Is it Time for a New NAFTA?

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Commentary by Doug Donahue

Much has been made of the 20th anniversary of NAFTA, the pact which originally came into force on January 1, 1994. A fascinating Economist article cites the example of Bombardier’s Learjet 85 as a quintessential NAFTA success story. With the exception of the wings, made in Northern Ireland, the plane is entirely a North American product. The fuselage is made at Bombardier’s plant in Querétaro, the engines are made in Canada but designed by US firm Pratt & Whitney, with final assembly taking place at Learjet’s headquarters in Wichita, Kansas.

No matter how one feels about NAFTA politically, it’s clear the pact has opened up many new opportunities for US, Mexico and Canadian companies. It might be the OEMs like Bombardier that we read about in The Economist, but there is an entire supply chain of providers underneath that are also benefitting too. Meggitt Aircraft Braking Systems, a US-based supplier of aircraft wheels and brakes that manufacturers parts in Entrada Group’s facility in Zacatecas is the type of company that leveraged new opportunities courtesy of NAFTA. There are hundreds of others.

A New Era
Today’s world of manufacturing is hugely different from what it was 20 years ago. These changes are due not just to the emergence of China and SE Asia as manufacturing powerhouses, but also to huge advances in technology. Manufacturing is far more efficient now in comparison to 20 years ago. Thus, in real terms today, American companies create more value-added product today than when NAFTA was implemented.

At the same time, there are fewer people employed in the manufacturing field in the US compared to when NAFTA came into force. This is mainly due to the growth of automation in the field, not to Mexico taking away manufacturing jobs from America.

However, you cannot fully remove some labor-intensive aspects from the manufacturing process, and this is where Mexico has grown immensely. That growth has also had a net effect of helping US and Canadian manufacturing to expand too. If anything, the trend of labor-intensive manufacturing heading to Mexico will only become more prominent in the future. But while some may lament the loss of American and Canadian jobs to Mexico, the reality is that if NAFTA didn’t exist, those jobs would likely be in China anyway. Think that would be better, overall, for US or Canada?

Demographics and Priorities
Mexico’s manufacturing base will continue to grow because the American and Canadian workforces are getting older and we have a labor shortage, particularly for low-wage manufacturing jobs. There aren’t enough CNC workers, welders or technicians, for example, right now in the US and Canada because they are aging and not being replaced. If anything, this trend will only become more prominent in the coming decade.

Further, on the US side, engineering and math education is no longer a priority, so we won’t turn out the next generation of engineers to replace those retiring. Mexico, on the other hand, is focusing in a big way on both on-the-job training programs to elevate their engineering skills as well as state-sponsored educational programs to respond to the growing need for technicians. It is a strength they are continuing to bolster and the US is falling Mexico there.

Foreign companies operating in Mexico, in partnership with the Mexican government, are training the next generation of engineers, instead of handing production over to China or losing out to China. The strength of technical training in Mexico is keeping foreign companies from the need to go to China in the first place.

It illustrates a large philosophical difference between manufacturing in Mexico versus in China. Mexico is willing to partner with foreign companies and work together on elements like workforce development. The same can’t be said for China, where Chinese manufacturers prefer to take over wholesale all the manufacturing on their own and just sell back to the West. It’s another reason why Mexican manufacturing is proving more attractive.

Source: The Economist

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