Contrary to conventional wisdom, manufacturing in Mexico, and the existence of NAFTA , could be the answer to creating more jobs in the United States over the next twenty years.
Since the mid 1980’s, manufacturing jobs have steadily declined in the United States due to a variety of factors, the most impactful of which continues to be automation. However, another significant attribute was the dramatic difference in labor costs in other countries, such as China, Vietnam, India and Mexico. China, however, was the clear winner.
By comparing the United States’ trade deficit with China and other manufacturing countries, including Mexico, it is clear that China has attracted the majority of manufacturing jobs that have left the United States. If fact, economists estimate the ratio is over 5:1. And while labor rates under $0.50 per hour, and an extremely liberal regulatory environment, were the primary catalysts that drove large manufacturers from the United States to China, it was the movement of the entire supply chain that caused the greatest, long-term impact on U.S jobs. No longer was it just low-cost labor working against U.S. suppliers/manufacturers, transportation costs, lead-times and the nuances of a twelve-hour time difference made it nearly impossible to compete with Chinese suppliers.
Fast-forward thirty years and the global manufacturing market is once again undergoing a major shift. Labor rates in China are now over $3.00 per hour and while that is still relatively low compared to the United States, it is equal to that of Mexico. China’s regulatory environment has also tightened, creating a more globally competitive playing field. In addition, executives from around the world, especially the United States, now understand the “true” costs of moving to Asia, including the loss of intellectual property, travel and a poor work/life balance for their employees.
So how will the North American Free Trade Agreement and manufacturing in Mexico lead to job creation in the United States? First, many large manufacturers have already begun moving their factories out of China in search of a more competitive, and less risky, environment. While some have chosen to move plants to countries like Vietnam and India, many are choosing to set up plants in Mexico. The growing importance of just-in-time manufacturing, and time-to-market distribution, gives Mexico the greatest advantage over any other lower-cost manufacturing country in the world. In the same light, U.S. suppliers are once again able to participate in the supply chain and NAFTA makes them all the more competitive by eliminating duties and/or taxes on all goods traded between Mexico and the United States.
There is no greater proof to this reality than in the Maquiladora manufacturing market in Mexico. Maquiladoras, who are simply foreign companies operating in Mexico, import nearly 80% of their raw materials into Mexico. Of this 80%, the majority is imported under NAFTA from U.S. manufacturers. As the manufacturing industry in Mexico continues to draw companies back from Asia, the need for raw materials from the United States continues to expand and create well-paid manufacturing and production jobs. More importantly, these new jobs are being created in a free market environment without government protection or subsides, which improves the likelihood of real, sustainable growth.
Despite some U.S. jobs being transferred to Mexico over the past twenty years, it is a relatively small number compared to China. NAFTA participated in making Mexico a more competitive manufacturing environment for U.S. companies and now it could be the very reason jobs return from China to the United States.