Posted on 04/11/2019 8:44:52 AM PDT by Kaslin
Trade agreements have been greatly successful at lowering trade barriers around the world. But they're not without their flaws. Each agreement, in practice, tends to retain some counterproductive protectionist policies and may even export some bad policies. The United States-Mexico-Canada Agreement (USMCA), or "new NAFTA," is no different.
As soon as President Donald Trump got into office, he threatened to withdraw from the North American Free Trade Agreement. He imposed metal tariffs on steel and aluminum for the stated purpose of forcing Canada and Mexico to renegotiate the 25-year-old trade agreement. The result was the USMCA.
Assessing the impact of this new agreement, a recent International Monetary Fund paper found that on net, the USMCA is more protectionist than NAFTA and will impose net welfare losses on Americans. The main manifestations of this greater protectionism are "tighter rules of origin" and a new minimum wage requirement for producers of automobiles and auto parts.
NAFTA had some rules on the country where products originate, but it had no minimum wage requirement. In contrast, the USMCA (assuming it's approved by Congress), will require that 40% of a car is made in plants where the workers are paid at least $16 an hour or U.S. tariffs will be imposed on those cars.
This minimum wage requirement is a perfect example of how the United States exports unsound labor regulations to our trading partners through trade agreements, in this case to Mexico. At an industry average of $3.14 per hour, it's true that the Mexican autoworker wages are generally lower than in the United States. But this reflects the reality that the productivity of workers in Mexico is much lower than that of U.S. workers.
As economists have known for years, artificially increasing the cost of employing workers reduces the number of workers employed. This USMCA provision will therefore drive some Mexican autoworkers out of the auto industry and into even lower-paying jobs.
This argument isn't merely theoretical. It's supported by many empirical studies. While the degree to which minimum wage affects employment varies by sector, the indirectly proportional relationship is real. It hits workers with the lowest skills the hardest. Some workers obviously benefit from the mandated higher wage, but these workers' gains come at the expense of other workers.
Consider the impact of the minimum wage hike from $11 in 2017 to $13 last year to now $15 on New York City's restaurant industry. While most NYC industries were already paying higher wages and were mostly unaffected by the hike, a jobs recession has hit the city's full-service restaurants.
A recent piece in The Wall Street Journal notes, "Employment in January dropped 3.7% year over year, according to the Bureau of Labor Statistics. At the start of 2018, the Big Apple's sit-down restaurants had 167,900 employees. This January, after the wage bump, it fell to 161,700, a three-year low." According to a New York City Hospitality Alliance survey of full-service restaurants, "Nearly half, 47%, planned to eliminate jobs in 2019 to deal with higher labor costs. Three-fourths expected to cut employee hours, and 87% said they would raise menu prices."
This is the type of policy we'll export to Mexico through the USMCA, and the reason we're doing so is as simple as it is sad: protectionism. Encouraged by U.S. automakers and autoworkers' unions, our politicians believe that this measure will artificially boost demand for cars made in the United States. Want evidence? Speaker Nancy Pelosi announced that the House of Representatives won't vote on the USMCA until Mexico implements the labor requirements.
Of course, Pelosi claims that this is about "how workers are treated in Mexico" -- the assertion being that this provision will do much to raise wages there. It may for some. However, unless the laws of economics are somehow suspended in Mexico, we should expect a negative impact on others.
For instance, faced with higher labor costs, Mexican automakers may choose to give up the tariff-free trade and simply pay an additional levy on their exports instead of raising wages. They might also decide to set up their supply chain outside of the USMCA zone, where labor remains cheap. This law may accelerate the already existing trend toward electric cars using globally sourced software.
Either way, some Mexican workers will ultimately be harmed in the process. And don't count on American workers reaping the benefits of this government-created situation.
Wow, mandating a 5X increase in auto wages in Mexico is nuts. As the article points out, productivity and quality just aren’t the same in Mexico and you shouldn’t be paying them anywhere near that much.
