U.S.-Mexico Trade: Pulling Together or

Pulling Apart?

September 1992

OTA-ITE-545

NTIS order #PB93-101707
Recommended Citation:

U.S. Congress, Office of Technology Assessment, U.S.-Mexico Trade: Pulling Together or

Pulling Apart?, ITE-545 (Washington, DC: U.S. Government Printing Office, October 1992).
Foreword

In a matter of months, Congress will be asked to ratify or reject what is likely to be the

final round of debate over the proposed North American Free Trade Agreement (NAFTA).

One side in this debate argues that a NAFTA will mean increased prosperity for the United

States and Mexico. Others hold that it would lead to ruthless economic competition based on

low wages, and hence to stagnant productivity on both sides of the border. The most dismal

predictions see a wholesale movement of U.S. manufacturing to Mexico.

In this report, requested by the House Committee on Education and Labor and the Senate

Committee on Labor and Human Resources, OTA finds little likelihood that a NAFTA, by

itself, will lead to the most dismal scenarios. But OTA’s analysis also indicates that market

forces alone are not likely to produce the social and economic rewards the heads of both states

have promised from a free trade agreement.

For both countries, the key to success in managing the social and economic

transformations of the coming decades lies with the institutions that frame public and private

choices---decisions made by employers, by workers, by government officials. In the United

States, that framework still reflects the mass production era of the first half of the century,

when labor and management hammered out an uneasy accommodation and the Federal

Government in the New Deal years took on greater responsibilities for managing the

macroeconomy and providing a safety net for laid off workers and their families.

More recently, Washington has been backing away from these responsibilities, without

replacing them with new institutions and new policies suited to a ‘‘postindustrial’ U.S.

economy that is much more a part of the world economy than even a half-generation ago, The

NAFTA debate provides an occasion to reconsider U.S. institutions. Among the reasons for

doing so, perhaps the most pressing lies in the social strains that would be created by a future

of dead-end jobs for less educated workers in the lower half of the Nation’s income

distribution.

The subtitle of this report is intended to convey one of its central findings: labor,

management, and society at large must pull together in the United States, or the social strains

created by ‘ ‘globalization’ could pull the Nation apart. The subtitle also conveys a second

message: Mexico and the United States, neighbors sharing a 2000-mile border and

distinguished by a host of cultural and institutional differences, cannot negotiate a divorce.

Their economies are intertwined, and will become more so in the future. A NAFTA could

bring out the worst in each nation, or it could put them on the path to mutually supportive

high-wage, high-productivity strategies.

&d? AJ#L&kJOHN H. GIBBONS

Director

. . . Ill
Advisory Panel—U.S.-Mexico Trade

Diego Asencio

Former Assistant Secretary of State

Steven Beckman

United Auto Workers

Robert Dillon

Sony Corporation of America

John T. Eby

Ford Motor Company

Sheldon Friedman

AFL-CIO

John Stepp, Chairman

Restructuring Associates

M. Patricia Fernandez Kelly

The Johns Hopkins Institute for Policy Studies

Peter Morici

The University of Maine

Harold Eugene Nichols

Local 717, International Union of Electrical,

Radio, Machine, and Furniture Workers

Robert Paarlberg

Wellesley College

Michael Piore

Massachusetts Institute of Technology

William A. Raftery

Raftery Consultants

Mark Ritchie

Institute for Trade and Agriculture Policy

Elizabeth Santillanez

Western Governors’ Association

Steven Schlossstein

SBS Associates, Inc.

Robert Swadell

PALCO

Sidney Weintraub

University of Texas

Vim R. Whiting, Jr.,

University of California at San Diego

Len Young

AT&T

Raul Yzaguirre

National Council of La Raza

NOTE: OTA appreciates and is grateful for the valuable assistance and thoughtful critiques provided by the advisory panel members.

The panel does not, however, necessarily approve, disapprove, or endorse this report. OTA assumes full responsibility for the

report and the accuracy of its contents.

iv
OTA Project Staff—U.S.-Mexico Trade

Lionel S. Johns, Assistant Director, OTA

Energy, Materials, and International Security Division

Audrey B. Buyrn, Program Manager

Industry, Technology, and Employment Program

John A. Alic, Project Director

Margaret L. Hilton, Deputy Project Director

Kenneth E. Freeman

Stephen A. Herzenberg

Gretchen S. Kolsrud

Jerry R. Sheehan

Contributors

Robert D. Atkinson

W. Wendell Fletcher

Deanna Haremend, Congressional Research Service

Michael J. Phillips

Elizabeth G. Tsehai

Howard Wial

Administrative Staff

Carol A. Guntow, Office Administrator

Diane D. White, Administrative Secretary

Publishing Staff

Mary Lou Higgs, Manager, Publishing Services

Chip Moore

Cheryl Davis Dorinda Edmondson Denise Felix

Christine Onrubia Bonnie Sparks Susan Hoffmeyer

Contractors

Thomas Bailey

Jack N. Burby

Susan M. Christopherson

Martin Kenney and Richard Florida

Thomas H. Kelly

Sylvia Maxfield

Harley Shaiken

Leslie A. Sklair

Wallace E. Tyner

Gary W. Williams

Particia A. Wilson
Contents

Page

Chapter 1. Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Chapter 2. Policy Issues and Options: Incentives for a High-Productivity Future . . . 25

Chapter 3. Mexico’s Needs: Growth and Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

Chapter 4. Two Traditions, One Continent: Labor Relations and Labor Markets

in Mexico and the United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77

Chapter 5. Mexico’s Workers: Bonanza for U.S. Companies? . . . . . . . . . . . . . . . . . . . . . . 97

Appendix 5A. Economic Models as Predictors of NAFTA Impacts . . . . . . . . . . . . . . . . 109

Chapter 6. The Border: A Boundary, Not A Barrier . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115

Chapter 7. Autos and Parts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133

Chapter 8. Electronics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153

Chapter 9. Apparel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175

Chapter 10. Agriculture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197

Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 215

Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 219

vi
Chapter 1

Summary
Contents

Page

PRINCIPAL FINDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Short-Term Impacts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Longer-Term Social and Economic Impacts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

POLICY AND THE NAFTA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

MEXICO’S INDUSTRIAL DEVELOPMENT PROSPECTS . . . . . . . . . . . . . . . . . . . . . . . . .

THE SECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

THE UNITED STATES, MEXICO, AND NORTH AMERICA: TWO SCENARIOS . .

4

4

6

7

11

12

19

Boxes

Box Page

l-A. What Happens to U.S. Workers Whose Jobs Move to Mexico? . . . . . . . . . . . . . . . . . . 5

l-B. Free Trade Theory and the Economic Consequence of NAFTA . . . . . . . . . . . . . . . . . . 6

l-C. Mass Production, Flexible Production, and Sweatshops in the Garment Industry . . . 21

Tables

Table Page

1-1. Summary List of Policy Options . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1-2. Policy Options for the Near Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1-3. Autos and Parts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

l-4. Electronics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1-5. Apparel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1-6. Agriculture and Food Processing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1-7. Alternative Development Paths for the U.S. Economy . . . . . . . . . . . . . . . . . . . . . . . . . . .

8

9

13

15

16

18

19
Chapter 1

Summary

The United States and Mexico are vastly different

nations, one rich, the other poor, one with political

and legal roots in England, the other a blend of

Imperial Spain and ancient native American civilizations. If the countries implement the proposed

North American Free Trade Agreement (NAFTA),

they would begin an unprecedented experiment in

economic integration—the creation of a single

market spanning an industrialized country and a

developing country with over one-third the population but only one-tenth the per-capita gross domestic

product (GDP).

OTA’s analysis suggests that market forces alone

are not likely to produce significant social and

economic rewards following a free trade agreement.

To yield substantial rewards, trade liberalization

will have to be accompanied by significant changes

in other aspects of U.S. and Mexican policies.

●

●

If it is, more open trade could increase prosperity and raise standards of living in both

counties.

If it is not, closer economic links between the

two countries could bring out the worst in each,

driving down wages and living standards in the

United States without accelerating development in Mexico.

To put the United States and Mexico on the right

course will require fundamentally changing relations among government, industry, and labor in each

country.

In the United States, the necessary changes could

begin with Congress serving notice that competing

based on low wages is not acceptable and that

government and the private sector are committed to

creating incentives for high-productivity, high-wage

strategies that will yield benefits for communities,

workers, and employers throughout the Nation.

In Mexico, a similar commitment may be necessary, in part through a relaxation of the government’s hold on labor unions and wage setting. In

addition, to complement foreign competition and

deregulation in its efforts to strengthen the economy,

Mexico’s government may need to actively promote

human resource development and diffusion of modem technology and organizational practices.

In both the United States and Mexico, negotiations over free trade represent part of a search for

new economic strategies that will bring back the

prosperity of the 1940s through the 1970s. In this

period, with their economies insulated from foreign

competition—by protectionism in Mexico and technical superiority in the United States—both countries enjoyed rising investment, consumption, productivity, and output. GDP grew at between 6 and 7

percent a year in Mexico and at roughly half that rate

in the United States. By the mid-1970s, workers in

the United States and Mexico earned roughly twice

in real terms what they had earned 30 years earlier.

Since the mid-1970s, stagnant productivity and

increasing international competition have brought

real wages in both countries back to the level of

1965.

In the United States, the end of the 30-year

post-World War 11 boom has hit less-skilled and

less-educated workers particularly hard (ch. 4).

From 1973 to 1991, hourly wages of male high

school graduates with 1 to 5 years of experience

declined by 29 percent. From 1980 to 1989, the

proportion of full-time workers with annual incomes

below the poverty level for a family of four rose

from 12 to 18 percent. It is in this context that the

United States, Mexico, and Canada began negotiating a NAFTA in June of 1991. (This assessment

responds to a request from Congress for an evaluation of the effects of an agreement with Mexico on

U.S. jobs and economic opportunities; OTA does

not deal here with the implications of U.S. trade with

Canada.)

OTA’s analysis indicates that a NAFTA would

not have large aggregate impacts on U.S. jobs and

job opportunities for the first 5 years, in part because

many NAFTA provisions would be phased in

gradually. Over a longer time period, during which

the impact of increased investment flows to Mexico

would be felt, the impacts could be more substantial.

For workers who lose their jobs because of a

NAFTA, whether in the short or long run, the

consequences can, of course, be devastating.

For the Mexican Government, NAFTA represents

the most recent in a series of steps toward a more

open- and market-oriented economy and away from

-3–
4 ● U.S.-Mexico Trade

a heavily protected, highly regulated one. The first

major step took place when Mexico joined the

General Agreement on Tariffs and Trade (GATT) in

1986, and began lowering the barriers that had

protected its industries for more than 50 years. Now

it seeks further industrialization by exposing Mexican firms to the spur of foreign competition and

encouraging foreign direct investment (FDI) and

transfers of technology that will help create new jobs

for a rapidly growing workforce (more than half the

population is under 20 years of age-see ch. 6).

Many in the United States worry that more

U.S.-based firms will move to Mexico to take

advantage of wages and benefits that average

roughly one-seventh of U.S. levels and that the shift

of investment to Mexico would be at the expense of

U.S. workers. After all, when Mexican wages

dropped by nearly two and a half times relative to

U.S. wages during the economic crisis of the 1980s,

production in border maquiladoras shot upward. In

this view, “footloose plants” might also move to

Mexico to escape stricter U.S. enforcement of

pollution and workplace health and safety standards.

