It is no secret that the wage gap between Mexico and China has been narrowing in recent years. While labour costs in China were roughly 200 per cent lower than those in Mexico a decade ago, wage inflation in China and wage stagnation in Mexico have combined to close the gap to nearly zero .
But could labour in Mexico now actually be CHEAPER than in China? Yes, according to Carlos Capistran, an economist at Bank of America Merrill Lynch. Not only are average hourly manufacturing wages in Mexico now lower than those in China in constant dollar terms, they are 20 per cent less.
Here’s the chart from Capistran’s note to clients on Thursday:
But is this necessarily a good thing for Mexico?
True, stagnant salaries over the past decade have been credited with reviving Mexico’s manufacturing sector, which was hard hit by China’s entry on to the world stage following membership into the World Trade Organisation in 2001.
A study by Barclays last year reckoned that the rise of China as the “world’s factory floor” chipped about 60 basis points off Mexico’s gross-domestic-product growth every year between 2002 and 2006. Some of the biggest casualties in Mexico’s manufacturing sector were textiles, clothing and shoes.
And now thanks to soaring wages in China, high transportation costs and the steady recovery seen in the US economy, the tide is turning back in Mexico’s favour.
As Capistran explained:
Mexico has been able to regain participation in the US market since the Great Recession and the international financial crisis. Part of the gain has been against China: from 2007 to 2012, China gained 1pp in market share, compared to 7.5pp between 2001 and 2007, while Mexico gained 1.6pp, compared to -0.74pp between 2001 and 2007. A larger share of the US market positions Mexico better to benefit from the US recovery. In our view, an important force behind this trend is Mexico’s hourly wages are 19.6% cheaper than those of China.
Optimism over Mexico’s growth prospects has made the country a darling among international investors. Some $80bn of foreign investment were poured into the country’s stocks and bonds last year, compared with the $16.5bn received by Brazil. Mexico’s stock market hit a record high earlier this year and banks ranging from Spain’s BBVA to the US’s JP Morgan have been busy bulking up their operations there.
Yet what about the human costs of wage stagnation?
Minimum wage in Mexico today is about 60 cents an hour, while average pay in manufacturing is only about $4.50 an hour. This compares to the $6.27 paid in Brazil.
During my visit [to Mexico City], I found widespread skepticism in the local media, and among Mexicans in general, about the sudden international love affair with Mexico.
“After so many years of mediocre economic growth, there is a lingering mood of frustration,” pollster Ulises Beltran, head of the BGC polling firm, told me.
In Brazil, falling unemployment and wage increases have helped millions rise out of poverty and spark a domestic spending boom.
By contrast, in Mexico, wage stagnation, under-employment and inflation have eroded the income level of some 31m Mexicans, according to Jose Luis de la Cruz, an economist and director of the Center for Research on the Economy and Business at the Mexico state campus of Monterrey Tech. And he reckoned that as many as 60m people are living below the poverty line. This in a nation of 113m.
As Luis de la Calle, a former Mexican government official who helped negotiate the North American Free Trade Agreement recently told the New York Times:
We need to increase wages to become a true modern country.
For now, banks and investors are happy to just focus on Mexico’s positive macoeconomic numbers.
Capistran from BoA said he expected Mexico to keep its competitive edge as a result of its demographic boom – which will see a young, growing labour force keep a lid on wage increases – and productivity gains.
From BoA:
Despite the appreciation we expect, Mexico’s competitiveness will continue through almost flat ULCs in dollar terms due to the positive effects of a demographic boom and productivity gains in manufacturing and potentially, in services. This underpins the upside revision to our GDP forecast to 4% from 3.5% for 2014 and is one of the reasons we see an increasing potential growth.
So more good news for investors. But less so perhaps for the Mexican labourer who’s toiling away in a factory somewhere for 60 cents an hour.
David Agren, Special for USA TODAY 9:33p.m. EDT March 18, 2013
MEXICO CITY — Robert Moser moved the manufacturing of his company’s lines of cleaning products and kitchen gadgets to China during the last decade. Now his company is moving its manufacturing again — to Mexico.
“When you look at total costs, you’re pretty much at parity,” says Moser, president of Casabella, based in Congers, N.Y.
Companies like Casabella couldn’t move out of Mexico fast enough a decade ago, sending production to China to take advantage of the cheaper wages and prices in a country keeping its currency artificially low.
But the cost of doing business in China has been rising steadily, say companies that have returned to Mexico. Salaries are surging there. The Chinese currency, the yuan, has risen in value, making goods more expensive to export. Shipping costs have risen as well, making a move to Mexico even more attractive to companies whose primary markets are in the Western hemisphere.
The Mexican peso this week rallied on optimism about the country’s economic prospects following an unexpected rate cut last week. The peso has risen 2.8% in 2013.
Recently installed President Enrique Pena Nieto, meanwhile, has promised changes to Mexico’s tax system and reforms of its government-run energy sector to attract more outside investors and businesses from the USA and elsewhere.
“Mexico is a stable country, close by, but unfortunately with cheap wages,” says Eduardo Garcia, publisher of online business journal Sentido Común.
Wages were six times higher in Mexico a decade ago, but only 40% higher than those paid in China in 2011, according to a recent report by the International Monetary Fund. Mexico is part of more than 40 free trade agreements, which tends to reduce costs further. Then there is the weariness of doing business in China what with the midnight telephone conferences and 16-hour flights to Beijing — says Ed Juline, whose Guadalajara-based company, Mexico Representation, consults and represents manufacturers moving to Mexico.
“I have a dozen projects on my plate” of companies that want to get out of China, Juline says.
The upswing in manufacturing — about 20% of Mexico’s GDP — is driving the Mexican economy. Mexico says it expects its economy to expand by 3.5% in 2013.
It’s a reversal of fortune for Mexico, which lost manufacturing jobs to China during the last decade and watched rival Brazil boom by selling boatloads of raw materials to the emerging Asian economy.
“Mexico was uncompetitive,” Juline says.
But China was gaming the system against places such as Mexico, he says. Along with keeping its currency low, China has subsidized fixed costs to benefit its commercial activity, which hurt Mexico, he says.
Meanwhile, lead times for Chinese factories are increasing and manufacturers there are showing less interest in handling smaller orders, says Mike Rosales, whose Los Angeles-based company, Manufacturing Marvel, makes toys and trinkets in both China and Mexico.
Rosales says that shipping costs for him jumped when oil prices hit $100 a barrel, and the lack of protection in China for industrial and intellectual property became problematic.
“They would ship your product out the front and your product with someone else’s name out the back,” he says.
Some of the merchandise being made in Mexico ranges from figurines to flat-screen TVs, along with advanced items such as aerospace parts and automobiles — 2.8 million of which were assembled south of the border last year.
Some here say more manufacturing in Mexico benefits U.S. businesses because it offers them suppliers on both sides of the border. Jim Raptes, custom sales manager at Deco Products, which makes zinc castings in Decorah, Iowa, says his Mexican business has increased from 1% of total sales to 10% over the past five years, due to orders from manufacturers in Mexico.
Security remains a concern in Mexico, Juline says. But he feels the violence, due largely to drug wars, has given few companies pause about coming south.
