North American Free Trade Agreement for Automotive Industry

Introduction

Trade agreements are created in the modern globalized world to remove trade barriers and stimulate trade, and by extension, benefiting national economies. In its creation and essence, NAFTA was one of the most prominent global trade agreements and was meant to ensure the competitiveness of U.S. industries on the international stage, establishing supply chains and benefiting both corporations and labor. NAFTA had a profound impact on manufacturing industries by resulting in the shift of production and labor to low-wage markets while resulting in the flow of capital to companies which led to negative impacts on U.S. workers in terms of wages, working conditions, and bargaining power that was further exacerbated by a lack of centralized national regulation.

NAFTA Background and Politics of Globalization

Globalization from an economic perspective is a process of private and public organizations developing international connections through either sale or point of production and supply chain in order to scale internationally and commonly improve profit margins (Munck 224). Globalization is closely tied to labor and manufacturing, as production quickly shifts towards locations where costs can be kept minimal either due to the availability of cheap resources or labor.

Thus, any given final product often consists of numerous parts, each originating in different parts of the world, shipped as part of the supply chains to be assembled, and then sold to the most profitable markets. The concept of the global supply chain is highly efficient and routine, allowing to maintain low costs and high volume when moving a specific good from production to consumers. However, developed countries where labor is expensive and there is often greater regulation tend to lose manufacturing industries and transition to either service and finance or highly sophisticated technological sectors.

There is a significant debate regarding the long-term and complex dynamics of free trade agreements on domestic production and labor. Based on political views and global attitudes, there have always been proponents and opponents of free trade, supporting either global integration or, on the other hand, seclusion with a sovereign economy, especially in terms of industrial manufacturing.

The North American Trade Agreement (NAFTA) came into power on January 1, 1994. It was a free trade agreement between Mexico, Canada, and the United States, eliminating most tariffs, particularly agriculture, automobiles, textiles, and others. It was implemented since a quarter of U.S. imports ranging from crude oil and machinery to livestock and produce come from its neighbors, and these countries account for a third of U.S. exports as well.

NAFTA was meant to further encourage and stimulate free trade among these nations, allowing for U.S. economic growth and the creation of hundreds of thousands of jobs. The Clinton administration at the time anticipated the dramatic increases in U.S. imports with lower tariffs. NAFTA was supplemented by the North American Agreement on Labor Cooperation (NAALC) regulation that was intended to regulate business relocation with the purpose of exploiting lenient labor wages and regulations (Duina 177).

For some people, companies, and sectors, NAFTA has been an extraordinary success, as the trade deal was designed to bring government protections and support to investors and entrepreneurs in all involved countries, who actively searched for cheap labor and lower production costs. Increased volumes of trade and significant financial flows can be attributed as an achievement of NAFTA. However, for the large majority of residents of NAFTA countries, who are laborers without higher education, particularly blue-collar workers, NAFTA had devastating economic effects.

It reduced bargain power, minimized the security of a decent level of living, and removed many protections for workers regarding labor standards and worker’s rights. The NAALC, from a subjective perspective, failed in regulation, and workarounds were found. Therefore, NAFTA, which eliminated approximately 766,000 manufacturing jobs in the United States in its first decade alone, can be considered a failure towards U.S. industry and labor (Salas et al. 1).

Shift of Manufacturing and Supply Chains

Before NAFTA, the U.S. already had a trial agreement in place with Canada. NAFTA cemented this partnership and unequivocally integrated developed and industrial U.S. and Canadian economies with Mexican developing largely agrarian society. Initially, NAFTA’s regulatory environment reduced tariffs and resulted in the surge of manufacturing exports from the U.S. to Mexico and Canada. The exchange of manufactured goods flourished, although employment was less homogenous as manufacturing competition from Mexico led to an increase in its import penetration ratio.

Domestic U.S. manufacturers began to face stiff competition and resulted in some states reforming their industries to achieve comparative advantages with highly technical, capital-intensive production. However, some industries which are labor-intensive such as textiles and apparel, saw a tremendous increase in Mexican import penetration, with the ratio virtually overwhelming domestic manufacturing subsectors by 2000, and effectively eliminating these industries in the U.S. Mexican imports also affected the durable goods sector, which requires capital-intensive production with subsectors such as metalwork, machinery, and electronics (Torres and Miller 2).

While NAFTA led to a three-fold increase of regional trade over two decades to1.1 trillion and a surge in foreign direct investment, the impact on the U.S. GDP is estimated to be a modest 0.5%. This is largely due to the trade disbalance that emerged, with the trade surplus being $1.7 billion in 1993 and becoming a $54 deficit by 2014 (McBride and Sergei). This occurred due to companies moving production to Mexico driven by low-wage competition.