Others in the United States see foreign investment

and movement of lower skilled jobs to Mexico as

complementing a U.S. economy focused on highwage, high-skill jobs. In this view, FDI would also

generate the wealth Mexico needs to enforce tighter

environmental and workplace standards and to

provide a growing market for U.S. goods.

OTA’s analysis indicates that whether a NAFTA

works for or against either country will depend on

how integration is managed. Managed well, with

adoption of new labor and industrial policies to help

the United States adapt to a unified continental

market, economic integration could enable U.S.

workers to enjoy 1 or 2 percent increases in living

standards over the next 15 years. Mexico could grow

at the 5 to 10 percent annual pace of developing

Asian nations such as Thailand.

Managed poorly, less educated workers in the

United States could expect to continue losing about

1 percent of their real wages annually while, after 15

years, Mexican workers would barely recover the

ground they lost in the 1980s.

So far, economic integration between the United

States and Mexico has not been managed well.

NAFTA presents an opportunity to begin managing

it better. This report focuses on how to take

advantage of that opportunity. In doing so, OTA

draws on considerable past analysis of international

economic competition and the implications for U.S.

workers, including: Technology and Structural Unemployment: Reemploying Displaced Adults (1986);

Making Things Better: Competing in Manufacturing

(1990); Worker Training: Competing in the New

International Economy (1990); Competing Economies: America, Europe and the Pacific Rim (1991);

and After the Cold War: Living with Lower Defense

Spending (1992).

PRINCIPAL FINDINGS

The United States and Mexico are negotiating a

free trade agreement at a time when workers in the

United States, particularly the roughly 50 percent of

the labor force that has no more than a high school

education, have suffered significant declines in

living standards. With or without a NAFTA, further

absolute and relative declines in living standards—

particularly for those in once high-wage manufacturing industries—are likely over the next 15 years. It

will take a concerted national effort, with cooperation among business, labor, and government, to help

the less affluent half of the U.S. workforce enjoy

even modest improvements in wages and economic

security.

1.

2.

3.

Short-Term Impacts

Over the next five years, a NAFTA is not likely

to have large impacts on job opportunities for

U.S. workers, primarily because Mexico, not

the United States, has the more protected

economy. As a result, reductions in tariff and

non-tariff barriers are more likely to boost

U.S. exports to Mexico than Mexican exports to the United States.

Because Mexico has not made a sustained

effort to upgrade its technology base and the

education and skills of its workforce, products

manufactured by Mexico’s domestic industry

are not likely to compete with sophisticated

U.S. manufactured goods. However, production by U.S. and other foreign investors in

Mexico, who have the technology and resources to improve the efficiency of the

Mexican workforce, could threaten U.S.

workers making more sophisticated products, such as auto engines.

Although Mexico has a comprehensive set

of legal protections for workers that some-
..—

Chapter l--Summary ● 5

times exceed those in U.S. law, the exercise

of government authority to interpret and

enforce those protections seriously compromises workers’ rights to form unions, to

bargain, and to strike. The Mexican government used these powers to reduce real wages

by 40 percent in the 1980s and to keep wage

increases modest as the Mexican economy

recovered in the early 1990s, Health and safety

standards in Mexico are also poorly enforced,

especially in smaller enterprises. As a result,

while trade with Mexico is not responsible for

the current predicament of U.S. workers or the

weakness of the U.S. system of labor protection, accelerating economic linkages with

Mexico could reinforce downward pressure on

U.S. wages and labor standards. Despite this

potential, the U.S.-Mexico Memorandum of

Understanding on labor issues, a response to

congressional pressure, has led only to limited

information exchange between the U.S. Department of Labor and its counterpart agency

in Mexico. Discussions have skirted core

worker rights issues in each country.

4. The impacts of a NAFTA on U.S. workers will

vary by and within industry sectors. These

impacts will include direct job losses and job

creation, as well as downward pressure on

wages and benefits for some workers who

retain their jobs. Workers in apparel, auto

parts, and TV assembly are already suffering

job losses due to movement of production to

Mexico; NAFTA may reinforce this tendency.

Regardless of whether the net effect on U.S.

jobs is positive or negative, the workers most

likely to be dislocated (e.g., workers producing standardized commodities such as blue

jeans) lack the skills for jobs that may be

created (e.g., machinists and technicians in

U.S. firms producing capital goods for

Mexican factories). Box 1-A illustrates the

difficulties faced by workers already laid off

due to trade with Mexico.

Immigration

5. Legal and illegal migration from Mexico to the

United States will remain high. In the short

run, a NAFTA promises to reduce employment in Mexico’s agricultural and smallfirm sectors and thereby increase emigration to the United States.

Box l-A—What Happens to U.S. Workers

Whose Jobs Move to Mexico?

Since 1983, Pillsbury Green Giant has reduced

its workforce in Watsonville, California, by about

1,000 workers. These food processing workers,

predominantly Hispanic women, have lost unionized jobs paying $7.50 to $12 per hour. The work

has been moved to Gigante Verde in Irapuato,

Mexico, where costs for the highly labor-intensive

initial processing of broccoli and cauliflower are

much lower. In January 1990, the company announced plans to move all cauliflower and broccoli

processing (including harvesting, trimming, blanching, and freezing, but excluding final packaging) to

Irapuato. Final packaging, a highly automated

process, continues to be done in the United States,

at Watsonville and at plants in Ohio and Illinois.

Watsonville also continues to do some of the initial

processing of California-grown vegetables.

Since 1990, the Watsonville workforce has

shrunk from 550 workers to 170. A joint unionmanagement-government outplacement and retraining program, established with Federal funds

through the EDWW (Economic Dislocation and

Worker Adjustment Assistance) program, provided

some help. Santa Cruz County’s EDWAA office

offered on-site job counseling, retraining, and

placement services at the plant. However, the

EDWAA grant lasted only 18 months, expiring on

July 1, 1992. Retraining focused on English language skills. As funds ran out, many of the workers

had been able to improve their English, but not their

‘‘marketable skills. ”

Environment

6.

7.

Although Mexico has comprehensive environmental laws not unlike those of the United

States, enforcement has been lax. Mexico has

few inspectors and budgets little for pollution

control, cleanup, and inspection. Public pressure for environmental improvement is only

now beginning to appear.

The jointly prepared Integrated Environmental

Plan for the Mexican-U.S. Border Area is only

a small step toward improving the border

environment. Many of the Plan’s ‘‘action

items’ call for information exchange and

more studies, rather than investments in needed

cleanup and control. The Plan lacks concrete

goals and the financial commitments needed
6 ● U.S.-Mexico Trade

for substantial improvements in the border Mexico’s economy will remain small comenvironment. pared to that of the United States. Mexico’s

GDP today is about 4 1/2 percent that of the

Longer-Term Social and Economic Impacts United States.

1. Over a 15-year time frame, a NAFTA could 2. Notwithstanding conventional economic wishave larger impacts on U.S. workers and dom (box l-B), the long-term impact of a

economic performance. Even over these peri- NAFTA on U.S. workers and productivity

ods, impacts would be limited by the fact that growth could be negative unless government

Box l-B—Free Trade Theory and the Economic Consequences of NAFTA

NAFTA proponents have used neoclassical free trade theory to argue that the United States and Mexico can

only benefit from an agreement. OTA’s analysis indicates that the neoclassical arguments for free trade are of minor

significance. The impact of a NAFTA on productivity growth and unemployment are more important. This is

particularly so because NAFTA comes when the United States is in a transition from a national, mass production

economy to a continental and global economy—a historical and institutional context ignored by mainstream free

trade models.

There are two central components to the neoclassical case for free trade between the United States and Mexico:

allocative efficiency and scale economies. The allocative efficiency argument maintains that free trade will benefit

the United States and Mexico because the two countries have widely different stocks of capital and labor. As a result,

if the United States specializes in the production of capital-intensive goods and Mexico specializes in the production

of labor-intensive goods, aggregate output will be higher than if each country produced a full complement of goods

internally. The scale economies argument maintains that production for a larger, more integrated market will permit

volume-related cost reduction, particularly in Mexico, where there are many small, inefficient plants that historically

served only the protected Mexican market.

Economic models suggest that the gains from allocative efficiency improvements will be less than 1 percent

of Mexico’s GDP. Depending on assumptions, gains from scale economies range between 1 and 9 percent of

Mexico’s GDP—at most, one-third of 1 percent of U.S. GDP.

More difficult to incorporate into economic models but ultimately of far greater significance will be the

influence of closer economic ties on long-run U.S. and Mexican productivity growth (ch. 5, app. 5A). As comparison

with Britain, West Germany, and Japan demonstrates, differences in productivity growth stemming from

contrasting corporate and national development strategies can, over the course of several decades, generate

differences in living standards on the order of 100 percent. In the U.S.-Mexico case, what matters most is whether

NAFTA and policies implemented in parallel with it push the United States and Mexico towards high-productivity,

human resource intensive paths or low-wage, low-productivity development paths.

A second issue, missing from neoclassical models of NAFTA impacts but potentially very important, is the

impact of wage competition on aggregate demand and unemployment. Some analysts worry that competitive

erosion of wages in a more integrated global and continental economy could result in wages in the United States

and its trading partners that lag behind productivity growth. As some believe happened in the Great Depression,

lower wages could cut workers’ purchasing power and create unemployment. But rather than worrying that wage

reductions might reduce aggregate demand, most economists today take the ‘‘classical’ view that wage reductions

reduce unemployment.

While the empirical and theoretical plausibility of a depression due to declining wages remains a subject of

controversy, making low wages a central part of full employment policy in North America does run the risk of

aggravating unemployment by reducing consumer demand. OTA’s analysis suggests that other approaches to

achieving full employment in North America be considered, including:

1. direct job creation through investments in improved infrastructure and environmental protection;

2. a North American Development Bank that would help alleviate Mexico’s debt burden, thereby enabling

Mexico to grow faster, reduce its own unemployment, and reduce U.S. unemployment by slowing

emigration and increasing Mexican purchases of U.S. exports;

3. reduced working hours.
Chapter I--Summary ● 7

and the private sector take steps to prevent that

outcome.

a)

b)

c)

NAFTA could precipitate a significant

diversion of U.S. investment to Mexico.

Following an agreement, U.S. firms might

move existing production to Mexico or

build new plants there instead of at home.

Many firms investing in Mexico will not

be responding to specific changes in investment regulations within a NAFTA, but to

heightened awareness of Mexico following

the NAFTA debate and to the signal that

investments in Mexico are ‘‘safe. ’ An

agreement would make it more difficult for

a future Mexican government to reverse

policies designed to attract investment.

While massive third-country investment

in Mexico is unlikely in the short term,

over the longer term a NAFTA could lead

to greater Asian and European investment to serve the U.S. market. To date,

Japanese and other third-country firms have

not been especially satisfied with investments in Mexico because of its poor infrastructure and lack of local suppliers. By the

late 1990s, however, these constraints

should begin to fade, making Mexico a more

attractive location.

With increased investment in Mexico and

a large (over 20 million) and rapidly

growing pool of less educated workers

there, U.S. employers will gain added

leverage in their dealings with less educated U.S. workers. More such workers in

the United States will find themselves

competing directly with workers in Mexican

plants; increasingly, employers will be able

to use the threat of relocation to depress

wages here.

Past experience in the United States

indicates that downward pressure on U.S.

wages could exist even if the United States

enjoys—as it does now—a trade surplus

with Mexico. From the 1950s through the

1980s, in most industries, southern U.S.

