Nafta May Have Saved Many Autoworkers Jobs

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1 Page 1 of 7 ECONOMY Nafta May Have Saved Many Autoworkers Jobs Eduardo Porter ECONOMIC SCENE MARCH 29, 2016 When Donald Trump threatened to break the North American Free Trade Agreement, auto industry workers offered up some of the loudest cheers. Mr. Trump easily won the Republican primary in Michigan this month. The state, home base for the American auto industry, also delivered an upset victory to Bernie Sanders, the Democratic anti-nafta standard-bearer. But the autoworkers animosity is aiming at the wrong target. There are still more than 800,000 jobs in the American auto sector. And there is a good case to be made that without Nafta, there might not be much left of Detroit at all. Without the ability to move lower wage jobs to Mexico we would have lost the whole industry, said Gordon Hanson of the University of California, San Diego, who has been studying the impact of Nafta on industries and workers since its inception more than two decades ago.

2 Page 2 of 7 Even in the narrowest sense to protect jobs in car assembly plants a wall of tariffs against America s southern neighbor would probably do more harm than good. To be sure, Rust Belt voters drawn to Trump and Sanders cause are not wrong to be angry. Trade and the deals to reduce trade barriers often threaten the livelihood of workers in the industries exposed most directly to foreign competition. In the home of the once proud Big Three carmakers, which virtually owned the American car market through most of the 20th century, the issue is personal. Nafta put them in direct competition with Mexican workers earning little more than one fifth of their compensation. The American trade deficit in autos and parts tripled in the two decades after the trade deal struck with Mexico and Canada took effect in 1994, to about $130 billion in The industry lost 350,000 jobs, or about a third of its workers, over the period. It was a massive shift in a flagship industry, said Thea Lee, deputy chief of staff of the AFL-CIO. Workers, she said, were promised one thing but got another. One thing you need to understand about why working class people are so cynical about these trade agreements, Ms. Lee said, is that every time we had these big debates, and they heard these optimistic projections and it never turned out the way they were told it would be. Still, for all the brickbats thrown at it, the impact of the Nafta trade deal itself was relatively modest, most studies agree. For one thing, the Mexican economy is still tiny compared with that of the United States and its trade surplus has remained relatively small. China, where workers were even cheaper and which has attracted far more foreign investment in manufacturing, ultimately bumped Mexico out of many American markets after Beijing entered the World Trade Organization in 2001.

3 Page 3 of 7 Nafta is often blamed for dynamics that are not of its making. The surge of Mexican exports in the 1990s was propelled by a sharp devaluation of the peso, which set off the so-called Tequila Crisis. The wave of immigration from Mexico into the United States, which lasted until 2005, was driven by a decline in government subsidies to farmers and an economic collapse that occurred just as millions of young Mexicans were entering their late teens and were desperate for jobs. Luis Rubio, who heads the Center of Research for Development in Mexico City known as CIDAC for its spelling in Spanish complains that Nafta gets the blame for the whole package of globalization and breakneck technological change that took off more or less at the same time. Nafta is also blamed for lots of things that are actually because of competition with China, he told me. The truth is that autoworkers in Detroit were not just competing with cheap workers in Mexico. They were also competing with American workers in the unionfree South, where many car companies set up shop. They were competing with robots and more efficient Japanese and Korean automakers. Detroit responded by cutting as many costly factory jobs as it could. But value added by the car and car-parts makers in the United States is only slightly lower than it was in The integration of production across countries with complementary labor forces cheaper workers in Mexico to perform many basic tasks, with more highly paid and productive engineers and workers in the United States turned out to play a central role in reviving the auto industry in North America. In the final analysis, Nafta might have saved hundreds of thousands of jobs. By offering a low-wage platform, Mexican plants increased the scale of production in North America, allowing domestic and foreign automakers to amortize their large fixed costs. Carmakers and parts suppliers tend to cluster relatively close together. So assembly plants in Mexico help sustain a robust auto-parts industry across North America.

4 Page 4 of 7 The Honda CR-V assembled in El Salto, Jalisco, for example, uses an Americanmade motor and transmission. Roughly 70 percent of its content is either American or Canadian, according to government statistics. This regional integration gave the United States-based auto industry a competitive edge that was critical to its survival. There was a concern 20 years ago that an auto industry production chain would develop across Asia, including China and Taiwan and Southeast Asia, Professor Hanson said. Maybe Nafta saved us from that. Nafta is now at a critical juncture. The Chinese manufacturing behemoth that squeezed Mexico out of so many markets over the past 15 years seems to be losing some of its power. As China s wages rise, it is offering Mexico another shot at gaining North American market share, perhaps even at achieving Nafta s unfulfilled promise to help Mexico get rich. Robust North American trade is also critical to the United States. If Mexico achieved significantly higher living standards, Mr. Trump could save the money for his border wall. Already fewer Mexican migrants are coming to the United States than going. Were Mexico richer, the flows back home to Mexico would probably be greater. And if the real concern is China another target of Mr. Trump s ire a truly integrated North American market would help keep it at bay. The auto industry remains a bright spot. Every auto manufacturer is setting up shop in Mexico, said Eugenio Sevilla- Sacasa, vice president for international supply chain operations and cross-border logistics at Ryder, whose trucks cross the border between Mexico and the United States 150,000 times a year. Ford, GM and Chrysler but also Toyota, Mazda, Honda, Mercedes-Benz, Kia. And it s no longer just about cars. Mexico is trying to get into the aerospace production chain too. Over the past few years, Bombardier, Cessna and Hawker

5 Page 5 of 7 Beechcraft have set up shop there, among others. Just as Michigan s autoworkers might thank Nafta for keeping China from taking over the global auto industry, aerospace workers might one day have Nafta to thank for keeping the Chinese out too. It s exactly the wrong time to blow up Nafta, Professor Hanson argued. We would be doing China an enormous favor ECONOMIC SCENE 2. ECONOMIC SCENE 3. OPINION JOE NOCERA 1.