Cross-border supply chains began to form to lower consumer costs and increase productivity, potentially improving U.S. industry competitiveness (Blair 50). Economists disagree on the negative impact of NAFTA on manufacturing, suggesting that the U.S. industry was under pressure for decades before NAFTA, and the majority of job loss and manufacturing migration came because of China when that country joined the World Trade Organization in 2001.

In fact, the regional industry cluster between Mexico, Canada, and the U.S. allowed for efficient integration of manufacturing and benefited American companies such as automakers at least some advantage in the fierce competition from China. The primary concern over NAFTA comes from labor, where wages have not kept up with productivity and leading to a rise in income inequality.

Labor Changes

Despite the political nature of NAFTA criticism, from an economic perspective, labor-market effects were moderate. The increased trade as a result of NAFTA created downward pressure on wages for non-college-educated workers, who are most at risk of competition from low-wage Mexican labor. The primary effect was distributional, both geographically and in industry, as workers living in different geographies saw greater inequality.

Mexican industry grew, and despite still relatively poor wages and working conditions, Mexican workers saw a decrease in inequality and poverty. However, Mexican farmers were actually driven out of business on a large scale by NAFTA, which allowed massive distributors from the U.S. to export agricultural products into Mexico without traffics. Therefore, where the U.S. saw a decrease in its manufacturing power because of Mexican labor, Mexico saw a hit to its farming sectors. Canadian and U.S. industries saw an improvement in productivity which led to employment reductions but no unreasonable wage decreases.

The distributional effects of NAFTA are significant, but highly affected industries are those employing blue-collar workers. As transition occurred towards moving production to Mexico, blue-collar workers who often lack college education are unable to easily switch industries and mitigate wage reductions (McLaren & Hakobyan 5). On a large scale, this leads to the elimination of whole industries in local economies and migration of labor, which in itself leads to other socioeconomic problems in countries.

Workers’ Conditions and Bargaining Power

Although NAFTA had a positive effect on trade and corporate profit margins increased in many industries, the agreement had an adverse effect on labor and employment, including wages, working conditions, and bargaining power. The agreement ultimately promoted unrestricted competition among corporations and workers, resulting in often questionable practices. The NAALC and NAAEC clauses of NAFTA have been labeled as ineffective in addressing labor protection due to the complex adjudication process, which is prone to political manipulation. Labor rights of the strike, assembly, and collective bargaining are not even subject to legal protection or arbitration.

The shift of production to Mexico, where wage levels in purchasing power parity are several times lower than in the U.S. and Canada, effectively undermined labor bargaining positions in these countries (Ozarow 764). Corporate leadership used pressure on its employees to maintain low wages and fringe benefits under the threat of completely eliminating the manufacturing jobs and simply moving them to Mexico. Labor unions had little support politically or legally and could not achieve leverage in any bargaining negotiations.

The NAALC under NAFTA values sovereignty over accountability, resulting in unfortunate outcomes for labor rights. A lack of an enforcement mechanism results in a lack of harmonization, where similar standards apply to all three countries. No country is compelled to enforce its own labor laws, and sanctions are restricted. Finally, businesses are not held responsible for standards of operations, including rights and safety. In the negotiation of NAFTA and many other trade agreements with developing nations such as Mexico, it is common to find resistance to linking international worker rights provisions to trade deals, eventually with the agreement being ratified for greater economic prosperity. Worker rights and bargaining power raises labor costs which are not beneficial to corporate leadership (Bolle 9-10).

The provisions in both the current NAFTA agreement and subsequent negotiation on a new agreement leave gaping loopholes for wage, benefit, and working conditions suppression by public and private sector employers, applying downward pressure on employees. In Mexico, the situation is inherently worse than in the U.S. Therefore, the failure of a significant set of workers to receive their rights can undermine the functioning of the market by suppressing demand for goods produced in the country and by other trading partners. Companies create tremendous pressures on unions and their workers, essentially dividing any opposition and crushing isolated resistance.

The deliberate suppression in the current system, particularly of Mexican export platforms, does not contribute to the development of the national economy. Without proper enforcement, compensation and working conditions deteriorate, with some informal “gray” sectors of the economy arising. Mexico saw the rise of the maquiladora program, where companies from the United States employ Mexican workers near the border, often under cheap wages and substandard working conditions and hours.