States ran a ‘ ‘trade deficit’ with the Midwest; nevertheless, low wages and low

levels of unionization in the South contributed to the erosion of industry-wide bargaining, union influence, and manufacturing

wages in the Northeast and Midwest.

d) A NAFTA could reinforce U.S. employers’ efforts to compete using lowwage rather than high-wage strategies,

increasing direct competition with Mexico

and other developing countries on the basis

of wage levels.

POLICY AND THE NAFTA

OTA’s analysis suggests that Congress may wish

to evaluate NAFTA in light of an agreement’s

contribution to the effective management of the

long-term process of economic integration. The

policy options listed in table 1-1 and discussed in

detail in chapter 2 are designed to help manage that

process. These policy options would encourage U.S.

manufacturing and service firms to pursue skillintensive strategies that generate wage growth for

U.S. workers, limit U.S. income inequality, enable

positive sum trade with Mexico, and assist dislocated workers.

OTA’s analysis indicates the need for major

reorientation of U.S. industrial development, training, and labor market policies, The Nation’s current

economic difficulties-and declining wages—were

“made in the USA”; that is where, by and large,

they must be solved. OTA’s domestic policy options

fall into three complementary categories:

1.

2,

3,

those that would help provide U.S. firms and

workers with the skills and technological

know-how to compete on the basis of quality,

productivity, and flexibility rather than low

wages;

policies intended to discourage low-wage,

low-skill strategies that can be replicated

easily in Mexico and other developing countries; and

options that would promote the worker participation and worker commitment necessary to

compete on a basis other than wages.

While domestic policy matters most, OTA’s

analysis indicates that policies and development

strategies in Mexico will have an important influence on workers’ prospects in the United States. In

particular, if Mexico fosters broad-based development, and allows workers to share in its fruits, the

resulting wage increases, exchange rate appreciation, reduced emigration, economic growth, and

demand for imports will facilitate U.S. adjustment to

a high-productivity, high-skill path. OTA’s continental policy options suggest ways in which the
8 ● U.S.-Mexico Trade

Table l-l—Summary List of Policy Options

1. Domestic Policy Options

Issue Area A: Promoting a Productive Economy (see table 2-2, ch. 2)

1. Approve a modified version of the High Skills, Competitive Workforce Act of 1990

2. Create a comprehensive worker adjustment program

3. Expand Trade Adjustment Assistance

4. Certify basic skills of new labor force entrants

5. Broaden and deepen links between firms

6. Create a Regional and Community Adjustment Corporation, focusing on direct public job creation

Issue Area B: Curfailing Low-Productivity Strategies (table 2-3)

1. Establish national commitment to social welfare through a U.S. Social Charter

2. Discourage low-wage strategies and reduce income inequality through wage and tax policies

3. Discourage State and local economic development based on “bidding wars” to recruit new

industry

/ssue Area C: Participation in a Productive Economy (table 2-4)

1. Create a Labor Market Productivity Center to foster consensus-buiIding and expand institutional

support for work reorganization

2. Create Employee Participation Committees to provide worker “voice” in nonunion as well as

unionized companies

3. Extend union representation to more workers and industry sectors

4. Foster institutions for worker voice in the service sector

Il. Continental Policy Options (table 2-5)

1. Negotiate a North American Social Charter and establish a North American Commission for

Labor and Social Welfare

2. Establish procedures for continental management of trade and investment in autos and other

sectors

3. Create a Binational Commission with stable funding to improve the environment and infrastructure in the border region

4. Provide technical assistance to Mexico for improving worker health and safety

5. Provide loans and aid for balanced economic development in Mexico

6. Establish North American works councils to represent employees of companies operating in

more than one country

7. Provide trilateral dispute resolution on labor issues

8. Negotiate shorter work time for the continent

9. Establish a Commission on the Future of Democracy in North America

SOURCE: Office of Technology Assessment, 1992.

United States and Mexico could cooperate to foster

broad-based development in Mexico that will benefit U.S. workers as well.

OTA’s domestic and continental policy options

go considerably beyond those so far discussed in the

NAFTA debate. The focus of that debate has been

on: 1) domestic adjustment policies and funding,

which the administration promised as Congress

considered “fast track” negotiating authority in the

spring of 1991; and 2) a commitment to negotiate

labor and environmental issues with Mexico in talks

parallel to but not part of NAFT.A.

Claimin g the administration has not followed

through, some labor, environmental, and business

interests are likely to urge Congress to vote down

NAFTA. Voting no might, however, precipitate the

reemergence in Mexico of nationalist hostility to the

United States. Particularly if accompanied by a stall

in Mexico’s recovery, it could threaten the stability

of the Mexican political system, reducing the

prospects for both democratization and for cooperation with the United States. Political and economic

problems, in turn, could worsen Mexico’s underemployment problem, keep wages stagnant, and increase emigration. Thus, failure to reach an agreement could increase the immediate pressures on

less-skilled U.S. workers and also dim the prospects

for improving environmental management along the

border.

Moreover, a congressional no vote on NAFTA

would be the first refusal to approve a trade

agreement in U.S. history. It would signal a further

retreat from the Nation’s role as defender of open

trade within the multilateral system. Erosion of the
Chapter l-Summary ● 9

Table 1-2—Policy Options for the Near Term

Domestic Options

Curtailing

Promoting a low-productivity Participating in

productive economy strategies productive economy Continental options

Statements of principles Approve a U.S. Social Char- Negotiate a preliminary

ter recommitting the United North American Social

States to improving the wel- Charter

fare of U.S. workers

Near-term policies Approve a modified ver- Approve H.R. 3160, the Provide technical assistsion of the High Skills OSHA reform bill, with its ance to Mexico to improve

Competitive Workforce provision for workplace health and safety standAct of 1990 health and safety corn- ards

Establish a comprehenmitteesEstablish a Binational

sive worker adjustment Commission with stable

system funding to improve environment and infrastructure in

border area

Negotiate a Japan-North

America or Global Auto

Pact

Study, reporting, and insti- Fund a private sector, Establish a North Ameritution-buildlng options multi-constituency Labor can Commission for Labor

Market Productivity Cen- and Social Welfare

ter and ask it to-study

how to f ill the U.S. repre- Provide trilateral dispute

sentation gap resolution on labor issues

Call for creation of North

American works councils

SOURCE: Office of Technology Assessment, 1992.

multilateral system could also diminish prospects

for international agreements on environmental and

labor issues.

On the other hand, if NAFTA comes before

Congress unaccompanied by significant domestic

reforms, voting yes might be tantamount to ratifying

the mismanagement of economic integration. This

could further lock the United States into a low-wage,

low-productivity future.

Congress will have 90 days from the time of

official notification of an agreement to consult with

the administration on NAFTA before turning to

implementing legislation. This period offers an

opportunity for Congress and the executive to

consider the merits of a ‘‘bare’ NAFTA-the

narrow trade and investment deal returned by the

negotiating teams for the three countries in August

1992--compared with a NAFTA as part of a

package that might include complementary domestic and continental social policy measures and

parallel understandings with Mexico on environmental and labor issues. Such a package could make

it clear to U.S. workers and to U.S. corporations that

North America means to shift away from low-wage,

low-productivity development to high-productivity,

environmentally and socially sustainable development.

A relatively lengthy period of debate and discussion would necessarily precede adoption of some of

the domestic and continental options listed in table

1-1 and discussed in chapter 2. Table 1-2 lists a

package of the policy options from table 1-1 that

would, taken together, send a positive signal about

future development in North America. This package

includes options that fall into three categories: 1)

statements of principle that could guide domestic

and continental development as the United States

and Mexico become increasingly interdependent; 2)

policy options that could be adopted in the same

approximate time frame as NAFTA itself; and 3)

study, reporting, and institution-building options.

Enacting statements of principle and reporting and

institution-building options could help ensure that

attention to options that require more extended

debate does not flag after the NAFTA spotlight has

dimmed.
The first row of table 1-2 suggests that the United

States might seek to combine a NAFTA with U.S.

and North American social charters. Chapter 2

outlines some of the rights and goals that could be

included in a U.S. Social Charter. It would represent

a blend of recommitments to familiar social goals,

such as full employment, and the definition of new

goals-+. g., a right to training for workers throughout their careers, and a reversal of the trend toward

greater income inequality-to guide U.S. policy as

the Nation adapts to global economic competition.

Along with the new Mexican Productivity Accord

(ch. 4), a U.S. Charter could help lay groundwork for

a North American Social Charter. A skeletal Charter

might be negotiated quickly and incorporated in an

extended preamble to NAFTA or in a separate

accord. It could then be elaborated and implemented

through future negotiations over a later period.

The second row of table 1-2 lists a number of

concrete policy options that could be implemented

in the same time frame as NAFTA approval,

including three domestic options:

1. Adopt a modified version of the High Skills,

Competitive Workforce Act of 1990. In the

domestic arena, the obvious choices for immediate consideration begin with skill development. The administration and Congress have

both expressed the view that the United States

needs to invest more heavily in human resources, particularly for workers with less

education and those with jobs at the base of

organizational pyramids. This consensus is

reflected in the bipartisan High Skills, Competitive Workforce Act of 1990 (S. 1790 and

H.R. 3470).

This bill would encourage certification of

basic and occupational skills, demonstrate new

approaches to helping young people move

from school to work, foster creation of multiemployer training consortia and diffusion of

production practices making better use of

workers’ knowledge, require all firms with at

least 20 employees to spend 1 percent of

payroll on training or pay an equivalent sum

into a State training trust fund, and encourage

the States to create State and local Employment and Training Boards. This act would be

the first comprehensive, multifaceted federal

effort to move the United States towards a

skill-intensive development strategy. A free

2.

3.

trade agreement with Mexico would make it

more important than ever for the United States

to take a decisive step in this direction.

Create a comprehensive U.S. worker adjustment

system by enhancing training and income

support for unemployed workers. The NAFTA

debate on labor market adjustment has focused

on whether workers displaced by imports--or

the movement of production to Mexicoshould be provided with training and income

support through Trade Adjustment Assistance

(TAA) or a new NAFTA adjustment program.

Rather than continue to make assistance for

displaced workers depend on why they lose

their jobs, OTA’s analysis suggests a more

comprehensive approach in which increased

finding for the Economic Dislocation and

Worker Adjustment Assistance (EDWAA)

program and the unemployment insurance

(UI) system make a full range of services,

including long-term training with income support, available to all displaced workers.

Pass H.R. 3160, the OSHA reform bill. Workers in the United States are concerned that

competition with Mexico will erode health and

safety standards here; OTA’s analysis indicates that weak U.S. institutions of worker

voice—a “representation gap’ ‘—leads to low

worker commitment and obstructs pursuit of

participative strategies. Congress could respond to worker concerns about health and

safety and create a modest new institution of

worker voice by passing H.R. 3160. The key

provisions of this bill include the establishment of health and safety committees in

companies with 11 or more full-time employees. Committees and their employee representatives would have specified rights and responsibilities for monitoring and enforcement of

health and safety standards. Other provisions,

including an employee right to refuse to work

in imminently hazardous conditions, would

also strengthen health and safety protection,

On the continental front, the second row of table

1-2 lists three concrete policy options that could be

implemented in approximately the same time frame

as a NAFTA:

1. A program to provide Mexico with technical

assistance to improve its workplace health and

safety standards.
-..—.

Chapter I-Summary ● 1 1

2,

3.

Establishment of a Binational Commission on

Border Environment and Infrastructure. This

Commission could be provided with a stable

funding source outside the annual appropriations processes in the two countries, perhaps

based on a binationally negotiated maquila

investment tax.

Negotiation of a Continental (Japan-North

America) or Global Auto Pact. Shifting additional auto production to North America would

give Mexico the opportunity to build integrated networks of assemblers and suppliers

without cutting into U.S. production and jobs.

