President Trump is not happy with the North American Free Trade Association (NAFTA). During the Presidential campaign, he described it as the ‘worst trade agreement the U.S. ever signed’. He blames it for the loss of large numbers of manufacturing jobs across the border to Mexico, where wages are lower. According to the White House website’s new page on trade, ‘blue-collar towns and cities have watched their factories close and good-paying jobs move overseas, while Americans face a mounting trade deficit and a devastated manufacturing base.’
At the same time, President Trump complains about the flow of migrants across the border from Mexico to the US. They take American jobs and American money, apparently. So, he plans to build a wall to stem the flow, and make Mexico pay for it. Exactly how he plans to make Mexico pay for it is as yet unclear: suggestions range from a 20% tax on American imports from Mexico (which my colleague Tim Worstall was quick to point out would in practice be paid by American businesses and consumers), to a withholding tax on remittances from Mexicans working in the U.S.
I sympathise hugely with the Americans who feel that they are losing out. Well-paid manufacturing jobs have indeed declined in the last decade or two, partly replaced by poorer-paying service jobs. But something is not right here. If all the good jobs have gone across the border, how come so many Mexicans have come to the U.S. to work? We should not kid ourselves that this is an easy option. The Mexican border is already heavily policed, and just about the only open route is a long and dangerous desert crossing in which many migrants lose their lives. Why would so many people risk that crossing, if all they had to do was wait for the good jobs to come to them?
Unfinished buldings remain in the site of a called off Ford car factory in Villa de Reyes, near San Luis Potosi, Mexico, on January 11, 2017.In a rocky desert of northern Mexico, impoverished villagers fear they may be the first people in the world to suffer the impact of US President-elect Donald Trump’s trade crackdown. The $1.6-billion plant was expected to bring thousands of jobs to the impoverished area, but Ford abruptly called off the project this month. / AFP / PEDRO PARDO (Photo credit should read PEDRO PARDO/AFP/Getty Images)
We must surely conclude that the jobs leaving the US are not good jobs. Or at least, not good enough to attract Mexicans – which is a bit of a worry, given that these are supposed to be well-paying manufacturing jobs. Obviously, moving jobs to a lower-wage jurisdiction enables companies to cut their costs. But it doesn’t change the nature of the job. So a well-paying manufacturing job in the U.S. should still be well-paying in the poorer economy of Mexico, even though the absolute wage in dollar terms would be lower. So, how would a well-paying, well-respected job in America somehow become a drudge job that barely pays enough to live on in Mexico?
Well, if Mexico’s unemployment rate were much higher than America’s, companies could bid down wages to the floor, paying a basic pittance for skilled jobs that across the border would pay far higher wages. But that’s not the case. Mexico’s unemployment rate is about the same as America’s. So, if companies really are paying bare subsistence for what in the U.S. would be well-paying manufacturing jobs, Mexico must have serious problems with its labor laws.
This is something that President Trump perhaps should look at when renegotiating NAFTA. If companies are taking advantage of lax labor laws and a desperate – and much poorer – population in Mexico, it is surely in the interests of American workers that Mexico tightens its labor laws to ensure that companies don’t rip off Mexican workers. It would also be sensible to insist on improvements to social safety nets so that there is less reliance on informal or illicit labor, which artificially depresses unemployment figures and gives a misleading impression of the health of the Mexican economy. This would of course raise import prices for American consumers, but that would help meet another of President Trump’s objectives – closing that trade deficit.
Alternatively, perhaps there just aren’t that many jobs going across the border. Certainly not enough to occupy all the Mexicans looking for work. Yet we know significant numbers of jobs HAVE relocated to Mexico: employment in automobile manufacture, for example, has quadrupled since 1994. Clearly something is very wrong. The figures just don’t make sense. Jobs have gone from the U.S. to Mexico, but people continue to migrate from Mexico to the US in search of work, though the rate has slowed dramatically in recent years. In fact Mexico has become somewhat dependent on its migrants: it now receives more foreign currency from migrant remittances than it does from exports of crude oil. This is mainly because of falling oil prices and production since 2014. But it also reflects a distorted and unhealthy economic relationship between Mexico and the U.S.
The truth is that NAFTA has been a rotten deal, not for the U.S. but for Mexico.
