With all the hubbub created by Donald Trump’s recent tweets about U.S.-Mexico trade, the offshoring of automotive production and jobs, and the companies’ reactions, it’s worthwhile to step back from the President-elect’s tweets to look at the bigger picture. It reveals that Mr. Trump could not be more correct that the North American Free Trade Agreement (NAFTA) has been a complete bomb when it comes to boosting American and even North American manufacturing competitiveness. And not so coincidentally, the data make clear that the automotive industry represents NAFTA’s quintessential failure.
Auto-related trade has long been held up as the leading example of how NAFTA could become a win-win for national economies, companies, and workers throughout the regional economic zone. U.S. auto-makers could reap major cost savings by using very low-cost Mexican workers for labor-intensive parts manufacturing, and the higher sales that would result would boost overall production and therefore employment and wages for their more expensive but more skilled American, who would be needed for higher value production.
Indeed, just yesterday, reacting to Ford’s (at least partly Trump-induced) decision to scrap a new factory planned for the San Luis Potosi state, Mexico’s government showed that this rationale remains operative. According to Mexico’s economy ministry:
“The growth of the Ford Motor Company in North America, particularly in Mexico, is a strategy of competitiveness based on global value chains, in which North America competes with other world regions….The jobs generated in Mexico have contributed to keeping manufacturing jobs in the United States that would otherwise have disappeared in the face of Asian competition.”
But the facts say otherwise – emphatically.
Auto-related trade has long comprised much of total U.S.-Mexico merchandise trade. In 2015 (the latest full-year statistics), vehicles and parts represented 32 percent of all American goods imports from its southern neighbor, and parts alone comprised 10 percent of all U.S. goods exports to Mexico. (The Congressional Research Service report from which these numbers are taken makes clear that American vehicle exports were modest.)
And what’s happened to U.S. automotive employment? When NAFTA went into effect, in January, 1994, American vehicle payrolls stood at just over 280,000. Today, even after the recent domestic industry’s strong post-recession bounce back, it’s nearly 24 percent lower. That’s actually better, but only a little, than the the nearly 27.3 percent employment drop for manufacturing overall. Parts employment had held up even better – dropping only by about 19.3 percent.
Of course, job figures throughout manufacturing (and other sectors) are also affected by productivity improvements. At the same time, inflation-adjusted wages for U.S. blue-collar vehicle workers have fallen by just short of 18.7 percent since NAFTA’s inception, and for parts employees by nearly 24.5 percent. That’s actually much worse than the results for manufacturing non-supervisory workers as a whole – whose real wages are up 5.31 percent during this period.
The automotive sector’s performance has been better on the output side. Since January, 1994, according to the Federal Reserve’s industrial production index, constant-dollar manufacturing production has risen by 59.2 percent. Real vehicle production has been somewhat stronger, rising by 64.6 percent, and price-adjusted parts output is up by 78.3 percent.
But despite these gains, since NAFTA came into existence, the global competitiveness of both the U.S. and North American auto industries has worsened, not improved. A 2015 Chicago Federal Reserve report shows that from 1990 to 2014, North America’s share of global vehicle production is actually down: all the way from 31 percent to 19 percent. And within this relatively weaker North American industry, the U.S. vehicle production share has sunk from 78 percent to 67 percent.
As I’ve explained, a main reason for this subpar performance has been a central flaw in NAFTA’s design. Rather than creating a relatively hard trade bloc that would use high tariffs to lure extra-regional companies to produce and innovate within North America in order to sell into that lucrative market, NAFTA’s authors enabled European and Asian firms to keep relying much too heavily on exporting to North America.
Mr. Trump has suggested an interest in reforming NAFTA in order to fix these problems, and however reluctantly, the Mexican and Canadian governments have signaled their willingness to talk. Launching serious negotiations should be one of the new administration’s highest trade policy priorities once the new president takes office.
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