Finally, the bottom row of table 1-2 lists one

domestic and three continental monitoring and

institution-building options that would help sustain

the debate about the domestic and continental

management of economic integration and pave the

way for implementation of more comprehensive

policies over time:

1.

2.

3.

4,

A U.S. Labor Market and Productivity Center,

with a board composed of representatives from

business, labor, disadvantaged labor market

groups, and the training community, to help

develop consensus on the labor market and

labor law policies necessary to move towards

a high-productivity path. As one major task, to

be completed within perhaps 2 years of the

signing of a NAFTA, the Center could be

called on to forward recommendations for

filling the U.S. representation gap-the absence of unions or other forms of employee

representation in most workplaces.

A trinational North American Commission for

Labor and SociaI Welfare, with its own funding and separate from the executive branches

of each country, having responsibility for

further developing the principles outlined in a

North American Social Charter and defining

ways of achieving those goals.

The creation of a nonbinding trilateral dispute

resolution mechanism on labor issues.

Provision for North American works councils

in companies with significant operations in

more than one country of North America.

MEXICO’S INDUSTRIAL

DEVELOPMENT PROSPECTS

Analyzing in detail the implications of free trade

with Mexico requires understanding the capabilities

Photo credit: Ford Motor Company

Worker training at Ford’s Hermosillo, Mexico stamping and

assembly plant.

of Mexican industry. Parties to the debate on

NAFTA have expressed widely divergent views of

Mexico’s capabilities and the resulting implications

for the United States. At one extreme are those who

hold that Mexico has shown itself capable of

producing most manufactured goods as well as the

United States and that massive flows of investment

to Mexico will take place over the next decade to

take advantage of cheap labor. At the other extreme

are those who believe exposure to competition will

decimate historically protected Mexican enterprises

to the benefit of U.S. exporters. OTA’s analysis

indicates that both views mistake one part of the

unevenly developed Mexican economy for the

whole.

Over the past decade, new plants operated by

multinational corporations (MNCs) have demonstrated levels of productivity and quality equal to

those in the United States. High-performance

‘‘islands of excellence’ in Mexico’s largely inefficient manufacturing sector span significantly more

than simple assembly operations. They include, for

example, world-class auto engine and stamping

plants. Threatened U.S. workers see these examples—

like the recent announcement by Smith-Corona of

the transfer of its remaining typewriter production to

Mexico-as precursors of wholesale movements of

production that could cost their jobs and destroy

their communities.

Most of Mexican manufacturing, however, is

inefficient and produces low-quality goods using
12 ● U.S.-Mexico Trade

labor-intensive methods. Compared with, say,

South Korea, Mexico has only a few large and

technologically sophisticated fins. Unable to compete, many small Mexican manufacturers of apparel,

furniture, shoes, and other goods have gone out of

business since Mexico began lowering its trade and

investments barriers in the mid to late 1980s. More

will disappear in the future.

Nonetheless, based on the success of pioneering

modern plants and proximity to the U.S. market,

Mexico will gain increasing investment. At the same

time, Mexico’s attractiveness as a location for

export-oriented production will be limited by poor

infrastructure, shortages of local suppliers, and lack

of experienced technicians, engineers, and managers. MNCs can circumvent these bottlenecks-e. g.,

by paying well enough to attract the most trainable

workers from local labor markets-but human

resource constraints will limit prospects for smaller

Mexican-owned companies.

Mexico did not emphasize vocational training and

development of technical professionals and managers during its extended period of import-substitution

industrialization (from roughly 1950 until the middle 1980s). Investments in basic education lagged

behind those in the successful developing Asian

economies. Moreover, Mexico, like the United

States, spends its educational resources disproportionately on those at the top of the educational

hierarchy.

Given a legacy of protection and human resource

bottlenecks, small and medium-sized Mexican firms

are only now learning the techniques long since

mastered by the better small U.S. fins. As a result,

Mexican production for the U.S. market is likely to

depend for the next 10 to 15 years on the resources,

including technology and managerial expertise, of

foreign-based MNCs. Thus, Mexican development

may continue to resemble the ‘‘branch plant’

economies of the southern United States from the

1950s to the 1980s. At the same time, the policies of

Mexico’s government, the rapid expansion of production in parts of northern Mexico, and growing

corporate preferences for suppliers willing to locate

nearby could foster more rapid and more integrated

development than the low-wage, low-tax development strategies in the U.S. South.

THE SECTORS

This part of the summary includes snapshots of

four broad sectors analyzed by OTA. Three are

manufacturing industries-autos and parts, electronics, and apparel. The fourth consists of agriculture and food processing. Four tables, one for each

sector, highlight findings from the body of the report

concerning the relative attractiveness of production

in the United States as compared with Mexico over

the medium-term future of 5 to 15 years. These

summaries are based on extensive interviews by

OTA staff and contractors, as well as published

sources (see chs. 7-10).

To a greater or lesser extent, the four sectors are

each part of global industries. Mexican production

today depends on imported parts and components.

These patterns are not fixed. But Mexico’s ability to

absorb foreign know-how fast is limited, even with

the aid of multinational investment. And while

Mexico’s competence improves, so will that of

Taiwan, Thailand, and Brazil.

Autos and Parts--(table 1-3). U.S.-owned automakers and parts firms are in deep trouble. For two

decades they have been pressed by Japanese-owned

fins, who now assemble cars and small trucks in

U s. ‘ ‘transplants. ’ ‘ The U.S. Big Three have

pursued their own international production strategies, which have long included production in

Mexico. Since before World War II, the Mexican

Government has required automakers to assemble

cars in Mexico in order to sell there. More recently,

complex export-balancing requirements have led to

investments in production for export to the United

States (ch. 7).

Assembly and engine plants went into Mexico

primarily to satisfy the demands of the Mexican

Government; cost advantages with respect to U.S.

production, when they exist, have been relatively

small. In contrast, production of auto parts having

relatively high labor content is substantially cheaper

in Mexico. More than 65 Mexican plants already

supply wiring harnesses to U.S. (and Mexican)

assembly plants. Most maquiladora parts plants

perform simple operations using unskilled labor, but

the world-class assembly and engine plants operated

by Ford, Nissan, and other automakers demonstrate

that Mexican labor can also compete in quite

sophisticated production. Transportation costs eat

up most or all of the labor-cost savings for finished
Chapter 1--Summary ● 13

Table 1-3—Autos and Parts

United States Mexico

Structure of industry and market

Vehicle Producers. Six major assemblers, several smaller firms,

compete through both North American production and imports.

Open market but stagnant demand, with limited growth prospects

over foreseeable future. Nonetheless, shifts in demand (e.g., for

small trucks in place of passenger cars) will create new opportunities to stake out market position.

Independent suppliers. Assemblers are streamlining their supply

networks, reducing the number of firms they buy from. Many

second-and third-tier suppliers will have trouble meeting stringent

demands for cost, quality, delivery, and, in some cases, for

engineering.

Blue- and grey-collar labor force

Ample supply of skilled and experienced labor, but many transplants prefer nonunion workers over experience. Smaller suppliers,

mostly nonunion and paying significantly lower wages than assemblers, have had trouble attracting and retaining skilled employees.

Technical and managerial labor force

American managers, in both automakers and suppliers, must adapt

more quickly to new competitive conditions.

Labor Relations

Traditionally adversarial. Tentative moves toward more cooperation

in U.S. assembly plants but only a few suppliers. Industry shrinkage,

nonunion transplants, and movement to Mexico could resurrect

adversarial relations.

Vehicle producers. Five major firms compete in a historically

regulated market, one that remains almost entirely closed to

imports. Growth in demand potentially quite rapid, but will depend

both on Mexico’s overall economic expansion and on shifts in

income distribution.

/dependent suppliers. Mexican-owned supply industry largely

uncompetitive. Maquilas have focused on labor-intensive items.

Mexico’s blue-collar workforce seems nearly up to world standards

in terms of trainability, but high turnover means companies lose

much of their human resource investment. Availability of skilled

grey-collar workers (technicians, machinists, toolmakers) could

restrain expansion.

Capable managers in short supply, particularly at middle levels and

for supply firms. Lack of experienced engineers will make it difficult

for suppliers to move into technologically demanding niches.

Much variation. Some local unions co-opted and manipulated by

government or by companies. Worker-controlled independent locals

could pioneer “negotiated flexibility” but may be repressed.

Availability y of Materials, Components, and Other Inputs to Production

Almost anything is available, but quality sometimes questionable.

Infrastructure (transportation, communications, etc.)

Generally good; deteriorating highway system needs attention.

Government Policies

Federal. Japanese quotas symbolic in recent years; only major

trade restriction is 25 percent tariff on light trucks. Trade friction,

especially over sourcing of parts by transplants, will continue.

State. Intense competition to attract major plants through incentive

packages. Industrial extension, network building should help

improve productivity and adaptability of small- and medium-sized

suppliers.

The Future

U.S. jobs in parts production (in plants operated both by independent suppliers and the Big Three) will beat greater risk than assembly

jobs. Many U.S. parts plants are old and poorly managed. If costs

are high and quality low, managers may opt to move to Mexico

rather than trying to modernize and improve performance in the

United States. A growing supplier base in Mexico might then attract

more assembly plants.

Very restricted from local sources,

Ground transport slow, unpredictable, and expensive but improving

rapidly, especially near the border. Poor communications promise

to be easier to overcome (e.g., through private lines and data links).

Water supplies, sewage, waste disposal promise persistent though

manageable difficulties.

Heavily regulated, with gradual trade and investment liberalization

in recent years. Future human resource and industrial policies could

be significant for supplier development.

Automakers are likely to put new assembly plants into Mexico at

rates that depend more on Mexican demand than on U.S. demand.

SOURCE: Office of Technology Assessment, 1992.
14 . U.S.-Mexico Trade

vehicles, but engines and other powertrain components can be shipped more cheaply; for engines,

Mexican production yields savings of up to 10

percent (e.g., $70 delivered to the United States for

an engine with a manufacturing cost of $700).

As many as 150,000 Mexicans now work in

export-oriented auto and auto parts plants. It would

be too simple to state that all these jobs would

otherwise be located in the United States; some

would be in other low-wage countries, and some

would have been automated if production had

remained in the United States (or Canada). It would

also be too simple to conclude that U.S. or Japanese

automakers will put new plants into Mexico simply

because Mexican wages are low. Direct labor

accounts for perhaps 10 percent of costs in assembly

plants, less for engines-and will decrease with

continued improvements in design-for-manufacturability. But the pressure on U.S. parts suppliers

suggests continuing movement to Mexico in search

of lower costs.

Electronics-(table 1-4). The segments of this

industry differ in fundamental ways (ch. 8). Labor

costs are a relatively minor concern, with two major

exceptions: consumer electronics and some kinds of

components. Much of consumer electronics—

especially TV production—remains a traditional,

mass production business, with low margins and

intense cost competition. Only one U.S. firm of any

size remains-Zenith-and it produces most of its

output in Mexico and other offshore locations.

Components and subassemblies for electronic products, such as transformer coils and power supplies,

which also have high labor content, have likewise

migrated out of the United States, often to Mexico.

Simple personal computers (PCs) are not too

dissimilar from TVs in assembly requirements, but

product and system designs—and component technologies--change much more rapidly. Except for

standardized, low-end PCs, there has been little

reason to locate production in low-wage countries.

