House Republican Conference Issue Brief - Myths About NAFTA

8/3/2019 House Republican Conference Issue Brief - Myths About NAFTA

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Dick ArmeyChairman

26th District. Texas

Answers to Bumper Sticker Protectionism

The North American Free Trade .Area (NAFT A) agreement between the UnitE~dStates, Mexico and Canada will be considered by Congress later this year. When in

place, NAFT A 1Nillcreate the world's largest open market, with a population of 370

million and a GDP of $7 trillion. The unique nature of this agreement, between twodeveloped countries and a less developed partner, has raised much controversy. ~Vill

Americans lose high-wage jobs to low-wage Mexican workers or gain new export

opportunities? Will America weaken or strengthen its industrial base? Will Americci

become more or less competitive In international trade?

NAFTA, which builds on the current U.S.-Canada Free Trade Area, will phase

out all tariffs on trade in goods between the member countries. Since U.S. tariff~

a ainst Mexican oods avera e about 3 ercent while Mexican tariffs on U.S. oods.avera e about 10 ercent the U.S. has alar er burden removed from its ex orts.

Further, Mexico will remove barriers to trade in services such as insurance,

transportation and telecommunications, which will especially help American providers.Most remaining Mexican restrictions on foreign ownership will be eliminated.

The bottom line is that NAFT A will benefit all three countries. Yet there is rTluch

confusion among:private citizens and policy makers about NAFT At based not on falcts

but on economic myths that have made their way into the public dialogue. ~

and to create jobs throuah free trade. It is an opportunity especially for American

industries to grow more competitive in an increasingly competitive global economy.

'1

This Issue Brief addresses the economic myths concerning the NAFT A so thatAmericans have the facts before they make up their minds on this important issue.

1618 Longworth Building, Washington, D.C. 20515 (202)225-5107



LOW MEXICAN WAGES

MYTH: Low wages in Mexico will cause American firms to move operations

south-of-the-border, throwing Americans out of work.

FACT: If this were' true, Puerto Rico, an American Commonwealth with virtually

unrestricted assess to the U.S. market, would have a booming economy. TheCaribbean island, with a population of over 3.5 million, employed some 148,000

manufacturing workers in 1989 at an average annual salary of $14,700.1 The18.8 million American manufacturing workers in 1990 had an average salary of

$28,250.2 Further, businesses in Puerto Rico are exempt from many Americantaxes. Yet even with these lower wages, unemployment in Puerto Rico is over

14 percent,3 twice as high as the 7 percent rate in the U.S.4

If low waaes necessarily attract industries. the world's less develoDed c

would have attraC1ed such industries lona aao and would no lonaer be less

develoDed.

MYTH: The low 58 cent per hour Mexican minimum wage Is bound to cause

American enterprises to flee to Mexico.

FACT: Less than 20 percent of Mexican workers officially earn only this

minimum wage. Over 80 percent earn more.5 Further, many Mexicans earn

additional income through informal economic activities, income that does not

appear in official ~jtatistics.

Mexican wage rates, when non-salary benefits are taken into account, in

general are well above the minimum level. Wage controls under Mexico'sPacta economic plan have held down salaries in recent years. But Mexican

workers are usually given many non-salary benefits such as free lunches during

their work shifts, (:hild care, and transportation subsidies. Thus, workers in the

special maquiladora border factors in Mexico earn some $2 per hour in salariesbut $4.50 when o-ther benefits are included.

IFrom the Statistical Abstract ofthe United States: 1992. Economics and Statistics Adminisb"ation, Bureau of

the Census, U.S. Department of Commerce, Table No.1353, most recent available numbers.

2~ Table No.1243 and 1244.

3!hi9.. Table No.1349.

."Economic Indicators, April 1993," prepared for the Joint Economic Committee by the Council of Economic

Advisors, Washington, D.C.

'Office of the U.S. Trade Nepresentative and U.S. Department of Commerce sources.

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MYTH: Whatever the real average Mexican wage, it is still far below American

wages and thus will pull in firms from the U.S., throwing Americans out of work.

FACT:~~~§~ccount. on averaqe. for only about 15 percent of t

of production in M~.6 Low wages certainly are important for the production

of labor-intensive goods employing lower-skilled labor, but other factorsgenerally are even more important. Transportation costs for shipping parts and

products between the U.S. and Mexico are high. The cost of energy, utilitiesand other factors of production in Mexico can be high as well. Poorer

infrastructure hinclers businesses. Thus, while some American enterprises maybe able to lower production costs by locating in Mexico, others cannot.

