Can the US Have Balanced Trade with Mexico under a Renegotiated NAFTA?

Widespread discontent regarding America’s large trade deficits with Mexico is clearly the main force behind the U.S. Government’s desire to renegotiate the North American Free Trade Agreement (NAFTA). As President Trump said repeatedly during the campaign, 

       "Mexico is killing us on trade."

He reiterated that point in a recent tweet:

“The U.S. has a 60 billion dollar trade deficit with Mexico. It has been a one-sided deal from the beginning of NAFTA with massive numbers of jobs and companies lost.” [1]

Can NAFTA be renegotiated in a way that restores a better balance in trade between Mexico and the United States? 

The Big Mac and other Purchasing Power Parity Indices - Use and Abuse

Does the "Big Mac Index" that The Economist regularly publishes indicate if a country's currency is over- or under-valued compared to the rate needed to balance its external trade? 

Far too often, the popular press -- and even serious policy makers --assume that this is true. However, neither the light-hearted Big Mac indices nor the very serious Purchasing Power Parity (PPP) indices have any significance in the context of determining if exchange rates are consistent with balanced trade. 

NAFTA - The Problem is the Dollar's Overvaluation, Not Currency Manipulation by Mexico and Canada

Commentaries for the upcoming USTR hearings on NAFTA modernization from various labor and industry organizations have called for tough measures against currency manipulation.

Currency manipulation is of course a well-known hot-button issue and deserves to be addressed. But in the context of NAFTA hearings, this is simply the wrong focus.

To raise currency manipulation in the NAFTA context implies that Mexico and Canada are currently manipulating and undervaluing their currencies, thereby harming the United States. This is not true.

If a country has an undervalued currency, by definition it has an overall trade surplus with its global trading partners. However, as shown in the following graph, Mexico and Canada both run overall trade deficits.

In fact, for the past sixteen years Mexico has had an unbroken string of global trade deficits, averaging 1.7 percent of GDP, and Canada has had nothing but trade deficits since 2009, yielding an average trade deficit since 2000 of 0.7 percent of GDP. In 2016 alone, the respective deficits of Canada and Mexico were 3.7 percent and 2.7 percent. On average, their deficits are getting worse, not better.

How can we explain the fact that our NAFTA trading partners have been running significant trade surpluses with us, but despite these surpluses, their overall trade has been in deficit for years? The answer is very simple:

• The currencies of Canada and Mexico are overvalued, but the U.S. dollar is even more seriously overvalued. 

The solution to our trade deficits with Canada and Mexico lies not in forcing them to revalue – that would leave them with even larger global trade deficits. The solution lies instead with reducing the dollar’s overvaluation – currently estimated at about 25 percent with respect to the rate that would balance U.S. trade.

Launching futile fights against currency manipulation that does not exist within NAFTA today will do nothing to solve America’s trade problems and could easily undermine progress in other area important to America's future.

Instead, the road to a prosperous future for all Americans lies with bringing the U.S. dollar to a fair competitive value and keeping it there. The  Market Access Charge (MAC) is the only tool that can accomplish this important task.

The MAC can make U.S. factories, workers, and products more competitive, both within America and in export markets, by removing the 25 percent tax on the selling price of all US industrial, agricultural, and other products currently imposed by the dollar's overvaluation with respect to the exchange rate that would balance US trade. Furthermore, the MAC would eliminate the 25 percent subsidy automatically granted to all imported products by the dollar's overvaluation.

I hope that organizations making oral presentations at the NAFTA hearings will make this point loud and clear.

America Needs a Competitive Dollar - Now!

MAC - Expert References

This post provides a list of key explanatory posts about the MAC appearing on this website, plus selected references made by other economic experts to the MAC since the beginning of this year.

Key Explanatory Notes on the Market Access Charge

This website provides over 50 posts on the MAC's design, the reasons the MAC is needed, and the MAC's probable benefits for America. The most useful and most frequently visited are the following:

How the MAC Would Help Restore American Manufacturing
http://abcdnow.blogspot.com/2016/05/how-mac-would-help-restore-american.html

Currency Manipulation or Currency Misalignment
http://abcdnow.blogspot.com/2016/03/currency-manipulation-or-currency.html

Make the Better Way Even Better
http://abcdnow.blogspot.com/2017/01/make-better-way-even-better-add.html

Of these, the first provides the best overall view of the MAC's purpose, design, and implementation.

