March 30, 2016
Eduardo Porter had an interesting piece in the NYT in which he argued that NAFTA actually saved jobs for auto workers in the United States. The argument is that by allowing U.S. manufacturers to have easier access to low cost labor in Mexico for part of their operation, they were able to keep a larger market share than would otherwise be the case.
The same would apply to foreign manufacturers choosing to locate operations in the United States rather than staying in Europe, Japan, or elsewhere. The argument is that better access to low cost labor in Mexico made locating part of their operating in the United States more attractive.
Currently we import roughly $100 billion a year in cars and parts from Mexico, this compares to total domestic production of around $500 billion. Porter argues that on net, because NAFTA improved the competitiveness of the U.S. industry, it actually saved jobs. This is not impossible, but it does seem implausible. I headlined the case of doctors to see an analogous story.
Suppose that we have large numbers of people going to other countries for major medical procedures to take advantage of the fact that the cost is typically less than half as much and sometimes less than one tenth as much for comparable quality care. (Imagine saving $200,000 on open heart surgery by having the operation in Germany. Most of these surgeries are done on a non-emergency basis, so it is possible.)
In this scenario, suppose that we have a somewhat different NAFTA that made it much easier for Mexican doctors to train to U.S. standards and come practice in the United States. Let’s imagine 200,000 Mexican doctors, or roughly one fifth of our total, chose to take advantage of this opportunity.
The Porter argument would be that this inflow of Mexican doctors actually created more jobs for doctors in the United States. By bringing down the cost of many types of procedures and follow up care, we managed to keep more people from going to Germany and other countries for medical care.
Would the increased percentage of people having surgery in the United States offset the displacement of one-fifth of U.S. doctors? My guess is no, but that would be the question. In the case of the U.S. auto industry, the question is how much has better access to low cost labor increased its market share and furthermore who would have gotten the share otherwise.
For Porter to be right, and NAFTA to be a net job gainer for U.S. autoworkers, we would need this increase in market share to be equal to one fifth of U.S. production or roughly 40 percent of the current production of the Big Three U.S. manufacturers. Furthermore, this would have to be net of the increased share of foreign producers located in the U.S. If Ford loses market share to a Nissan or Honda plant located in the United States, this is a loss to Ford workers, but a wash for jobs in the domestic auto industry. (There is also the issue of increased incentive for foreign manufacturers to locate in the U.S. This is real, but of course some of the foreign manufacturers simply located in Mexico, in part because of NAFTA. It is worth remembering that the first “transplants” came to the U.S. in response to the “voluntary” export restraints on Japanese cars put in place by the Reagan administration.)
Anyhow, I would not say that Porter is necessarily wrong on this one, but it does require that NAFTA had a very large impact on the ability of U.S. manufacturers to preserve market share. (It’s also worth noting that some movement of production to Mexico would have taken place even without NAFTA.) We don’t have to ask about the doctor story, because our doctors have enough political power that no serious politician talks about making it easier for foreign doctors to practice in the United States or for people in the United States to get access to lower cost care elsewhere. Perhaps if doctors enjoyed the same benefits of international competition as autoworkers we would see a more honest discussion of trade.
One item mentioned in the Porter column that we can dismiss is the idea that Mexico has become a better market for the United States because of NAFTA. Mexico has actually fallen further behind the United States since NAFTA came into effect in 1994. According to the I.M.F. Mexico’s per capita GDP has risen by 31.0 percent since 1993. By contrast, per capita GDP in the United States has risen 39.1 percent over this period.
Poor countries are supposed to see more rapid growth than rich countries. This has not been the case in Mexico since 1993. Perhaps Mexico’s economy would have fared even worse without NAFTA, but clearly the deal has not allowed the country to get rich.
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