Much the same is true in telecommunications. Labor

costs are important for telephones, answering machines, and other types of customer premises equipment. AT&T and other U.S.-based firms now make

some of these products in Mexico and others in the

Far East. But direct production labor is a minor cost

factor for more complex, systems-oriented telecommunications products. These are made in Mexico by

multinational firms because the government has

demanded it. Through its controls over market

access, Mexico’s government has also attracted

some production of small computers. Now that IBM,

Hewlett-Packard, and other companies have plants

there, they are not likely to leave, even though a

NAFTA might allow them to ship into Mexico from

the United States or elsewhere. But as the government’s ability to influence foreign investors wanes,

Mexico may have trouble attracting new electronics

plants except for the simple assembly operations in

which it already specializes-products like TVs,

keyboards, and printers.

Mexico’s problem in electronics, even more than

in autos, is one of organizational competence.

Mexican fins, unless they have strong ties to U.S.

or third-country fins, have very limited capabilities. Quality standards are low, trainin g poor and

turnover high, work organization inflexible, product

development and marketing experience minimal.

Companies without links to the international economy will have trouble forming them.

Apparel—(table 1-5). Exports from maquiladora

apparel plants to the United States grew at about 10

percent annually during the late 1980s, and even

more rapidly during the last 2 years. These plants

assemble basic, commodity-like items (work

clothes, underwear) in direct competition with U.S.

plants, which sometimes have costs up to twice as

great for sewing and manual cutting, Nonetheless,

the United States continues to produce large volumes of basic clothing, in part because automation

(computerized cutting) and work reorganization

(so-called Quick Response strategies, aimed at

greater flexibility and responsiveness to market

demand) have helped offset higher wage bills (ch. 9),

Where quality requirements are higher, or retailers

want rapid deliveries of women’s clothing and other

fashion-sensitive apparel, Quick Response appears

especially promising. Here the competition has been

from Asia; Mexican apparel firms do not currently

compete in this part of the market. But given a

NAFTA, some U.S. apparel firms might decide it is

easier to move to Mexico than to implement new

strategies at home.

The non-maquila sector of Mexico’s apparel

industry includes many small firms that make cheap

clothing of poor quality for sale in domestic markets.

These firms are in no position to export into the

United States. To do so, they would need infusions
Chapter I---Summary ● 15

Table 1-4--Electronics

United States Mexico

Structure of industry and market

Consumer. Most demand filled by imports (VCRs, camcorders,

audio, etc.), although final assembly of some large TVs remains.

Sales growth a function largely of new product introductions (CD

players, Walkmen)--otherwise mostly a replacement market. Few

new products developed in the United States.

Computer equipment. Pioneering industry faced with new challenges as growth slows after many years of expansion and markets

fragment into specialized niches. With maturity, production of

simpler items has moved abroad, beginning with peripherals and

low-end processors.

Telecommunications equipment Still dominated by AT&T, but

imports a major factor in simpler customer premises equipment

(keysets, PBXs, FAX machines); foreign-based multinationals will

continue to seek to expand in the deregulated U.S. market.

Blue- and grey-collar labor force

Broad range of skill requirements, from simple assembly to

trouble-shooting complex digital systems. Continuing retraining will

be needed, particularly in software.

Technical and managerial labor force

Available and adaptable.

Labor relations

Much of electronics has been nonunion. Those sectors that have

been organized-e. g., TV production-have been so damaged by

foreign competition that labor has little leverage left.

Availability of materials, components, and other inputs

Increasing imports even of high-technology components, also

production equipment.

Infrastructure (transportation, communications, etc.)

Satisfactory.

Government policies

Important especially in telecommunications (e.g., the ability of the

regional Bell operating companies to enter manufacturing). Highly

visible industry will continue to draw trade and technology policy

attention.

The future

As electronics becomes more a matter of systems and software,

there will be fewer U.S. jobs for less skilled workers. At the same

time, a good deal of final assembly will remain in the United States

simply because of low direct lab content. Imports of components

will continue to increase, but most will come from Asia, not Mexico.

Consumer. Maquilas produce subassemblies and finished products

for export to the United States. Domestically-oriented firms have

been decimated by import competition since lowering of trade

barriers.

Computer equipment. Little or no independent capability. MNCs

and Mexican-owned firms assemble simple machines, produce

keyboards, monitors, and other components and subassemblies.

Thus far, foreign investment has not led to much growth of Mexican

suppliers.

Te/ecommunications equipment. Essentially all technology from

abroad. With TelMex newly privatized, AT&T has joined Ericsson

and lndetel-Alcatel as a third major hardware supplier.

Need for skills will slow movement beyond simply assembly tasks.

Limited,

High turnover in maquilas in part a symptom of poor underlying

relations, as well as ongoing “industrialization of the labor force, ”

but unions in any case docile and ineffectual, with a few exceptions

(e.g., TelMex).

to production

Little local production except for simple components.

Poor (see table 1-3 entry).

A privatized TelMex does not necessarily mean an end to

government influence. As multinational suppliers continue to

compete for future telecommunications sales, their investments and

imports of technical know-how will contribute to Mexico’s capabilities.

Mexico will continue to produce home entertainment electronics for

export, and more complex equipment intended for sale within

Mexico. Multinationals and Mexican firms closely linked with

multinationals will account for almost all of this production.

SOURCE: Off Ice of Technology Assessment, 1992.

of capital for more modern equipment, better trained ciently and market their goods in an intensely

workers able to turn out higher quality goods, and competitive setting; poor distribution channels into

managers able to organize production more effi- the U.S. market have been a particular handicap.
16 ● U.S.-Mexico Trade

Table 1-5-Apparel

United States Mexico

Structure of Industry and market

Despite many years of intense import competition, a relatively large Although maquila plants can produce basic apparel products at

number of mostly small apparel firms continue to manufacture in the costs well under U.S. costs, the Mexican industry is weak overall

United States, many in New York, California, and the Southeast. In compared with successful Asian producers. Countries like China

part, this is because rapid, flexible response to market shifts can can undercut Mexico’s costs at the low end, while manufacturers in

compensate for higher direct production costs-especially in more advanced Asian countries (e.g., Hong Kong) can supply better

fashion-sensitive clothing-in this highly labor-intensive industry. cost/quality combinations for fashion-sensitive goods. Domestically

oriented Mexican apparel firms have had great difficulty meeting

Asian competition since the lowering of import barriers.

Blue- and grey-collar labor force

Large U.S. cities continue to provide pools of workers, many of t hem In principle, nearly unlimited; apparel firms often provide the first

immigrants, willing to work for low wages under sweatshop industrial jobs held by workers from rural areas.

conditions.

Technical and managerial labor force

Technical labor (as opposed to design) not particularly important, Poor productivity and quality in much of the industry reflect poor

but management is critical for “Quick Response” strategies. organization and management.

Labor relations

Industry largely nonunion in the Southeast. Strong unions particu- Low union coverage became of small size of domestic shops.

Iarly in New York City have engaged in a lengthy effort to retain jobs

and improve working conditions.

Availability of materials, components, and other inputs to production

Many U.S. textile firms are Iow-cost producers, but because textiles

trade internationally in large volumes, a local textile industry does

not confer a great deal of advantage in apparel. Much the same is

true for production equipment.

Infrastructure (transportation, communications, etc.)

Good transport, communications including computer links-a

requirement for Quick Response.

Government policies

Extensive structure of import quotas within the framework of the

Multi-Fiber Arrangement (MFA), coupled with relatively high tariffs,

have provided considerable protection for U.S. production. At the

same time, because duties are only levied on foreign value-added,

offshore assembly in Mexico and the Caribbean has been encouraged.

The future

U.S. apparel employment has been declining since the early 1970s,

and now stands at something under a million. Many of these jobs

have been preserved through business strategies keyed to responsive customer service. To the extent that U.S. firms continue to

implement such strategies effectively, they will remain viable

against competition from both Mexico and the Far East. But if

companies see a NAHA as meaning easy access to low-wage

labor, they may forsake innovative strategies and simply move

south of the border. Moreover, continuing U.S. trade restrictions on

imports from third countries could lead to greater Asian investment

in the Mexican apparel industry.

Mexico’s textile industry is generally uncompetitive. Maquila producers get almost all their cloth from the United States, in part

because this has been a condition for favorable tariff treatment.

Problems the greatest for small, independent firms and least for

those tightly linked with U.S. apparel manufacturers or retailers.

While Mexico’s exports to the United States are in principle

governed by bilateral quotas, in practice almost any apparel items

from Mexico can enter in almost any quantity.

Whether or not a NAFTA Is implemented, Mexico’s export-oriented

apparel sector will continue to expand. A NAFTA would accelerate

this expansion by reducing or eliminating tariffs on Mexican apparel.

Most of the export-oriented plants, moreover, currently do sewing

on fabric cut In the United States because this qualifies the product for

more lenient tariff treatment. With a NAFTA, manual cutting for

Mexican assembly would begin moving south of the border,

although companies with heavy U.S. investments in automated

cutting would probably not relocate these operations.

SOURCE: Office of Technology Assessment, 1992,
.

Chapter 1--Summary ● 17

None of this is to say that U.S.-based firms,

migrating to Mexico in search of low-cost labor,

could not prosper in such an environment. A

NAFTA that eliminated tariffs on Mexican apparel,

which now average 17-18 percent, would accelerate

the expansion of sewing in Mexico and lead to the

movement of more cutting as well. But so far there

has been little transfer of advanced production

practices associated with Quick Response. If such

practices were to be adopted in Mexico as rapidly

and effectively as in the United States, much

production that would otherwise remain here would

be at risk.

Agriculture and Food Processing--(table 1-6).

In Mexico’s two-tiered agricultural system, several

million small-scale farmers grow subsistence crops

(corn, beans) with traditional practices, while a

relatively modem agribusiness industry produces

fruits and vegetables for export to the United States.

The traditional sector has low productivity; indeed,

many small farmers cannot feed their own families.

The modem sector has been able to capitalize on

Mexico’s inherent advantages-which stem from

climate and growing conditions as well as low

wages-to compete effectively with U.S. producers,

particularly for labor-intensive fruits and vegetables

(e.g., winter tomatoes) (ch. 10).

But Mexico’s advantages have their limits. The

country has relatively little water and arable land,

Agricultural technology remains well behind U.S.

practices, for example in use of pesticides, herbicides, and fertilizers. Many farms even in the

modem sector get substantially lower crop yields

than are common in the United States. Mexico faces

constraints in breeding stock; mechanized equipment; know-how concerning what, where, and when

to plant; distribution channels; and modern food

processing capacity. And even though Mexico

appears to have long-term, sustainable advantages

for some kinds of fruits and vegetables, the United

States has an overwhelming productivity edge in the

staple crops of wheat and corn.

For many reasons, then, trade between the two

countries’ agricultural sectors is more nearly complementary than competitive. For instance, Mexico

imports breeding stock and bull semen, sending

feeder cattle back to the United States for fattening

on cheap U.S. grain. Mexico buys some beef in

return. Since U.S. meatpackers have been driving

down their labor costs by closing unionized plants

and hiring immigrant workers, for most of them

Mexico’s still lower wage levels would probably not

offset the added costs of transporting grain (or cattle)

to feedlots or packing plants south of the border. But

here, as in other agricultural sectors, impacts will be

shaped by local conditions and transportation costs.

Thus, there may be some relocation of cattle feeding

and meatpacking from Texas to Mexico after a

NAFTA, while the bulk of U.S. production, which

takes place farther north, seems unlikely to move.

(Because poultry consume less feed per pound of

meat, poultry production and processing may prove

more mobile.)

