The raging bull in a china shop (sorry for the cheap pun) doesn’t stop to take account of the random destruction. But those of us who profess economics can and should reflect on the unintended consequences of our actions.
Larry Summers did this recently in analyzing Trump’s desire to weaken Mexico’s link to the U.S. market by renegotiating NAFTA.
Summers raises an important political point—the potential rise of a left-wing government in Mexico:
“As illustrated by the more than $60 billion China has poured into Hugo Chávez’s Venezuela, China would regard opportunities to ally with a hard-left anti-American government as strategic windfalls. What better than a country of 130 million people with a 2,000 mile border with the United States? Every Mexican with whom I spoke said that the risk of Mexico electing a Chávezlike government had gone way up in recent months on account of American disrespect and truculence.”
When I teach about NAFTA it is always in a political context. We did not engage with Mexico in a free trade zone for the economic reasons, since Mexico represents such a small and declining market for the U.S. (see below):
We engaged in Mexico for political reasons, because we have such a long border and so many immigrants. It is in the U.S.’s interest to have a prosperous Mexico, because that provides (we think) for the best chance to stem the flow of illegal immigrants, and also the best chance to prevent the rise of communist or left leaning dictators (as arose in other parts of Latin America).
Summers rightly reminds us that politics, not economics, should dominate our trade negotiations in some contexts.