Goodbye to a New NAFTA

Renegotiations for NAFTA have reached a crucial point and the Peña government has run out of time. They burnt their bridges betting that nothing would happen, meanwhile ignoring the decisive facts noted by the Trump administration: The United States has a $70 billion trade deficit with Mexico, 90 percent of which is due to the automotive sector. The Mexican Automotive Industry Association supports this with ridiculously low salaries — in a high tech industry — in order to attract investments and jobs that, in turn, drain U.S. resources.

The reality is undeniable. Mexican auto industry workers in end product factories, according to studies by this author, were paid an average of $2.30 per hour — not $7 or $8, as reported by official sources — at the end of 2017, 90 percent less than the average $27 per hour that their counterparts in the U.S. or Canada earn. Furthermore, factories that produce parts that are tier 1 or 2 on the value chain pay half that rate and those at tier 3 or 4 pay one-third. This is how a worker in the most robust industry in the country, an industry that in other countries is a step towards social mobility, could end up making barely more than minimum wage, up to $3 in the best of cases.

Faced with this, instead of using the opportunity to propose substantial initiatives, Mexican representatives decided to wager on maintaining the same basic terms of a treaty that was negotiated more than two decades ago, and to ignore, once again, the parts about labor, the environment and the influx of people. At the same time, public and private spokespeople have tried to fill the gaps with the eternally insubstantial language of Mexican politics; for example, “Mexico will not negotiate under pressure.”

Mexico could have proposed salary adjustments spread over time and tied to productivity. There was support for this, since end product subsector productivity has increased at rates of 5 to 7 percent in the last decade while salaries have fallen 4 percent annually on average in the same period. In addition, Mexico could have proposed strategies to increase the industry’s regional competitiveness by creating scientific competencies and complementary technology. The possibility would have been even more relevant for an industry whose days are numbered against the disruptions of the digital revolution and new business models resulting from emerging alternative mobilities, raising frontier after frontier.

Instead, Mexican negotiators chose to lay low, like a government in its comfort zone which hopes that investments and jobs come from outside and whose total message seems to be — consistent with earlier criticism from the Canadians: Mexicans are proud to be poor and that’s how we want to remain, so don’t mess with our poverty or our poor people.

Hence, the proposal from the Trump negotiators. In summary: Raise the current requirement for 62.5 percent origin of content to a 75 percent ceiling, with a three year grace period prorated by the type of product, divided between central, principal and complementary. Also, 30 percent of every vehicle must be manufactured in a country where the workers earn more than the average wage for the industry in the North American region. This is an average wage of $15 to $16 per hour.

Can NAFTA survive these proposals? Difficult, but not impossible. The problem now is on the Mexican side and the disadvantage begins with the lost opportunity for a proposal from the Peña government. In order for it to continue, the possibility of NAFTA without Mexico looms again.

The U.S. and Canada can imagine a treaty with these rules of origin and labor content, where Mexico, given its position, would appear to be self-excluded. Under this framework, they could evolve towards production and trade of cars and components of higher value-added vehicles and components where their companies have some advantage or would work under protected markets and with the strong fiscal stimuli that Donald Trump is giving them. They would abandon the market for gas powered compact vehicles and trajectories from the previous century that have been Mexico’s specialty and whose future is commoditization.

Can NAFTA be modernized with Mexico? There is a slight opening. But the only chance for entering depends on what the future government of Mexico can propose.