One of the great ironies of politics is that measures intended to solve problems often intensify them. The North American Free Trade Agreement, for example, was touted as a means to promote “free trade” and make it easier on companies to do business in North America. The reality is not always that way. NAFTA, like many other political innovations, involves increasing the political and economic power of some agencies, and increased power in the hands of bureaucrats rarely results in reduced barriers to commerce and innovation.
As one example, here’s an excerpt from the July/August 2012 issue of Textile World in an article called “Insider Advantage(?)” by Janet Bealer Rodie:
Within the NAFTA region, one textile trade issue that owes its impact to actions vis-à -vis NAFTA’s strict rule of origin provisions involves extensive audits by the Servicio de Administración Tributaria (SAT), Mexico’s equivalent of the Internal Revenue Service. SAT has required a number of U.S. textile companies doing business with Mexican textile companies to provide detailed records of transactions with their Mexican partners in order to verify sources of all U.S. inputs shipped to Mexico. The process has been very time-consuming and expensive for some companies, and has even required them to obtain records from their upstream suppliers. Failure to comply within a set time subjects a company to large penalties.
So the cost of doing business with Mexican companies now involves the newly added burden of expensive and invasive reporting to a foreign government. This is free trade? Freer than before NAFTA? Such burdens are especially severe for the smaller companies most likely to be on the forefront of innovation. Government policies and burdens that hinder business can often favor well-connected insiders and big companies while making life disproportionately difficult on small, nimble companies who may not have the connections and the teams of lawyers to achieve compliance.
Free trade can strengthen innovation, when it’s actually free.