Back in May David Welch, formerly with the Star-Telegram and the long-time Detroit Bureau Chief for BusinessWeek, co-wrote an article with Nacha Cattan revealing how the autoworkers’ unions in Mexico are actually not on the side of the workers at all. Instead they function more like an employment service for automobile manufacturers looking to cash in by opening yet another factory south of the border.
Behind the scenes, manufacturers tend to cut deals with the union even before they announce yet another new Mexican factory. The one Welch and Cattan highlighted was BMW’s in San Luis Potosi; BMW reached its labor agreement with the Confederacion de Trabajadores de Mexico two days before making the announcement at the presidential palace in July of 2014. That agreement set the plant’s workers’ income at $1.10 per hour for many, with a top hourly rate of $2.53 for those on the assembly line.
In fact, since the manufacturer often pays the union’s dues directly, it’s probable that in newer factories, many Mexican auto workers don’t even know they belong to a union. Then again, the union will not be there to protect their rights, nor will it try to bowl over management for better wages. Instead, these so-called Protection Contracts put Mexico’s unions solidly on the side of manufacturers and the government.
Worse, the manufacturers’ freebies don’t end with a union decidedly anti-union in nature. No, $27 billion worth of new automobile and part suppliers’ factories have been announced for Mexico since 2010. And, to ensure that the factory owners’ outlay is the lowest possible, many state governments there have donated the land and promised to pay for all necessary infrastructure — highways, electricity, sewer systems, and rail lines. For the Mazda plant that opened in Guanajuato recently, the local state even paid half of the workers’ salaries for the first six months.
Mexico’s is not the first government to make these almost obscene offers to lure new factories to their country. Many of our own states have been known to literally give away the farm, as it were, in order to lure in one more factory. Infrastructure and other items, like training of a new staff for auto production, are often paid for by the taxpayers. Not to mention huge tax abatements, which starve the states of revenues just as their expenses go up for all the items promised to entice the plant in the first place. But in Mexico, this is all to create jobs that, as the New York Times wrote in June of 2015, may entail “12-hour days, often including weekends, that paid about $75 a week, with $3 of that disappearing into union dues.”
When states give millions, if not billions away to secure a plant, which often does little to elevate citizens’ income, one has to wonder why anyone gets at all excited about another new factory.
But in NAFTA’s case, it should be remembered that factories were already moving south of the Rio Grande, and taking advantage of the almost nonexistent wages paid on the other side, decades ago. Since NAFTA, Detroit was directly responsible for much of the mass migration south. In the original NAFTA agreement, the Big Three got language inserted that said if an automobile manufacturer didn’t have a factory in Mexico, then it would not be eligible to take advantage of the upcoming tariff reductions.
At the time, only Nissan and Volkswagen had such factories; but immediately Honda opened a little plant, which built a handful of Accords from kits, in order to qualify for the tariff reductions. Since then, virtually every name in the Japanese and German auto industries has either opened Mexico factories or has one under construction. BMW has another point on why Mexico makes sense; the country has more free trade agreements with other countries than the U.S., so it’s easier to export worldwide from Mexico than from their American plant. Or so they say. Personally, I bet it’s about the labor costs.
When General Motors’ massive factory opened in Silao back in 1996, many of the workers were so poorly paid that they quickly discovered they could sleep inside the Chevy Suburbans they had built that day, use the center consoles as chamber pots, and — as long as the gasoline held out — they even had air conditioning to make their sleep more restful.
It was reported at the time that many used those same Suburbans, once they were loaded onto rail cars, to ride the rails in comfort into the United States. To its credit, because of this and other incidents, GM soon said it would work toward finding ways to make sure its workers could have proper living quarters.
However, the previous year the Clinton Administration had been playing hardball with the Japanese over the claims that their home market for automobile sales was not friendly to Detroit’s offerings. Nor were the Japanese buying enough parts from American suppliers. At the time Clinton threatened a 100 percent tariff on Japanese luxury cars if they didn’t accede to Washington’s demands — which were really Detroit’s. To make sure the proper level of pain was applied, we manipulated the dollar-yen exchange rate to where one dollar was worth 79 yen at the bottom, with the result that vehicles like the Acura Legend L and the Infiniti J30 saw their window stickers climb from $32,000 to $42,000 within a year. (When Acura was about to bring its products to America in 1985, the value of the yen was still over 200 to the dollar.)
