U.S.-Mexico Trade: Pulling Together or Pulling Apart? September 1992 OTA-ITE-545 NTIS order #PB93-101707 Recommended Citation: U.S. Congress, Office of Technology Assessment, U.S.-Mexico Trade: Pulling Together or Pulling Apart?, ITE-545 (Washington, DC: U.S. Government Printing Office, October 1992). Foreword In a matter of months, Congress will be asked to ratify or reject what is likely to be the final round of debate over the proposed North American Free Trade Agreement (NAFTA). One side in this debate argues that a NAFTA will mean increased prosperity for the United States and Mexico. Others hold that it would lead to ruthless economic competition based on low wages, and hence to stagnant productivity on both sides of the border. The most dismal predictions see a wholesale movement of U.S. manufacturing to Mexico. In this report, requested by the House Committee on Education and Labor and the Senate Committee on Labor and Human Resources, OTA finds little likelihood that a NAFTA, by itself, will lead to the most dismal scenarios. But OTA’s analysis also indicates that market forces alone are not likely to produce the social and economic rewards the heads of both states have promised from a free trade agreement. For both countries, the key to success in managing the social and economic transformations of the coming decades lies with the institutions that frame public and private choices---decisions made by employers, by workers, by government officials. In the United States, that framework still reflects the mass production era of the first half of the century, when labor and management hammered out an uneasy accommodation and the Federal Government in the New Deal years took on greater responsibilities for managing the macroeconomy and providing a safety net for laid off workers and their families. More recently, Washington has been backing away from these responsibilities, without replacing them with new institutions and new policies suited to a ‘‘postindustrial’ U.S. economy that is much more a part of the world economy than even a half-generation ago, The NAFTA debate provides an occasion to reconsider U.S. institutions. Among the reasons for doing so, perhaps the most pressing lies in the social strains that would be created by a future of dead-end jobs for less educated workers in the lower half of the Nation’s income distribution. The subtitle of this report is intended to convey one of its central findings: labor, management, and society at large must pull together in the United States, or the social strains created by ‘ ‘globalization’ could pull the Nation apart. The subtitle also conveys a second message: Mexico and the United States, neighbors sharing a 2000-mile border and distinguished by a host of cultural and institutional differences, cannot negotiate a divorce. Their economies are intertwined, and will become more so in the future. A NAFTA could bring out the worst in each nation, or it could put them on the path to mutually supportive high-wage, high-productivity strategies. &d?AJ#L&k- JOHN H. GIBBONS Director Ill. Advisory Panel—U.S.-Mexico Trade John Stepp, Chairman Restructuring Associates Diego Asencio William A. Raftery Former Assistant Secretary of State Raftery Consultants Steven Beckman Mark Ritchie United Auto Workers Institute for Trade and Agriculture Policy Robert Dillon Elizabeth Santillanez Sony Corporation of America Western Governors’ Association John T. Eby Steven Schlossstein Ford Motor Company SBS Associates, Inc. Sheldon Friedman Robert Swadell AFL-CIO PALCO M. Patricia Fernandez Kelly Sidney Weintraub The Johns Hopkins Institute for Policy Studies University of Texas Peter Morici Vim R. Whiting, Jr., The University of Maine University of California at San Diego Harold Eugene Nichols Len Young Local 717, International Union of Electrical, AT&T Radio, Machine, and Furniture Workers Raul Yzaguirre Robert Paarlberg National Council of La Raza Wellesley College Michael Piore Massachusetts Institute of Technology NOTE: OTA appreciates and is grateful for the valuable assistance and thoughtful critiques provided by the advisory panel members. The panel does not, however, necessarily approve, disapprove, or endorse this report. OTA assumes full responsibility for the report and the accuracy of its contents. iv OTA Project Staff—U.S.-Mexico Trade Lionel S. Johns, Assistant Director, OTA Energy, Materials, and International Security Division Audrey B. Buyrn, Program Manager Industry, Technology, and Employment Program John A. Alic, Project Director Margaret L. Hilton, Deputy Project Director Kenneth E. Freeman Stephen A. Herzenberg Gretchen S. Kolsrud Jerry R. Sheehan Contributors Robert D. Atkinson W. Wendell Fletcher Deanna Haremend, Congressional Research Service Michael J. Phillips Elizabeth G. Tsehai Howard Wial Administrative Staff Carol A. Guntow, Office Administrator Diane D. White, Administrative Secretary Publishing Staff Mary Lou Higgs, Manager, Publishing Services Chip Moore Cheryl Davis Dorinda Edmondson Denise Felix Christine Onrubia Bonnie Sparks Susan Hoffmeyer Contractors Thomas Bailey Jack N. Burby Susan M. Christopherson Martin Kenney and Richard Florida Thomas H. Kelly Sylvia Maxfield Harley Shaiken Leslie A. Sklair Wallace E. Tyner Gary W. Williams Particia A. Wilson Contents Page Chapter 1. Summary . 