NAFTA: The Best Medicine?
by Patrick G. Clifford
During the 1992 presidential election, candidate Ross Perot made a memorable contribution to the American vernacular in predicting the effect of a proposed trade bloc among the United States, Mexico, and Canada: U.S. jobs would flow into Mexico, he declared, making a “giant sucking sound.”
Despite Perot’s prognostications, on January 1, 1994, the North American Free Trade Agreement (NAFTA) was created. Its basic intent was to foster trade among its members by lowering or eliminating tariffs over the next 15 years. Since then, NAFTA has seen many of its objectives met; it continues to struggle with others.
From the beginning, the textiles and apparel industry was an essential component of the agreement (in fact, all of Annex 300-B is devoted to these matters). While growth and activity in this industry have been seen throughout the bloc, the most drama has occurred between Mexico and the U.S.
By the Numbers
To begin, a look at some statistics:
● At its peak in 1973, the U.S. supported 2,447,900 jobs in the textiles and apparel industry. By 1993, on the eve of NAFTA, 36% of those jobs had already been lost. Ten years later, in 2003, an additional 33% had disappeared. And the trend continues: As of June 2007, only 22% of the 1973 total remained.
● Since the implementation of NAFTA in 1994, an estimated 64% of the 1,001,100 total U.S. jobs lost have been in the apparel area of the industry. This represents an astonishing 75% of all apparel jobs.
● On the other hand, wages for the jobs that remained rose an average of 43% between 1993 and 2003.
● Between 1993 and 2003, trade among the NAFTA nations grew by over 220%; before the U.S. recession that began in 2001, it had in fact peaked at $23.3 billion, corresponding to 260% growth.
● During this same period, textiles and apparel’s share of all NAFTA trade grew from 2.7% to 3.0%. This seemingly small advance in fact reflects 139% growth in the industry overall.
● While textiles and apparel’s share of Canada-U.S. shipments remained fairly constant at 1.5%, its share of Mexico-U.S. shipments grew from 4% to 6%.
Key Trends
Employment
Even NAFTA critics concede that the agreement has not been the sole cause of U.S. job losses, but, as the American Manufacturing Trade Action Coalition called it, it has been at least symbolic of a “sea change in U.S. trade policy”: that is, lowered or eliminated import restrictions for countries whose consumers don’t have the wherewithal to purchase finished American goods, and/or for countries where tariffs and other barriers remain.
Indeed, industry jobs in the U.S. have been dwindling for 30 years. As in virtually every area of the economy, productivity improvements are both pervasive and cumulative. International competition has also walked through the door marked “global markets,” a revolving door that too many Americans had assumed opened only outward.
Throughout Mexico, but especially along the northern border, plants have been built for the explicit purpose of importing parts and materials for assembly. The finished products are then exported; usually this is to the originating country, and even more usually it is to the U.S. The factories are called maquiladoras; while they have been around for almost half a century, the new opportunities presented by NAFTA prompted a flurry of new building, and they soon comprised the backbone of Mexico's role in NAFTA.
From NAFTA’s inception through 2000, the number of textile and apparel maquiladora jobs grew more than eightfold before declining in lockstep with the 2001 U.S. recession. However, since the start of the recovery in 2003, maquiladoras serving virtually all other industries have restored their growth by 15% to 67%, but textiles and apparel jobs continue to decline, losing about 16 percent of their peak. On the other hand, this decline has leveled off somewhat, and the number of these jobs is still about five times what it had been pre-NAFTA.
Skills and Technology
Taking a look at the nature of the jobs undergoing this churn suggests that NAFTA has all but turned North America into a massive laboratory for David Ricardo’s theory of Comparative Advantage, in which (to roughly summarize) each participant performs not necessarily the function that it’s best at, but the function that its trading partner is worst at. Even if, on absolute terms, the trading partner is better at both functions, adhering to Ricardo’s concept should optimize trade.
Textiles and apparel is a notoriously labor-intensive industry. Indeed, over the past three decades, the jobs that have moved offshore have been lower-skilled; for example, one difficulty that has proven largely intractable is automating most sewing functions. During the same period, however, the U.S. has retained and developed the industry’s more high-end functions, such as:
● Technologically advanced manufacturing and design
● CAD (computer-aided design)
● CAM (computer-aided manufacturing)
● Marketing
● Product development
Ricardo would argue that this reallocating of duties is all to the good. In a 1999 trade briefing, Daniel T. Griswold of the Cato Institute agreed, advocating the freest version of free trade: “It is debatable whether protectionism even serves the long-term interest of workers in protected industries. In the apparel and textile industries, for example, employment has continued to fall despite an elaborate system of import quotas in place for more than three decades” (http://www.freetrade.org/pubs/briefs/tbp-006.pdf).
In a separate article published eight years later, Griswold offers this: “[A]pparel jobs are among the lowest paying manufacturing jobs in our country, but they are among the best paying in poor countries….The apparel industry actually pays its foreign workers well enough for them to rise above the poverty line….In Honduras, for example, where college protestors have targeted its alleged "sweatshops," the average apparel worker earns $13 per day, compared to the $2 a day or less earned by 44 percent of the country's population” (http://www.freetrade.org/node/602).