Beyond whatever direct job losses result in the

United States, the further integration of beef and

poultry production and processing-and growing,

freezing, and canning of fruits and vegetables—will

maintain downward pressure on the wages of U.S.

agricultural and food processing workers. At the

same time, the ultimate expansion of U.S. agribusiness into Mexico will be limited by that country’s

modest endowments of fertile land and available

Photo credit: Grant Heilman Photography

Boxing beef.
18 ● u.s.-Mexico Trade

Table 1-6-Agriculture and Food Processing

United States Mexico

Structure of industry and market

Production highly sensitive to local conditions (climate, soil, water

supplies). Most sectors and subsectors dominated by relatively

Iarge farms, ranches, feeders, and processors. Nonetheless a very

large absolute number of small producers (e.g., “family farms”)

continue to account for substantial shares of output in many sectors.

Consumer tastes (e.g., lower consumption of red meat) promise

continuing demand shifts.

Blue- and grey-collar labor force

Low-wage, temporary field labor jobs often hard to fill. Much food

processing has been deskilled, with downward pressure on wages.

Technical and managerial labor force

Many experienced farmers, often generally receptive to new

technologies but not necessarily to new business practices.

Labor relations

Traditionally adversarial in processing (e.g., rneatpacking); farmworkers historically unorganized and exploited.

Many small farmers produce only for local or self-consumption.

“Communal” ejido sector-in which peasant farmers have had t he

right to use state-owned Iand--are now to be privatized. Ejidos

account for nearly half of Mexican land, but the sector as a whole is

inefficient and has been heavily subsidized. Larger farms in export

sectors (e.g., winter vegetables) have developed relatively good

distribution into U.S. markets.

Large surplus; most of those in the ejido sector, or working as day

laborers, have little education and limited prospects for mobility.

Severely constrained. Limited capacity to develop hybrid seeds,

pesticides, herbicides, fertilizers, or cultivation practices tailored to

Mexico’s growing conditions, or to adapt technologies from elsewhere.

Much self-employment, casual labor in production, particularly in

ejido sector; rural poverty even worse than urban poverty.

Availability y of materials, components, and other inputs to production

The United States remains a world leader in livestock breeding,

development of hybrid crops, agrochemicals, and mechanization.

Biotechnology has become the newest source of competitive

advantage. However, some current and common practices could

prove unsustainable over the next several decades, and serious

water supply problems in the West seem Iikely.

Infrastructure (transportation, communications, etc.)

Advertising strategies frequently used to differentiate products.

Government policies

Heavily regulated, supported, subsidized, with the farm lobby

remaining extraordinarily powerful. Indeed, agribusiness is more

directly influenced by government policies than almost any other

sector (subsidies, water rights, pesticide regulations, trade restrictions, extension and other technology measures). These very high

Ievels of policy intervention could begin to change with a Uruguay

Round GAIT agreement.

The future

The impacts of a NAFTA will be localized by product and by region

in this sector more than in any other. For example, Florida tomato

growers—who have managed to meet Mexican competition for

many years through a combination of greater productivity and

“strategic” trade protection-might finally begin to lose out. At the

same time, California tomato growers, who do not confront Mexican

production as directly (because their growing season is later), might

be affected little if at all. U.S. agriculture is highly efficient; a NAFTA

would have more impact on the choice of crops to be grown in a

given location than on absolute levels of production.

Mexico’s modern agricultural sector must import seeds and breeding stock. The traditional sector is more nearly self-sufficient but low

in productivity; few small farmers can afford modern agricultural

machinery. Limited arable land and water supplies create fundamental restrictions on future production.

Marketing and distribution sometimes still a bottleneck for export

products; the added costs can offset Mexico’s lower wages. Poor

transportation is particularly serious for perishable crops. Little sign

of successful marketing strategies based on product differentiation.

Policies ranging from price controls on food products to credit

allocation for small farmers have served in part as a rural poverty

program and a tool to keep people from leaving the land for the

cities. Supports and subsidies, including irrigation projects and

low-cost fertilizer sales, have been scaled back since the middle

1980s; declining subsidies have cut into the cost advantages of

some export crops.

A NAFFA, coupled with ongoing domestic policy shifts, promises to

lead to greater dislocations in Mexico than in the United States.

Declines in subsidies and price supports, and the reform of the efido

system, promise to drive even more of Mexico’s rural population off

the land and into the cities, where there is unlikely to be work for

more than a few. Likely consequences include increasing emigration to the United States.

SOURCE: Office of Technology Assessment, 1992.
Chapter I-Summary ● 1 9

Table 1-7—Alternative Development Paths for the U.S. Economy

Low-wage, Iow-productivity growth High-wage, high-productivity growth

Overall strategy

. Low cost through scale economies, long production runs, use . Low cost through economies of scope, use of skilled workers in

of contingent workers, outsourcing to low-wage subcontrac- combination with flexible technology, and cooperation among

tors, and relocation to low-wage areas. geographically concentrated vertical and horizontal networks of

● Sale of limited variety of standardized products and products firms.

based on price; product cycles remain fairly long. ● Sale of specialized goods and services with short life cycles in

markets segmented by quality and attributes tailored to customer needs and tastes.

Organizational structure

● Decentralized, but control over profit centers maintained cen- . Greater decentralization of authority.

trally. . Heavy use of cross-functional management teams, simulta-

● Significant specialization within management along functional neous product and process engineering.

lines, turf boundaries. ● Flatter hierarchies, authority pushed down in the organization.

● Symbolism of the company or plant as a team; hierarchy and

top-down control in practice.

●

●

●

●

●

Work organization and labor relations

Independent worker representation (unions, employee par- . Independent worker representation at most workplaces.

ticipation committees) weak or nonexistent. . Flexibility arrangements negotiated with workers and their

Formal internal flexibility due to lack of work rules, unions; representatives on the job.

restricted flexibility in practice below team leader level. ● Worker commitment generally high.

Some commitment to employer goals among large-firm, core . Segmentation of workers into secure and contingent groups

workers with job security. limited through internal flexibility and multi-employer labor

External flexibility y through hiring/firing of part-time, temporary, market intermediaries.

contract, less senior workers.

Adversarial, autocratic relations predominate in suppliers, small

firms, and among temporary, contract, or part-time workers in

large firms.

Human resource development and job ladders

●

●

●

Minimal training for low level workers, except informally on the .

job, with short (up to 3-6 months at plant start-up, usually much

less) training sessions for team leaders and trusted workers. .

Specialized training for grey-collar craft and technical workers.

Little advancement for most workers; some opportunities for .

team leaders; hiring for most technical positions based on

outside credentials.

water. Continued improvements in U.S. agricultural

technology, many of them the results of biotechnology, will transfer relatively slowly to Mexico

because so many agricultural technologies (e.g.,

hybrid seeds) must be customized for local growing

conditions.

THE UNITED STATES, MEXICO,

AND NORTH AMERICA:

TWO SCENARIOS

The spectrum of possibilities for future development in the United States, Mexico, and North

America can be summarized by describing two

alternative futures for each country and for North

America as a whole. One alternative would bring

Significant development of most employees through on-the-job

learning, classroom training.

Increased pay and some upward mobility through experience

and mastery of additional skills.

Qualified lower-level employees can take learning sabbaticals

to acquire new knowledge, qualify for promotion or switch in

occupation.

(Continued on next page)

back the sustained prosperity of the 1940 to 1970

period. The other would lead to continued decline in

the United States, insufficient growth for Mexico to

support its rapidly expanding population, and the

social and political tensions associated with economic stagnation.

The United States faces a choice between a

low-wage, low-productivity path and a human

resource intensive, high-productivity path (table

1-7). In the “low-wage” alternative, U.S. firms

would use computer technology and limited work

reorganization to somewhat expand their product

offerings and rate of innovation, but would remain

committed to ‘‘scientillc management” and the

routinized production of a limited variety of stand-
20 ● U.S.-Mexico Trade

Table 1-7—Alternative Development Paths for the U.S. Economy-(Continued)

Low-wage, Iow-productivity growth High-wage, high-productivity growth

Wage setting

● Wages for entry-level employees, technical workers, and upper ● Wages for small pool of contingent, secondary workers set by

managers set by the market. the market.

● Other wages set at plant or company level by employer. ● Most wages set within broad ranges by minimum wage, multi-

. “Efficiency wage” premia (10-20 percent) for core workers in employer industry-wide or local occupation-specific agreebig firms; some discretionary profit-sharing and merit-based ments.

pay. ● Some flexibility in wages based on negotiated and verifiable

criteria-e, g., gain sharing, acquisition of skills.

Interfirm relations

. Some cooperation between core firms and their suppliers on ● More stable, longer-term links with networked suppliers. In

quality and engineering issues. Greater cooperation impeded some cases, firm boundaries blur due to extensive cooperation

by hard bargaining over contract terms, adversarial labor and movement of personnel.

relations within suppliers. ● Small firms cluster in industrial districts characterized by

● Atomistic competition and little cooperation among small firms cooperation on technology, training, and marketing.

on training, technology diffusion, marketing.

Industrial and labor market policy

● Laissez-faire approach to industrial development punctuated ● Federal and regional agencies seed cooperation among linked

by ad hoc, politically motivated protection and subsidies. firms in industrial networks and districts.

● Passive (primarily Ul) labor market adjustment policies to the ● Active (i.e., training, job matching) policies to enhance labor

extent that budgets permit. market flexibility.

● Development of training infrastructure Ieft to the private-sector. ● Government catatyzes private-sector cooperation on training,

● No change in U.S. laws governing union formation, collective job matching.

representation. ● Labor law supports creation of worker voice institutions in small

as well as large firms and in the service sector.

SOURCE: Office of Technology Assessment, 1992.

ardized goods. As in the past, most workers at the

bottom of organizational hierarchies would have

jobs that required limited skills. Knowledge and

control of production would be embodied in machines and computer programs and monopolized by

managers. Subcontracting would increase as part of

efforts to find lower wage, more contingent labor.

Under the alternative, high-productivity direction, U.S. firms would employ computer-based

technologies and new forms of work organization to

design, develop, and produce varied, high-quality

and continuously improving goods and services.

Employers would foster the innovative capacity and

flexibility necessary to compete in this way by

training workers and restructuring internally to

promote cooperation among workers and managers.

Flexible automation would be used to complement

and enhance workers’ knowledge and skills, not to

displace them. Small firm and suppliers would

compete by capitalizing on the inherent flexibility of

small organizations rather than by paying low

wages.

OTA’s analysis indicates that Mexico, like the

United States, stands at a juncture between two

futures. The frost alternative would represent a sharp

break from Mexican traditions of state guidance of

the economy; it would continue and extend 1980s’

policies of maintaining low wages and eliminating

regulations on investment by foreign multinationals.

The second alternative would also be marketoriented compared with the past but would draw

more than the frost on Mexico’s tradition of state-led

development and commitment to social justice. The

end results would include more even development

among regions and across rural and urban areas.

In its development policy under the second

scenario, Mexico would look more like many of

Asia’s developing economies. Rather than trade and

industrial policies driven by politics and rentseeking, Mexico would shift to guided targeting

through direct state support, efforts by Mexican

firms to collectively improve their technologies,

organizational practices, and worker skills, and, to

the extent permitted by GATT and NAFTA discipline, strategic protectionism. In the human resource

area, too, Mexico would come to resemble countries

like Korea, increasing its overall investments, and

redirecting them towards a combination of basic

education for all, plus technical training for technicians, managers, and engineers. For labor policy, the
Chapter I-Summary ● 2 1

developmentalist scenario would bring renegotiation of Mexico’s social pact so that unions would

gain more independence. This is likely to be

necessary to inhibit reliance on low-wage strategies,

particularly in smaller fins, and to counter autocratic traditions that, unchecked, would probably

result in adversarial rather than participative

workplace relations.

