Los Pollos Coming Home to Roost

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When President Trump — El Jefe, as he is known to his precious few Mexican devotees — started his jihad against the NAFTA treaty two years ago, some of us predicted trouble. NAFTA — conceived by President Reagan, negotiated by President Bush the Elder, and signed in 1994 by President Clinton, never was a “bad deal” for the US. It dramatically increased North American trade, and while we ran trade deficits with other North American countries, they were small in comparison to our major deficits (with Germany, Japan, and China — none with which we ever bothered to do free trade agreements), and were matched by counterflows of investment.

But the protectionist populist Trump believed his own propaganda that free trade “costs” Americans their jobs. He still maintains this, as our unemployment rate approaches a miniscule 3%. And his method of negotiation was as crude as it was thuggish. He repeatedly attacked Canada and Mexico, both their leaders and — in the case of Mexico — their citizens.

There were two results.

First, he was able to get a new deal. But it is worse than the original, at least from the view of the classical liberal. In exchange for a few tariff reductions, Trump’s new NAFTA forces regulations on Mexico to pay its autoworkers more — so they won’t be so competitive against US autoworkers. But while that satisfies Trump’s union supporters, it screws the rest of us, who will now have to pay more for cars.

NAFTA was never a “bad deal” for the United States.

In other words, the man who claims we need fewer regulations just jacked them up. Yes, the Boss is the Master of the Deal — the Raw Deal.

But the other effect of the Boss’s infantile bullying is to have driven anti-American sentiment through the roof in both Canada and Mexico. This sentiment helped elect the extreme leftist Andres Manuel Lopez Obrador — aka “AMLO” — to the presidency of Mexico. AMLO took office on December 1, and a few recent reports in the Wall Street Journal indicate that the chickens — los pollos! — are coming home to roost with their afterburners on.

One report is a sketch by the Journal’s Latin America expert — the estimable Mary Anastasia O’Grady — on just what this inaugural is inaugurating. For one thing, AMLO had as special guests Venezuela’s Marxist dictator Nicolas Maduro and Bolivia’s caudillo Evo Morales, both Fidel Castro wannabes.

For another thing, AMLO is reverting to his demagogic character (he was known for his fierce leftist philippics and for summoning forth his myrmidons to march in the streets). And he has already shown an inclination to disregard existing contracts and rule by diktat. For example, he opposes the new Mexico City International Airport, $6 billion in bonds for the construction of which have already been sold. He prefers to expand the existing location, which just by chance is located in the district where he has traditionally held power, thus funneling the funding to his supporters.

The new deal is worse than the original, at least from the view of the classical liberal.

As a consequence, bond investors appear to be getting ready to sue, in case of default. For this reason, three of the five worst performing quasi-sovereign bonds in the world this quarter are Mexican. These include bonds for the airport, the Mexican Federal Electricity Commission, and Pemex, the Mexican national oil company. The drop in Pemex bonds especially indicates a fear among investors that AMLO will undercut or even repeal the game-changing 2013 revision of the Mexican constitution that allows outside — read “gringo” — investment. AMLO’s energy advisors are all long-standing opponents of the reform; they are all Mexico-first protectionists. In other words, they are all Trumps-in-Pancho-Villa costumes.

Add to this two other AMLO policies, and investors have every right to revolt. First, he wants to spend money freely to “create” jobs — rather like Trump’s own advocacy of infrastructure spending. AMLO would start by spending nearly $20 billion on a new refinery (in his home state, of course), a new thousand-mile train in the Yucatan, and a jobs bill for the youth. Like Trump, AMLO has no fear of deficits.

Second, AMLO proposes to fight the high crime rate in his country by creating a new “National Guard” combining regular army soldiers, marines, and federal police to fight the cartels. Of course, this standing AMLO army would be a perfect SS, should he decide to go into full Hugo Chavez mode.

Lopez-Obrador's energy advisors are all long-standing opponents of free-market reform; they are all Mexico-first protectionists.

Just the thought of a toto-AMLO government has sent the Mexican IPC stock index and the peso itself down into the tank with the bonds.

The death of Bush the Elder came at an ironic time. Bush 41 was a masterful conciliator and international diplomat. He maintained our alliances while overseeing the peaceful dissolution of the Soviet Union. By contrast, Trump the Infantile has managed to alienate our former allies, and so antagonize the Mexican people that they elected a populist leftist radical.

The result is shaping up with astounding rapidity. Mexico has elected an extremist leftist, who will likely turn Mexico into a veritable Venezuela. The result of that will be a wave of Mexican immigration that will dwarf any prior waves. Consider this. So far, three million Venezuelans have fled their country to avoid the economic disaster. Mexico has four times the population of Venezuela, so if a like number flee Mexico we can expect about 12 million more immigrants. The irony is breathtaking: Trump’s policies creating a massive wave of his least favorite people moving in.

A further irony inheres in Trump’s attempt to protect American autoworkers.GM has just announced that it will be getting rid of 15% of its salaried workforce in North America, and will be shuttering five plants. The total loss will be almost 15,000 jobs. GM will focus on its more profitable cars, especially pickup trucks and SUVs.

Mexico has four times the population of Venezuela, so if a like number flee Mexico we can expect about 12 million more immigrants.

The news cheered investors but enraged Trump, who immediately blasted the company and threatened to remove GM’s continuing subsidies — which immediately lowered the value of GM’s share by 2.6%. The anger was shared by other politicians, who remember the nearly $50 billion the taxpayers gave the company to rescue it from bankruptcy less than a decade ago — not to mention the continuing tax credit of $7,500 for each of its electric vehicles sold. The bad publicity resulted in GM’s announcing, a few days later, that it will be adding about 2,700 jobs at some plants in other states, and that some laid-off employees could apply for those jobs. But it still means a major drop in high-paying jobs.

I am not merely saying that Trump’s protectionism didn’t help GM enough to stop its layoffs, though that’s bad enough. I am saying that his actions are going to make it harder to prevent future layoffs. To avoid them, GM would have to sell more cars, but there is a limit to how many expensive SUVs and pickups it can sell. So it would need to increase sales of lower-end cars. But given the high US labor costs, this would require moving more of the supply chain to lower-cost venues, such as Mexico. By blocking that, therefore, Trump won’t protect highly paid American workers making low-end cars, using components manufactured in low-cost Mexico) he will force the automakers simply to stop making low-end cars, thus eliminating jobs.

Clearly, we cannot say whether the Trump renegotiation of NAFTA played any role in GM’s recent decision. After all, we cannot read minds. But just as clearly, the USMCA will make it hard for American automakers to save on labor costs.

I am not merely saying that Trump’s protectionism didn’t help GM enough to stop its layoffs, though that’s bad enough. I am saying that his actions are going to make it harder to prevent future layoffs.

So there you have Trump’s magisterial strongman running of the economy. He bullies two of our closest allies to get only trivial benefits in tariff concessions, but at the cost of electing an anti-American in our southern neighbor. The main thing he got was a regulation placed on plants in another country to pay inflated prices with the intention of protecting highly paid American union jobs. But the result isn’t likely to be a gain in American jobs; it’s likely to be a loss, as the heavily regulated US automakers struggle to make a reliable profit. The only probable gain will be a massive new wave of immigration, as lower wage Mexicans get priced out of their jobs.

Why anyone would suppose that Trump or anyone else can run American industry by divine fiat is beyond me. But people crave the Strong Man who will guide the economy like a god. And that, dear readers, is in my view goddamned stupid.




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