Question

Find out why President Trump proposed renegotiating NAFTA. Provide two arguments for doing so.

• Analyze these arguments using the concepts of absolute advantage, opportunity cost, and comparative advantage.
• Do you think comparative advantage and absolute advantage are the best reasons for seeking trade with others? Why or why not?

Answer 1

Trump said that NAFTA was the worst trade deal that the country had agreed to. Trump is against NAFTA is because he sees this agreement as the reason unemployment increased in the nation. He is of the opinion that many firms moved their factories to Mexico to take advantage of cheaper labour there which led to the loss of jobs in the US.

NAFTA was created between Canada, Mexico and the US to eliminate tariffs. This way when tariffs are removed, there is free trade created between nations, so that they can produce goods and services as per their comparative or absolute advantage. For instance, manufacturing goods were produced in Mexico and imported into the US because of the lower labour costs in Mexico.

It is indeed true that though these theories are almost 200 years, they are still relevant. For instance, many developing countries use the comparative advantage and leverage their low labour costs to boost growth of their economies. Similarly countries have absolute advantage as well which they are using by export commodities of their absolute advantage. For instance, Canada has an absolute advantage in crude oil when compared to some countries. Canada is rightly using it's absolute advantage and is the largest exporter to the US. This is why it is necessary that countries use both comparative advantage and absolute advantage to determine which goods and services to produce and export. This way they can grow faster.