Trade — Fair, Free, Trump Trade

Today we speak of trade — fair trade, free trade, Trump trade.

It has been a little time since your Big Red Car has posted. Please accept my apology. I will do better in the future.

So, here we are with the issue of trade becoming a big argument in the Presidential election of 2016.

One candidate, Crooked Hillary, was/is for TPP (the TransPacific Partnership) while Donald Trump has been a huge critic of all trade deals suggesting they are one of the root causes of the offshoring of American jobs. Crooked Hillary is now not so much for the TPP and other trade agreements because a focus group told her her opinion.

Let us reason together, beloved readers, and see what a few facts may throw on the situation.

We shall focus on the famous Maquiladora economy on the Mexican side of the border with the United States.

What is a Maquiladora plant, Big Red Car? Is this trade?

A Maquiladora plant is a “special economic zone” as promulgated by Mexico as part of the Border Industrialization Program which is often called the Maquiladora Program. [This plan came from the ashes of  the Bracero Program which allowed seasonal Mexican workers into the US to support agriculture. When it ended in 1964, the Mexican government was left with widespread unemployment along the border. This was an attempt to deal with that widespread unemployment.]

A Maquiladora plant is a manufacturing factory which imports material and equipment into Mexico on a duty-free and tariff-free basis for the purpose of assembly, processing, or manufacturing and upon the completion of that process, it exports the finished goods, sometimes to the country of origin of the parts.

When you think “Maquiladora” think importing parts and exporting finished goods with the labor being provided by the country of Mexico. This labor is the “jobs” which are at the center of this debate. Jumping ahead, these were once upon a time American jobs.

Why did US manufacturing companies find this attractive, Big Red Car?

American manufacturers found the use of these Maquiladora plants attractive because they could:

Tap into incredibly cheaper Mexican labor — originally less than $1.00/hour;

Handle growth without having to build additional plant in the United States;

Did not have to own American manufacturing plants — meaning real estate. [Note: Most Maquiladora plants are “contract” manufacturers and no American companies are required to actually own the real estate. In this manner, US manufacturers get a big one time gain with the sale of their real estate.]

The American dollar was appreciating v the Mexican peso, so the American dollar went further in Mexico than it went in Indianapolis.

There were no restrictions on the re-entry of the finished goods and no tariffs to be paid.

There are those amongst you who will find the words “corporate greed” forming on your tongues. Say it because that is what was happening. American companies wanted to ship their jobs to Mexico where labor was cheap and where their costs to manufacture were cheaper still. The US Congress allowed this to happen. We did this to ourselves.

In the early 1970s when this was beginning, the Maquiladora plants were along the border but by the middle of the 1990s, they were spread throughout the country taking advantage of even cheaper labor in the hinterlands of Mexico.

So, Big Red Car, how big?

The Maquiladora Program delivers the second largest source of funds to the Mexican economy.

By 2000, the Maquiladoras accounted for 25% of Mexico’s GDP and almost 20% of total Mexican employment.

Read that again — 25% of GDP and 20% of employment.

By the beginning of the 2000s, Maquiladora plants accounted for almost half of all Mexican exports. Wow!

This baby is huuuuuuuuuuuuuuuge!

Melanie with baby

Are there some real numbers, Big Red Car?

Yes, there are, dear reader.

The 2015 Mexican minimum wage is 70 pesos per day which equates to $0.55/hour.

Maquiladoras currently pay approximately $2.00/hour plus performance bonuses based on productivity which can add as much as an additional ten percent. There is also a 25% fee for social security, housing, and retirement. They pay much less in the hinterlands.

How does NAFTA impact this, Big Red Car?

NAFTA is an agreement amongst the United States, Canada, and Mexico. The Maquiladora program pre-dates NAFTA by quite a few years and it was drafted, primarily, by Mexico for Mexico’s advantage. Mexico is enjoying more than a million jobs from this program.

NAFTA cemented many of the advantages written into the original plan by Mexico.

What happened to this, Big Red Car?

One of the things that has happened is that places like Malaysia, India, Pakistan, Vietnam, China are cheaper to manufacture than even Mexico.

Now, that’s hard to believe. Believe it.

Some of these jobs have now moved to these countries.

Bottom line it, Big Red Car

So, an American manufacturer lays off its workers in the US and ships those jobs to a Maquiladora plant in Mexico. The American workers lose their jobs.

