was being debated people did raise some of these questions they said specifically they were concerned about here I guess we're going to be talking about Mexico we're concerned about conditions for workers in Mexico their ability to organize and collectively bargain and so forth and there was another set of issues that had to do with the difference between environmental laws of the two countries. And so the side agreements were entered into as an accompaniment and after that was supposed to address those issues were conditions for workers and also environmental issues and I think that some people have said that that those things they they

weren't carried forward that the promises to address those issues that were made at the time that naphtha was signed simply haven't they they haven't been. They have been kept. I think that's debatable. You know Mexico is not the United States. They have a long history of trying to go it alone keeping their markets closed having a centrally planned economy throughout basically a one party state and that system just ran out of gas in the 80s. And so you can't blame all these problems that Mexico is still struggling with. After all when all those problems predated after. What NAFTA's done won. It has increased cooperation between the United States and Mexico our relations have probably never been better with Mexico more cooperation on cross-border issues having to do with pollution. I think Mexico has made real progress. The air in Mexico City is slowly but surely getting cleaner. We're making progress and

cleaning up issues at the border. Labor conditions have improved in terms of worker protections. You know the best jobs the best jobs in Mexico are in the north in the keel of Dora industries that are exporting to the United States. The problems they have in the south are because of now after their Because the southern Mexico is the least integrated part of Mexico so again I come back to this basic proposition that how can we best help people in poor countries lift themselves out of poverty and raise their standards. It's not by clothes. In our markets the products that they can produce for export. It's by trading with them and by trading with them we help to lift overall living standards and raise environmental and labor standards in poor countries. Well let me I got a caller here and I'm part of the promise that I won't make them wait too long but I mean make sort of take one further step here I guess I was very struck as I was trying to read some of what had been written here just recently about after how much of the reporting

was not on the economic effect on the United States but on the economic effect on Mexico. And that initially the promises that were made or the things that were said that that now after would do for Mexico and that in fact some people argue that while the growth in Mexico has not been zero since naphtha. It has been a guest you would say anemic. Less than 1 percent increase per capita per year. And while there was an initial boom in manufacturing particularly along the border in the MacKillop eras that in fact in recent years a significant hundreds of thousands of jobs that were gained there have actually been lost most of them to China as again manufacturers go in pursuit of lower wages. And so that the benefits in Mexico have perhaps been small and they've also benefited mostly the the people who live in the States in those areas in Mexico that are close to the United States and there and now has perhaps accelerated the sort of

gap between people who live in the rest of Mexico who are rural people than those who live in those part of Mexico those parts that are close to the United States. Well this is where figures can be very misleading. The opponents of naphtha like to make generalizations about the last 10 years and what what they often don't acknowledge is that in the first year after naphtha and that was unrelated to that but Mexico underwent a severe economic crisis the peso crisis you remember in the Christmas time in 94 that the peso plunged Mexico was on the verge of defaulting. That wasn't because of Knapton fact that was in some ways the last gasp of the old order. Mexico had been having economic crises virtually every six year elections. Go back to the 70s in 82 and 88 to get to 94. And so Mexican worker suffered a traumatic drop in their real wages in 94 95 and what happened is

now after allowed Mexico to bounce back quite a bit more quickly than it was able to dig itself out of the previous crash in the 1080. So since 95 in 96 Mexico's actually experienced a growth rate that is relatively good for Latin America. Secondly they broke out of this destructive cycle they didn't have an economic crisis or meltdown in this last election cycle. Mexico is now one of the most stable economies in Latin America you know when there was all the talk about contagion and the financial crisis in East Asia and then Brazil and Argentina. Well Mexico's been pretty insulated from that fact today. Mexico and Chile are the only two Latin American countries that have investment grade on their bonds there. They have macroeconomic stability. They have the conditions for growth. The only two un-American countries by the way that have free trade agreements with the United States that that should tell you something so Mexicans are not going to turn. Back

now state is not an issue that the major parties are fighting over. They know there's the hold the policies of the past failed. They want to move forward to a modern open and democratic society. Let us go and bring in here another caller. We have someone in Urbana line too. Hello. Yeah. Well what you just just said about how their credit rating has gone up. To me that that brings up dozens of the World Trade Center and it's being targeted the U.S. is absolutely vicious on its way and the way it will destroy the credit rating of a country that doesn't agree that toe the line. And when you have Mexico and Chile now have good credit ratings it's really