From the early days of NAFTA’s implementation, the maquiladora program took advantage of the large populations of farmers and others desperate for work in an economic crisis and elimination of industries by the trade agreement. The U.S. and Canada meanwhile saw an upward redistribution of income and the gradual elimination of social safety nets. NAFTA contributed to a continent-wide pattern of employment insecurity, rising inequality, and stagnant incomes, all at a time of economic instability driven by the speculative bubble which burst in 2009 and can easily reoccur (Salas et al.).

Case Analysis Automotive Industry

The automotive industry was one of the most affected in the last two decades since NAFTA implementation, both with benefits and concerns for the sector, which will be explored in this section as a case analysis. Reduction and elimination of customs and tariffs across the continent led automobile manufacturers and relevant suppliers to optimize their supply chains and operational structures by relocating assembly line operations to the best-cost location.

In fact, the automotive industry is the biggest “product” of trade among the three countries. This drove down costs and attracted billions of re-investment into the national industries across all three countries, with the U.S. benefiting the most with its internationally recognized automobile brands, helping to keep the industry competitive, competing with low-cost labor in Asia. It is unarguable that manufacturing has declined in the U.S., with a loss of more than 4 million manufacturing jobs and closing tens of thousands of factories since 1994, but NAFTA’s impact is difficult to isolate, with most experts agreeing the automotive supply chain would have continued to spread into Mexico without NAFTA’s implementation (Rizzo)..

In the 25 years since NAFTA’s creation, auto production in the United States increased by more than 1 million vehicles, which tremendously benefits U.S. auto and auto parts industries by creating a strong regional bloc with a healthy regional automotive supply chain which enables job creation rather than inhibiting it.

Manufacturing employment and automotive industry employment have followed similar trajectories in the last decades, with motor vehicles actually doing better. However, manufacturing employment, including in the automotive industry, has also declined due to increased productivity, where fewer workers are necessary during assembly production. U.S. and Canadian automakers were virtually forced to move production to Mexico before NAFTA to remain competitive with the Japanese, and then later, Chinese auto manufacturing (Wen).

Nevertheless, NAFTA saw similar impacts on the automotive industry in terms of labor rights discussed earlier. NAFTA saw the rise of labor transnationalism, which auto unions began experiencing before the introduction of the free trade agreement. Unions in countries are likely to develop relationships leading to different pathways and outcomes. There is the progressive path which a presence of an independent Mexican labor union and progressive U.S. and Canadian ones. However, the crisis pathway is what occurred where U.S. and Canadian unions lacked progressive ideologies, resulting in vulnerability to foreign trade (Kay 234).

The industry saw wage suppression and fringe benefits, while unions as a whole experienced pressure from businesses and regulators. There was a lack of enforceability, particularly in Mexico, where worker’s rights and wages in the automotive industry have been suppressed. Various barriers that emerged to prevent collective bargaining and exchange of information regarding safety or benefits led to vulnerability of foreign trade, with even the American unions lacking the influence to prevent downward harmonization of wages and benefits as manufacturing relocates to Mexico (Kay 236).

Regulation of Labor in Trade Deals

The inclusion of enforceable labor provisions in free trade agreements by the U.S. has evolved over time, as the first trade policy focused solely on lowering tariffs and then addressed non-tariff issues. It is important to consider that labor standards are not subject to WTO rules, with the principles being regulated by the International Labor Organization (ILO) of the UN, which seeks to encourage member countries to adopt conventions that establish international standards. In NAFTA, labor provisions were not included in the main agreement, but aside treaty of the NAALC mentioned earlier.

However, the NAALC could only enforce sanctions if a party demonstrated persistent failure to enforce standards of occupational safety, minimum wage, and child labor. This is covered by mutually recognized labor laws rather than the commercial operations covered by NAFTA. In essence, under NAFTA and NAALC and other modeled trade agreements, the labor standards must be enforced to the minimum of international standards, but basic labor rights such as bargaining, organized, and by extent wages and safety are not enforceable, with countries independently choosing which provisions and labor rights to recognize and enforce (Bolle 5).

Discussion

The model of globalization and free trade, which has focused on the exploitation of cheap labor, has been termed as the “race to the bottom,” which is defined by competitive business practices to undercut rivals in prices by sacrificing quality standards and worker safety. The phenomenon often correlates with government deregulation, particularly in poorer countries, in order to attract economic activity to local jurisdictions. Despite evident failings of protecting labor in NAFTA, scholars and policymakers agree that international trade has significant potential for improving labor standards; it is just not realized properly.