MYTH: With free trade, Mexican manufacturing wages, which average a little

over $2 per hour, will rise. American manufacturing wages, averaging around$15.50 per hour, will drop. This will establish a wage equilibrium somewhere in

the middle, around $7.50 per hour in both countries.

FACT: There are no actual examples of such an equilibrium occurring, nor are

there theoretical reasons to expect this would occur. As noted above, otherfactors besides wages help determine the best locations for production. There

is not a one-to-orle corollation between a wage increase in one country and a

wage decrease irl another .

For example, after World War II European wage levels were far below those in

the U.S; America kept its market more open to European exports than Europe

did to American ~Joods; and for two decades after the War, Europe wasAmerica's principal trading partner after Canada. Yet American wages did not

fall to meet rising European wages somewhere in the middle. Real wages, that

is, real purchasing power, rose both in Europe and the U.S.

MYTH: Whatever the actual numerical relationship, free trade with low-wage

Mexico must necessarily pull down America's high wages.

FACT: American wages, that is, the real purchasing power that a worker's labor

will earn, are determined most importantly by the productivity and quality of the

labor. American firms have much more capital investment per worker than in

Mexico. America's infrastructure --such as roads, transportation systems,telecornmunications, energy generation and distribution facilities and waterfacilities --is more efficient than Mexico's. This means that for each hour of

labor. American workers aenerallv Droduce more aoods and

Mexican counteroarts. and thus earn hiaher waaes.

~ited by Senator Robert Bennett (R. Utah) in an April 22. 1993 hearing of the U.S. Senate Banking, Housing

and Urban Affairs Committee.

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LOSING JOBS AND INDUSTRIES TO MEXICO

MYTH: NAFTA will remove barriers to American firms wishing to relocate in

Mexico, causing many of them to flee south-of-the-border .

FACT: There is little to stop them from doing so right now. Americanbusinesses already can relocate in Mexico if they wish with few Mexican

impediments in the way. In fact, many have. American firms wishing to

produce in Mexico and re-export products do so through the maquiladorasystem. Mexico has liberalized its investment restrictions over the past few

years. NAFT A will remove remaining Mexican investment barriers, thus addinga small incentive for some American firms to locate operations there. But since

easier to sell in Mexico without movina their operations.

MYTH: Studies show that many Americans will lose jobs under NAFTA.

FACT: Most studies of the effects of NAFTA show job gains for the U.S. The

bi-partisan International Trade Commission (ITC) reviewed a number of studies

that use standard economic models to determine economic and job growthunder a NAFT A. Based on these studies the ITC found that net job creation in

the U.S. under NAFTA would range between around 35,000 to over 93,000.7

Gary Clyde Hufbauer and Jeffrey J. Schott of the non-partisan Institute forInternational Economics predict that over five years NAFT A will result in a net

job gain of 171,000.8 Among other things, these researchers compare Mexico

to South Korea dlJring its period of economic growth. They find that if similar

development patterns of the countries continue, as is likely under NAFT A, thatMexico will continue to purchase substantial quantities of American products,

producing even more American jobs.

Free trade is one of the few issues that economists across th~ id

s~ectrum can aaree on. Scholars at the liberal Brookinas !n§titu

moderate American Enterprise Institute. the conservative Hed

~nd the liDertarian Cato Institute all see NAFT A oroducina job

Mexico and Cana~.

7"potential Impact on the U .S. Economy and Selected Industries of the North American Free-Trade Agreement, "

usrrc Publication 2596, January, 1993, pp. 2.1-2.3.

IHufbauer and Schott. NAFTA: An Assessment. (Washington: Institute for International Economics, 1993).

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MYTH: Other studies refute the studies showing job creation through NAFTA.

FACT: The few studies showing job losses under NAFTA are either partisan

studies sponsored by particular businesses, unions and other special interest

groups that feel threatened by free trade, or are ill-conceived and not defensible

on empirical or theoretical economic grounds.9

Example: The Cuomo Commission on Competitiveness report contends thatNAFTA will cost America jobs.1° Yet the report mistakenly assumes that Japan

will be able to flood America's market with goods by going through Mexico. But

as with the U.S.-Canada FTA, NAFTA has strict provisions against

transshipments.

