NAFTA and Improving Labor Standards in Mexico: You can’t get there from here

NAFTA renegotiations are in full swing. The second round is currently underway in Mexico City with the main issue emerging as differential labor standards among the three countries. The main concern on the part of Canadian and U.S. negotiators and their respective trade union movements is the much lower wages and poorer working conditions in Mexico as compared to the other two countries. The argument of course is that lower pay and poor working conditions in Mexico are at the root of the flow of jobs southward, putting downward pressure on labor standards in the U.S. and Canada and swelling corporate profits. The argument that NAFTA has been a bad agreement for working people in all three countries is a compelling one. That being said, can a renegotiated NAFTA agreement do anything much to address workers’ plight in Mexico? Some observers are optimistic, even seeing Trump’s push for better wages and working conditions as potentially positive for Mexican workers. However, I have my doubts.

The Employment Deficit in Mexico

Probably the most important reality to bear in mind is the fact that, on balance, NAFTA has not been a win for Mexico in the area of job creation. An estimated 60 percent of the economically active population works in the informal sector, which includes such activities as shining shoes and opening your cab door for you—essentially disguised unemployment. This has been a long-standing problem in Mexico, but NAFTA has done nothing to mitigate it. Arguably, just as many jobs have been lost as have been gained through the NAFTA due to the impact of trade liberalization—more if we consider the devastation wrought on the small farmers of southern Mexico by corn imports. In fact, according to a recent World Bank report, manufacturing jobs have been declining in Mexico—a fact we tend to lose sight of if we just focus on the auto sector.

NAFTA and Improved Labour Standards: The Impact may not be good

So what will upping labor standards do in this context? Given that one of the main reasons companies locate in Mexico is to reduce labor costs, removing this incentive will cause companies to flee to places (such as Central America) where they can continue to pay competitively low wages. Indeed, this has been a chronic problem for Mexico all along. The government needs to keep wage rates down to prevent firms from leaving. Hence, if wages increase, more Mexican workers will join the informal sector where working conditions are poor, pay is low and unstable, and social benefits of any kind are absent. It is pertinent to bear in mind that although wages in the foreign companies in northern Mexico are very low in comparison with those in the U.S. and Canada (Mexican assembly plants pay about $US 8 an hour), they are the best wages in the country. Raising wages in these Mexican plants (assuming that the plants do not up and leave), will probably not help most Mexicans. Without an overall improvement in incomes, increasing wages in foreign assembly plants will mean a further increase in the country’s already high level of inequality, which is counterproductive to political stability and social peace.

Increasing the Power of Trade Unions: Not a Panacea

Measures to strengthen the power of trade unions are often suggested as key to improving wages and working conditions. In northern Mexico, for example, the imposition of “white unions” (unions under the control of management) is a common and effective strategy used to keep labor costs low. Weak government controlled trade unionism is a long-standing feature of the Mexican political scene. The building of strong and independent trade unions is a place to start. However, we can expect Mexico’s NAFTA negotiators to fight tooth and nail against any reforms that might be conducive to strengthening the country’s unions as doing so will erode the current comparative advantage for cheap labor and mean substantial job losses. Furthermore, stronger trade unions, and even measures facilitating the formation of new unions, is not going to help those millions of Mexican workers engaged in informal employment.

What Mexico needs is more employment generating productive activities. Mexico needs more jobs and it needs better paying jobs—framed as decent employment in the Sustainable Development Goals. More gainfully employed Mexicans will create a larger domestic market and more purchasing power. This will stem the flow of migration northward and provide more trade and investment opportunities for everyone. NAFTA, however re-negotiated, unfortunately is unlikely to provide this for Mexico because from its inception this agreement has shared the economic policy assumptions of economic globalization: that the objective of economic activity is not improvement in human welfare, but being competitive by integrating production, lowering costs, and increasing exports.