Executives won’t travel to Mexico, he says. “But the Americans who do come down here secretly love it.”
That boom coming from North America’s southernmost state isn’t just gunfire
by David Agren on Monday, March 18, 2013 11:50am
Mario Armas/AP
A new truck rolls off the assembly line every minute at the GM factory in the conservative Catholic heartland of Mexico’s Guanajuato state. The factory in Silao, set in the shadow of a giant Christ statue considered the geographic centre of the country, produces so many trucks that GM has expanded its workforce by more than 60 per cent since 2008 and has plans to hire even more. The nearby Volkswagen plant just opened a $550-million engine plant and Toyota has announced plans for a facility down the road.
Manufacturing activity is mushrooming across Mexico, mirroring an upswing in the overall economy. The country produced more than 2.8 million cars last year, while factories in border towns like Tijuana and Ciudad Juárez churn out everything from plastic toys to plasma TVs. Manufacturing is now moving back from China—almost as fast as it fled Mexico a dozen years ago—as Asian salaries and shipping costs continue to rise. “This has nothing to do with Mexico,” Ed Juline, head of Guadalajara-based Mexico Representation, a business consultancy, says of the trend. “It has everything to do with China.”
Ten years ago, wages in Mexico were six times higher than those paid in China, but the gap had narrowed to 40 per cent by 2011, according to an International Monetary Fund report. Geography also works in the country’s favour, as companies take advantage of its easy access to U.S. and Latin American markets, where economies are expanding, demanding Mexico’s autos, appliances and advanced electronics.
But manufacturing is just one part of the picture, as Mexico moves from mess to can’t-miss status, the hottest of the emerging markets. “This is Mexico’s moment,” said new President Enrique Peña Nieto, summing up the sentiment at his December inauguration. Indeed, the Mexican government is projecting growth of 3.5 per cent this year—better than Brazil, which investors are suddenly bearish on after a decade of adulation. In Brazil, a credit bubble appears set to burst and demand for its commodities is diminishing.
The scenario has created a collective giddiness among elites and investors unseen since the early 1990s, when Mexico prepared to enter NAFTA and appeared poised for First World status, only to suffer a calamitous peso crash. Last year, investors poured $80 billion into Mexican securities—five times more than went to Brazil, according to the Banco de México. But external factors also benefit Mexico, especially as the BRIC countries lose their lustre.“Brazil is a mess,” says Manuel Molano, adjunct-director of the Mexican Institute for Competitiveness, a Mexico City think tank, “China is decelerating, India’s growth has been stalled for three years, Russia is nothing special.”
Peña Nieto is pledging structural reforms to the energy, tax and social security systems—measures his party previously opposed. The reforms, he says, will generate six per cent economic growth, tripling the rate of the past dozen years. He’s formed a pact among the three main political parties to pursue his agenda and has already struck deals to overhaul labour laws and an education system that allowed teachers to sell their positions like personal property. “He’s a smart political negotiator,” says Molano. His administration is “resourceful in convincing people.”
The story doesn’t begin with Peña Nieto. For three decades, government policies have been geared to suppressing spending and controlling inflation that had climbed to triple digits. The central bank’s interest rate and inflation both now hover around four per cent, while central government debt is low, amounting to approximately 28 per cent of GDP. (It’s around 36 per cent in Canada.)
Remarkably, the raging drug war has done little to dampen enthusiasm for Mexico. “A pile of 49 headless human bodies on a roadside is apparently less scary than an interest rate cut,” says Ulysses de la Torre, a blogger who focuses on emerging markets.
How much the “boom” benefits average Mexicans remains to be seen. Almost half (46 per cent) say their economic condition actually deteriorated over the previous year, according to a recent poll, and many expect little improvement in the short term, says Federico Berrueto, director general of polling firm Gabinete de Comunicación Estratégica. Fully 59 per cent of Mexicans now work in the informal economy. “The average person sees unemployment, that ends don’t meet, that their salary is low,” says Berrueto. When compared to the perspective of international investors, “it’s two distinct worlds.”
China lost its factory wage advantage over Mexico earlier this year, an ongoing trend that has fueled Mexican economic growth past its neighbors to the north and south.
But whether Mexico can maintain that momentum may depend on how much political will President-elect Enrique Pena Nieto has in pursuing reforms that challenge special interests.
In 2005, China’s productivity-adjusted manufacturing wage advantage over Mexico was $1.22 an hour, but that narrowed to 34 cents in 2010, according to the Boston Consulting Group. They switched places this year, and Mexico’s wage advantage is estimated to widen to $1.75 by 2015.
Fast-rising Chinese labor costs are prompting companies to “reshore” production back to Mexico and the U.S., where transportation and other logistical costs are lower.
“Mexico is going to be a big winner in reshoring,” said Hal Sirkin, managing director at Boston Consulting Group, though not as big as the U.S. will be.
Rio Grande Vs. Rio
U.S. exports have helped Mexico outpace economic growth in Brazil after lagging for years. In 2011, gross domestic product expanded by 3.9% vs. 2.7% in Brazil. In Q1 2012, Mexico grew 4.6% vs. a year earlier against Brazil’s scant 0.8%. That was also significantly faster than the U.S.
Mexico’s economy could top Brazil’s by 2022, helped by manufacturing, Nomura analysts predict. Mexico is benefiting from its reliance on the U.S., where manufacturing has recovered, while Brazil sees less commodity demand from China.
Media coverage of gruesome drug violence hasn’t deterred companies like Alcoa (AA) from expanding plants or Nissan (NSANY) from moving production there.
Mexico is once again reaping the benefits of the 1994 NAFTA pact with the U.S. and Canada. Manufacturing production has leapt to new highs, after a lull in much of the last decade when companies rushed into China. Mexico’s auto production from January to July rose 13% from a year ago to a 1.65 million vehicles, a record for that period.
But several obstacles to Mexico’s continued growth remain.
The amount of production Mexico can absorb from China will be limited by the availability of skilled workers, infrastructure, supplier networks and safety concerns, Sirkin says.
Mexico will still get higher-end production, like transportation equipment and machinery, and stands to capture a substantial amount from China, he said. But about three-fourths of the manufacturing reshored from China will flow to the U.S. in the next decade.
Mexico Still Has Problems
China will still enjoy a more flexible labor market, where workers can more easily be added or cut, notes Peter Morici, a University of Maryland economist.
Chinese factories can also quickly ramp up production and revamp work schedules to meet client deadlines, while Mexican unions limit such flexibility. But proximity to the U.S. gives Mexico an edge in just-in-time manufacturing, as shipping from China can take 3-6 times longer.
Government corruption in Mexico is another disadvantage, especially given the country’s infrastructure needs. Corruption is a problem in China too, but at least its government is more efficient, Morici added.
“It’s going to take more than wage parity,” he said. “Mexico is having a lot of trouble getting its act together.”
While China’s wage advantage is disappearing, Mexico’s regulatory edge over other emerging markets is shrinking too, says Tom Fullerton, an economics professor at the University of Texas at El Paso.
Red tape for businesses and labor inflexibility are Mexico’s biggest weaknesses, and there isn’t much chance for improvement, he said.
The incoming president’s Institutional Revolutionary Party has a bad record of deregulation, as interest groups in the PRI have blocked prior reforms. That could benefit China and India, which are “making progress toward parity with Mexico,” Fullerton said.