Example: A study by Timothy Koechlin and Mehrene Larudee 11assumes that

under NAFTA, Mexico's capital stock will grow by between $31 billion and $53

billion, with a corresponding drop in American capital investment. But there isno empirical or theoretical basis on which to assume such a one-to-one

transfer. To begin with, if American firms planning to invest in Mexico decide

not to, many likely would invest in other foreign countries. Further, capital, like

goods, is created, not simply transferred or redistributed. Free trade and

economic reforms will allow Mexico to create capital as well as import it.

MYTH: By rejecting NAFTA, the U.S. would be able to hold on to those jobs that

would otherwise have gone to Mexico ~ keep the jobs In the U.S. that would

have supported those Mexican jobs.

FACT: That's not how businesses work. A firm with Mexican and American

operations would see its costs of production go up if it were forced to return

operations to the U.S. due to rising U.S. trade barriers. The higher prices it

would have to charge for its goods would mean lower demand. The firm wouldhave to cut production and workers. In many cases, such costly production

simply would not be profitable. The firm would have to close its operations or

move the entire operation out of the country , to Asia, for example.

9See Hufbauer and Schott. ~ for a more detailed analysis of the problems with these studies.

loAmerica's AJZenda: Buildin2 Economic Stren2th, (New York: M.E. Sharpe, 1992).

I'Koechlin, et. at., "Effects of the North American Free Trade Agreement on Investment. Employment. and

Wages in Mexico and the U.S.," unpublished paper, University of Massachusetts, Amherst. cited in n'C NAFTA

report, OD.cit.; and Koechlin and Larudee, "The High Cost of NAFTA," Challen2e. September/0ctober, 1992.



NAFTA will primarily open America's market to Mexican goods.

FACT: Mexico's tariffs on average are 10 percent, 7 percent higher than

America's 3 percent average. Thus. most of the trade aains will be for the

Mexico also will remove barriers to the sales of such services as insurance,

transportation and telecommunications, as well as to agriculture products w

normally are not covered by international trade liberalization agreements.

A will not help American manufacturers.

FACT: Many American manufacturers are waiting for Mexican tariffs to be

eliminated under NAFT A in order to export more goods to Mexico.12

Example: 3M of Minnesota plans to increase its exports of production mate

to Mexico once NAFT A is passed. This American firm recently added 300

manufacturing jobs in the U.S. to service growing demand in Mexico.

Example: Gilford Textiles Mills of Alabama is waiting for the 12 percent

Mexican tariff on textiles to be eliminated in order to sell more to Mexico.

Example: Apple Computer's James Johnson welcomes NAFT At maintaininthat .With 20 percent lower prices, we can reach deeper into the consumer

education markets. That represents major new business..

Example: Campbell Soup Company's Sacramento, California and Paris, T

plants, according to company official Ronald Warass, are .well positioned tsignificantly expand. exports to Mexico under the NAFT A.

Only American big business can benefit from NAFTA.

FACT: While large enterprises naturally are in the best position to look ahe

the Mexican market, smaller enterprises will also find opportunities south-oborder. Many large American firms already operate in Mexico. NAFT A wi

open the door for small businesses to sell their products in Mexico as well.

Examplr; Trino Gonzalez, President of the seven person Chula Lumber

Corporation of National City I California, hopes to see his $2 million annual

to Mexico increase by 25 percent next year. Says Gonzalez, .1 believe 10

percent in a North American Free Trade Agreement. It will help open the

market and unlock tremendous opportunities there..



Example: The eighteen person North American Trade Corporation, which

specializes in transportation, construction and electronics industries, and had

$500,000 in sales to Mexico last year, stands to benefit from NAFTA. Its

President, Jorge Guiloff says "The potential to increase exports to Mexico is

excellent."

MYTH: Mexican goods will surge into the U.S. under NAFTA, throwingAmericans out of work.

FACT: Low American tariffs currently pose only a minimal barrier to Mexican

exports to the U.S.

It is much more likelv that the surae will be in the other direction. In fact, it hasalready begun. American sales to Mexicl:> have jumped from 11.9 billion in 1985to $40.6 billion in 1992. Mexico will need to import many goods and services to

modernize its economy and production f,acilities as well as to satisfy the needs

of consumers growing more prosperous through free trade and economicreforms. For the next decade America should run trade suroluses with Mexico.

