Magazine article Business Credit

NAFTA: First Round of Talks

Magazine article Business Credit

NAFTA: First Round of Talks

Article excerpt

About the only thing accomplished in the first round of talks over NAFTA is that everybody now seems to know how tough this is going to be. One would be hard pressed to find common ground among the participants. Now the focus is on determining whether any of these positions are real or just early-stage posturing to appeal to specific constituents. What makes these discussions even more unpredictable is that two of the three leaders have significant political issues to deal with at home. The elections in Mexico are not that far away and the candidates are making their positions known. The threat to the PRI (currently the party in charge with Enrique Peña Nieto as president) is AMLO (Andrés Manuel López Portillo). He is the former mayor of Mexico City and a fiery leftist who has made much of President Trump's alleged hostility toward Mexico. Anything that appears to be giving in to Trumps demands will be a boost for AMLO and his hard-line position. Trump also has to worry about his base. The events in the White House that led to Steve Bannons firing threaten to alienate many of those who have been ardent supporters. Giving in on NAFTA will only further distress this voting bloc.

As expected, the focus of the talks has been manufacturing. The U.S. has been watching a great deal of manufacturing capacity shift to Mexico over the years, especially as far as the auto sector is concerned. The U.S. automakers have been trying to bring their costs down for parts and assembly and have chosen to rely on Mexico more. The migration of the auto sector has been going on for many years as operations have left the industrial Midwest for the southern tier of states and from there to Mexico. At least this is the standard assertion, but the data doesn't really bear this out. U.S. auto production has remained quite stable for over a decade. It is true that Mexican production has increased, but the country that seems to have lost the most productive capacity is Canada. It should also be noted that much of the expanded capacity for auto-related manufacturing in Mexico is from car makers and parts makers from around the world that have set up in Mexico to have better access to the U.S. market. These parts were not likely to be made in the U.S., regardless. Many had been from production facilities in Asia before moving to Mexico. In the long run, it is better for the U.S. economy for Mexico to make these parts because Mexico buys far more from the U.S. than do countries like China or Vietnam or Indonesia.

The U.S. has opened these talks with demands that both Canada and Mexico have rejected out of hand. The content rules put forward by the U.S. have been rejected by the automakers themselves. They assert that the suggested rules would make them uncompetitive-even against imported cars. The U.S. business community as a whole has taken a dim view of the U.S. position as it would severely limit trade. There are far more jobs dependent on imports from Mexico than would be preserved or added by these new rules and regulations. That is the position from most of the business organizations that have weighed in.

As is so often the case, the effort to hold on to U.S. manufacturing in 2017 is a case of too little, too late. The majority of those manufacturers that were seeking lower production costs have already left the U.S. They will not be bringing jobs back to the U.S. even if they elect to return capacity. The cost of labor is too high to compete globally. …

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