that that's going to charge can you give an example of a country who's had it rating we've destroyed because of that. Well I would guess Cuba would be a good one. Castro's communist 40 years of communism has anything to do with that. And you don't think our financial industries have put up at all for the metal pedal to the floor in terms of destroying the credit rating. We we opposed the trade embargo against Cuba we think if it serves any purpose it's long out of done that purpose and it's hurting the United States and hurting the people of Cuba but Cuba's problems fundamentally have to do with Castro's failed 40 year communist experiment. You know communism failed in Russia it failed in Eastern Europe. The Chinese and the Vietnamese can't run away from communism fast enough I think to blame Cuba's problems on some conspiracy on the part of the United States will that. That's what Castro wants us to believe. But that just defies any

objective look at the situation in Cuba. Yeah and our our industries don't practically think that the prospect of having to trade with Cuba. Of course they do but let me move on here. You're getting me stalled on a minor point actually. Brazil's been watching what NAFTA's done to Mexico and it's Brazil. That's the big plum in South America and it's and it's Brazil has digging in its heels here for very good reason. I would like I would I would direct people to a recent paper in the Foreign Policy in Focus web side by June Chang called kicking away the ladder. The real history of free trade one of the most lucid papers I have ever read on this whole topic where he he points out quite clearly and supports it with great documentation that the

historian to quote him are. I believe I am a historical pictures clear when they were trying to catch up with the front tier economies. The now developed countries used interventionist trade and industrial policies in order to promote their infant industries and in relative terms many of them actually protected their industries a lot more heavily than what the currently developing countries have done unquote. He often points out that that the per capita income in developing countries grew at 3 percent per year between 160 in 1980 but it's only grown in about one and a half percent between one thousand eighty in 2000 and even this one and a half percent would be reduced to 1 percent. So we take out India and China which have not pursued liberal trade and industrial policies recommended by the developed countries. And lastly I'm

sure you respond to that but let me let me. Not that even theoretically that one of the big big reason that people talk about free trade is the whole idea of comparative advantage but as people approach pointed out most recently Paul Craig Roberts at the Hoover Institution their comparative advantage is meaningless in the context of mobile factors of production. And that's absolutely true. So I'll let you I'll let you go at any of that and I'll hang up. OK. You put a lot on the table. Let me just respond briefly to some of the more major contentions there. First I don't believe the US became prosperous because of our own trade barriers economists have looked at that we we grew despite those trade barriers to the sectors of the U.S. economy that expanded the most rapidly when we had high trade trade barriers in the 19th century. We're not the party. Back to sectors Great Britain became a world power through free trade. So

what I do reject that and you look around the world today and those less developed countries that are growing the most rapidly are those that are moving towards freer markets more openness to the global economy. Of course China and India are not perfect examples of capitalism but they are moving decisively in that direction. And you have places like Hong Kong which has been free trade all along and that has some of the highest standards of living in the world. So more and more developing countries are realizing that they can't go it alone. Opening up to the global economy is is the way to grow. One last thing. About Brazil's complaints you know I listen to what Brazil says and there's a lot of truth in their complaints about the United States but what they complain about is our trade barriers. You know we have high trade our highest trade barriers in the United States are against products that are most important to poor countries in export you know agricultural products

steel footwear textiles and apparel. Brazil's complaints are legitimate we maintain our trade barriers on citrus on sugar on steel on footwear these are all very important Brazil there. Their complaint isn't against free trade. It's that we're not practicing what we preach here in the United States. And I say. Three. Three cheers to Brazil for criticizing the United States I think they could do more to lower their own trade barriers which I think has inhibited growth in Brazil. So you can you can say all you want about these studies what they miss you know it. It's. Quite an admission to say that India and China are the exceptions to that study that the caller cited I mean that is about half the world's population there are at least half the world country population and those countries have been moving decisively towards freer trade because they got tired of the stagnation and the grinding poverty of closed markets and hostility to foreign investment.