So, we shipped Chrysler Neons, Saturns, and Chevy Cavaliers to Japan, where they rusted on dealers’ lots; the Japanese auto companies purchased more American-made parts, and within years nobody cared about the results of those hardcore negotiations anymore. Proof of that is that GM ditched Delphi and Ford spun off Visteon into its own separate parts companies. That made all of 1995 negotiations and threats much ado about nothing.
Slapping Innocent Hands
A week ago Friday, the Commerce Department released a study that it claims aligns with the reasons the current administration is renegotiating the NAFTA agreement. Keep in mind that there are many reasons NAFTA could and should be renegotiated. After all, since it went into effect over 20 years ago the Internet, along with online commerce, has come into being; and because of its international scope this new trillion-dollar industry would be well served by having the rules codified into a trade agreements.
Of course, that’s not what the Commerce Department was pointing at as the reason NAFTA is now a failure. No, it’s because someone there noticed that the use of “American-made content” for vehicles assembled in Mexico and Canada has been dropping since 1995. In the case of Mexican auto production, the use of American-made parts dropped from 1995’s 26.5 percent to just 18.1 percent in 2011. While at the same time the content from non-NAFTA countries has jumped to 29.5 percent from just 13.2 percent in the same period. Hence Commerce Secretary Wilbur Ross’s complaint, in the Automotive News, that NAFTA’s rules of origin are little more than a backdoor way to use more Chinese auto parts.
Fair enough. There’s just one problem with this entire scenario that so far no one in the media has explained to the public. It may be true that Mexico’s autoworkers union is no such thing at all, just an employment agency that traffics in newly trained autoworkers for the benefit of the world’s automobile companies. But neither Mexico’s nor Canada’s government has a single thing to do with automobile manufacturers’ buying parts from America, Mexico, Germany, Taiwan, or even China.
Think about it. We’re negotiating with countries over our claims, mostly accurate in nature, about where the parts come from in vehicles produced somewhere other than here. But it’s the car companies that make those decisions. That’s right. It’s General Motors’ purchasing department that buys parts for its Mexican- or Canadian-built vehicles from either here, China or wherever. The same is true for Ford or anyone else.
And the media has long pointed out that car companies go to their known supplier chain and start the discussion for new parts with one threat: If you don’t match the “China price” for this part, you won’t build it for us. This has been a sore point with parts suppliers for years and they have complained loudly about it.
Now let’s add capitalism to the mix. The entire concept of capitalism is to seek the lowest possible costs for production so you can maximize profits by selling your product at a price the public can afford. Corporations are always seeking the lowest cost of money, supplies and labor in order to survive and prosper. And we should remind everyone that the whole idea of free trade agreements is to lower the cost of doing business by removing or substantially lowering tariffs between countries.
However, capitalism in its purest form is fairly cruel. That’s why governments get involved, to smooth its rough edges. That’s how we went a century without a peasants’ revolt.
Still, back to the NAFTA situation. Why are we negotiating with countries to rewrite NAFTA when those countries had nothing to do with finding loopholes in the treaty to buy parts elsewhere for automobile production? Why isn’t Washington negotiating with the world’s automobile manufacturers about where their content, and what percentage thereof, comes from? After all, if we cut a new NAFTA deal, it’s simply a proxy to force automakers to buy more American parts.
These negotiations look similar to Clinton’s 1995 negotiation to get the Japanese to buy more American parts and cars. Its upshot: Our cars were shipped to Japan, where they rusted until Japanese automakers cut prices in half to get rid of them. (The Chevy Cavalier was renamed the Toyota Cavalier in Japan. In time Toyota sold them half off list in a fire sale, thereby disposing 20,000 of them.) The Japanese bought more American parts, but GM and Ford got out of that business anyhow. Meanwhile, the price of many cars imported from Japan went through the roof as the yen strengthened against the dollar. Even the inexpensive Mazda Protégé went from $14,000 to $18,000 overnight.
Now Mexico and Canada have to deal with yet another free trade agreement in flux, which technically isn’t a free trade agreement at all: It dictates where parts must be sourced from. That said, Mexico and Canada are looking like the villains in this story, but it wasn’t those countries or any of their government agencies that ordered parts for automobile production there. No, the car companies made that decision, as they always have.
We’re just not negotiating with them.
© Ed Wallace 2017, Ed Wallace is a recipient of the Gerald R. Loeb Award for business journalism, bestowed by the Anderson School of Business at UCLA, and hosts the top-rated talk show, Wheels, 8:00 to 1:00 Saturdays on 570 KLIF AM. Email: firstname.lastname@example.org