Still, hopes are high for Nieto, who has pledged to allow more private investment in the state-run oil industry, overhaul the tax code to raise government revenue and liberalize labor laws.
Russell Investments’ index of Mexican stocks topped an all-time high Monday, reflecting a 20.5% return so far this year vs. 8.9% for its global index.
“The run-up in the performance of the Russell Mexico Index is largely due to optimism around President-elect Enrique Pena Nieto giving indications of market reforms,” said Mat Lystra, senior research analyst with Russell Indexes, in a statement.
Julio Don Juan makes $400 a month at a noisy, cramped Mexico City call center. Without a raise in three years, he says he had to pull his 7-year-old son out of a special-needs school he can no longer afford.
In some places he might seek another job. Not in Mexico, where wages after inflation have risen at an annual pace of 0.4 percent since 2005 — worse than other nations in the region including Brazil, Colombia and Uruguay, according to the International Labour Organization. Close to a third of Mexicans toil in the informal economy without steady income. Julio Don Juan says many would envy him.
The cheap labor that is helping Mexico surpass China as a low-cost supplier of manufacturing goods to the U.S. — and lured companies including Nissan Motor Co. (7201) — has restrained progress for many of the country’s 112 million citizens. While Enrique Pena Nieto, the front-runner in polls to capture the July 1 presidential vote, has said wages are too low, whoever wins confronts the challenge of boosting workers’ incomes but not so much that assembly lines leave for other markets.
“The trick isn’t only to pay better salaries, it’s to make raises more sustainable,” said Sergio Luna, chief economist at Citigroup Inc.’s Banamex unit in Mexico City. “We have to be more productive, but it won’t be easy because it implies changing the status quo.”
Mexico’s low wages, cheap peso and surging auto shipments to the U.S. — which buys 80 percent of its exports — have increased manufacturing competitiveness during the past decade as labor costs in China and Japan have risen.
Sounder Footing
This has put Mexico’s economy on a sounder footing than Brazil’s to weather a prolonged global downturn. After trailing growth in Latin America’s biggest economy during the past decade — and watching as a commodities boom allowed Brazil to increase wages an annual average 3.4 percent above inflation from 2005 to 2011 — Mexico is poised to outperform Brazil for the second consecutive year.
President Felipe Calderon’s government forecasts gross domestic product will expand 3.5 percent this year and says exports will probably surpass a 2011 record of $350 billion. By contrast, Brazil will grow around 2.5 percent, according to a central bank survey of economists this month.
“A changing of the guard is slowly but surely taking place,” Nomura Holdings Inc. (8604) analysts wrote in a May report. “Ten years from now, we are confident that Mexico will likely be seen as having become the most dynamic economy in the region.”
Trade Agreements
Low wages aren’t Mexico’s only attraction: Inflation that reached 180 percent in 1988 has been kept under control by a central bank that since January 2010 has been under the stewardship of Agustin Carstens. The former deputy managing director of the International Monetary Fund has kept the benchmark rate at 4.5 percent since taking office, helping to fuel a rally in government bonds.
Investors also benefit from laws that limit the government deficit and trade accords with more than 30 nations, including the North American Free Trade Agreement with the U.S. and Canada. Mexico also offers savings for companies that want to be closer to American consumers, after a tripling of oil prices in the past decade raised transportation costs for Asian manufacturers.
Nissan, Japan’s second-largest automaker, shifted production of low-cost cars to Thailand and Mexico in recent years to counter losses as the yen appreciated, while Mexico’s peso slumped 18 percent in the past six years against the U.S. dollar. The company’s Mexican output hit a record 607,087 cars and light-duty trucks last year, rising 20 percent from 2010.
The latest company to expand operations is Plantronics Inc. (PLT) (PLT), which this month announced a $30 million investment after closing its plant in China as wages began rising there, said Cesar Lopez Ramos, the company’s Mexico legal representative.
Human Capital
Mexico has proven more attractive for the Santa Cruz, California-based headset maker because of its steady wages and “human capital that is more developed and capable of not only making products but innovating,” Lopez Ramos said in a telephone interview from Tijuana.
Some Mexicans criticize Calderon’s National Action Party, or PAN, for not spreading the benefits of economic stability more widely during 12 years of rule. In the absence of a stronger domestic market, jobs remain heavily dependent on U.S. consumers and foreign-operated assembly plants, known as maquiladoras. Unemployment, currently at 4.9 percent, has been more than double a 2000 low of 2.2 percent since 2009.
“We’re scraping by,” said Julio Don Juan, 37, the call- center worker. “Because costs keep rising, I’m actually getting a pay cut each year, rather than a raise.” He lives with his parents, who help him care for his son.
Low Inflation
Economy Minister Bruno Ferrari says that low inflation and expanded social programs have reduced poverty during the past dozen years and stemmed declines in purchasing power from previous decades, he told reporters May 8 in Mexico City. The share of Mexicans suffering from food poverty — lack of access to healthy, nutritious meals — fell to 19 percent in 2010 from 24 percent in 2000, according to government data.
A press official from the Mexican finance ministry didn’t respond to a request for comment.
Partly as a result of muted wage growth, Mexico’s per- capita GDP has risen 48 percent since 1999 on a purchasing- power-parity basis, the least among Latin America’s seven biggest economies, according to the IMF. By comparison, Venezuela climbed 51 percent, Brazil increased 73 percent and Peru more than doubled.
Time Lost
The lack of opportunities has spurred an exodus of 12 million Mexicans to the U.S. in the past four decades, more than half illegally, according to a study published in April by the Washington-based Pew Research Center. While net migration dropped to zero between 2005 and 2010, and some Mexican immigrants may be returning home because of the weak U.S. job market, departures northward could resume if the U.S. expansion picks up, Pew said.
“We need to make up for time lost over the past four or five years in the area of employment and salaries,” former President Vicente Fox, of Calderon’s PAN party, said in a May 2 interview in Mexico City. “The challenge for the next government is very big.”
Dissatisfaction with the economy is propelling Pena Nieto’s bid to return his Institutional Revolutionary Party, or PRI, to power for the first time since Fox ended its 71-year reign in 2000. The 45-year-old former governor of Mexico state had 37.2 percent support in a June 8-10 poll by Consulta Mitofsky, compared with 25.1 percent for Andres Manuel Lopez Obrador, who narrowly lost to Calderon in 2006, and 21 percent for Josefina Vazquez Mota of the PAN.
Raise Salaries
If elected, Pena Nieto says he’ll raise salaries gradually, by improving productivity. To do so, he promises to support legislation making it easier to hire and fire workers, luring more companies into the formal economy where they can take out loans more easily and make investments. He also favors ending state-run Petroleos Mexicanos’ monopoly; revenue for Latin America’s largest oil producer funds about a third of Mexico’s public budget.
“In no way are we willing to sustain Mexico’s competitiveness through low salaries, nor can we raise salaries artificially through populist measures,” Luis Videgaray, Pena Nieto’s campaign manager and his finance chief when the candidate was governor, said in a May 30 interview. “The only way to increase productivity is through reforms.”