In recent years, on the basis of horrific accidents and human rights violations (although not NAFTA related) that have occurred as a result of this “race to the bottom” phenomenon, the U.S. has begun to gradually shift its approach to bilateral free trade agreements. New model trade and investment frameworks have emerged to counter the phenomenon by implementing various labor provisions and enforcement mechanisms. Participating nations and businesses are called upon to ensure safety and quality of life standards for workers based on international norms (Brown 385). While the efficacy of such changes in advancing international labor standards is yet unknown, it is a promising step, albeit there needs to be a greater commitment from political leadership, including in the United States.

Currently, the Trump administration is in the process of negotiating and ratifying an update to the NAFTA agreement, known as the United States – Mexico – Canada Agreement (USMCA). Unfortunately, similar to its predecessor, the USMCA does little to address labor concerns and rights on either side of the border, focused once again on profit-making opportunities for large corporations that have had disastrous effects on regular people. The USMCA, similarly to NAFTA, requires each country to enforce its own laws and encourages aspects such as labor unions and workers’ rights. However, history with NAFTA has demonstrated that regulatory bodies fail to enforce such laws.

Only recently have Mexican workers, with help from progressive politicians, made some progress in establishing unions; previously, any attempts to organize were met with firings and even violence. In the United States, the National Labor Relations Board has not sufficiently enforced the National sLabor Relations Act, allowing for illegal practices of union-busting and vehement attacks from politicians along with the fine print prohibiting organized labor in various smaller trade agreements or corporate rules (Bacon). The USMCA has no dedicated section requiring regulation or reform of labor laws, suggesting that the trade agreement process is not even expected to enforce workers’ rights which is highly concerning.

Conclusion

It is evident that NAFTA is a free trade agreement that fundamentally changed the economies and politics of the United States, Mexico, and Canada. It had a profound impact on manufacturing industries, shifting production to markets with cheaper labor and less regulation. While this benefited capital flows for corporations, workers in all countries faced declining working conditions, lower wages, and lack of bargaining power as government deregulation drove companies to adopt high-pressure tactics on their employees. Labor standards and quality of life declined as the market experienced changes that were largely negative for basic workers.

This paper explored a case study example of the automotive industry in which the labor force was one of the hardest affected by NAFTA. Despite the significant potential for improving labor standards and wages, modern free trade agreements do not offer sufficient incentive or regulation to prevent the unsustainable race to the bottom.

Works Cited

Bacon, David. “The New NAFTA Won’t Protect Workers’ Rights.” The Nation. 2019. Web.

Blair, Andrew R. “United States Manufacturing Direct Investment and Trade: The Case of Canada and Mexico under NAFTA and Earlier Trade Liberalization Measures.” Review of Economics & Finance, vol. 7, no. 1, 2016, pp. 50-65.

Bolle, Mary Jane. Overview of Labor Enforcement Issues in Free Trade Agreements. 2016. Web.

Bolle, Mary Jane. NAFTA Labor Side Agreement: Lessons for the Worker Rights and Fast-Track Debate. 2001. Web.

Brown, Ronald C. “Promoting Labour Rights in The Global Economy: Could the United States’ New Model Trade and Investment Frameworks Advance International Labour Standards in Bangladesh?” International Labour Review, vol. 155, no. 3, 2015, pp. 1-31.

Duina, Franceso. “Beyond Free Trade: Accounting for Labor and Environmental Governance Standards in NAFTA.” Governance Transfer by Regional Organizations. Governance and Limited Statehood Series, edited by Tanja A. Börzel and Vera van Hüllen, Palgrave Macmillan, 2015, pp. 177-191.

Kay, Tamara. NAFTA and the Politics of Labor Transnationalism. Cambridge University Press, 2011.

McBride, James, and Mohammed Aly Sergie. “NAFTA’s Economic Impact.Council of Foreign Relations. 2018. Web.

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Munck, Ronaldo. “Globalization and the Labour Movement: Challenges and Responses.” Global Labour Movement: Challenges and Responses, vol. 1, no. 2, 2010, pp. 218-232.

Ozarow, Daniel. “North American Free Trade Agreement (NAFTA).” America in the World, 1776 to the Present: A Supplement to the Dictionary of American History, edited by Edward J. Blum et al., Charles Scribner’s Sons, 2016, pp. 763-765.

Rizzo, Salvador. “President Trump’s Claims About NAFTA and the U.S. Auto Industry.The Washington Post. 2018. Web.

Salas, Carlos, et al. NAFTA at Seven Its Impact On Workers In All Three Nations. 2001. Web.

Torres, Luis B., and Wesley Miller. Globalization’s Effects on Texas Manufacturing. 2017. Web.

Wen, Yi. “The U.S. Auto Labor Market since NAFTA.Federal Reserve Bank of St. Louis. 2019. Web.

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