Commentary: In my last column, I ran through a simple scenario of how production is linked between U.S. and Mexican companies, in which a U.S. plastic injection company sells components to a Mexican components company which sells its finished product to a GM plant in Kentucky. All three companies account for a stage of the production and jobs are created/maintained in both Mexico and the U.S. One recurring question I received from several readers was pertaining to the Mexican components, and why U.S. companies simply couldn’t manufacture all the components in the chain. Another question focused on why slapping tariffs on companies exporting their products to the U.S., namely from China and Mexico, wouldn’t automatically result in more U.S. manufacturing being generated, and jobs coming back to the U.S.
Trade is not a black and white issue; it is a more complicated shade of gray. Since 1965, Mexico’s maquiladora (twin plant) industry, has brought industrialization to Mexican cities such as Tijuana, Monterrey, and Juarez. However, the program’s biggest failure has been not developing a major supply base for this manufacturing base. Approximately 95 percent of the production inputs (i.e. plastic, metal, electronic components, and wire) that go into making a TV, computer, or automobile in Mexico are supplied by foreign companies, mostly from the U.S. This is why there is a tremendous manufacturing/supply base on the U.S. side of the border with Mexico. President-elect Trump’s threat to slap 35 percent tariffs on Mexican imports to the U.S. is akin to slapping a 35 percent tariff on U.S. production that goes to Mexico. If this occurs, American jobs and investment will be affected.
A major point to consider is that companies in a supply chain are located where it makes the most sense for them from a total cost of business standpoint. A company with a labor-intensive production process will most likely be best situated in a country where labor is economical and plentiful, provided that the logistics costs of exporting their product to buyers in their final markets doesn’t significantly add to their costs. The company also must consider the skill level of the employees, local infrastructure, government regulations, the quality of local suppliers/service providers, foreign exchange rates, and company image. These and other costs add up to the total cost of business, which can differ greatly among companies and countries.
In many cases, a company will make the decision to leave the U.S. to produce in a country such as China or Mexico based on its total cost of business. Years ago, I witnessed many U.S. plastic injection companies move their operations to Mexico, because their production was labor intensive, labor being the major factor in the total costs. However, lately I have seen more of these operations either establish themselves in the U.S. or repatriate from places such as Mexico, because technology has automated the production process and created the necessity for reliable power and highly-skilled labor – both are factors on which the U.S. can compete.
Other U.S. companies move operations for other reasons. A few years ago, Burger King moved its corporate headquarters from the U.S. to Canada to escape higher U.S. corporate taxes. In this case, changing the U.S. tax law could result in a repatriation of white-collar jobs and investment, if Congress and the president can come to an agreement.
Several years ago, one U.S. company I know that produces large components for the energy industry chose to manufacture in Juarez, Mexico. One day, a manager of this company complained to me what a hassle it was for them to move their bulky products across the border on oversize loads to deliver them in the U.S. I asked why they didn’t just produce in the U.S. and was told that the components needed to be painted and coated. EPA regulations were so strict in the U.S. for the company’s paint booth that it made better sense for the company to set up in Mexico, and to deal with the complicated logistics of crossing their products into the U.S. at the border. In this case, policymakers must balance environmental concerns with job creation and investment.
Unfortunately, most of the labor-intensive industries for which free trade was made a scapegoat during the presidential campaign are not going to see their jobs come back to the U.S. because of factors such as cheaper labor and lower unionization in other countries, and increasing automation in manufacturing which results in less physical labor being required. Slapping a tariff on companies that have moved their production out of the U.S. is not going to result in these jobs magically reappearing in places such as Ohio or Michigan.
A sound government trade strategy must consider where policies can be enacted to make the U.S. a more attractive place to manufacture, rather than simply espousing punitive actions. This includes revising corporate tax laws, increasing the skills of American workers, and upgrading the infrastructure so needed to attract the highest quality manufacturers. Finally, toning down the rhetoric that tends to alarm or alienate important trade partners and companies which are responsible for American jobs is also an important part of this strategy.
Jerry Pacheco is President of the Border Industrial Association. His columns appear in The Albuquerque Journal.