3 Chapter 2. Policy Issues and Options: Incentives for a High-Productivity Future . 25 Chapter 3. Mexico’s Needs: Growth and Development . 57 Chapter 4. Two Traditions, One Continent: Labor Relations and Labor Markets in Mexico and the United States . 77 Chapter 5. Mexico’s Workers: Bonanza for U.S. Companies? . 97 Appendix 5A. Economic Models as Predictors of NAFTA Impacts . 109 Chapter 6. The Border: A Boundary, Not A Barrier . 115 Chapter 7. Autos and Parts . 133 Chapter 8. Electronics . 153 Chapter 9. Apparel . 175 Chapter 10. Agriculture . 197 Glossary . 215 Index . .. 219 vi Chapter 1 Summary Contents Page PRINCIPAL FINDINGS . 4 Short-Term Impacts . 4 Longer-Term Social and Economic Impacts . 6 POLICY AND THE NAFTA . 7 MEXICO’S INDUSTRIAL DEVELOPMENT PROSPECTS . 11 THE SECTORS . 12 THE UNITED STATES, MEXICO, AND NORTH AMERICA: TWO SCENARIOS . 19 Boxes Box Page l-A. What Happens to U.S. Workers Whose Jobs Move to Mexico? . 5 l-B. Free Trade Theory and the Economic Consequence of NAFTA . 6 l-C. Mass Production, Flexible Production, and Sweatshops in the Garment Industry . 21 Tables Table Page 1-1. Summary List of Policy Options . .. 8 1-2. Policy Options for the Near Term . 9 1-3. Autos and Parts . .13 l-4. Electronics . 15 1-5. Apparel . 16 1-6. Agriculture and Food Processing . 18 1-7. Alternative Development Paths for the U.S. Economy . 19 Chapter 1 Summary The United States and Mexico are vastly different In both the United States and Mexico, negotia- nations, one rich, the other poor, one with political tions over free trade represent part of a search for and legal roots in England, the other a blend of new economic strategies that will bring back the Imperial Spain and ancient native American civili- prosperity of the 1940s through the 1970s. In this zations. If the countries implement the proposed period, with their economies insulated from foreign North American Free Trade Agreement (NAFTA), competition—by protectionism in Mexico and tech- they would begin an unprecedented experiment in nical superiority in the United States—both coun- economic integration—the creation of a single tries enjoyed rising investment, consumption, pro- market spanning an industrialized country and a ductivity, and output. GDP grew at between 6 and 7 developing country with over one-third the popula- percent a year in Mexico and at roughly half that rate tion but only one-tenth the per-capita gross domestic in the United States. By the mid-1970s, workers in product (GDP). the United States and Mexico earned roughly twice in real terms what they had earned 30 years earlier. OTA’s analysis suggests that market forces alone Since the mid-1970s, stagnant productivity and are not likely to produce significant social and increasing international competition have brought economic rewards following a free trade agreement. real wages in both countries back to the level of To yield substantial rewards, trade liberalization 1965. will have to be accompanied by significant changes in other aspects of U.S. and Mexican policies. In the United States, the end of the 30-year post-World War 11 boom has hit less-skilled and ● If it is, more open trade could increase prosper- less-educated workers particularly hard (ch. 4). ity and raise standards of living in both From 1973 to 1991, hourly wages of male high counties. school graduates with 1 to 5 years of experience ● If it is not, closer economic links between the declined by 29 percent. From 1980 to 1989, the two countries could bring out the worst in each, proportion of full-time workers with annual incomes driving down wages and living standards in the below the poverty level for a family of four rose United States without accelerating develop- from 12 to 18 percent. It is in this context that the ment in Mexico. United States, Mexico, and Canada began negotiat- To put the United States and Mexico on the right ing a NAFTA in June of 1991. (This assessment course will require fundamentally changing rela- responds to a request from Congress for an evalua- tions among government, industry, and labor in each tion of the effects of an agreement with Mexico on country. U.S. jobs and economic opportunities; OTA does not deal here with the implications of U.S. trade with In the United States, the necessary changes could Canada.) begin with Congress serving notice that competing based on low wages is not acceptable and that OTA’s analysis indicates that a NAFTA would government and the private sector are committed to not have large aggregate impacts on U.S.