Worley Blog


Posted on: April 3rd, 2017 by Clifford F. Lynch

One of the first campaign promises that President Trump made was the renegotiation or outright termination of the North American Free Trade Agreement (NAFTA). First conceived in 1987, during the Reagan administration it was signed into law in 1994, by president Bill Clinton. Simply stated, NAFTA eliminated most tariffs among the U.S., Canada, and Mexico, allowing for an unencumbered flow of products across North American borders, thus forming the largest free trade zone in the world. Today, about $3.5 billion worth of good move across the borders every day. Although Canada is a major player in the agreement, Trump has focused on Mexico as the major culprit, blaming it for the loss of manufacturing jobs in the U.S. He wants to place a 35% tariff on products manufactured in Mexico and exported to the U.S. Between these discussions and those about the famous “Wall”, relationships with Mexico are a little strained, to say the least.
Is Trump right in his assumptions? It is true that some U.S. firms have moved manufacturing to Mexico; and lately, as the economic and political unrest have increased in China, an increasing number of firms are exploring the possibility of near-shoring from Asia to Mexico. As wage rates increase in Asia, and political and human rights issues continue to be problematic, more firms are considering returning closer to home, and Mexico has emerged as the country of choice for many. While wage rates there are higher than those in Asia, they are significantly lower than U.S. salaries. In addition, the economic climate and transportation infrastructure are improving as well. Security has been a concern, but the Mexican government has taken major steps in improving both prevention and enforcement.
After the passage of NAFTA, the automobile manufacturers were early entries into the Mexican market. Mexico accounts for about 20% of North America’s auto production, up from 3% in the 1980’s, and is expected to reach 25% by 2020. Honda, Nissan, Audi, Ford, General Motors, and Chrysler all manufacture in Mexico, and the industry has set the pace for other industries through their labor education and quality initiatives. Additionally, the periodic West Coast port problems are painful reminders that a lot can go wrong on shipments from Asia to the U.S. Obviously, the auto makers have profited from NAFTA because of the lower wage rates they have enjoyed, and would stand to lose if a 35% tariff was slapped on each auto they sent to the U.S.
But did NAFTA cost us jobs? According to the Economic Policy Institute, about 800,000 jobs were lost to Mexico between 1997 and 2013; but it is not that simple. This is far less than the number of jobs that have been created by NAFTA. The U.S. Chamber of Commerce estimates that about 6 million jobs depend on trade with Mexico.; and there have been studies that have shown that we lost more jobs to automation than to Mexico. On that note, many feel Trump’s emphasis is misplaced. According to a recent report from Pricewaterhouse Coopers, 38% of U.S. jobs are at high risk of being replaced by automation over the next 15 years, far more concerning than Mexico.
Most informed experts believe that terminating NAFTA would be disastrous. In a recent presentation to a Canadian business audience, Tom Donahue CEO of the U.S. Chamber of Commerce said., “Withdrawing from NAFTA would be devastating for the workers, businesses, and economies of our countries”.
Killing NAFTA would cost us millions of jobs that depend on the trade with Mexico, and if Mexican costs rose because of it, companies would not just shut their doors and move back to the U.S. They probably would take a hard look at the next cheapest company. Somehow, antagonizing our next-door neighbor doesn’t seem like real good politics to me, especially when they bring so much to the table.