The New NAFTA Is Exporting the Same Old Bad Habits

Protectionist policies produce negative results.


Trade agreements have been greatly successful at lowering trade barriers around the world. But they're not without their flaws. Each agreement, in practice, tends to retain some counterproductive protectionist policies and may even export some bad policies. The United States-Mexico-Canada Agreement (USMCA), or "new NAFTA," is no different.

As soon as President Donald Trump got into office, he threatened to withdraw from the North American Free Trade Agreement. He imposed metal tariffs on steel and aluminum for the stated purpose of forcing Canada and Mexico to renegotiate the 25-year-old trade agreement. The result was the USMCA.

Assessing the impact of this new agreement, a recent International Monetary Fund paper found that on net, the USMCA is more protectionist than NAFTA and will impose net welfare losses on Americans. The main manifestations of this greater protectionism are "tighter rules of origin" and a new minimum wage requirement for producers of automobiles and auto parts.

NAFTA had some rules on the country where products originate, but it had no minimum wage requirement. In contrast, the USMCA (assuming it's approved by Congress), will require that 40 percent of a car is made in plants where the workers are paid at least $16 an hour or U.S. tariffs will be imposed on those cars.

This minimum wage requirement is a perfect example of how the United States exports unsound labor regulations to our trading partners through trade agreements, in this case to Mexico. At an industry average of $3.14 per hour, it's true that the Mexican autoworker wages are generally lower than in the United States. But this reflects the reality that the productivity of workers in Mexico is much lower than that of U.S. workers.

As economists have known for years, artificially increasing the cost of employing workers reduces the number of workers employed. This USMCA provision will therefore drive some Mexican autoworkers out of the auto industry and into even lower-paying jobs.

This argument isn't merely theoretical. It's supported by many empirical studies. While the degree to which minimum wage affects employment varies by sector, the indirectly proportional relationship is real. It hits workers with the lowest skills the hardest. Some workers obviously benefit from the mandated higher wage, but these workers' gains come at the expense of other workers.

Consider the impact of the minimum wage hike from $11 in 2017 to $13 last year to now $15 on New York City's restaurant industry. While most NYC industries were already paying higher wages and were mostly unaffected by the hike, a jobs recession has hit the city's full-service restaurants.

A recent piece in The Wall Street Journal notes, "Employment in January dropped 3.7% year over year, according to the Bureau of Labor Statistics. At the start of 2018, the Big Apple's sit-down restaurants had 167,900 employees. This January, after the wage bump, it fell to 161,700, a three-year low." According to a New York City Hospitality Alliance survey of full-service restaurants, "Nearly half, 47%, planned to eliminate jobs in 2019 to deal with higher labor costs. Three-fourths expected to cut employee hours, and 87% said they would raise menu prices."

This is the type of policy we'll export to Mexico through the USMCA, and the reason we're doing so is as simple as it is sad: protectionism. Encouraged by U.S. automakers and autoworkers' unions, our politicians believe that this measure will artificially boost demand for cars made in the United States. Want evidence? Speaker Nancy Pelosi announced that the House of Representatives won't vote on the USMCA until Mexico implements the labor requirements.

Of course, Pelosi claims that this is about "how workers are treated in Mexico"—the assertion being that this provision will do much to raise wages there. It may for some. However, unless the laws of economics are somehow suspended in Mexico, we should expect a negative impact on others.

For instance, faced with higher labor costs, Mexican automakers may choose to give up the tariff-free trade and simply pay an additional levy on their exports instead of raising wages. They might also decide to set up their supply chain outside of the USMCA zone, where labor remains cheap. This law may accelerate the already existing trend toward electric cars using globally sourced software.

Either way, some Mexican workers will ultimately be harmed in the process. And don't count on American workers reaping the benefits of this government-created situation.


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  2. How dare we change the rules to prevent Canada from gaming the system!

    1. How dare we interfere with the free exchange of goods and services!

      1. Like Canada and Mexico do and the renegotiated agreement improved?

      2. “muh anarchy!”

    2. +100

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    Julian Assange was arrested by British police today after being hauled out of the Ecuadorian embassy in London following an extradition request by the US.

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      1. I would not be surprised if Wikileaks still have some documents that it has not released.

        For a ‘special occasion’ like this.

        It looks like criminal charges in the USA have been dropped because of the 1st Amendment but Assange is wanted for testimony before a Grand Jury and rape charges in Sweden.

    2. Assange showed up on gubmint radar after allegedly interfering with launch of a space probe out to where there is no solar energy. Addled by antinuclear dinning, the fool imagined the Seebeck effect plutonium batteries would somehow pose a threat to Mankind out near the orbit of Jupiter. Wikileaks were useful in understanding how the 2008 asset-forfeiture crash was eventually palmed off on primitive countries via exportation of enough prohibitionism to collapse THEIR economies. Here’s hoping the system survives and that Assange reads Petr Beckmann’s “The Health Hazards of NOT Going Nuclear”

    3. ‘the UK must resist’

      Good luck with that.

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  5. “…Mexican autoworker wages are generally lower than in the United States. But this reflects the reality that the productivity of Mexican workers is much lower than that of U.S. workers.” Any time someone says something as useless as “this reflects the reality that…” you can bet that they have no data to back up the claim. And of course she doesn’t, because economic systems are complex and it’s almost impossible to single out factors that determine outcomes. Does Veronique really think that productivity is the only possible reason wages can be lower? How about the relative supplies of labor in each country? How about the strength of the employers? How about regulations? Orthopedic surgeons in Sweden make slightly more than half the income of those in the U.S. I guess Swedish surgeons must be half as productive as US surgeons.

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  7. Veronique’s article brings to mind posters from the protectionist Mckinley campaign of sixscore years ago; pictures of ragged and emaciated foreigners showing their average national wages. But that was after the Supreme Court repealed the communist income tax that has been tacked onto the 1894 tariff act. Communist manifesto taxation was pushed by red Altrurians and white Dixiecrats as the way to eliminate and replace the protective tariff. If only we had it so good today. During the first Wilson Administration, government squandered but 1/8 of the gross national product (according to Herbert Hoover).

  8. “Either way, some Mexican workers will ultimately be harmed in the process. And don’t count on American workers reaping the benefits of this government-created situation.”

    File Mexican workers under “Not the US Federal Government’s Responsibility”.

    Reason does so hate any policy that puts America First. Or worse, that puts American Workers First.

    I like the relentless denial that limiting the ability of Mexican workers to compete in the US market won’t benefit US workers. Reason loves repealing the law of supply and demand when it doesn’t maximize corporate profits as they lecture us about economics.

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