Economic Reflections on the North ­American Free-Trade Agreement (NAFTA)

By John F. Sase, Ph.D.
Gerard J. Senick, Senior Editor
Julie Gale Sase, Copyeditor

“I had a huge advantage when I started 50 years ago — my job was secure. I didn’t have to promote myself. These days there’s far more pressure to make a mark, so the temptation is to make adventure television or personality shows. I hope the more didactic approach won’t be lost.”
—David Attenborough,
British journalist

During the past five months, I (Dr. Sase) have documented an imaginary conversation with the American Polymath R. Buckminster Fuller while standing on the envisioned bridge of Spaceship Earth. We considered many big-picture issues of our past, present, and future existence as well as the growth upon our planet. Descending from the bridge, I view a changed country that has resulted from an unexpected national-election result and a new manner of governance. Following the first few weeks of presidential orders and controversies, we have before us a cornucopia of topics that we need to address as responsible professionals in the fields of Law and Economics. Therefore, we will focus on an important one of these topics, the matter of the North American Free-Trade Agreement (NAFTA).This remains close to many of us in Southeast Michigan, both within our cultural hearts and our wallets.

The NAFTA Briefing

The North American Free-Trade Agreement (NAFTA) is a treaty signed by Canada, Mexico, and the United States that created a trilateral trade bloc in North America. This agreement became effective on January 1, 1994, during the Clinton Administration. It superseded the Canada–United States Free-Trade Agreement between the U.S. and Canada that was signed by President George H. W. Bush and Prime Minister Brian Mulroney on January 2, 1988. Recently, I received a copy of a document titled NAFTA Briefing: Trade Benefits to the Automotive Industry and Potential Consequences of Withdrawal from the Agreement by the Center for Automotive Research (CAR) that was published late last year (Kristin Dziczek, Bernard Swiecki, Yen Chen, Valerie Brugeman, Michael Schultz, and David Andrea, CAR, Ann Arbor, MI, 2016: for those readers who have a deeper interest in this topic, download a PDF of the full 19-page report at http://www.cargroup.org/?module=Publications&event=View&pubID=148). This work is worth reviewing in respect to the imminent dispute arising as to whether the United States should renegotiate the NAFTA or abandon it completely. Therefore, a careful read of real facts rather than misleading “alternative facts” is necessary in order to avoid economic disruption and decay in Detroit, Southeast Michigan, and beyond. In this column, then, we will present a condensed overview of this report as well as some personal comments and insights on the topic.

Experiences with the Center  for Automotive Research

Should we trust the work produced by the Center for Automotive Research? Personally, I have had the privilege and pleasure of working with a few of the researchers at CAR in my capacity as the Urban Economist for the Great Lakes Global Freight Gateway (GLGFG) initiative, which was started by Dr. Michael Belzer at Wayne State University. For more than five years, the GLGFG has focused on the creation of a quarter-million sustainable jobs in Southeastern Michigan and Southwestern Ontario through the further development of our multi-modal transportation systems and the prospect of high-tech warehousing and freight-handling. We have relied upon the high-quality research, data, and analysis that we received from the CAR. Though they have obvious connections to the automotive industry, this team maintains a clear objectivity in respect to the work product that they deliver.

Facts about the NAFTA

Since 1994, the NAFTA has helped to expand the United States/Canada Automotive Products Agreement. In so doing, it included Mexico in our continental reduction or elimination of trade tariffs. In respect to the automotive industry, the goal has been the optimization of supply-chain production and vehicle-manufacturing operations. The strategy used has allowed for the location of supplier and final-product manufacture in a geographic system that minimizes both production costs and shipping costs. In this way, our domestic automotive industry remains globally competitive. Currently, U.S. firms are no longer the Big Three. Rather, they are part of a Big Six in the world marketplace—General Motors, Ford, and Fiat-Chrysler as well as Toyota, Nissan, and Honda.

Recent changes proposed by our new administration could have major ramifications for all automotive suppliers and manufacturers doing business in North America. Though the thirteen-year old NAFTA is less than perfect and may benefit from numerous improvements, it has enabled manufacturers to deliver a product mix of vehicles that is demanded by consumers and delivered at an affordable price. In addition, the NAFTA supports global supply-chains with cost-competitive materials that are not available within the United States. The effectiveness of the original agreement can be updated in order to meet current global-market conditions. However, a withdrawal from the NAFTA could cripple the U.S. automotive industry and have a negative impact on domestic job growth.

