Mexico Prepares for New Trade Deal with U.S.
Following the U.S.’s new preliminary trade deal with Mexico a few weeks ago, Mexico’s President Andrés Manuel López Obrador recently announced new legislation to prepare for the agreement’s terms.
For the U.S., the underlying goal of creating a replacement for the North American Free Trade Agreement is to minimize the wage gap between the U.S. and Mexico, hence, reducing the competition for production. Since 2007, records indicate that the highest monthly hourly rate of manufacturing workers in Mexico was $3.60, incentivizing American firms for decades to move their factories across the southern border.
Mexico’s defective collective bargaining system depressed wages for many years, with little possibility to form independent unions.
In order to facilitate the movement towards higher wages, President Obrador is expected to outlaw protectionist agreements, which are usually signed by union leaders and employers without the workers’ consent. President Obrador hopes to accomplish this by compelling unions to prove that they have at least 30 percent of the workers’ permission before signing the collective contracts. According to the Wall Street Journal, “Nine out of 10 collective-bargaining contracts signed in Mexico are agreed without the consent, and sometimes without the knowledge, of a company’s workers.”
President Trump’s administration also insisted as part of the deal that 40 to 45 percent of the auto parts of cars must be manufactured by workers in the U.S. earning at least $16 per hour. These car auto parts are also expected to make up 75 percent of all cars sold in North America, compared to the current requirement of 62 percent.
“Higher wages in Mexico are in the interests of Mexico and the U.S.,” economist Peter Navarro told The Wall Street Journal. “Without this adjustment Mexico will never have a robust middle class, and our middle class will wither if not die.” The full implementation of the deal would boost the wages of Mexican manufacturing workers, labor conditions, and productivity.
The original signing of NAFTA in 1994 had eliminated tariffs between the U.S., Mexico, and Canada. As a result, exports from the U.S. to its two neighbors rose from $142 billion to $525 billion. During this time frame, trade among them quadrupled from $297 billion to $1.17 trillion. No tariffs allowed the U.S. to keep import prices low, and consequently, keep both inflation and the Federal Reserve interest rate low. With the elimination of high tariffs and reduction of trade barriers in most service sectors, the U.S. industries that benefited the most from the original deal were the agriculture, automobiles, and service sector.
However, the U.S. will now have the ability to impose trade sanctions in the case that Mexico aborts to enact the labor reforms.
The deadline to publish the new update to NAFTA is Oct. 1, with Canada’s participation still remaining in question.
President Obrador made a statement to indicate that “... in the event that the governments of the United States and Canada do not come to an agreement … we would have to maintain the bilateral deal with the United States and seek a similar deal with Canada.”
As the deadline approaches, the U.S. and Canada are making slow progress in forming an agreement. There is significant demand from the U.S. for more access to Canada’s protected dairy market, however, the deal is being jeopardized by the threat of auto tariffs that the U.S. insists on including in the agreement’s terms.