Question

When Congress was considering the North American Free Trade Agreement (NAFTA) in 1993, Ross Perot, a prominent business owner (and third-party candidate for president in 1992) argued that it would do no good for the USA to engage in trade with Mexico, since Mexicans, according to Perot, had incomes that were too low to allow them to afford American goods. Thus, he claimed, trade between the two countries would simply be in one direction with low-wage Mexicans producing and sending cheap goods into the USA but no producers in the USA being able to sell anything to Mexicans. Economically speaking (applying trade theory), is the scenario that Perot described what actually happens in trading relationships? Please explain.

Answer 1

Ross Perot was the independent candidate in the 1992 US presidential elections and he also founded the Perot Systems. Ross Perot argued against the NAFTA claiming that the Mexico is a very low income country as compared to the US so it will have a low wage advantage. That way, it will steal manufacturing jobs by producing goods at lower cost and will sold them to the US. Meanwhile, there won't be any takers for high-cost US products in the Mexico.

The free trade agreement allows unrestricted floe of goods without any duty or quota across the borders. The NAFTA is a similar free trade agreement between the US, Canada and Mexico. This has resulted in shifting low-skilled or low cost jobs to the Mexico such as automobile manufacturing. The theory suggests that the trade is not a zero-sum game in which one party benefits at the cost of other. The trade has a mutual benefits and lower cost of manufacturing means the end product has been cheaper and that means US consumer had to pay lower so there are benefits to the either side. The rise in income in the Mexico will increase the demand for the high-cost US goods in the future such as machinery, equipments, software suites.

The trade is not a zero-sum game but it has a mutual benefits.