The globalization of the automotive industry has resulted in the development of a complex industrial web that has spread throughout the world. As a result, offshoring and nearshoring to minimize costs that are subject to other constraints has translated into lower prices for consumers as well as a better return on capital for investors. Nearshoring--the sharing of interconnected supply-chains throughout the Canada/Mexico/United States region of North America--is a newer concept that grew out of the NAFTA. Any changes in the NAFTA affecting nearshore automotive production could undermine supply-chain employment in the United States because rising costs may induce a transplant to more distant offshore locations. Not only do the elements of the industrial supply-chain centered in the U.S. serve our Big Three, but they also serve many non-domestic producers as well. The primary driver acting throughout this web appears as the repeated movement of intermediate products back and forth across our northern and southern borders.

The CAR briefing states that some components cross our borders as many as eight times before reaching the point of final assembly. Furthermore, this supply-chain web not only serves firms that sell finished vehicles in the United States. With its cross-border movement, this web also serves non-domestic producers that have plants in Mexico. The producers deliver their total Mexican output to countries other than the United States. This part of the supplier industry is increasing because the greatest percentile of foreign national-capacity growth has occurred in Mexico in recent years. Approximately 90 percent of the new investment made in Mexican light-vehicle assembly plants is by Japanese and European producers. Due to the connectivity to the cross-national supply-chain, an increase of 500 jobs in Mexican plants may translate into a growth of more than 500 jobs in the United States.

The six major automakers with plants in Mexico that produce vehicles for the U.S. market have developed their global-manufacturing bases to a point of maturity. The following is a list of these firms by order of total plants and measuring by percentile in global locations: Toyota has a total of 44 plants but only 17% of its capacity in North America; General Motors, with 24 plants, has maintained 43% of its capacity here; Nissan, with 33 plants, has only 13% here; Ford, with 20 plants, maintains 38% here; Fiat-Chrysler, also with 20 plants, has 35% in North America; while Honda, with 20 plants, has located 29% of its capacity here. If vehicle imports from, and supply cross-haul with, our two neighboring countries, Canada and Mexico, become limited, the industry has adequate capacity outside of North America. Therefore, major segments of the industry can choose alternate locations for assembly while prompting their primary supply-chain firms to move elsewhere in the world.

To Be or Not to Be?

The CAR brief cites China and Eastern Europe as the most likely destinations for supply-chain and assembly plants to be relocated. However, let us consider an imaginary, hypothetical, but plausible alternative scenario. The abandonment of the NAFTA leads to the relocation of major elements of the North-American supply-chain and vehicle production to Ukraine. Russia succeeds in their plans for controlling Ukraine, including the Crimean peninsula. Furthermore, Russia develops the ports of Illichivsik along the western Ukrainian  coast south of Odessa and Serastopol in southern Crimea. President Vladimir Putin enters the global automotive industry with little direct investment by Russia. Of course, new hotels and casinos would need to be developed in order to draw an international clientele to the region.

We can only hope that such deals do not present any conflict of interests for our president. Though many words enter my (Dr. Sase’s) mind to describe such a deal, I am but a “so-called” economist. I must defer to my colleagues in the field of Law (with their “so-called” judges) to find more precise legal terms to describe such a deal. However, without a NAFTA disruption, light-vehicle production-capacity in the United States is projected to grow by 11% by 2023, though Canadian capacity is expected to remain flat. The greatest percentile growth in capacity will be in Mexico by a factor of 45%. Overall, capacity within the NAFTA region is projected to grow by 17%--from 19.3 million units in 2016 to just over 22.5 million by 2023.

Employment in the U.S. can grow at small plants within the supply-chain web in numerous towns that are located along the rail-and-trucking routes of North America. Therefore, further capacity-growth within the industry can be expected to have a positive effect on the U.S. job market. In part, this growth would result from an increase in the U.S. content of vehicles that are imported from our two NAFTA neighbors. For vehicles imported from Mexico before 1994, U.S. content was only 5 percent. Today, that content has increased to 40 percent. Ergo, the larger employment picture for the North American industry is fed by both domestic and ­international production. To the surprise of few, higher-wage jobs requiring advanced education and experience have shown the greatest gains since 1980. Meanwhile, the purchasing power of low-skilled workers with a secondary education or less has experienced a loss of 1% per year since that benchmark year. This translates into a loss of more than one-third of the income needed to preserve the standard of living that these workers enjoyed in 1980. For many families, the answer has been for an individual to work a second job or to rely on other household members to cover the difference.