Expert References

Since the beginning of 2017, the following references to the MAC by other experts are particularly relevant:

2017.01. Robert E Scott. Growth in U.S.–China trade deficit between 2001 and 2015 cost 3.4 million jobs. Here’s how to rebalance trade and rebuild American manufacturing. Washington: Economic Policy Institute.

 “John Hansen (2016), another distinguished economist, has proposed the imposition of an adjustable “market access charge,” a tax or fee on all capital inflows that would reduce the demand for dollar-denominated assets and hence the value of the currency. By revaluing the currencies of surplus countries, the U.S. trade deficit could be reduced by between $200 billion and $500 billion dollars, raising demand for U.S. exports. (Rebalancing the dollar would also help exports in the services and agriculture sectors.)”
(http://www.epi.org/publication/growth-in-u-s-china-trade-deficit-between-2001-and-2015-cost-3-4-million-jobs-heres-how-to-rebalance-trade-and-rebuild-american-manufacturing/)

2017.02. Jeff Ferry. Fixing the Bloated Dollar. Washington: Coalition for a Prosperous America.

"... Joe Gagnon ... is intrigued by another, even more radical proposal, called the Market Access Charge or MAC.  The MAC is the brainchild of economist John Hansen, now retired after a career at the World Bank. Hansen’s vision is for a charge, starting at 50 basis points (half of 1%) on inflows of foreign capital into U.S. financial assets. The one-time charge upon entry would be levied not on the interest but on the principal invested into U.S. assets. There would be no political debate required over which nations pay the MAC. They all would. The revenue flowing to the Treasury would be counted in billions of dollars.
The advantages of the MAC are that it is relatively easy to administer and it is highly likely to drive down the dollar. Most important, it demonstrates to the world that the U.S. is serious about making sure that its currency serves the needs of its domestic economy instead of the other way around.
(www.Prosperousamerica.Org/Fixing_The_Bloated_Dollar).

2017.06. C. Fred Bergsten and Joseph E. Gagnon, Currency Conflict and Trade Policy: A New Strategy for the United States. Washington: Peterson Institute for International Economics.

“The United States could impose a transactions tax or a “market access charge” on new purchases of US assets by currency manipulators.”
(https://piie.com/bookstore/currency-conflict-and-trade-policy-new-strategy-united-states).

2017.06. Daniel DiMicco, Brian O’Shaughnessy, and Michael Stumo. CPA Testimony for NAFTA Negotiations. Washington: Coalition for a Prosperous America.

"First, and most importantly, a capital flow management tool called the Market Access Charge (MAC) should be implemented to push the US dollar towards its trade balancing equilibrium rate, increasing U.S. exports and reducing imports. CPA’s recent analysis, using the IMF Fundamental Equilibrium Exchange Rate (FEER) method, corrected to target a zero current account balance in 5 years, shows the dollar is about 25.5% overvalued today."
(http://www.prosperousamerica.org/cpa_testimony_nafta_negotiations)

2016.06. Bob Tita, "How to Revitalize U.S. Manufacturing," Journal Report: Future of Manufacturing, pp 1-2. New York: Wall Street Journal.

Although it did not appear in 2017, this expert reference to the MAC is well worth noting as it appeared in the Wall Street Journal. In the article, Mr. Tita noted:

"Lowering the value of the dollar is difficult, especially as long as foreign investors keep pumping their dollars into U.S. investments. John Hansen, a former economic adviser for the World Bank, has a solution that he says could keep a strong dollar from further swelling the trade deficit and discourage high-frequency, speculative trading by foreign investors in U.S. financial markets.
The idea: market-access charges. A base-rate charge of 0.5% could be applied on all foreign-originated inflows of money into U.S. investments. The rate would gradually climb to about 2%. Further increases would be linked to increases in the trade deficit, which is about 3% of U.S. GDP. If the deficit remains unchanged even with the fee, Mr. Hansen anticipates 0.25% increases in the fee every six months. When the deficit retreats, the fee would fall. The fee revenue could be used for government-funded research to help manufacturing."
(http://www.wsj.com/articles/how-to-revitalize-u-s-manufacturing-1465351501)

America Needs a Competitive Dollar - Now!