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!
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.