Pena Nieto’s rivals say he isn’t capable of bringing about the change he promises and returning the PRI to power would reignite corruption that blossomed under its previous rule.
Poor Performance
Boosting Mexico’s productivity won’t be easy, given the poor performance of the country’s schools and the size of its underground economy, which the government says employs 29 percent of the workforce.
The nation’s education system ranks last out of 34 countries for enrolled high school-age students, behind regional rivals Chile, Argentina and Brazil, according to a 2011 study by the Paris-based Organization for Economic Cooperation and Development. The study included non-OECD members.
Improving education and generating better-paying jobs may also help the next government turn the tide in the battle against the nation’s drug cartels. A bloody turf war between rival gangs has claimed more than 47,000 lives since Calderon took office in 2006 and the government estimates that the drug war shaves 1.2 percentage points off economic output annually.
Skill Shortages
Delphi Automotive Plc (DLPH) (DLPH), the former parts unit of General Motors Co. (GM) (GM), has been addressing the skilled-labor shortage by training engineering students at its factories in the border city of Ciudad Juarez. About half of the Troy, Michigan-based company’s global workforce of 101,000 is employed in its 46 Mexico plants, compared with less than 30 percent in China.
While wages for some engineering jobs are rising, Delphi isn’t concerned that salaries will spike anytime soon, said Enrique Calvillo, the company’s human-resources manager in Mexico.
“We are always monitoring this, and we don’t see the possibility of an extreme boom in the next two or three years,” he said in a telephone interview from Ciudad Juarez.
That’s bad news for Antonio Chavero, who makes less than $1,000 a month as an engineering supervisor with three decades of experience in the car industry and who works at a parts plant in the central state of Queretaro. While he does metalwork in his basement to supplement his income and support his daughter, who is a teenage mother, his family still doesn’t earn enough to eat meat more than once a week, he said.
“I supervise 15 workers,” Chavero said. “I should be making more money.”
Good news for Latin America: wages in China, Vietnam and other Asian countries are rising faster than expected, leading growing numbers of multinational firms to move their manufacturing plants to Mexico and other countries closer to the U.S. market.The Feb. 19 announcement by Foxconn Technology Group, which assembles iPads and other products for Apple, Dell, Nokia, Motorola and other firms in China, that it has raised pay for its workers by 16 to 25 percent was just the latest example of how fast Chinese salaries are rising. It was Foxconn’s third wage hike since 2010.
“More and more companies are telling us that wages are rising faster than they expected,” says Harold Sirkin, managing partner of the Boston Consulting Group, which recently published a study on China’s wages.
“The quality of the workforce in China is highly competitive,” Sirkin added. “People have options to go to other factories, and they do, which is why companies are forced to raise wages.”
According to BCG projections, China’s wages in the Yangtze river delta technology belt have risen from 72 cents an hour in 2000, to $2.79 cents in 2010, and are expected to reach $6.31 in 2015.
And the trend is likely to continue beyond 2015. A growing appreciation of the Chinese currency, higher education standards and a declining workforce will drive Chinese salaries up for decades to come, economists say.
A new joint report by the World Bank and China’s government-run Development Research Center, entitled “China 2030,” says China’s labor force “will start to shrink from around 2015, initially slowly but faster from the 2020s, and is projected to be 15 percent smaller than at its peak by 2050.”
That is because, among other reasons, the population is getting older, Chinese workers tend to work fewer years than their counterparts in other countries, and the supply of rural workers moving to the cities is drying up, the report says.
Even if China were to further relax its one-child policy, things would not change much, because Chinese women are not likely to have more babies, it says. Fertility rates in countries such as Japan, South Korea and Vietnam are not significantly higher than China’s, and suggest that China’s average rate of children per couple — now at 1.5 — will remain stable “even if the (one-child) policy were eliminated,” it says.
In Vietnam and India, wages are rising at an even faster pace. That will present a fantastic opportunity for Latin American countries to attract technology companies and service industries that help produce long-term growth, economists say.
Most multinational companies will maintain plants in China to serve the local market and neighboring countries in Asia, but will move their export-oriented plants to other parts of the world, they add.
While in 2002 China’s average wage was 237 percent lower than Mexico’s, by 2010 it was only 14 percent lower, a recent study by the J.P. Morgan investment bank said. Because of Mexico’s proximity to the U.S. market, many U.S. car companies and other manufacturing industries are moving from China to Mexico, the study said.
Augusto de la Torre, the World Bank’s chief analyst for Latin America, told me that many Latin American countries’ labor forces may already be too expensive and not skilled enough to draw manufacturing plants away from China, but added that Latin America can benefit in other ways from China’s rising wages.
As China’s population becomes wealthier, it will import more consumer goods, entertainment, health and education services. “Latin American countries need to find a niche in supplying that demand on the basis of higher productivity, rather than on the basis of cheap labor,” he said.
My opinion: Either way, Asia’s rising wages present a fabulous opportunity for Latin America.
But to lure foreign manufacturing plants and to export increasingly sophisticated goods and services to China, Mexico and Central America will have to reduce their violence rates, and all Latin American countries will have to dramatically improve their education systems, which nowadays lag far behind those of their Asian competitors.
Granted, these are major challenges. But Latin American countries that realize the golden opportunity they have thanks to Asia’s rising wages and take advantage of it will do great in coming decades.
Read more here: http://www.miamiherald.com/2012/03/03/v-print/2672086/chinas-wage-hikes-could-benefit.html#storylink=cpy
President Obama reports that free trade agreements (FTAs) with Panama, Colombia, and South Korea should be enacted by the end of the year
In the past, FTAs such as NAFTA have prompted the outsourcing of U.S. jobs, in spite of Washington’s claims to the contrary, causing unemployment in the U.S. and deleterious working conditions in low-wage jobs in partner states abroad
Maquiladoras, whose proliferation under liberalized trade policies fostered the creation of NAFTA, provide a disturbing example of detrimental working conditions laborers face under FTAs
Neither U.S. unemployment, nor the success of overseas industry sectors, such as maquiladoras, can be used as an excuse to justify the passage of FTAs as a solution to the current North American economic crisis
In a section of President Obama’s address to Congress that received relatively little attention, he observed that “it’s time to clear the way for a series of trade agreements that would make it easier for American companies to sell their products in Panama, Colombia, and South Korea… If Americans can buy Kias and Hyundais, I want to see folks in South Korea driving Fords and Chevys and Chryslers.”[1] Obama followed his speech with a press conference, which asserted that the free trade agreements (FTAs) should be passed by the end of the year. He did not mention the disturbing thought that FTAs traditionally have prompted U.S. companies to transfer their manufacturing processes to countries with lower wages, rather than noticeably creating jobs in this country.[2] While proponents of free trade often cite the creation of U.S. jobs in export-oriented industries, the U.S. is at least as likely to import products from overseas countries where manufacturing and labor costs tend to be cheaper.