Well no I guess I'm curious what when you I'm wondering about your of your idea Cato's idea. Some people make the criticism that people here in the United States talk about free trade but they don't really mean it they mean free for us and not for anybody else when you look at trade barriers to imported products in the United States whether you're looking at tariffs or we're looking at quotas or you're looking at the kinds of price supports and legislation all the kinds of things that we do that to benefit our producers and manufacturers in the competition with foreign producers and manufacturers. Do you when people say well that there we really don't have free trade would you say yes that's right we really don't and you would say we ought to take those barriers. We have to be. Remove those barriers. Yes. You know to to say that we don't have perfect free trade in this country is not a criticism of free trade. It just shows that one we're a democracy and so you're going to have these kind of messy exceptions to good policy. But

you know if you look at the U.S. trading system we are one of the more open countries in the world and again you look around at the world look at the rich countries that you see around the world in Western Europe Japan East Asia almost invariably the people who are the most well-off and actually incidentally the most free politically happen to live in countries that are generally open to the global economy. But we do have exceptions I think it's a it's rather shameful that here in the United States we have maintained our highest trade barriers against those products that are most important to poor countries. A World Bank study showed that the typical trade barriers and rich countries are four times higher against imports from less developed countries than they are against imports from other rich countries. I think we should address that. Those are the budget amid complaints made by Brazil and other developing countries at the Cannes coup last fall. I think we should get those barriers down. And by the way there. It's a movement towards freer trade the complaint of

the poor countries around the world isn't against free trade. It's that we're not practicing free trade. And they want more free trade. And I think we should. I think we should accommodate them for their benefit and our benefit. We have about 20 minutes left in this part of focus 580 and I'd like to introduce Again our guest and we'll get right on to the next caller We're talking with Dan Grizz Wald He is associate director of the Center for Trade Policy Studies at the Cato Institute in Washington D.C. and he specializes in the economic effects of international trade and immigration. He's contributed articles to the Wall Street Journal Los Angeles Times other major publications He's also been interviewed on radio and television both public and to commercial. He has academic background both in journalism and economics as a journalism degree from the University of Wisconsin Madison and also a diploma in economics and a master's degree in politics of the world economy from the London School of Economics. If you're interested by the way in finding out more about the Cato Institute about the guests about their

positions on various issues and you have access to the Internet they do have a website which is w w w dot Cato that CA t o dot o RG. So you can. Go right there and questions and comments are welcome here this morning we're talking about now we thought as it was 10 years now since the passage of the North American Free Trade Agreement that went into effect January of 1994. It would be good to take a look at its effects and to talk about it from two different perspectives. And we have done that this morning on the program in the first hour talking with Mark Weisbrot who's generally critical. And in this hour talking with Dan Griswold who is generally supportive. Questions are welcome 3 3 3 9 4 5 5 toll free 800 to 2 2 1 4 5 5. The next caller is in Champaign County Line 1. Hi. I guess at the London School of Economics they taught you that their wealth and development was based on on free trade and not the fact that they had a world wide empire and had gunboats around the country exacting whatever relations they wanted to have with

the various commies that they had for centuries. What was the basis of their prosperity. Oh no. Well you know the. Paul Kennedy. Right right OK. Well it. That doesn't meet the laugh test obviously I mean you know what. They lost money running the Empire well some you know that might have might have transferred wealth from the middle class of their own country into the upper class but it did construct a huge industrial system that was based on the on the on the pillaging of the of the world and that's called imperialism you're not allowed to bring that up I guess. But I mean there are so many examples. The Asian tigers which are pointed at some kind of free trade the image is is just baloney they were they were very Arthur Tarion economies. Their

initial part of their development was though the war economy even during Vietnam. I mean there's a history to all of this that you can't but you can't deny and I'm sure you will but. It's the. You're living in la la la. And if and if it comes up when you say that the past policies and 19th century had nothing to do that are protected that we you know that our tariff had nothing to do with it and hit us and then you turn around and say But we have all these tariffs now that we shouldn't have and if free trade is a myth it and most of now after ten and the other trade agreements are actually about investment protection and all sorts of things like that they have very little to do with trade they have a lot to do with allowing corporations to be insured and transferring the productive capacity to these high repression and little wage countries where the Comparative advantage of having a state that will impose

the conditions that are necessary to get people to work and situations. And why were and why would the dumping of the corn from here are depressing the countryside of Mexico and forcing people to the so-called much better jobs in and free trade zones than Makita Doris. It's ludicrous been I don't know how you can you can possibly maintain a straight face on it but. Yeah we'd like to abolish all the protections and subsidies to agriculture. You know it it's a scandal. We CDs estimated rich countries spend three hundred fifty billion dollars a year subsidizing their agriculture in this. This is bad for consumers in those countries we pay higher food prices than we should at the grocery store for milk and other products but it it is very bad for farmers in poor countries and they shouldn't have to compete against subsidized agriculture