Table 1 --U.S.-Mexico Bilateral Trade

(in $-billions)

1991 1992989 1990986 1987 1988

u.s. Exportsto Mexico 40.68.4 33.34.6 20.6 24.91.9

u.s. Imports

from Mexico 35.21.23.2 27.2 30.27.5 20.2

+2.1 +5.42.3 -1.85.1 -5.6 -2.6alance

Source: u.s. Department of Commerce.

MYTH: The relocations of firms that occur will all be from the U.S. to Mexico.

FACT: A number of America fi~s will move Mexican operations ~ack to the

~.S. under NAFTA. This is because with Mexic~n tar!ffs r_e_m~¥American fi~s will be able to produce in the U.S. and sell in Mexico at

competitive price.

Some American firms have already returned from Mexico to takeadvantage of higher quality labor or other production advantages. For

example, Lionel Trains was moved in 1 383 from Mt. Clemens, Michiganto Tijuana, Mexico. In 1985, Lionel moved back to the U.S. While the

company cut costs in Mexico, it also cU't quality; the result was a decline

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in sales. Under a NAFT A, without Mexican tariffs to contend with, other

American firms no doubt will move operations back to the U.S. and

export to Mexico.

MYTH: Under the NAFTA, Mexicans will buy up many U.S. firms and move them

to Mexico.

FACT: Mexicans can do this already. In fact, a consortium of Mexicans

recently' was formed to purchase American enterprises. But since Mexicans

have far less capital than Americans, such purchases under NAFT At as they

are now, will be limited.

MYTH: A job gained In Mexico Is a job lost In the U.S.

FACT: This myth assumes that there are a set number of jobs in the world. The

only way one country can gain a job is if another country loses one.

In fact, as even Labor Secretary Robert Reich has conceded, MWorld trade is

not a zt~ro-sum game in which a finite number of jobs are to be parceled outamong the workers of the world. Trade is a positive-sum game in which there is

no natural limit to the number of jobs that can be created.M14 The fact that

~Jrchasina cower and world trade have all arown since World Wa

refutes this myth.

AMERICA'S COMPETITIVENESS

MYTH: Trade protectionism in the past generally has been good for the United

States.

FACT: American trade protectionism in the 1920s and early 1930s helpedprecipitate and prolong the Great Depression. American exports dropped from$7 billion in 1929 to $2.4 billion in 1933 while imports during that period fellfrom ~1).9-billion to $2 billion. Unemployment went from 3.3 percent in 1929 to

25 perc:ent in 1933. GDP was cut in half during that period, from $103.4 billionto $55.8 billion. Per capita income fell from $850 per year to $445 per year .

14RobertB. Reich, "Trade With Me~ico Is a Boon for U.S. Workers," The Wall Street Journal, Friday, April 30,

1993, p. A13.



MYTH: Free trade is not good for America.

FACT: After World War II, primarily through the General Agreement on Tariffs

and Trade the average tariff level for industrialized countries dropped from 40

percent to 5 percent. Since 1960, when Europe recovered from the War,

worldwide exports have skyrocketed from $100 billion to over $3 trillion today,and American exports of goods and services grew as well, from $25.3 billion to

$636.3 billion. Using the U.S. Department of Commerce estimate that every $1billion in exports supports 22,800 jobs, 14.5 million Americans work to satisfy

overseas. demands for American products.

MYTH: The only way American firms can stay competitive is to shield

themselves from competition with Mexican firms.

FACT: The only way to remain competitive is to compete. H. Ross Perot,

revealin~1 the secret of his business success, observed that after leaving IBM,for which he worked for five years, .Then I had to compete with them, and it

was like competing with Sherman tanks. I give all credit to my business

success to the fact that you had to be tough to survive in that environment andthey forced us to be pretty good..15 Industries that have hidden behind

protectionist walls have become less productive and in the end have been

forced to layoff w~.

MYTH: NAFTA. will seriously damage America's manufacturing base.