In fact, these imbalances typically have created a large trade deficit under the North American Free Trade Agreement (NAFTA) among the three signatories: the U.S., Mexico, and Canada.[3] NAFTA already has greatly increased the rate at which U.S. corporations have used both factory shutdowns and the threat of closure of additional facilities as anti-union strategies. This process also has prompted the outsourcing of U.S. jobs to Mexico as manufactured goods flowed from south to north.[4] Overall, the Economic Policy Institute has estimated that NAFTA has cost the U.S. some 879,280 production jobs, “contributed to rising income inequality, suppressed real wages for production workers… and reduced fringe benefits,” which, all-told, has proved woefully detrimental to U.S. workers.[5]
Proposed Free Trade Agreements and Overseas Jobs
By considering these new free trade pacts, President Obama is not only preparing the groundwork for massive job losses at home, but is also maintaining a long tradition of ignoring both the escalating job-drain and detrimental working conditions abroad, which together create a “hemispheric race to the bottom.”[6]
Maquiladoras, a distinct group of foreign-owned manufacturing and processing plants physically located in Mexico but exporting their products abroad, were the original poster children for free trade.[7] In maquiladora manufacturing, the Mexican authorities allowed raw materials to be imported to their country duty-free while lifting export tariffs on finished products. Maquiladoras, also known as maquilas, technically bypassed the Mexican economy, halting within it only to take advantage of low labor costs.[8] Implemented in 1965, the Mexican maquiladora program was one of the first informal free trade agreements worked out with the U.S., and the revenues it generated for businesspeople in both countries helped prompt the creation of NAFTA. Maquilas, therefore, “presaged” free trade policies such as NAFTA while contributing to maquiladorization, or the spread of maquila-like trade liberalization policies and flexible labor usage to other segments of the Mexican economy.[9] These specialized factories exemplified the effects of free trade policies on export-oriented production, suggesting that future FTAs may have similar effects across the globe.
In response to each of the periodic economic crises that have affected Mexico, the maquila-related free trade strategy implemented by the Mexican state included the devaluation of the peso, which ended up allowing the maquiladora industry to grow profusely. The working conditions to be found in maquilas, however, have not markedly improved. In 2006, after the maquila program was folded into the Maquiladora Manufacturing Industry and Export Services (IMMEX) program— which included both Mexican and foreign-owned export-manufacturing plants— statistics regarding these two types of plants were aggregated.[10] It is thus difficult to assess how the current financial crisis and the resultant economic policies have affected the foreign-owned maquila industry. The results of the maquiladora program as an experiment in free trade policies, however, are clear: the detrimental labor conditions and low wages found at many maquiladoras demonstrate that free trade policies are not a reasonable answer to economic crises at home or abroad.
The Pattern of Mexican Maquiladoras: In Crises, Free Trade Policies Fuel the Factories
The recent history of Mexican maquiladoras follows a distinct pattern: first, an economic crisis occurs; then, the state devalues the peso, liberalizes maquilaregulations and trade policies, and finally, the maquilas grow. Maquiladoras are thus inherently countercyclical in that many indicators of their success, including their proliferation as well as growth in employment and hourly earnings, closely follow major economic crises and patterns regarding recessions in Mexican history rather than following periods of growth. Their success, however, is not only tied to these events, but to the free trade policies that followed these crises.[11]
Although maquilas predate Mexican neoliberalism and the creation of NAFTA by a number of years, the neoliberal free trade policies adopted following economic crises have led directly to their proliferation and growing importance in the country’s economy. This maquiladorization suggests that production sites with maquila-like working conditions could grow rapidly in other countries as they sign FTAs with the U.S.
The 1981-1982 economic crisis became the key turning point in maquila history. Dollar wages rose much faster in Mexico during this period than in other countries of the Global South, and many foreign corporations threatened to close their factories.[12] The government’s subsequent peso devaluation slashed both the dollar wages paid by firms and the real wages received by workers (in pesos); wages as a percentage of operating costs also fell from 25 to 17 percent.[13] The new neoliberal government quickly made maquilas an official “priority sector,” after which they immediately began their boom. In 1982, their growth rate jumped from 9.5 to 17.5 percent, and 1983 saw the biggest rise in maquila employment yet.[14] Growth in plant size and productivity also ensued; wages as a share of value added fell rapidly.[15] This unprecedented transformation in the function of the maquila sector occurred because of policy changes under the new government, even as the rest of the country fell into a long and deep recession. The quick growth of this low-wage sector of industry during a recession suggests that FTAs will continue to produce similar “solutions” to the globe’s current economic crisis.
Trade liberalization policies affecting maquiladoras continued to proliferate after the 1982 crisis, as was the case of the maquilas themselves. In 1983, President Miguel de la Madrid (1982-1988) passed a new National Development Plan focusing on trade liberalization and established a new agreement with the International Monetary Fund (IMF). He also wrote a new decree on the maquiladoras, altering the laws to facilitate the creation and operation of the specialized factories.[16] Furthermore, Mexico liberalized its laws to allow 100 percent foreign ownership of these firms.[17]
Between 1994 and 1995, as a financial crisis once again was striking the Mexican economy, the state devalued the peso a third time and accepted a USD 17.8 billion IMF stand-by credit, the largest of its kind to any country at the time.[18] Real maquila wages fell significantly, and the maquiladora growth rate proceeded to witness a boom in terms of both number of plants and the magnitude of employment.[19] Economist Paul Cooney reported that “in stark contrast to the -6.2 percent growth rate for the overall Mexican economy, the maquiladora industry expanded by 30 percent in 1995.”[20] The 1994-1995 recession was thus a dramatic instance of the maquiladoras‘ positive response to trade liberalization policies following Mexico’s economic crises. The remarkable booms in this sector were a huge success for U.S. corporations as well as for some Mexican businesspeople, and played a decisive role in convincing the North American nations to rush into enacting NAFTA.
NAFTA predated the 1994-1995 crisis by a year, and extended many of the special legal protections afforded to maquiladoras to other export manufacturers in Mexico as well. Therefore, it is difficult to tell if NAFTA contributed to the post-1995 maquila boom or if the peso devaluation alone brought about its success. Economists William C. Gruben and Sherry L. Kiser noted that “by 1999, the majority of imports that earlier had been processed under the maquiladora program for entry into the United States could enter duty-free without any connection to maquila plants.”[21] On the other hand, by eliminating “priority industries,” the government forced some businesses to become outright maquiladoras in order to continue importing intermediates duty-free, and “some processed products…were able to reenter the United States more cheaply in NAFTA’s wake.” Thus, it is no easy task to tell whether NAFTA contributed to the growth of the maquilas themselves. Nonetheless, the policy certainly has allowed other business enterprises to operate in a manner similar to maquiladoras, outside of maquila laws and regulations.
Once again, recession has hit Mexico with the global financial crisis first seen in 2008. The country’s economy, which is intimately tied to that of the U.S., contracted by 6.1 percent in 2009, with hundreds of thousands of lost jobs witnessed in the manufacturing sector. [22] In 2010, the government passed a new decree on the IMMEX program, which came into effect in early 2011, and was designed to “streamline administrative burdens” as well as clarify tax issues.[23] The effects of this new measure are still unclear. Although the maquila industry is increasingly using local sourcing, development, and sales, the decree still provides tax breaks for foreign-owned plants, demonstrating a continued push for free trade.[24] Most available statistics aggregate the maquilas with domestic-owned production into the IMMEX program, but one statistic is free standing and clear: foreign-owned maquila profits have recovered. Income for these plants, which fell precipitously beginning in October 2008, began to recover slowly in January 2010, and spiked beginning in January 2011.[25] Overall IMMEX program employment has increased since July 2009.[26] It is difficult to assess the effects of the decree itself, but foreign-owned maquiladoras, aided by liberalized trade policies, still recovered faster than the rest of the Mexican economy, even as the U.S. was confronting the pain of its own high unemployment rate.