Materials
Not only the processing, but the materials themselves are in flux. U.S. demand for components, specifically yarn and fabric, continues to decline, but being able to ship these materials to Mexico and the Caribbean for processing and assembly has allowed the U.S. to retain related jobs, which would otherwise have also been lost. Reflecting this, in 2005, $3.1 billion of Mexico’s textiles and apparel exports used U.S.-sourced yarn and fabric.
Additionally, the U.S. focus is moving away from staple fabrics and toward niche products like sportswear, active wear, home furnishing products, and industrial textile products. The value of U.S. textile mill product shipments (for example, yarn, woven fabric, and knit fabric) actually declined by an average of 3% per year between 1993 and 2003. The share of U.S. textiles shipments represented by these products also declined during this period, from 68% of the total to 52%.
Rules of Origin
Because they are complex, prone to error and malfeasance, and provoke myriad exemption requests, NAFTA’s Rules of Origin have long been controversial.
In short, a garment, fabric, or any part thereof can be categorized within NAFTA as one of the following:
● Fiber-forward: All fibers are produced in a NAFTA nation
● Yarn-forward or thread-forward: All yarn or thread is produced in a NAFTA nation, though particular fibers might not be
● Fabric-forward: All fabric is produced in a NAFTA nation, though particular yarns might not be
● Single substantial transformation: Cutting, knitting, sewing, or other assembly is performed in a NAFTA nation, though the fabric used might not be
According to the agreement, fabric and garments are duty-free among the partners, as long as they are at least yarn-forward. That is, only products made of fabric knit and woven in NAFTA from NAFTA yarn qualify for NAFTA tariffs and quotas.
In recent years, however, a clamor has mounted to switch to the Breaux-Cardin model--established under Section 334 of the Uruguay Round Agreements Act and incorporated in the U.S.-Jordan Free Trade Agreement--in which origin is determined not according to composition but according to the most significant production process performed in a partner country.
Asian Influence
By far, the most significant external force being exerted upon NAFTA relationships is China’s ascendancy in manufacturing. After 15 years of negotiations, China gained entry to the World Trade Organization on December 11, 2001. Chinese business wasted no time in making the most of the attendant opportunities, and dramatically ramped up development of factories specializing in assembly of imported components, including textiles and apparel.
For Mexico, the timing of these events could not have been worse: Its economy has always closely correlated with that of the U.S., and the U.S. was on the cusp of a recession, primed by the March 2000 bursting of the dot-com bubble, and sealed by the trauma of September 11. Sure enough, from 2001 to 2005 China’s apparel and footwear shipments to the U.S. would rise by $18.9 billion; Mexico’s would fall by $1.8 billion.
Another macroeconomic concept, Trade Diversion, began to see its full effects played out: China’s production capabilities, efficient even before 1994, had become so much more efficient that even with NAFTA’s lowered trade barriers Mexico could not beat China’s low prices. As a result, the maquiladoras began to suffer a hard landing: employment fell from 300,000 to 174,000 workers between 2001 and 2005.
Not only does this seem to make clear that Mexico’s rapid rise vis-à-vis U.S. imports was largely an artificial phenomenon, it should be further noted that China’s relative success was in spite of its onerous U.S. tariff hurdles and that without them Mexico would have fared even worse. In fact, since 1999 the U.S. market has not become less restrictive, as NAFTA had envisioned, but more restrictive, and tariff preference levels (TPLs) for apparel have been fully implemented during that time, to Mexico’s benefit.
On a related note, with the implementation of the Dominican Republic–Central America Free Trade Agreement (DR-CAFTA) in 2004 and subsequent development, Asian companies have begun investing in Central America to gain a competitive foothold in the Americas. Indeed, this seems to confirm the suspicions of some DR-CAFTA supporters, who saw the far-reaching agreement as instrumental in trying to fend off Asian overreach of the industry.
What’s Next
China remains a low-price juggernaut at Mexico’s expense, but in an age that is increasingly focused on the just-in-time ideal for everything from design to production to inventory, Mexico’s location, as one commentator put it, “on the doorstep of the greatest consumer market on earth,” is tough to beat. What can take three weeks from China can arrive from Mexico in days. As a certain invisible hand has guided the reallocation of technology and materials, so too entire classes of apparel could find new centers of gravity: For example, it might make the most sense to look to Mexico for trendier items requiring quick turnaround, and to China for high-volume, low-urgency commodities.
Furthermore, our southern neighbor maintains a sizable lead in the following important areas of U.S. relations:
● Two-way trade
● American-owned affiliates, in terms of both sales and employees
● Direct investment by U.S. companies in Mexico
● Direct investment by Mexican companies in the U.S.
● Same-company affiliate trade
Finally, multiple polls have shown show that citizens of all three nations generally look with favor on NAFTA, despite the general tendency to see the other nations as coming out even further ahead.
Combined with the other advantages enjoyed by the NAFTA nations, such as raw materials, well-developed infrastructure, and proximity to major markets, the confidence of the citizens of North America is perhaps the strongest reason for continued optimism. Whatever sound Ross Perot thought he heard, it seems to be growing fainter all the time.
Patrick Clifford is a Senior Consultant with Ogden Associates (www.OgdenConsultants.com). He is currently working with Ogden president Janet Murphy on the 2007 Customer Centricity Study, to be published in cooperation with the National Retail Federation (NRF). Contact the author at pclifford@OgdenConsultants.com.