FACT: Manufacturing still accounts for around 20 percent of America's GOP .the same as it was 30 years ago. The percentage of American workers in thissector is, down, from 22 percent in 1960 to 16 percent now. The number of

workers in manu;acturing is down from 19.1 in 1982 to 18.8 in 1990. This is in

part due to efficiency gains in the 19805 --that is to say, American businessesare producing the same value of GOP with a smaller share of the labor force

and wittll slightly felwer workers.

MYTH: The Northeast and North central states will be especially adversely

effected by NAFT A.

FACT: These states currently are big beneficiaries of Mexico's market openingefforts BInd economic reforms. Of the twelve states with the largest value sales

to Mexk:o, six are Northeastern and North central states. They likely will benefit

even more under NAFT A, which opens Mexico's market to American

manufac~ured products.

l'Testimony before the Senate Committee on Banking, Housing and Urban Affairs, April 22, 1993,

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Table 2 --Value of Exports to Mexico -Top 12 States

(in $-millions, 1991 dollars)

Source: U.S. Department of Commerce and the U.S. International Trade

Administration.

THE ASIAN CHALLENGE

MYTH: NAFTA will give Japan a base from which to flood the American market,thus gaining the benefits of free trade without having to open its market to

American goods.

FACT: Domestic content requirements in the NAFT A guard against this. For

example, to be considered a North American product enjoying free movement

in NAFT A, an automobile must have 62.5 percent North American content once

NAFT A is fully implemented. This means that the JaDanese cannot shiD Darts

to Mexico to be assembled into cars for shiDment to the U.S.

As with the current Free Trade Agreement with Canada, the NAFT A prohibits

transshipments. 'This means that a country cannot ship goods into Mexico for

immediate shipmf~nt into the U.S. Further, non-NAFTA members will be subjectto Mexican tariffs that are generally higher than those in the U.S. Thus a third

country would gain little or nothing by trying to bring goods into Mexico first,

due to hi~ Mexi<:an tariffs.

MYTH: Greater Integration with any other economy, such as Mexico, will weaken

America's posItion In the global economy.

FACT: Economic integration will allow American firms to become moreproductive and competitive, as well as increasing the purchasing power of

American consumers. In any case, America is already too integrated in the

global economy to pull out. In 1960 trade in goods and services equaled onlyabout 9.5 percent of GDP. Today it is valued at nearly 22 percent of GDP .

Total exports last year were valued at $636.3 billion or 10.7 percent of GDP.

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MYTH: NAFTj~, by encouraging American firms to integrate their production with

Mexlco'a weaker economy, will play into the hands of Japanese competitors.

FACT: U.S. firms with operations in Mexico will be better able to beat Japanese

competitors at their own game. A business strategy of many Japanese

enterprises centers on the policy of .co-production.. This means that Japanesefirms contract out part of their production to factories in other, usually lower

wage countries. Japanese firms generally keep the better jobs, such as

planning, design and final assembly, in Japan. This allows them to keep thecosts of their pro<jucts down and the quality high, thus remaining competitive inthe home market and overseas.

American firms also engage in this practice --most notably the auto companies.Cars and computers with the label .Made in U.S.A.. usually contain some if nota substantial amount of foreign components. This does not mean that

Americans have lost jobs to foreign suppliers. In many cases it means that

rather than moving the entire operation offshore. or shuttina factories down

com~letely. factories in America remain open and the aoods they product are

sold at a competitive price.

MYTH: Co-production under NAFTA will drive all American enterprises overseas.

FACT: Co-produ(:tion has allowed many American companies to .§.YQiQmoving

their entire operations overseas.

Example: Samsonite's manufacturing facilities in Denver, Colorado and Tucson,

Arizona, with a total of 1 ,200 workers, stay open in part because some of their

operations are In Nogales, Mexico.

Example: Warnaco, an American apparel manufacturer, has operations inMexico employing 1 600 workers. These workers in turn make possible 1,000

jobs in the U.S., one-fifth of the company's 5,000 employees.

CONCLUSION

There are still mciny important issues to be considered in the NAFT A debate.The details of the side agreements on the environment and labor, for example, still

must be studied closely to determine their effects on American productivity and job

creation. Those citizens and policy makers who still have not decided whether they

will support or oppose the NAFT A should make their decisions based on reasoned

considerations and not bumper sticker slogans. Facts, not myths, should guide the

NAFT A debate.

This Issue Brief was prepared by economist Edward Hudgins, Ph.D.

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House Republican Conference Issue Brief - Myths About NAFTA

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