The greatest danger of NAFTA is that it could

bring out the worst in each country. Trade and

investment liberalization could reinforce commitment to low-wage business strategies among U. S.,

Canadian, and Mexican fins; destabilize the attempt to foster less adversarial relations between

labor and management; weaken the commitment of

U.S. corporations to train less educated U.S. workers; reduce incentives for small and medium-sized

U.S. firms to construct and participate in cooperative

networks aimed at fostering innovation and technology diffusion; and, in the wake of rising corn

imports, reform of the small-scale ejido farming

sector, and slow wage growth in Mexico, increase

the tide of unskilled emigrants from Mexico to the

United States. The combined effect would be to

encourage growing numbers of U.S. firms to pursue

business strategies depending on or compatible with

production in Mexico (box l-C).

Alternatively, the NAFTA debate could lead to a

shared commitment to high productivity development in which each country’s move in this direction

makes it easier for the partner to move in parallel.

Broad-based development in Mexico should bring

both larger wage increases and more rapid exchange

rate appreciation. More rapid and diversified development would reduce emigration to the United

States and lead to more rapid expansion of U.S.

exports. By contrast, less integrated development

and a continuation or worsening of labor surpluses

due to ejido reform and bankruptcies among smaller

Mexican firms would mean slow exchange rate

appreciation and a continuation of low wages even

in world-class Mexican plants.

The choice of development paths is a stark one. It

will have consequences not only for productivity

and wages but for social and political stability. In the

United States, a low-wage path would widen the gap

between workers’ aspirations and the jobs available

to them. It would likewise widen the gap between

rich and poor. Both countries must recognize the

stakes before their choices lock them into the wrong

path.

Box l-C—Mass Production, Flexible Production, and Sweatshops in the Garment Industry

The El Paso garment industry provides an example of the dangers for the United States of remaining committed

to standardized, high-volume manufacturing in an age when Mexico and other low-wage countries can approach

U.S. productivity and quality levels in this kind of production. A center for men’s work clothes since the 1920s,

El Paso’s garment industry expanded rapidly in the 1960s and 1970s due to investment by national mass producers

of jeans and men’s pants, including Levi Strauss, Farah, Billy the Kid, and Blue Bell. Employment rose from around

3,000 in the 1950s to over 15,000 by the early 1970s. The large plants that employed most El Paso garment workers

provided good working conditions, benefits, and paid significantly above the minimum wage. Starting in the 1970s,

El Paso began facing increased competition from low-wage countries, including Mexico. Farah, which once

employed 8,000 workers in El Paso, shifted most of its sewing to Mexico and Costa Rica. Its El Paso workforce

fell below 1,000. Billy the Kid, which once employed 2,000 workers, closed down its El Paso operations. Most of

El Paso’s losses have been high-volume, low-end jeans and work clothes produced with lead times of as long as

a year.

As large plants moved over the border or around the globe, El Paso stemmed its overall loss in apparel

employment by expanding production in low-wage ‘sweatshops. The growth of this segment is reflected in early

1990s employment statistics: large plants, anchored by Levi’s seven facilities and over 3,000 employees, account

for 60 percent of employment but less than 15 percent of El Paso’s garment plants; the remaining 90 establishments,

mostly subcontractors, account for 40 percent of employment. Average establishment size is now half what it was

in the 1970s. In 1990, in a surprise sweep of 39 small shops by the U.S. Department of Labor, 20 were found to

owe workers a total of $85,000 in back wages. Other shops employed underage workers and failed to meet basic

health and safety standards. Some immigrant women workers have been willing to tolerate sub-minimum wages,

poor working conditions, and sexual harassment because they need employer verification letters to qualify for legal

residence in the United States.

(Continued on next page)
22 ● U.S.-Mexico Trade

Box l-C—Mass Production, Flexible Production, and Sweatshops

in the Garment Industry-(Continued)

As high-volume production moved to developing countries, and to stem the expansion of small, low-wage

sweatshops, a local organization of working women, in cooperation with the El Paso business community and local

government, has been searching for a third, more economically and socially viable competitive strategy. Worker

representatives argue that this industry should not all go to low-wage countries. In their view, restructuring towards

flexible production for fashion-oriented markets makes more sense than trying to find jobs for 15,000 less educated

workers, many with limited English skills, in other sectors. Their strategy for competing in less price-sensitive

markets includes stricter enforcement of fair labor standards to preclude attempts to compete with developing

countries based on wages, and cooperative, government-catalyzed efforts by local industry to provide human

resource development, technical assistance, credit, and marketing research for small employers. To coordinate this

strategy, a 15-member, business-government-labor Fashion Industry Development Commission has been

established, along with a pilot Subcontractor Incubator Project intended to demonstrate that subcontractors can

operate competitively without resorting to sweatshop conditions.

That it is possible for a high-wage country to retain a presence even in this, the most labor-intensive of all

industries, is suggested by the fact that wages and apparel exports in industrialized countries are positively

correlated Higher wage Italian, German, and Japanese garment industries are able to compete by targeting

high-quality segments with rapidly changing fashions. El Paso itself has retained some jeans and trouser production

in large plants that cater to increasingly fashion-oriented and fragmenting mass production markets (e.g., Levi’s

Dockers line). The general lesson of the El Paso garment situation is clear. Unless the United States masters more

flexible, skill-intensive ways to compete, it will lose out to developing countries in low-end markets and to Europe

and Japan in high-end markets. Workers, like those in El Paso who have lost their jobs, will pay the highest price.

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Chapter 2

Policy Issues and Options:

Incentives for a High-Productivity Future
Contents

Page

DOMESTIC OPTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

Issue Area A: Promoting a Productive Economy (table 2-2) . . . . . . . . . . . . . . . . . . . . . . . . 30

Issue Area B: Curtailing Low-Productivity Strategies (table 2-3) . . . . . . . . . . . . . . . . . . . . 38

Issue Area C: Participation in a Productive Economy (table 2-4) . . . . . . . . . . . . . . . . . . . . 42

CONTINENTAL OPTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . 47

Boxes

Box Page

2-A. Institutions in a Market Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26

2-B. A High-Wage, High-Productivity Service Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

2-C. Health Care Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

2-E. The DOL-STPS Memorandum of Understanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

Tables

Table Page

2-1. Summary List of Policy Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

2-2. Issue Area A: Promoting a Productive Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

. . . .

2-3. Issue Area B: curtailing Low-Productivity Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

2-4. Issue Area C: Participation in a Productive Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42

2-5. Continental Policy Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Chapter 2

Policy Issues and Options:

Incentives for a High-Productivity Future

Despite assertions to the contrary, there is no

reason to believe that a North American Free Trade

Agreement (NAFTA) would automatically benefit

the United States (see ch. 1, box l-B). But OTA’s

analysis indicates that a NAFTA, if coupled with

other policies designed to strengthen the foundations of each economy, could work to the benefit

of both Mexico and the United States.

This chapter discusses two major groups of policy

options designed to stimulate high-productivity

development---domestic policies, which would not

require bilateral or trilateral negotiations, and continental policies. Table 2-1 summarizes the options in

each group. (The identical table appeared in ch, 1 as

table l-l). Both sets of policy options are based on

analysis of what it takes to guide a market economy

along a high-productivity path. Studies of dynamic

industries and countries suggest that the most

important factor is the institutional context in which

marketplace competition is embedded (box 2-A).

The most productive market economies are not

necessarily the least regulated, but those in which

institutions-e. g., industry and trade associations,

labor unions, corporate structures and policies, legal

systems, and informal norms-encourage firms to

compete in ways that are economically productive

Table 2-l—Summary List of Policy Options

L Domestic Policy Options

Issue Area A: Promoting a Productive Economy (for further detail, see table 2-2)

1. Approve a modified version of the High Skills, Competitive Workforce Act of 1990

2. Create a comprehensive worker adjustment program

3. Expand Trade Adjustment Assistance

4. Certify basic skills of new labor force entrants

5. Broaden and deepen links between firms

6. Create a Regional and Community Adjustment Corporation, focusing on direct public job creation

Issue Area B: Curtailing Low-Productivity Strategies (table 2-3)

1. Establish national commitment to social welfare through a U.S. Social Charter

2. Discourage low-wage strategies and reduce income inequality through wage and tax policies

3. Discourage State and local economic development based on “bidding wars” to recruit new

industry

Issue Area C: Participation in a Productive Economy (table 2-4)

1.Create a Labor Market Productivity y Center to foster consensus-building and expand institutional

support for work reorganization

2. Create Employee Participation Committees to provide worker “voice” in nonunion as well as

unionized companies

3. Extend union representation to more workers and industry sectors

4. Foster institutions for worker voice in the service sector

Il. Continental Policy Options (table 2-5)

1. Negotiate a North American Social Charter and establish a North American Commission for Labor

and Social Welfare

2. Establish procedures for continental management of trade and investment in autos and other

sectors

3. Create a Binational Commission with stable funding to improve the environment and infrastructure

in the border region

4. Provide technical assistance to Mexico for improving worker health and safety

5. Provide loans and aid for balanced economic development in Mexico

6. Establish North American works council to represent employees of companies operating in more

than one country

7. Provide trilateral dispute resolution on labor issues

8. Negotiate shorter work time for the continent

9. Establish a Commission on the Future of Democracy in North America

SOURCE: Office of Technology Assessment, 1992.

–25-
26 ● U.S.-Mexico Trade

Box 2-A—Institutions in a Market Economy

The collapse of communism in Central and Eastern Europe and the stagnation of developing country

economies with high levels of government intervention underline the virtues of markets in fostering efficiency and

decentralizing power. Variations in economic performance among capitalist economies, on the other hand, indicate

that deregulated markets do not always translate into the highest performance. German and Japanese institutions

differ substantially from each other and from U.S. institutions. These institutions shape corporate decisions and

worker behavior.

The right kinds of institutions can help an economy deal with market failure, in particular.

● underinvestments by employers in human resource development and in implementation of new technology

(the “software” or “humanware” of work organization as well as the hardware of product and process);

and

. the inability of markets alone to ensure cooperation within firms and an appropriate mix of competition and

cooperation among firms.

Institutions, Human Resource Development, and Technology Diffusion

Firms in market economies underinvest in human resource development and new technology because they

cannot appropriate all the returns from their investments (see Domestic Policy Options, Issue Area A). Companies

underinvest in human resource development if workers can be “poached” by “free-riding” competitors. (Human

resource development includes not only classroom training but structured on-the-job learning, improvement of

interpersonal skills, team-building, and development of the organizational competence and flexibility characteristic

of high-performing companies). Companies lose a portion of investments in new technology if the individuals or

groups in which technological learning is embodied move to competing firms.

A socially optimal degree of human resource development requires institutions that enable firms to appropriate

the full benefits of training and technology investments. Japan and Germany do this quite differently. In Japan,

employment security (for some), and the fact that employees cannot easily change jobs in mid-career, mean that

firms retain most of their investments in people.l In Germany, strong labor unions, a dense network of geographic

and sectoral industry associations, and supportive government policies underlie a longstanding system of multifirm

apprenticeship and training. Though voluntary, these policies and programs lead most companies to invest heavily

in human resources.

A market economy needs other institutions to solve the problem of underinvestment in technological learning.