The end result may be that some jobs come back to the US which is good. But it will create more poor Mexicans wanting to head north, as if there aren’t enough of them already.
“NAFTA had some rules on the country where products originate, but it had no minimum wage requirement. In contrast, the USMCA (assuming it’s approved by Congress), will require that 40% of a car is made in plants where the workers are paid at least $16 an hour or U.S. tariffs will be imposed on those cars”
So this is another libertarian writer who wants to give our manufacturing jobs to foreigners working for coolie wages. I wonder if she’d give up her own fat salary to a low-paid Third World replacement?
Wow, mandating a 5X increase in auto wages in Mexico is nuts.
It’s nuts only if you want American workers to lose jobs to Mexicans working for dirt wages
You don’t jump wages 5X by government mandate, especially when a foreign nation (the US in this case) forces it on you. Maybe grow into 5X over 10 years. But the dislocations of 5X in a single shot will be staggering and impossible to predict. This is terrible policy...but it IS government at work.
ou don’t jump wages 5X by government mandate, especially when a foreign nation (the US in this case) forces it on you.
Agreed. The point is to keep our corporatists from shipping our jobs to Mexico. If they can’t pay dirt wages there, they’ll keep the jobs in the states that voted for Trump for exactly this reason - to protect and rebuild our manufacturing. Your libertarian philosophy is why the GOP (Romney , Mc Cain, Bush) couldn’t win these states. Trump won them by promising to make American manufacturing great again, and to stop shipping jobs to Mexico
Yes indeed. America took a thirty year test drive of “free trade”.
In 2016 we handed the keys back and said “no sale”.
Today there are not enough voters out there who believe in neoliberal free trade theory to win elections any longer. Ideological purity has become a losing strategy.
The GOP fails to heed this lesson at their peril.
[ Wow, mandating a 5X increase in auto wages in Mexico is nuts. As the article points out, productivity and quality just aren’t the same in Mexico and you shouldn’t be paying them anywhere near that much.
The end result may be that some jobs come back to the US which is good. But it will create more poor Mexicans wanting to head north, as if there aren’t enough of them already. ]
Mexico will never get better until the 3% that would affect change are not allowed illegally into another country acting as a pressure relief from straightening out their own g-damned sh!t...
Actually, it may incentivize companies buying from Mexican suppliers to shift their parts sourcing to non-NAFTA countries.
It’s much simpler than that. I contend that a modern industrialized country like the U.S. has no business signing a “free trade” agreement with a corrupt, dysfunctional Third World dump like Mexico in the first place.
Troof. Will also add, the ideological purists on free trade ignore slave labor, currency manipulation, governments underwriting businesses to allow them to operate at a loss until they drive competitors out of business, product dumping to crash markets, the fact that other countries still have high tariffs on our goods, and other nefarious activities.
This is the problem with ideological purity on a lot of subjects. While the purists are patting themselves on the back about their purity, the realists are figuring out how to use their purity to destroy them.
Since 1946, with the Victory In WWII, the USA was the only manufacturing Country in the world, that hadn't been devastated by the presence of war.
Out of both self interest and our good will, we signed 'trade agreements' with countries that had been destroyed. We agreed to self impose tariffs on our US based companies to 'help' the other countries, get back on their feet.
That was over 70 years ago, and we still have lopsided 'trade agreements' with the entire world.
President Trump has realized this imbalance for the past 30+ years and is now trying to put some balance back into the equation. While tariffs stink, they are not as bad as is the current one sided set of agreements that are now controlling our dealings with the rest of the world.
When President Trump axes the rhetorical question of "Who made these bad deals"?
He knows the answer, but the real question is, "Why has no one had the balls to change the rules"? So he said, "I will do it".
Exactly. This measure encourages auto manufacturers to stay in the USA and puts us on an even playing field. Whether it creates some uneven wage stress in Mexico is for the Mexican negotiators to have considered.
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