in rich countries but again that's not free trade. What he has done this in the third world you keep saying that they all wants and we have these basically comprador regimes that are calling for free trade that's the only option they have at this point and getting rid of the subsidies. There are other people that are calling for authentic development investment not just a World Bank that imposes You know they can have the subsidies on and there are production because we don't we won't we won't. We got them by the debt crisis we have them by the Coneys as it were. The callers again put several things on the table but let me let me talk a bit about about East Asia for a second. You know yes South Korea and Taiwan and other countries engaged in various forms of industrial policy. Was that the secret to their success. I don't think so. Lots of poor countries N-Gage an industrial policy one way or another and they're they're still caught in poverty and Hong Kong didn't engage in any industrial policy they had pretty much a pure

hands off free trade approach. And they and they prospered. And the caller was right that that part of the world hasn't been a fountain of democracy in the past. But look what's happened in South Korea and Taiwan and places like that. First they rapidly expanded their engagement in the global economy. Yes their exports went up but their imports went up as well. That helped to create a more prosperous larger and educated middle class. And now South Korea Taiwan increasingly places like Indonesia and the Philippines multi-party democracies that respect human rights. And by the way I just did a study for Cato which you can find on our website on looking at the effects of. Trade on democracy and what you find are that those countries that are the most open to trade also tend to be the most prosperous and are the most likely to be democracies that

protect human rights and so when we pursue trade liberalization it isn't just for our own economic benefit. It's to help the soil for democracy and human rights around the world. Let's take another call here someone who's calling from a car phone mobile phone south of champagne line number two. Hello. Hello can you hear me. Yes. You know I had a number of questions. First of all about maps. How is it if we have free trade with Mexico now the protected sugar prices at about 22 cents a pound and you can make sure it happen all a lot cheaper than you can corn and of course it would be cheaper than corn syrup all these products made here in central Illinois. How did that happen without any discussion. The second question I have is drug companies like Roche with your located in Basel Switzerland can charge one price for their drugs in Europe and come over here and

charge three times the same price. That's obviously free trade and that some kind of an institutional barrier needs to be dealt with. Yes. But those are a couple of very few. The questions yes sugar was one of the exceptions to an after and I don't know why it should have been back to our sugar program. Is is another one of those scandals. It's one of those exceptions that's particularly scandalous towards from free trade. We have a domestic protected sugar price that is about three times the global price. The caller is exactly right we pay 22 cents a pound domestically the global spot market price is about 7 cents. And you know better that is having an impact not just on consumers who buy sugar we pay one to two billion dollars extra a year for sugar but it has an effect on US industry you know right there in Illinois. Chicago in the past has had a number of candy and confectionery plants there. They paid a heavy price for this high domestic price for sugar and they've

lost business we've had factories moved to Canada where they can import sugar for free and now we're finding that sugar is complicating our. Efforts to open up markets abroad and free trade agreements that were trying to negotiate with Central America and Australia. Sugar is coming up the sugar lobby is very powerful they're very well funded and they are basically extracting payment from millions of American families to increase the profits of a relatively small number of sugar producing companies. Secondly the drug issue that is so complicated. You know you get into intellectual property one reason why we give protection to drug companies is to encourage research and development and innovation so there's a tradeoff there. So I can't really say that that's where it gets cut. Kid Yes we have trade restrictions on drugs but also you have

safety issues you have actual property issues so that I just say that's a very complicated issue may be best left to another show. Well let's go again to another caller this is champagne and callers on the line number three. Hello. Yes I work with a Christian ministry here at the University of Illinois. And in a few weeks we are going to Juarez Mexico and cross the border with about 60 college students and we will build homes for homeless people living on the border. These people have been brought to this area to work across the street for a Lexmark and for Toro and for these companies that line up and pay them $50 a week and they live in cardboard shacks. And I've always wished that I could take an economist along and. And help them explain their thoughts. What do you call it what do you think when you see