The US manufacturer has to ship parts to Mexico where they undertake “final assembly” and thereby can return the finished good to the US with no tariffs or duties.

The American manufacturer screws its workers and is able to continue to sell its finished goods in the United States at the exact same prices as when they made them in the US.

What the Hell is Trump going to do about this, Big Red Car? Trump trade?

What Trump indicates he is going to do is a three fold attack:

Trump says he is going to expose this terrible system and withdraw from any and all trade agreements which allow such job killing arrangements.

He is going to use the bully pulpit and legislation to penalize American companies as they try to exit the US. These are future defections.

He is going to propose tariffs on finished goods returning to the US from such assembly areas in a manner which will destroy the labor advantage.

The result he is looking for? The prevention of future defections and the return of the lost jobs. He is doing this to create American jobs.

But, hey, what the Hell do I really know anyway? I’m just a Big Red Car!cropped-LTFD-illust_300.png

 

 

 

 

  • Tim Bates

    There is a better path! Regulation now more than employee cost is a primary driver of moving off shore. Take for example Carrier who if they were still building Air conditioners here would be limited in what they can produce in the US with the new coolant regulations John Kerry just instituted. Yes the US is saving the globe but the other 96% of the globe wants cheaper proven product that We can’t make here.
    So does Carrier move and make any product the market needs, or build a plant in the US and have higher costs to save us from Climate Change? Simple risk profile answer is build where you can build what the market wants!

    • JLM

      .
      Fair play. The world is complicated.

      As to what we CAN control, we can only control what we are making and selling here.

      If a company — Caterpillar — can only manufacture in a market in which they sell, then that is another problem but there are a million workers in the Maquiladoras who are working on manufacturing good that are coming back into the US.

      The issue of A/C is an interesting one. Since 2010, R-22 (Freon) has been banned though there is still plenty of it out there.

      R410A — non-ozone depleting — is a good system but it requires much higher pressures. This requires physical changes to equipment. This fluid is way more efficient than R-22 which means equipment can run at lower temps which prolongs the life of equipment.

      There is also the issue of lubricating oil which works better with R-410A (polyol ester oil) than R-22 and mineral oil.

      In the end, while I think much of the hysteria about ozone depletion is pure hokem, the design of A/C systems is also driven by efficiency and longevity. A new unit today is much, much better than even one from 5 years ago.

      Two stage compressors and variable speed fans and humidity control.

      I used to expect to get 7 years from a 75% top of the line A/C system. Now I expect to get almost twice a long from a slightly higher quality system but at a substantial energy savings.

      The sale of domestic A/C units is driven by building codes and utility rebates. In many instances, it costs nothing — due to the rebates — to incorporate all the new bells and whistles.

      It is not a simple issue but I come down on the side of thinking Carrier is just tapping into cheap labor. They have clearly announced they intend to sell product into the US. The exact same product they make and sell here right now.

      Thank you for an insightful and interesting comment.

      BRC
      http://www.themusingsofthebigredcar.com

  • sigmaalgebra

    I’d sure like to see some more numbers.

    But, for a 20,000 foot view, maybe there is some good news: A Trump tariff of, as he commonly mentions, 35% will be 35% of WHAT? Well, likely the value of the product as imported. So, that’s the factory cost likely plus transportation to a US port of entry. Okay. But often US retail costs are much more. E.g., import running shoes for maybe $4 a pair and sell them for, what, $40 a pair? Much more for Nike? Why? Ad costs. What leading athletes get.

    But the Trump tariff would be the 35% on the $4, not the $40. So the $35% would be $1.40, and that shouldn’t empty the wallet of the usual buyer of running shoes.

    I don’t know how general this hypothetical example is. As I mentioned, I’d like more data.

    But I also am learning that next to no one would pay attention to the numbers, and the effect on the election would be next to zip, zilch, and zero. So, I don’t expect to see such numbers.

    Next big question: What the heck are the international macro economic forces that have an hour of work in the US usually worth $20+ and in many Asian countries less than $0.50? Why the heck is the US dollar so valuable? How can the US expect to export US products to countries where the workers are making less than $0.50 an hour?

  • JLM

    .
    What is the importance of trade agreements? It is all about jobs.

    http://themusingsofthebigredcar.com/fair-trade-free-trade-trump-trade/

    BRC
    http://www.themusingsofthebigredcar.com