Dean Barber

Ride the Tiger

In Site Selection on April 26, 2015 at 3:48 pm

During the 1992 presidential campaign, then candidate Ross Perot, an astute Texas businessman if there ever was one, warned that NAFTA (North American Free Trade Agreement) would create a “giant sucking sound” of jobs going south to the cheap labor markets of Mexico.

There is no question that many companies have turned to Mexico because of its proximity to the United States and because of its substantially lower labor costs, factors that became more enhanced with NAFTA. You don’t have to be Jack Welch to figure that out.

Just in the past couple of weeks alone, three behemoth world-class manufacturers, Toyota, Ford and Goodyear, announced plans to build major facilities in Mexico.

Toyota said it will build a $1 billion plant in the central state of Guanajuato, north of Mexico City, to produce Corollas, while Ford will spend $2.5 billion on new engine and transmission factories in Chihuahua and Guanajuato.

Advantage Mexico

Low labor costs and fewer tariffs gives a huge competitive advantage to Mexico, where eight automakers have opened or announced new plants in the past two years.

A worker in Mexico costs car companies an average of $8 an hour, including wages and benefits. That compares with $58 in the U.S. for General Motors and $38 at Volkswagen’s factory in Tennessee, the lowest hourly cost in the U.S., according to the Center for Automotive Research.

Mexico also trumps the U.S. on free trade. It has agreements with 45 countries, meaning low tariffs for exporting globally. That, along with low labor costs, convinced Audi to build an SUV factory in the state of Puebla.

Audi will save $6,000 per vehicle in tariffs when it ships a Q5 to Europe, compared with building the same vehicle in the U.S., says Sean McAlinden, chief economist at CAR.

What Does Volvo Know?

So these substantial cost advantage factors in favor of Mexico, both in terms of labor and tariffs, have to make me wonder why Volvo is centering its focus on South Carolina and/or Georgia for a new $500 million plant. What does this company know that the other automakers don’t know?

Mind you, I would be gratified if Volvo does build in the U.S. Both Georgia and South Carolina have good business climates in comparison to many other states. But I still fail to see the rationale.

Some would counter with the answer of quality or transportation costs. Based on what the industry is doing, not saying, I believe quality is now largely a moot point. The automakers are getting the quality they want, and even luxury models are planned for production in Mexico.

In terms of transportation costs, I think it is safe to say that such costs do not offset or exceed the savings offered by lower labor rates and the NAFTA agreement afforded to Mexico.

Was Perot Right?

But between 1994 and 2000, the U.S. economy created 2 million jobs annually, despite NAFTA.

The truth is that both exports and imports are good for just about every country in the world. Exports typically create better-paying manufacturing jobs while, imports give consumers more choice at lower cost, and they force competing domestic firms to improve their game.

There is no question in my mind that Detroit had gotten lazy and complacent and was turning out pretty crappy products in the 1970s and 80s. Slowly, the Big Three began to realize that Japanese automakers were for real and were not going away.

In short, Detroit had to up its game to survive. (But that’s another story for another day.)

Battling a Ghost

Today, President Obama finds himself battling the ghost of NAFTA in his desire to pass legislation in Congress ratifying the Trans-Pacific Partnership, an agreement, among 12 nations bordering the Pacific, aimed at reducing trade barriers and promoting greater economic cooperation

Obama says that critics of TPP — primarily organized labor, most Democrats and environmental groups – are wrong to see the proposed trade agreement as another NAFTA. The president argues that unlike NAFTA, TPP would compel other countries to adopt enforceable labor standards, leveling the playing field and opening them up to U.S. exports — creating more U.S. jobs.

“When I listen to criticism of this deal, what I primarily hear is criticism of NAFTA,” Obama said. “If you don’t like the fact that labor provisions aren’t enforceable right now, why wouldn’t you want a trade deal that makes labor provisions enforceable with some of the same countries we currently trade with?”

Said the president to a group of supports last week: “You need to tell me what’s wrong with this trade agreement, not one that was passed 25 years ago.”

Strange Bedfellows

It is interesting to note that the president is getting most of his support on TPP from Republicans and the nation’s business community, although not all are in lockstep by any means.

Kevin L. Kearns, president of the U.S. Business & Industry Council, opposes TPP, calling the proposed agreement “another giant step in the industry-by-industry giveaway of American manufacturing,” while the National Association of Manufacturers and the U.S. Chamber of Commerce supports the ratification of TPP.

The way I see it, the Asia-Pacific region is a tiger we’re going to have to ride. For the U.S. not to do so will be to our competitive disadvantage.

I say this because, according to the International Monetary Fund, the world economy will grow by $21.6 trillion over the next five years. Nearly half of that growth will be in Asia, where the region’s middle class has grown by 2 billion people in the past 20 years.

On the Outside Looking In

This a lucrative market to say the least, but U.S. companies have lost market share in the Asia-Pacific region because many countries maintain steep barriers against U.S. goods.

Trade agreements, if they are done right, are crafted to overcome these barriers. However, Asia-Pacific nations are clinching trade deals among themselves that threaten to leave the U.S. on the outside looking in.

The number of trade accords between Asian countries surged from three in 2000 to more than 50 today, with some 80 more in the pipeline.

Meanwhile, the U.S. has just three trade agreements in Asia, with Australia, Singapore and South Korea.

Remember, one of the main reasons that Audi cited for picking Mexico over the U.S. for its future new assembly plant was because Mexico had twice as many free trade agreements in place with other countries than the U.S.

Now I would be lying to you if I told you that I knew the intricacies of TPP. I don’t and I bet very few people do.

But I do believe that free trade agreements in principle, if negotiated right, can benefit U.S. companies by opening up potential new markets to them, thereby creating U.S. jobs. A study by the Peterson Institute for International Economics estimates that TPP could boost U.S. exports by $124 billion by 2025.

So let’s try to ride this tiger.

I’ll see you down the road.

Dean Barber is the president/CEO of Barber Business Advisors, LLC, a location advisory and economic development consulting firm based in Plano, Texas. He can be reached at dbarber@barberadvisors.com or at 972-767-9518. If you liked what you read here, invite him to speak at your next meeting.

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  1. Well said, Dean. I remember back in the 90s when the NAFTA was just being discussed and GE opened a turbine plant in Mexico – anticipating the new deal. But customers started calling the products “taco wraps” because there was such a high defect rate. But with automation came quality control and the problem disappeared. It would be interesting to compare – not the wages – but the contribution of human input into the products – compared to say 20 years ago – and the share of the various categories of employment… How many techs, compared to assembly line, admin, etc.

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