Via Wolf Street

NAFTA 2.0 gets complicated for US & global manufacturers, particularly automakers.

By Nick Corbishley, for WOLF STREET:

This week, an 11th-hour demand from Democrat members of the U.S. Congress concerning the U.S.-Mexico-Canada Agreement (USMCA), the trade agreement to replace NAFTA, has put Mexico’s government and global manufacturers in a tight spot. The U.S. lawmakers are calling for a program of inspections to enforce the beefed up labor standards included in the new deal, along with meaningful penalties for companies that don’t comply — including the imposition of tariffs on the goods they manufacture.

The proposed trade agreement, unlike NAFTA, includes protections for workers in all three North American countries as well as a stipulation that 40% of the cars assembled in the region would have to be made by workers earning at least $16 an hour, multiples higher than the average hourly wage earned by Mexican auto workers. The protections include “the right to collectively bargain”, “freedom of association,” and the “right to strike.”

Mexican workers will also be freed to challenge so-called “protection” contracts, which lock in low wages as a precondition demanded by many companies to set up shop in the country.

These protection contracts are part of the wage-repression system in Mexico, established between global manufacturers, local unions, and governments. This system has been able to repress wages in auto plants even as wages in other emerging-market auto plants, particularly in China, have surged. And it has induced automakers to shift production from the US to Mexico, at the expense of US workers.

These contracts are particularly prevalent in Mexico’s auto sector, whose exports to the US market continue to grow even as total deliveries of vehicles to end-users in the US have fallen.

It is hoped that the new measures featured in USMCA will go some way to strengthening, at long last, labor standards and rights in Mexico as well as reduce systematic wage repression. But there are major concerns about just how rigorously the new standards will be enforced. Hence, the new demand that inspections be held in Mexican workplaces to ensure they are being implemented.

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While the proposal may enjoy strong support among auto workers in the US and the unions that represent them, it faces stiff opposition south of the border.

Mexico’s chief negotiator on the USMCA deal, Jesús Seade, bristled at the idea of what he called “Lone Ranger inspectors” from the U.S. being drafted in to survey Mexican factories. Seade insists that Mexico is working hard to improve workers’ rights, citing a February 2017 constitutional amendment enshrining labor rights.

The proposal has also aroused fits of apoplexy from business lobby groups in Mexico. After meeting with Seade this week, the Business Coordinating Council (CCE) labelled the U.S. lawmaker’s proposal as “extreme” and “totally unacceptable,” arguing that it “could severely affect competitiveness in Mexico and its partners in North America.”

Aha — worried about getting caught cheating and having to raise wages.

Ever since NAFTA, the central plank of Mexico’s economic model has been to attract global manufacturers by keeping wages and other labor costs miserably low. A recent survey by Mexico’s statistical institute INEGI showed that less than 4% of Mexicans earn over $800 a month.

As Moody’s notes, “Mexico has maintained its comparative advantage through negative real wage growth, at the expense of income levels. As a result, instead of converging through trade, wage and productivity gaps with the US have widened.”

This was a feature, not a bug, of NAFTA, which created a template for economic rules in all three of its signatory countries that ensured that the lion’s share of the benefits would flow to capital, and away from labor.

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In Mexico, the systemic wage repression, often carried out in connivance with local political and union leaders, has been a major boon for manufacturers, but ultimately a big drag on the Mexican economy, depriving it of the internal demand needed to drive robust, long-term economic growth and development.

But the days of Mexico’s low-cost labor model may already be numbered, as business groups in Mexico come under increasing pressure on wages and labor standards, not only from its NAFTA partners but also at home.

The AMLO government already passed a sweeping major labor reform bill earlier this year and is now pushing for a complete overhaul of the laws governing the outsourcing and subcontracting of jobs in the country.

Millions of jobs have been subcontracted in recent years in order to further depress labor costs, particularly in high-risk sectors such as mining. According to a report by Ernst & Young, subcontracting structures are “commonly used in Mexico by both foreign and Mexican businesses and generally consist of a group of companies establishing one or more operating companies and one or more service companies to provide the labor component of the business activity.”

“Unfortunately”, the report adds (emphasis added), “these structures have been abused” (as opposed to being used in the exact way they were designed to) in order to deprive “employees of their social security, union, and housing benefits, among others.”

The main goal of the new legislation is to combat these abuses, while setting clear parameters for the legal use of outsourcing and subcontracting. It also seeks to render the profits of the operating companies subject to profit sharing and social benefits.

But that appears to be the last thing that manufacturers in Mexico want. Business lobby groups are furiously lobbying against the proposed law, arguing that outsourcing and subcontracting in Mexico have led to the creation of millions of jobs, and that the law would add fresh uncertainty to private investment in the country, just at a time when economic growth has stalled.

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Coparmex, in a statement, bemoaned the “excessive sanctions and unclear regulatory framework” in the proposed legislation, saying it would dampen investment. Javier Treviño, director of public policy at the CCE, went a step further, arguing that not only would the new law jeopardize foreign investment in Mexico, it could even derail efforts to get the US and Canada to ratify the USMCA.

The bill will now go through extensive consultation with stakeholders, including the business lobbies. The fact that AMLO’s left-wing Morena party holds solid majorities in both houses suggests the business lobbies may get fewer concessions than they’re used to. One thing that is clear is that Mexico’s low-cost labor economy is in dire need of an upgrade — an upgrade that stimulates internal demand such as real wage growth. By Nick Corbishley, for WOLF STREET.

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