These insights may help us to pull together the NAFTA controversy. Our new administration in Washington, D.C. has asserted that NAFTA is responsible for the loss of American jobs. Though the NAFTA speech plays well to a core audience of low-skilled jobseekers, this approach misleads the public. While production increased in the United States by 17.6% from 2006 to 2013, factory jobs decreased by 13%. It has been widely noted that 88% of these job losses are due to automation, software development, and related factors. Meanwhile, many employers in manufacturing have stated that they need qualified workers for sustainable employment. Economists refer to the resulting problem as Structural Unemployment. Though low-skill jobs will remain in existence, the sustainable employment that brings more income and better lives for families requires a slightly higher degree of knowledge and skillset as determined by global competition.

A Personal Experience and Thoughts on the Matter

Through the 1990s, I (Dr. Sase) served as Head of Research for the Machinist Training Program at Focus:HOPE in Detroit. Many of the machines used today resemble those used a half-century ago. However, the significant change has been an upgrade of technology. A worker on the shop floor using milling machines, lathes, and other standard tools requires a higher level of Math and computer skills than a comparable employee of a half-century ago in order to do setup, production, and quality control.

At Focus:HOPE, we faced the challenge of helping candidates to acquire the knowledge and skills that they needed. Many of the applicants with whom we worked either had dropped out of high school or had been away from school for a decade, working at jobs that required only rudimentary abilities. Unlike many educational programs, we needed to meet them halfway. However, they needed to meet us halfway as well. Colleagues at Focus: HOPE had determined that the minimum requirement was a High School or a General Education Diploma. Though this level was required, not all students had done well during their secondary education. With this consideration, we found that we could work with them effectively if they tested at a level of at least 9th grade Reading and 10th grade Math.

Students were told that they needed to “show up and show up on time” every day because potential employers demanded this behavior. The program focused on classroom learning and shop-floor experience. The length of this arduous program was 10 hours per day, five days per week, for 10 months. Two-thirds of the candidates completed the program and earned a certificate in Basic Precision Machining. At this point, they were sustainably employable in a modern factory. Our follow-up research indicated that those who completed the program and entered the field of Manufacturing repaid the cost of the program within 3.5 years. Over their remaining work-life, these graduates would repay the cost more than 13 times over. We measured their accomplishment through the increase of income taxes paid and the reduction in food stamps received. Our institute became a model for a number of similar “welfare-to-work” programs around the country. For more detail, see the publications Probit Analysis of Focus: HOPE’s MTI Program 1991 & 1992, 1994, and Net Benefits of Focus: HOPE’s Machinist Training Program, 1996, both published by Focus:HOPE with support from the Aspen Group and Mott Foundation (www.focushope.edu).

A Takeaway

If the NAFTA comes to an end, some of us may experience short-run gains. However, a long-term approach to repair NAFTA may produce greater affluence and stability for our larger society. I hold the opinion that dumbing-down our manufacturing industries to match the current skills of our citizens to whom the current administration has promised jobs would be a dead-end. This approach only can lead to economic deterioration and to the loss of even more jobs due to our globally competitive economy. Also, corporate welfare that creates jobs that do not pay for themselves may be a faster track to disaster. In contrast, an investment in rebuilding our industrial workforce will lead to greater security and affluence for those in need of sustainable employment as well as for the country as a whole. I encourage each of our readers to study the sources mentioned above and to urge Congress to take this bipartisan approach that has been proven to work.

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Dr. John F. Sase has taught Economics for thirty-six years and has practiced Forensic and Investigative Economics since the early 1990s. He earned a combined Masters in Economics and an MBA at the University of Detroit, and a Ph.D. in Economics at Wayne State University. He is a graduate of the University of Detroit Jesuit High School (www.saseassociates.com).
Gerard J. Senick is a freelance writer, editor, and musician. He earned his degree in English at the University of Detroit and was a supervisory editor at Gale Research Company (now Cengage) for over twenty years. Currently, he edits books for publication (www.senick-editing.com).
Julie G. Sase is a copyeditor and parent coach. She earned her degree in English at Marygrove College and her graduate certificate in Parent Coaching from Seattle Pacific University. Ms. Sase coaches clients, writes articles, and copyedits (royaloakparentcoaching.com).