something like that. People living in the mud in under pallets and under plastic sheeting eking out and didn't going across the street and having that the zone of beautiful building but factory is this is this part of free trade and and what are your thoughts on that. Well I was just down to Laredo Texas last fall another another border town and I agree with you the contrast could be quite stark but we have to ask you know did naphtha and free trade create those conditions. And I would say no. You know Mexico has had a lot of problems going back decades. They basically chose a fundamentally different path for much of the 20th century than the United States did. They kept their markets closed. They had a one party state that dominated the economy and in the end it failed it crashed and burned in the 1800s and now they're trying to pick up the pieces

and move on a new course. And so. I don't like those conditions any better than you do but I think we need to be realistic about what causes them and what alternatives there are. And again I come back to the point. When we do those people any good would with those people in the cardboard shacks that you're going to minister to and I compliment you for that it sounds like a great program you've got there. Would they be any better off if we kept our markets closed to those products that they can produce. I would say no. I think their best hope for raising their living conditions is to allow the market to work and allow them to create products that can be sold in the United States and raise their wages again the best jobs in Mexico are those that tend to be in the export sector that are working for foreign owned factories located mostly in the north of Mexico and producing for export so that that is their best hope let's not let's not extinguish.

Hope all is well thank you. All right I guess I find myself going back to this. The the idea that what manufactures have continued to do is pursue the lowest wage that they can. And the concern that I think some people in Mexico have raised is that some of the jobs that were created in manufacturing as as a result of naphtha have in fact now been lost. The figures I've seen are in the hundreds of thousands. And they have left Mexico and they most of them have gone to China where wages are significantly less. Is there anything. No I don't know I said. You might argue that in fact that's just the way economics work. And that that's not something that that we should intervene in but I guess I wonder what you think about this this constant pursuit of by manufacturers of the place where they can pay their workers the lowest wage.

Well first that doesn't prove to be true. You know if wages were all that determined where manufacturing located factories would be in Haiti they'd be in sub-Saharan Africa. In fact most of our foreign investment. Goes abroad goes to other rich countries with high wages and high standards they go to Europe. They go to Canada. Investment goes to Canada. Our investment in Mexico is actually 10 been pretty modest compared to what we invest domestically what companies are interested in are places where the workers are productive where the infrastructure works you know the phones working the electricity works where the roads and transportation is dependable where they can get products in and out of the country so it isn't just low wages and in fact wages are becoming a declining part of the value of most products most products. The main value is in the technology as opposed to Mexico competing with China. Again it's you have to look at the kinds of jobs that are that are going abroad and China has a tremendous advantage in certain kinds

of manufacturing. Generally the lower end consumer products and that sort of thing. I think Mexico's going to have to readjust and find its niche. You know Mexico still isn't a tech part of say the U.S. automobile industry. You know we're producing as many cars and light trucks in the United States today as we were before and after about 12 million a year. We're just doing it in a in a through a process that. Create some of the parts in Canada some of the parts in Mexico bring it all together here in the United States. So the answer isn't the kosher markets. It's to engage in the global economy and do more of what you can do best. And that's the way that you lift wages and living standards. The president has been talking about extending the principle of the Free Trade Agreement to essentially to the rest of the hemisphere first to Central America and then to to to all of the Americas and and there has been a lot of discussion of what has been called the Free Trade Area of the Americas a hemisphere wide version of

naphtha. And again people I think have raised some of the same arguments for and against that as they have to to naphtha. I'm assuming that you would be support generally supportive of the idea of extending this to add to the rest of the hemisphere. But that's a more complicated question than it would first first appear you know even free trade economists debate the best approach to free trade should it be a multilateral process through the WTO where everybody is on board and you have nondiscriminatory trade liberalization or is it better to go kind of piece by piece and in some ways that the Free Trade Area of the Americas is just too unwieldy. You've got 34 countries. They're at different stages of development and readiness. I'm I'm kind of skeptical that the Free Trade Area of the Americas will come to fruition any time soon. I mean. Much more in favor and optimistic about the Central American Free Trade Agreement. You know let's look at those five Central American countries when when I was in college and into the 80s that was a very

tortured region of our hemisphere you had insurgencies and Civil War you had widespread human rights abuses. That's a success today. The five Central American countries we've been negotiating with Costa Rica quat Amala Honduras El Salvador Nicaragua all five of them today are functioning democracies. They have increasingly opened their economies to investment and trade. And I think a Central American Free Trade Agreement would be a a way of reinforcing that very positive trend. We're going to have to leave it at that. I want to thank you very much Mr. Hall for talking back you have enjoyed.