Throughout the history of maquiladoras, a convergence of neoliberal policies focused on liberalized trade, thus allowing the industry to expand during periods of recession. These booms and the economic benefits that accompanied them, however, have not trickled down to the average Mexican nearly enough, but merely have introduced grossly inferior jobs along with deleterious and even abusive labor conditions.
Flexible Labor Conditions, Job Creation, and the Question of Empowerment
Indefensible working conditions were present in many maquiladoras, including both labor-intensive and newer, more capital- intensive factories. Laborers worked for “long…workdays [as]… part and parcel of the new ‘labor flexibility.’”[27] The Border Committee of Women Workers has reported that supervisors “act[ed] on their whims or show[ed] favoritism in giving out permission for absences or even to go to the bathroom.”[28] Involuntary overtime also has been frequently reported, and management enforced turnover through short-term labor contracts and by opening or shutting down factories with little or no notice, adding to job insecurity.[29] Health hazards abounded, including “lack of…ventilation and the provision of rudimentary face masks… toxic chemicals….back pain…[and] swollen feet,” though the biggest health issue reported by the Border Committee was stress resulting from poor working conditions and from some of the wage- and hour-related practices described below. [30]
The free trade policies that fostered the maquila sector’s growth have not only exacerbated poor working conditions, but also promoted low wages. Although above the minimum, most workers’ pay was below the average for the manufacturing sector as a whole; wages were also distributed using exploitative practices and primitive attitudes. Although real wages have stagnated or fallen, especially in dollar terms, maquiladora managers “ignored” increases in the minimum wage because they already pay a higher salary.[31] Under the new two-tiered wage system, senior employees are able to earn even higher wages. As a cost-saving tactic, some managers have offered severance packages to senior employees and then immediately hired new employees, rendering the concept of seniority “worthless” for former employees who apply to new firms.[32] Workers also had to “meet production quotas to earn… base pay, and [were] then induced to work for the extra pay doled out for pieces produced over and above the daily quota.”[33]
The Border Committee of Women Workers reports that “often, up to 50 percent of a worker’s take-home pay… [was] composed of so-called bonuses.”[34] These could be based on adhering to strict conditions such as not arriving to work more than five minutes late or never asking for time off, including for classifiable emergencies.[35] In other maquilas, production bonuses were earned as a result of “teamwork,” such that either each worker met the quota and the entire team earned the bonus, or no one earned the bonus, creating pressure among employees.[36] They also note that “most maquiladoras… [paid] bonuses in merchandise or scrip, claiming that the workers benefit[ed] because taxes on these sums… [were] not deducted from their paycheck.” This practice, however, is illegal, and many of the “benefits” involved turned out to be fraudulent, as workers still found themselves paying for access to “services,” such as cafeterias and transit.[37]
The Border Committee, asserting that these abuses (and government complicity) actually have worsened since NAFTA’s advent, continued to report labor violations and health hazards under the newer automotive and electronics maquilas.[38] Scholar Michelle Perla’s interviews with workers also suggest that conditions have worsened over the course of the maquila program. She writes that, “in contrast to the early years of the… [maquila] program, beginning in the late 1980s factories in the more labor-intensive sector of the industry with less technology began to speed up production, increase quotas, and cut benefits. In these later years women reported much higher levels of workplace stress.” [39]
It was also common for corporate maquila owners to suppress unions “with the complicity of a wide range of bodies, including the government.” [40] To prevent such organizing, high turnover was often enforced with short contracts or the sudden announcement of factory closures.[41] Sociologist Kathryn Kopinak commented that “while some companies are unionized on paper, the unions function[ed] to reinforce management’s wishes.”[42] Many companies even threatened to eliminate the official unions or to create “protection contracts,” or company unions.[43]
While women and men freely decided to work in maquiladoras, it was not necessarily under conditions of their own choosing. The choice to work in a maquila was made under clear income constraints and usually reflected a lack of better alternative job opportunities, as evidenced by the rise in unemployment during this gestative period.[44] While holding a job may have increased workers’ income and even their autonomy in the home, the job itself, with its often-degrading “flexible” conditions and traditionally low pay, was unlikely to be “empowering.” Michelle Perla brings this fact to light, reporting that women workers often preferred their working conditions when self-employed in the informal sector.[45]Maquiladoras also have not provided nearly as many jobs as Mexico needs or the quality of working conditions that Mexicans deserve, contrary to the “job creation” mantra recited by neoliberal policymakers.[46] The maquila experiment that prompted NAFTA and other FTAs demonstrates the effects of such agreements: not only has the program shifted jobs overseas, but it has also transformed them into low-wage jobs almost inevitably garnished with poor working conditions.
The Maquila Industry as a Bellwether
While the growth of the maquiladora industry might reflect a success story for U.S. investors and some Mexican businesspeople, it certainly was not a boon for Mexican workers, nor has it noticeably created jobs in the U.S. The prolific growth of maquilas following the crisis-driven implementation of free trade policies, and the resultant increase in the number of jobs with detrimental and even inhumane labor conditions, foreshadow the likely negative effects of a round of FTAs with Panama, Colombia, and South Korea.
In his recent speech, President Obama asserted that ”what I will not do is let this economic crisis be used as an excuse to wipe out the basic protections that Americans have counted on… We shouldn’t be in a race to the bottom, where we try to offer the cheapest labor… America should be in a race to the top.”[47] He is correct that the U.S. is not in a race to the bottom; that fate belongs to countries such as Mexico, and soon to Colombia, Panama, and South Korea. The basic protections on which U.S. citizens have relied will go neither to workers in the U.S., nor to their counterparts in other countries; in fact, there will be no “race to the top” for labor standards. As NAFTA and the maquiladora program that prompted it have demonstrated, FTAs will not and cannot guarantee the U.S. a lower unemployment rate; in fact, it will more likely bestow jobs with detrimental and even abusive conditions on workers overseas and fail to increase employment back at home.
Source: Rumbo
This analysis was prepared by COHA Research Associate Courtney Frantz.
With special thanks to Jeanne Hahn, Paul McMillin, Myra Thomas, Marissa Luck, and Jennifer Richardson.
MATAMOROS, Mexico — When the latest bloody headlines from the drug war in Mexico reach headquarters in New York, Ken Chandler, the manager of an American electronics manufacturing plant here, jumps on the phone.
He is not begging to come home. He is begging to stay.
“We try to put them at ease, to say it is not time to pack up,” said Mr. Chandler, who oversees the company’s operations in this border city, where the military arrived last week to help purge drug cartel members from the police department.
Not that his employer, Spellman High Voltage, needs much assurance. Like a crop of other manufacturers at the border, including six companies in this city alone, Spellman is expanding its operations, with a new plant under construction after making a calculation that offers one of the starker paradoxes of these violent days in Mexico.
Despite the bleak outlook the drug war summons, the Mexican economy is humming along, not without warning signs, but growing considerably faster than that of the United States.
