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NAFTA- Is It As Bad As People Think?

by Don Dovgin

There is a perceived notion that NAFTA has created a substantial economic loss for Americans. In a effort to reduce their labor costs, many companies continue to move some of their manufacturing plants to Mexico. The truth is that lost US manufacturing jobs are actually offset by an increase in exports. When more products are being exported, the increased demand drives more manufacturing.

Because only a portion of an organizations' manufacturing gets located over the border, we still experience an increase in manufacturing jobs back here in the US. This also feeds jobs into the corporations' supply chain network....trucking, warehousing and distribution.

A cross-sectional analysis of US-Mexico trade by state in 2000 shows that exports to Mexico tend to be positively correlated with higher levels of state income and lower levels of state unemployment. Export growth to Mexico by state averaged 28 percent, while state income growth averaged 5 percent in the year 2000.

Interestingly, the 18 US states which broke the 28 percent export growth barrier significantly outperformed the rest of the union in state income growth. Such is the case of Florida, where exports to Mexico grew 59 percent and income expanded 6 percent. Similarly, Nevada’s figures are 106 percent and 9 percent, Idaho 66 percent and 7 percent, and Arizona 42 percent and 7 percent.

There are 15,000 American companies with plant operations in Mexico. Everything from Ford Trucks, to IBM PC's to Tommy Hilfiger...all made over the border.

Just a few facts about the effects of NAFTA.

• On average, the United States and Mexico trade more than US$720 million every day.
• There was $659 billion in trade amongst Canada, the U.S. and Mexico in 2000; an average of 16% higher than before NAFTA.
• 44 out of 50 US states --88 percent of the Union—experienced growth in exports to Mexico in 2000 compared to only 28 states in 1993.

There are great opportunities for companies wanting to do business in Mexico. While some may be opposed to this culture change, the truth is the benefits outweigh the disadvantages. Companies moving their manufacturing over the border do this to stay competitive with foreign corporations.

After all, it must be working; otherwise how would I be able to buy a pair of jeans for the same price as I did 20 years ago?

IS MOVING YOUR PLANT TO MEXICO THE RIGHT CHOICE?

1. Evaluate the product - Are the materials and secondary services needed available in the region or do they need to be imported and developed at additional costs? Will special technology or processes training be necessary? Are they proprietary?

2. Determine the labor content - What percentages of the operations contain actual labor? Is there enough manual labor to justify the move?

3. Management - Above all do not make the assumption that once you decide to move to or source in Mexico that the operation will manage itself. Even with local managers in place, you need to monitor and stay in constant contact to guarantee the operation is running smoothly. Frequent visits and phone calls by corporate managers are needed to show you are closely watching the operation.

4. Product Destination - Where is the product's final destination? Remember to add freight and duty costs if the product is being shipped back to the US. Weight isn't the only factor when looking at shipping charges. Large lightweight parts can cost more than their smaller heavier counterparts.

5. Quality - Does your product have inherent quality issues that may require frequent visits or late night phone calls? Do you have the staff and resources available to handle the added burden of travel and late hours?

6. Customers - Are your customers open and agreeable to having their product made in Mexico?

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