2017-08-22 17:14:03
Economic Scene: Labor Wants to Make Nafta Its Friend. Here’s the Problem.

Can Nafta be re-engineered to raise workers’ wages?

Organized labor thinks so. As the United States sets out to renegotiate the North American Free Trade Agreement with Mexico and Canada, union officials are pinning their hopes on President Trump’s nationalist pronouncements, betting he can deliver what President Bill Clinton failed to put on the table nearly a quarter-century ago: real protection against cheap Mexican labor.

Fooled once by a labor “side agreement” that Mr. Clinton added to Nafta to gain union approval, but that proved unable to constrain employers’ misdeeds in any significant way, labor is aiming this time for the heart of what it considers unfair competition. It is demanding a guarantee that wages — especially Mexican wages — rise to ensure a “level playing field.”

Among an extensive set of recommendations presented to the United States trade representative, the A.F.L.-C.I.O. asked that Nafta guarantee that “all workers — regardless of sector — have the right to receive wages sufficient for them to afford, in the region of the signatory country where the worker resides, a decent standard of living for the worker and her or his family.” A decent standard of living, the labor federation specified, includes food, water, housing, education, health care, transportation, clothing and other essential needs, including the ability to save for retirement and emergencies.

Exporting a product that involved workers paid less than this living wage, at any point in the production chain, would be an outright violation of Nafta, subject to standard punitive procedures.

Mexican workers would undoubtedly appreciate being able to pay for all that stuff. Demanding a wage floor is the kind of straightforward arm-twisting that Mr. Trump might appreciate. Still, using Nafta to protect American jobs by mandating Mexico’s standard of living remains a fairly loopy idea.

“Stipulating that countries must pay above-market wages when producing export goods for the U.S. feels like outrageous economic imperialism,” said David Autor, an economist at the Massachusetts Institute of Technology. “Should Germany also impose this rule on the U.S., since our manufacturing workers surely make less than their German counterparts who are working under industry-level labor agreements?”

It is not the first time organized labor has thought along these lines. In the early ’90s, when Nafta had yet to become law, the union-backed Alliance for Responsible Trade argued that minimum wages in the tradable-goods sectors of all three North American countries should “move as quickly as possible toward that of the highest-wage country” and allow for a decent quality of life.

This time, though, labor has a better hand. It can afford to be bolder. A quarter of a century ago, unions reluctantly acquiesced to Nafta based on the premise that American workers would get the better end of the deal — new high-skilled, well-paid jobs in a regional supply chain that sent only its low-skill, low-wage bits south of the border.

What’s more, the cheap labor they so feared would become more expensive over time. Investment in Mexico by multinationals serving the North American market would naturally lift Mexico’s standards of living to converge with those of its neighbor to the north, turning Mexicans into rich consumers hungry for American-made products.

This didn’t quite happen. American manufacturing has lost millions of jobs, and typical household incomes have increased by less than half a percent per year. Most troubling for American workers staring into a future in which Nafta is still the name of the game, the wage gap with Mexico has not closed, even with the tepid wage growth in the United States.

Despite receiving billions in investments in gleaming state-of-the-art factories since Nafta came into being, Mexico’s auto industry still pays wages between a sixth and an eighth of those in the United States.

Mexico’s depressed wages remain a potent symbol of the shortcomings of Nafta as a tool for economic development. They offer a note of caution against the proposition that liberalized trade and investment alone can deliver the developing world from poverty.

“Wages are really low in both absolute and relative terms, among the lowest wages in Latin America,” said Ben Davis, director of international affairs at the United Steelworkers union.

“Low wages in manufacturing are not because of low productivity,” he said, but because of Mexico’s policy “of keeping wages low as an incentive for companies to locate there.”

Presented with a new shot at the trade deal, labor unions do not want to be fooled again. “In 1990 we would have been laughed out of the room had we talked about living wage,” said Thea Lee, who resigned as deputy chief of staff at the A.F.L.-C.I.O. in May after two decades at the organization. But “a lot of the comforting narrative didn’t happen.”

Still, the A.F.L.-C.I.O.’s argument does not quite deliver the justice for workers it so forcefully promises. Though Nafta has not produced a rich and prosperous Mexico, the labor federation’s demand for Mexican wages to be pulled up to a North American floor is unlikely to improve jobs or wages in the United States. What’s more, such a move could halt Mexico’s development.

The idea of a living wage, said Dani Rodrik of the Kennedy School of Government at Harvard, “is very difficult to define and can be harmful to employment if enforced too strictly.”

Nafta’s bad reputation is largely undeserved. It did not stop the decline in manufacturing jobs in the United States, but neither did it add much to it. Even the most persistent critics acknowledge that Nafta did not cost American workers more than a very small number of jobs. Neither did Nafta have much of an effect on wages north of the Rio Grande, according to most studies.

Researchers focusing on the most vulnerable sectors have identified substantial wage losses in narrow industries, like textiles and footwear. Yet it would seem strange to argue that protecting traditional low-skill industries should guide trade policy into the future.

Mexico’s dismal wages are an urgent problem. They will not rise by fiat, however, but only by improving productivity across the economy. Mexican labor productivity has grown less than 10 percent since Nafta came into effect, according to the Organization for Economic Cooperation and Development. That’s less than a third of the productivity growth in Canada, and less than a fourth of that in the United States.

What keeps Mexican wages down is not Nafta but Mexico’s vast informal economy outside the boundaries of laws and regulations, where half of the labor force toils in low-productivity jobs in small-scale manufacturing for the domestic market, low-skill services and the like.

Labor is right to worry about low wages in both the United States and Mexico, noted another economist, Gordon Hanson of the University of California, San Diego. “But a living-wage law would apply only to the formal sector, and that would make the formal sector even smaller.”

Nafta could be improved to better protect workers’ rights, assuming this is what the Trump administration really wants to do. Proposals by the A.F.L.-C.I.O. to facilitate complaints against abusive employers and to ensure quick and effective enforcement of agreed labor standards could prevent violations.

An improved Nafta could, indeed, help improve living standards for workers across North America — by further reallocating resources in the ways that are most productive. Regional integration gave the North American auto industry a competitive edge, for example, by adding a lower-wage platform in Mexico to make smaller cars. This increased the scale of production and helped sustain a larger ecosystem of auto parts makers, ultimately adding high-quality jobs that might otherwise have been lost to Asia.

Some jobs are likely to relocate to Mexico under this new deal, though. Policy makers must offer more than lip service to people displaced from their jobs by these transformations — including serious training programs and more robust safety-net services like, say, extended unemployment insurance and maybe even wage subsidies for workers who end up in lower-paying jobs.

But the core challenge is to figure out what will help productive, competitive industries grow in North America. That is something that putting a wage floor under the Mexican labor force will not do.