Even as drug organizations battle for turf around them, more TV sets are being assembled, car parts boxed up and electronic widgets soldered together in the large manufacturing plants here known as maquiladoras. The result is a boomlet in jobs in some of Mexico’s hardest-hit cities, a bright spot in an otherwise bleak stream of shootouts, departing small businesses and fear of random death.
Over all, jobs in Mexico’s manufacturing sector increased 8.2 percent to 1.8 million as of January, the most recent figures available, driven mostly by what Mexican officials called regaining health in the auto and electronics industries, the engine of the economy along the border. Even Ciudad Juárez, which has both the highest level of violence and the largest number of maquiladoras, added 1.3 percent more jobs, to 176,824.
Mostly American-owned and in border states, the plants import raw materials duty free and export assembled products, lowering the cost of goods in the United States and providing jobs that pay more than the Mexican average (typically $8 to $16 per day on the assembly line) but a lot less than American wages.
Some of the new or expanding plants come at the expense of plant closings in the United States. Electrolux, which makes washers, dryers and other home products, closed a plant in 2009 in Iowa but opened one in Juárez last month that is expected to employ 400 people.
Others are from investors farther afield. Foxconn, a Taiwanese firm that makes iPhones, Dell computers and other electronics, is one of several Asian companies taking root. It opened a plant in Juárez last summer. Down the coast from here, Posco, a Korean steel manufacturer, has announced plans to expand its operations with a second plant that will employ 300 people by 2013. Several other companies plan to built or expand in other states as well.
The gains have not made up for losses during the global recession; many plants closed or have shed jobs for good, focusing on making their operations more efficient through automation and other measures, analysts said.
Still, border towns are showing some of their biggest signs of economic life in months. Over all, the Mexican economy, the second largest in Latin America after Brazil, grew 5.5 percent last year, its fastest pace in a decade, and is expected to grow 4.5 percent this year, driven largely by manufacturing as well as internal growth from an expanding middle class. The American economy, by contrast, is expected to grow between 2.7 percent and 2.9 percent in 2011, the Federal Reserve projected late last month.
Economists say Mexico’s growth would be even stronger without the cartel violence, which in the last five years has left more than 40,000 people dead, according to the count by national newspapers.
And given how central the American economy is to its welfare, Mexico could suffer if the recovery in the United States does not pick up speed. While trade with the United States hit a record last year of nearly $395 billion, foreign investment has lagged, suggesting that much of the job and economic growth is depending on existing businesses expanding or restarting production lines that had been waylaid by the recession.
The Bank of Mexico reports foreign investment was $17.7 billion last year, far off pre-recession levels of $25 billion and fed in good measure by a single transaction, the purchase of a one of the country’s largest beer companies by Heineken.
Monterrey, the country’s business and industrial hub, has exploded with violence in the past year, though even there, in the suburbs, some plants have expanded or announced plans to open. For better or worse, the plants are at once part of and apart from the communities that surround them, protected by tall fences, armed guards and cameras galore.
The violence has largely spared the plants, though workers have been caught up in it. Last fall, gunmen apparently looking for a rival fired on a bus carrying maquiladora workers near Ciudad Juárez, killing four people. Higher-paid supervisors and managers, American and Mexican, tend to commute from the American side of the border.
Security costs are rising to protect property and shipments, and safety remains the top concern expressed by potential investors, said Bob Cook, the president of the El Paso Regional Economic Development Commission, which helps recruit businesses to Ciudad Juárez, Mexico’s most violent city.
“But we are still working with more companies now than we did three years ago,” he said.
Business is business, and the proximity to the United States is hard to pass up. The rising cost of labor, transportation and the renminbi have made some companies reconsider Mexico instead of China, he contended. Despite several murders a day, trade between Juárez and Texas rose 47 percent last year to $71.1 billion, he said.
“Central location, great infrastructure, suppliers and labor pool,” he said. “Those things haven’t been tampered with by organized crime.”
Industry promoters argue that the additional jobs may help dampen crime, with more people working and able to support their families. But cities that have benefited from manufacturing have often been slow to help workers and their families.
“The maquiladoras may be growing again, but there is still not much of an effort to address the social needs of the workers and their families outside the plants,” said Cirila Quintero, a sociologist at El Colegio de la Frontera Norte, a research group based in Tijuana, Mexico. “What investment has been made in schools and social centers has been minimal. The governments say they don’t have money and the plants say they are there to create jobs and help industry.”
But workers like Rosalia Carrasco, 41, who has worked at Spellman here for two months, said they are relieved to have steady work, with benefits. “I am hoping to improve myself and get ahead, like anybody else,” she said.
Loren Skeist, the president of Spellman, said he frets over security. The plant took additional safety measures after robbers stole an automatic teller machine last year. A few clients have refused to visit the plant, citing the violence. (The Mexican military this month moved in to police the streets.)
But over all he embraces Matamoros as a smart investment.
“Relatively speaking it is reasonably safe,” he said by phone from Hauppauge, N.Y. “There are compelling reasons, if you are willing to do it with reasonable security, to want to be in Mexico.”
Partly as a result of this process of regional economic integration, per capita GDP in Poland, on a purchasing power basis, has risen from $10,305 in 2000 to $18,058 in 2009. Mexico has experienced a similar path of progress, with GDP per person rising from $10,868 to $13,681 (according to IMF data).
However, for all these remarkable signs of progress on the road to integration, it is labour markets in particular that remain a point of concern and contention. As Mexican President Felipe Calderon rightfully never tires of pointing out, “the only way in which we can find prosperity for the American and Mexican economies is working together through integration.” In fact, neighboring economies have an abiding interest on utilizing each others’ strengths and advantages in a complementary fashion to position themselves as well as their entire region optimally in the global competitive landscape. Germany passed a major milestone toward more integration on May 1 by easing labour restrictions on eight eastern neighbours. This may herald lessons for the future of the U.S.-Mexico relationship as well.
Lower labor costs in Poland and Mexico and the availability of a skilled and motivated work force in these two countries have helped German and U.S.-based companies to produce their goods at competitive prices. In what is fast becoming a true “twinning strategy,” Polish and Mexican operations have become ever more an integral part of U.S. and German firms’ global operating strategy.
At a time when there is much concern about all too far-flung supply chains, having a reliable industrial partner just across the border is a considerable advantage. In addition, with the ongoing erosion of the once tremendous labor cost advantage of China, the economic incentive to depend on long distances for goods assembly — and having to ship goods all the way back from Asia — is becoming gradually less attractive. This ought to strengthen region-based manufacturing compounds.
Still, despite all this progress and for all the advantages and bright prospects that lie ahead, the free flow of workers — whether from Poland to Germany, or Mexico to the U.S. — does remain a point of nervousness in the two richer countries.
Here, the past approaches of Germany and the U.S. have been quite different. While the U.S. never had a stated policy to the effect that its border was open, de facto a lot of Mexican labor found its way into the United States, primarily on a demand-driven basis.
In contrast, Germany relied on formal agreements with other countries to agree on the arrival of pools of Gastarbeiter (roughly the equivalent of Mexican farm workers). Especially in the heyday of its “economic miracle” period in the 1960s, Germany entered into arrangements with many countries, from Spain, Portugal, Greece and Italy to then-Yugoslavia and Turkey, all with the purpose of allowing specified numbers of workers into the country on a temporary basis.
