Nafta is Dead. Long Live Nafta – The biggest problem with Nafta remains unaddressed

Wolf Richter wolfstreet.com, www.amazon.com/author/wolfrichter

The biggest problem with Nafta that hurt US workers, Mexican workers, and the Mexican economy, though it hugely benefited profit margins of global automakers and Corporate America, remains unaddressed: Wage repression in Mexico, including via “protection contracts” as condition for building a plant.

The deal was announced with fanfare at a press conference in the Oval Office this morning: The US and Mexico had reached a new deal that would govern their totally out-of-whack trade relationship.

“A big deal looking good with Mexico,” President Trump tweeted.

Mexico’s outgoing President Enrique Pena Nieto was wired in by conference call. This deal is between the US and Mexico. Canada, one of the few countries in the world with which the US has a balanced trade relationship in goods and services, was watching from the sidelines.

The name “Nafta” would be tossed. “We’re going to call it the United States/Mexico Trade Agreement,” Trump said. Nafta “has a bad connotation because the United States was hurt very badly by Nafta for many years.”

The negotiations between the US and Mexico had focused on the auto industry. This is important. US automakers and component makers – along with other global automakers and component makers, including Canada’s Magna International, the largest auto component maker in North America – set up huge manufacturing operations in Mexico to benefit from its cheap labor.

Thanks to the lure of cheap labor for Corporate America, the US had a goods trade deficit of $71 billion with Mexico in 2017, the second worst, behind China. A trade deficit is a negative for GDP.

The idea behind renegotiating Nafta had been to bring some of this manufacturing activity back to the US – against blistering lobbying by the automakers and component makers, often carried out in the media. They didn’t want to lose unfettered access to this cheap labor.

There will be some new rules, including requiring more US-content in some components. We don’t know the details yet. Bloomberg reported that the two countries “are said to have agreed” that the penalty for not complying with these rules will be a 2.5% tariff, same as under the old Nafta deal. But if new plants built in Mexico don’t comply with these rules, they might be exposed to US tariffs of 20% or 25%.

We also don’t know about the fate of a “sunset clause” that would allow the new deal to expire automatically after five years. US automakers and component makers, and Mexico had all opposed this provision, and given the pressure from the US auto industry, a watered-down compromise will likely be found.

But here is what has been silenced to death: One of the major selling points of the original Nafta was that it would create well-paid jobs in Mexico, raise wages in Mexico, and bring up the Mexican consumer base so that they could buy US products. And these higher wages in Mexico would relieve downward pressure on US wages.

But this is precisely what hasn’t happened.

In June, when GM announced that it would build its car-based crossover Chevrolet Blazer in Mexico, starting later this year, UAW vice president Terry Dittes put it this way:

“GM employs over 15,000 production workers in Mexico, pays the workers less than $3 per hour, and exports over 80 percent of the vehicles to the US to sell here. This is all happening while UAW-GM workers here in the US are laid off and unemployed.”

By comparison, in the US, assembly-line workers at automakers earn on average $29.62 per hour (June) and workers at component makers earn $20.81 per hour.

So how is it possible that, after all these years, wages in Mexico are still so low?

An AP report last year shed some light on a scheme of wage repression in auto manufacturing that makes this possible. The report cited an Audi plant in the state of Puebla, inaugurated in 2016, where workers made on average $2.25 an hour.

Government records cited by the AP show that in January 2014, when the factory was being discussed with local officials, Volkswagen, which owns Audi, signed a union contract that specified that wages would range from $1.40 per hour to $4 per hour.

The key may be so-called “protection” contracts, signed as a condition for building the plant. They lock in low wages in advance. Future workers have no say in it. While local officials might make out like bandits on a deal like this, workers come up short.

Automakers from the US, Germany, Japan, and Korea have invested heavily in Mexico to take advantage of these “protection contracts” that guarantee cheap labor for future years. And Nafta guarantees access to the US market.

Despite labor unrest in Mexico, manufactures have resisted significant wage increases in dollar terms. The peso continues to lose value against the dollar, so wages rise in peso terms, but don’t rise much in dollar terms. By now, wages in the auto manufacturing sector in Mexico are significantly lower than those in China and most other “cheap labor” countries – despite Mexico’s proximity to the US and the total integration of trade!

This type of organized wage repression is why, at least in part, the consumer economy in Mexico has lagged far behind. What Mexico needs is higher wages (in dollar terms). They’d perform miracles for Mexico’s consumer spending and the overall economy. And they would allow Mexicans to buy more imports from the US.

But rising wages in Mexico would squeeze profit margins of those automakers, and so everything must be done to repress them.

There appears to be nothing in this Nafta-is-dead deal that addresses this issue, and Trump has never said a word about it, and automakers will continue to use “protection contracts” to keep the scheme going. Corporate America’s profit margins are simply sacred. And no trade deal is allowed to impinge on them.

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