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There's been a good solution in sight for years. Barak Obama campaigned in the primaries on a platform of renegotiating NAFTA. Then he dropped that issue duri
by Consultant32452 9y ago
There's been a good solution in sight for years. Barak Obama campaigned in the primaries on a platform of renegotiating NAFTA. Then he dropped that issue during the general. Trump sang that tune all the way to the White House.
Here's the long story about what's wrong with NAFTA and it's mostly about tax structure. In Mexico they have a VAT sales tax. This is a huge chunk of their federal budget. Most of the taxes are on the consumption side (point of sale), not the production side. Goods produced in Mexico but sold abroad avoid the VAT tax. However, goods produced outside Mexico but sold in Mexico get the same VAT tax as every other good sold. Now let's look at the US. We have no federal sales tax, all of our taxes are on the production side. Every good that leaves a factory has its price loaded up with basically all of our tax costs. It's the production side that's taxed, not the consumption. That means a product manufactured in the US already is loaded up with US taxes, and then gets shipped to Mexico where the VAT is added on top. Double-taxation. Goods produced in Mexico have no VAT, come to the US tariff free, and sold to US consumers where no federal tax is collected on the consumption end. No-tax. You don't need a Ph.D. in Economics to understand what the result of this will be over time.
The way I see it there's two potential solutions to this. One is to renegotiate NAFTA just like we elected Obama and Trump to do. Another would be to restructure our taxes to be more like Mexico and load the taxes on consumption rather than production. This was the signature campaign idea by Herman Cain during the 2012 election with his 9-9-9 plan, though he was laughed at at the time. https://en.wikipedia.org/wiki/9%E2%80%939%E2%80%939_Plan https://en.wikipedia.org/wiki/9%E2%80%939%E2%80%939_Plan. I'm not suggesting that the 9-9-9 plan exactly is good, but only use it to point out that these solutions have been discussed in the mainstream. I remember Ross Perot's entire campaign against Bill Clinton in 1992 was about how much NAFTA would suck all our jobs to Mexico. But we elected Clinton anyways and look what happened.
- Lazare 9y agoThat's untrue; the exchange rate adjust to completely negate the tax differences. What economists call the "terms of trade" are not impacted by sales tax. This gets brought up and debunked periodically, the first result Google returns for me is http://www.aei.org/publication/keynes-at-the-border/ http://www.aei.org/publication/keynes-at-the-border/ which looks as good as any. > You don't need a Ph.D. in Economics to understand what the result of this will be over time. True enough, but it can still be a little confusing, as you've discovered. :)
- Consultant32452 9y agoThe discussion isn't about boosting GDP, but about where manufacturing labor takes place. The millions of people in the rust belt who are suffering don't care if them being out of work means a wealthy person in Silicon Valley can sell a few more ads overseas because exports eventually matches imports.
- Lazare 9y agoYes, but I don't think you understand my point: Mexico having a VAT does not do this. The US not having a VAT does not do this. The results of the US adding a VAT would not do this. VATs do not work the way you think they do. > The discussion isn't about boosting GDP, but about where manufacturing labor takes place. Where manufacturing labor takes place is not impacted by who does and does not have a VAT.
- Consultant32452 9y agoJobs eventually wind up where it's economically efficient for those jobs to be. Are you implying that tax and trade policy have no impact on economic efficiency?
- azinman2 9y agoThat’s not entirely clear. Certainly even in the US it’s more “efficient” if tech were anywhere but SF, but that’s not the case. Trade happens when countries agree to it, according to local taxes imposed, etc. China and Mexico did not have the manufacturing might they do now before trade deals allowed that flow, combined with a cultural trend in management to “outsource” everything and local in China and Mexico strategy to be that source (by doing things like heavily subsidizing energy, shipping, etc.)
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- y_u_no_rust 9y agoTPP included the rules that would supersede nafta....
- endorphone 9y agoThe US has a trade imbalance with Mexico of about -$6B per month. It has a trade imbalance with China of about -$35B per month. The trade deficit with Canada is often below $1B and has flicked to a trade surplus a number of times. The trade deficit with Mexico is a fluctuation amount in the trade deficit with China. So it's somewhat incredible that people can continue this "just renegotiate NAFTA" farce. Mexico isn't "the problem", if you believe that balanced trade is a problem. Jobs didn't go to Mexico. They went to China and automation, and when you were lucky the small remainder went to Mexico.
- Consultant32452 9y agoThe article and post I was responding to was specifically about jobs leaving the US for Mexico. A discussion about tax and trade policy which led to so many jobs going to China is also worthwhile, it just wasn't relevant to the article posted by the GP.
- endorphone 9y agoIt was entirely relevant. In that case the story was about a bearing manufacturer being squeezed by competitors, and then trying to reduce costs by moving to Mexico. Those competitors are almost universally Chinese manufacturers. China has become dominant in steel and ores (raw and processed) of all sorts, and just about every manufactured good. For this submission -- dollar stores -- Chinese goods are the overwhelming bulk of the products. To put it another way, manufacturers move to Mexico to compete with China, so enjoy those few remaining sales and white collar jobs because the alternative was the company disappearing. If that isn't enough they automate. And now China is automating to ensure they can't be out-automated.
- pm90 9y agoThis is actually a great point. And its something that's not exclusive to the US. Western European companies use low-cost labor provided in Eastern Europe to get many of the same advantages and compete with China (I was very surprised that the Nivea shaving cream I use is actually made in Poland!). The US should embrace Mexico: the Mexican govt. is a close ally, its a source of low cost labor. US companies can continue their ownership/expertise and control over products manufactured in Mexico, while protecting their IP and such. Whereas with China it is a different story....
- zzleeper 9y agoI don't really see many factory goods made in Mexico on my day-to-day. Mostly, it's Chinese goods. Sure, Mexico produces machinery, etc. but remember that there is no VAT in Mexico when it's a firm buying the good, so the entire VAT thing becomes moot for most goods. And the difference in costs wrt China is so large that even adding the 12% difference won't change things (12% = 17% VAT in China - 5.5% VAT where I live in the US).
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- Consultant32452 9y agoThe post I was responding to had an article specifically about a set of jobs going to Mexico. It's also worth talking about China, but that's not what this particular discussion was about.
- tom516 9y agoImmigrants are taking our jobs, China is taking our jobs & manufacturing, Mexico is doing it, Canada is doing it. Every other country is trying to take our jobs away. C'mon stop whining and start competing. This is what you signed up for, the thing called global economy.
- prostoalex 9y agoAny discussion of VAT, or just raising sales taxes, is met with the argument that VAT or sales taxes are regressive.