In many cases, this model worked admirably. A lot of these “guest workers” put in a stint, usually of up to a decade, working in Germany. While they often lived in rather crowded quarters, they usually did so for one simple reason: They were keen on saving up as much money as possible, preferably enough to start their own small business upon their return to their home country, whether as a baker, mechanic or building contractor.
With Mr. Obama attempting to relaunch the immigration debate in the United States, these are precisely the experiences that matter. They provide real-life evidence that Mr. Calderon ought to be taken at his word when he tells American audiences that the Mexican government’s primary goal is to keep as many Mexicans gainfully employed in their own country and also to have strong enough an economy to attract workers back home to seize economic opportunities which arise there. In addition, as the standard of living rises in Mexico, U.S. firms will have more opportunities to sell more goods just across the border.
More specifically, the lesson from Germany’s experience over the past half-century is that closing borders actually has the opposite effect to what is intended. It interrupts the labor demand-driven flow back and forth because these workers will obviously choose to stay in the richer country even during a steep recession because they see no realistic way back into the country.
That is a lesson the United States would do well to observe, since it is especially crucial here at the present time. Open borders, based on sheer economic logic, actually lead to having a smaller number of illegal immigrants, fewer migrants and less focus on family-based immigration. All of that would make the wider regional economy more flexible and responsive to market signals.
Ultimately, as labor markets evolve, and as regional economies expand and integrate on a cross-country basis, we need to comprehend that this path is beneficial to all sides. That is a pivotal lesson for all to embrace, whether we live in Europe or North America.
Look around the rain-fed corn farms in Oaxaca state, and in vast areas of Mexico, and one sees few young men, just elderly people and single mothers.”The men have gone to the United States,” explained Abel Santiago Duran, a 56-year-old municipal agent, as he surveyed this empty village in Oaxaca state.
The countryside wasn’t supposed to hollow out in this way when the North American Free Trade Agreement linked Mexico, Canada and the U.S. in 1994. Mexico, hoping its factories would absorb displaced farmers, said it would “export goods, not people.”
But in hindsight, the agricultural elements of the pact were brutal on Mexico’s corn farmers. A flood of U.S. corn imports, combined with subsidies that favor agribusiness, are blamed for the loss of 2 million farm jobs in Mexico. The trade pact worsened illegal migration, some experts say, particularly in areas where small farmers barely eke out a living.
That is the case in the rolling hills of western Oaxaca state, ancestral lands of indigenous Mixtecs who till small plots of corn, beans and squash between stands of jacarandas, junipers and eucalyptus. Eagles soar in the brilliant blue skies. Clumps of prickly pear and organ cactus attest to the sporadic nature of rainfall.
When a visitor arrives, the gray-haired men on the veranda of the village hall talk about the exodus of young men.
“When they hit 18 and finish secondary school, they leave for the United States or other states of Mexico,” Duran said.
His cousin, Jesus Duran, said young men see little future as corn farmers and observe with dismay how the government aims subsidies at medium and big farms, leaving only a trickle for small family farms.
“If you go to the offices over there and ask for help,” Duran said, nodding to the local agriculture agency, “they say there isn’t any to give.”
Mexican negotiators who signed the NAFTA agreement hoped that small corn farmers thrown out of work by rising imports of cheap U.S. corn would be absorbed into jobs in the fruit and vegetable export industry or in manufacturing.
“That turned out to be incorrect. The numbers of people displaced from family farming were much, much higher than the number of new wage jobs,” said Jonathan Fox, an expert on rural Mexico at the University of California, Santa Cruz.
Then U.S. corn imports crested like a rain-swollen river, increasing from 7 percent of Mexican consumption to around 34 percent, mostly for animal feed and for industrial uses such as cornstarch.
“It’s been roughly a tripling, quadrupling, quintupling of U.S. corn exports to Mexico, depending on the year,” said Timothy A. Wise, the director of research and policy at the Global Development and Environment Institute at Tufts University in Medford, Mass. “Is that a river? Yeah, that’s a lot of corn.”
Fox and Wise are among the collaborators on a study, “Subsidizing Inequality: Mexican corn policy since NAFTA,” released last autumn.
Representatives of small farmers say Mexico’s policymakers tossed the dice that trade-spurred growth would take care of rural disruptions – and lost.
“The great failure of this supposition is that there wasn’t economic growth that would absorb these people,” said Victor Suarez, the executive director of the National Association of Rural Producers, which represents 60,000 small farmers. “The result has left rural areas increasingly populated by the elderly and women.”
Faced with deepening poverty, rural migrants have tried to escape regions of Mexico that never used to be sources of emigration.
“In Chiapas, there was hardly any migration before NAFTA,” Suarez said, referring to Mexico’s southernmost state. “Farm laborers were even brought in from Guatemala. Now, more than 50,000 rural people from Chiapas go each year to the United States.”
Corn imports from the U.S. are only one component of what scholars say is a complex picture. In fact, Mexican corn production has risen since the trade pact, driven by domestic agribusiness and supported by subsidies biased to favor large producers that by one estimate surpassed $20 billion in the past two decades.
The Mexican government also has cash-transfer subsidies, known as ProCampo, for small farmers who are considered the free-trade pact’s losers. But they reach only a portion of small corn growers, a quarter of whom are indigenous.
Some rural farmers no longer have enough corn to sell, sinking into subsistence living for themselves and their families.
“Of my generation,” said 33-year-old Baldemar Mendoza, a Zapotec small corn farmer in the Sierra Juarez area of Oaxaca, “many people want nothing to do with farming because it doesn’t pay. With all the changes in the weather, there is no certainty that your harvest will be good.”
Unless the central government tweaks subsidies to make more small family farms economically viable, the result may be sustained migrant flows, experts said.
“The government didn’t so much pull the plug on corn. The government pulled the plug on family farmers who grow corn because the big guys who grew corn got massive subsidies and protection from imports,” Fox said.
Under the free-trade umbrella, several Mexican agro-industrial companies have become muscular global conglomerates.
“Before NAFTA, Grupo Bimbo was a big company. Now it is the largest industrial user of wheat in the world,” Suarez said, referring to the world’s No. 1 bread maker. “Maseca was a big company. Now it is a global company with a strong position in cornmeal worldwide.”
Their powerful position in the market has kept prices high for consumers, while in the countryside, the social fabric frays as families disperse to find jobs.
The impact, Fox said, “unravels rural communities, separates families and makes it difficult for young people to see a future in their communities of origin.”
Josefa Soriano, 74, doesn’t need an explanation of what’s happening. She sees it with her own eyes. As a rural exodus unfolds, families keep fewer of the animals such as goats, cattle and burros that provided manure for fields. Such livestock must have caretakers.
“You have no choice but to buy fertilizer now,” she said. “If you don’t fertilize, nothing grows, not even fodder.”
As she ambled through the settlement, Soriano offered a running commentary on those who have migrated.
“The village is almost without people,” Soriano said. “Many houses are empty. The fathers and the sons have gone.”
She turned to a visitor and said, “If the young people always leave, what do you think will happen to us?”