In Japan, employment security and financial linkages among networks of end-product manufacturers and suppliers

permit groups of firms to share the benefits of their investments. Industry associations, largely horizontal, perform

similar functions in Germany. Both countries rely more than the United States on government to diffuse technical

know-how to small- and medium-sized firms.

Institutions, Labor-Management Relations, and Cooperation Among Firms

Two pervasive features of market economies inhibit cooperation between workers and management and

between suppliers and their customers. First, the interests of workers and employers often differ, and neither party’s

separate interests necessarily coincide with the joint interests of both parties or of society as a whole. A similar

divergence of interests exists between firms that sell to one another. Second, workers or suppliers may have

knowledge that employers or customers cannot readily obtain, but that could benefit both parties-and society-if

shared. This may be knowledge about how to improve productivity on the shop floor, how to prevent product

failures in the field, or how to design products that will better meet market needs. When interests and information

diverge, workers or suppliers may withhold their knowledge--fearing, for example, that divulging it will lead to

layoffs or price reductions-and pursue individual goals at the expense of joint and social priorities.

Two kinds of institutions can increase information-sharing and cooperation within market economies

(Domestic Options, Issue Areas B and C): voice or participative institutions; and constraints on forms of competition

harmful to workers or suppliers. Voice institutions-unions, works councils, regularized consultation between

companies and their suppliers-encourage sharing of know-how and a search for “win-win’ approaches that

produce mutual gain. Constraints on competing at worker or supplier expense-job security, contractual wage

lworker Traim”ng: Competing in the New International Economy (Washingto@ ~: U.S. OffIce of ‘kchuoIogy Assessxmw Septemk

1990).
Chapter 2-Policy Issues and Options ● 27

setting, customs or contracts specifying the distribution of benefits from productivity improvement—help build

trust and assure workers and suppliers that sharing knowledge will benefit rather than hurt them.

An Example: Unions and Competition in the Auto Industry

The dynamics of competition in the U.S. auto industry illustrate the synergistic effects of institutions in

promoting skill-intensive strategies. By the early 1980s, the Big Three U.S. producers recognized that they needed

to fundamentally transform their operations to meet competition from Japanese imports. The United Auto Workers

(UAW accepted the need to moderate wage increases and reorganize production to reduce costs and improve

quality (ch. 7). During this ongoing transformation, the presence of a union gave workers a voice in how

reorganization would take place and the union contract guaranteed that they would benefit from improvements in

competitiveness through greater job security and profit sharing. The automakers and the UAW also negotiated major

new human resource development programs to ensure that workers had the problem-solving, technical, and

interpersonal skills necessary to implement new production methods. Base wages increased little in real terms, but

the union prevented a competitive response based on lower wages. The combination of human resource

development, worker voice, and constraints on low-wage strategies contributed to annual increases in labor

productivity averaging more than 5 percent in U.S. assembly plants. Real value-added per worker rose at over 10

percent per year from 1984 to 1988.2

Among independent parts suppliers, by contrast, unions now represent less than one-third of workers and have

little influence on wage setting. As a result, employers were free to try to remain competitive by cutting pay. By

1989, wages in independent parts plants had fallen below the all-manufacturing average and were only 60 percent

of Big Three levels--compared to 78 percent in the mid- 1970s. Able to lower wages, suppliers had little incentive

to invest in skill development and work reorganization. Labor productivity from 1978 to 1988 in independent parts

plants rose by only 2.4 percent annually and value-added per worker hour increased less than 1 percent per year.

2~~ucUv1ty fiWes in this box provided by David Campbell, based on Department of ComeNe tire.

and socially sustainable. Institutions can do this in ductivity and competitiveness without the proper

three mutually reinforcing ways (corresponding

roughly to the three categories of domestic options

in table 2-l):

. By creating incentives for employers and

workers to invest in skills and technology.

. Through constraints on pursuit of low-wage,

low-productivity strategies. Examples include

minimum wages and industry-wide collective

bargaining.

. By fostering worker participation, cooperation among firms, and consultation and

consensus-building between government and

the private sector. In the United States, with its

tradition of adversarial labor-management relations, promoting worker participation is the

greatest challenge, and the one on which

OTA’s policy options focus.

The three sets of institutional structures reinforce

one another. Companies cannot improve their protools. Efforts to promote human resource-intensive

strategies will have limited success if firms can

easily pursue low-wage strategies. The design and

functioning of institutions that enable and encourage

firms to pursue dynamic strategies depend on

consultation and negotiation among all affected

parties. In the United States, the spotlight turned on

education and training by Congress, the administration, and the private sector has led to greater

awareness of the importance of nonmarket institutions for economic performance. So has the new

focus on government as a “catalyst” for privatesector institution building following the deregulatory thrust of recent years.

Business, labor, and government increasingly

agree that the United States invests too little in

worker training. 1 The reason is the U.S. “institutional deficit’ ‘—the absence of mechanisms for

multiemployer cooperation, strong unions, and tra1 William B. Johnston and Arnold H. Packer, Workforce 2000. Work and Workersfor the 21sr Century (Indianapolis, IN: The Hudson Institute, June

1987); Work-Based L.zarning: Training America’s Workers (Washington, DC: Department of Labor, 1989); Worker Training: Competing in the New

International Economy (Washington, DC: Office of Technology Assessment, September 1990); America’s Choice: High Skills or Low Wages!

(Rochester, NY: National Center on Education and the Economy, 1990); Rebuilding Americans Workforce: Business Sfraregies (o CZose the Competitive

Gap (Homcwood, IL: National Alliance of Business, 1992).

331–019 O - 92 – 2! : QL 3
ditions of job security that lead to greater investments in skill development and technological competence in countries like Germany and Japan. Both

Congress and the Department of Labor (DOL) have

been considering measures for reducing the Nation’s

institutional deficit in skills development. The

possible impact of a NAFTA on less-educated U.S.

workers underlines the importance of such policies.

Rather than government intervening to draw up

blueprints for training, or to provide training directly, the institutional perspective suggests that the

best role for government is to set conditions under

which those who would benefit will take action on

their own. OTA’s policy options in Issue Area A,

table 2-2—and throughout this chapter—focus on

ways in which government can stimulate and

catalyze change, rather than directly regulate.

Better training by itself would not be enough to

push the U.S. economy toward a more dynamic

growth path. That would require more fundamental

change in government policies and in business

strategies and structures. Without effective constraints on wage-based competition and more extensive worker voice institutions (Issue areas B and C,

tables 2-3 and 2-4), U.S. firms could respond to

competitive pressures by abandoning high-end markets in favor of standardized goods that can be

produced by less skilled workers. This would put the

United States in direct competition with Mexico and

other developing countries in which vast numbers of

people are willing to work for a small fraction of

U.S. wages. Thus, policies that operate on the

demand side of the labor market to change the types

of workers that employers seek are a necessary

complement to training (the supply side). Without

these complementary policies, the United States

could find itself moving from a past of jobs without

training to a future of trainin g without jobs.

Discussion and debate over competitiveness,

jobs, and NAFTA gravitates naturally to manufacturing. Because few service products trade internationally, few service workers compete directly for

jobs against workers in other countries. But productivity in the services is just as important for U.S.

living standards as productivity in manufacturing—

indeed, more so, given that service industries

employ over 70 percent of the workforce. Many jobs

in the services pay low wages and offer little job

security or opportunity for advancement. The only

way to create enough high-wage jobs in the United

States is to improve productivity in the service

sector. Box 2-B suggests some ways in which this

might be accomplished.

A word on the scope of OTA’s policy alternatives.

As table 2-1 suggests, the options analyzed in this

chapter range well beyond the usual confines of the

NAFTA debate. Some of the policy options discussed in this chapter might be considered in the

time frame of a NAFTA vote. Others almost

certainly could not. But economic integration between Mexico and the United States will continue

regardless of NAFTA. And regardless of the outcomes of the congressional vote, it is possible to

pursue a subset of options that lays groundwork for

the future. Such a subset might include:

1.

2.

3.

principles for guiding domestic and continental policy choices as economic integration

proceeds;

near-term measures for beginning the construction of a high-wage domestic and continental economy; and

study, reporting, and institution-building to

sustain debate after the vote, when the spotlight on NAFTA itself has dimmed.

Table 1-2, in chapter 1, included one such subset of

policy options.

Regarding the costs of OTA’s policy options,

there is no avoiding the fact that some would be

expensive. At the same time, money for new policies

and programs can come from old policies and

programs. Many of those old policies and programs

have the effect of subsidizing low-wage strategies.

They are residues of the mass production era, now

past, in which the U.S. economy was more isolated

from the rest of the world. Today, Federal funds also

go in large amounts to remedial programs for

disadvantaged workers that often fail to help them

out of the trap of poverty, dead-end jobs, and

welfare. Broader and deeper human resource development, coupled with opportunities for good jobs

and advancement, should prove less costly over the

long run. Finally, many of the ‘‘institutionbuilding” options would cost very little, because

these policies aim to create incentives for private

sector action.
Chapter 2--Policy Issues and Options . 29

Box 2-B—A High-Wage, High-Productivity Service Sector

The service sector includes industries as diverse as retail trade and government, banking and health care,

education and temporary help. Large, bureaucratic organizations dominate some service industries. In others, small,

specialized firms are the norm. Some service jobs are among the highest paying, most skilled, and most secure in

the U.S. economy. Others are classic dead-end jobs.

The examples below suggest two possibilities for improving productivity and quality in service industries. The

first resembles the approach common in manufacturing: new technology coupled with human resource development

and broader job definitions, so fewer workers can accomplish more and do it better. The second targets workers in

unstable jobs in small firms. Such firms have little incentive to invest in human resources because turnover is high.

Here, multiemployer institutions could take responsibility for upgrading human resources and for matching workers

and job openings as small employers grow, shrink open, and close.

In both large and small service firms, the transition to high-productivity work organization should be easier

than in manufacturing. Although much service work is organized according to “scientific management”

principles-low-skill workers in narrowly defined jobs under close supervision (bank tellers, fast food

workers)--this approach is not as deeply institutionalized as in manufacturing. More important, many service jobs

call on low-level workers to perform varied tasks in direct contact with customers (selecting merchandise, approving

credit, offering instruction)--work that is incompatible with scientific management.

Human Resource Development and Broad Job Definitions in Large Organizations

Example 1: Hotel Services-The productivity of German hotel workers is substantially higher than that of their

British counterparts.l While the difference is partly attributable to the greater use of labor-saving equipment in

Germany, it is due mostly to differences in worker training and job definitions. Most German hotel workers have

completed an apprenticeship. Apprentices are trained in all major aspects of hotel operation and must pass a uniform

nationwide examination. In Britain, hotel workers are less likely to have relevant training. If they have had training,

it is less comprehensive than that provided in German apprenticeships. German hotel jobs are also defined more

broadly than those in Britain. For example, a hotel receptionist in Germany will make reservations, book guests into

rooms, provide advice and information, carry luggage, operate the switchboard, supervise room-cleaning, handle

accounts and payments, and in some cases prepare breakfast; in Britain, different employees perform each of these

tasks (except in small hotels).

Example 2: Clerical Work—Many U.S. firms have been disappointed with the failure of computer technology

to measurably improve the productivity of clerical workers. Careful study in the insurance industry suggests that

this is a consequence of traditional forms of work organization that companies have retained even as they invested

heavily in computers.2 Many large insurance companies have created computer software to automate preparation

of the standardized policies sold to most of their customers. These software packages require large numbers of

low-skilled clerical workers to collect and enter data from customers into the system. The jobs of these clerical

workers offer little or no opportunity for skill improvement or on-the-job advancement. These companies have to

employ a small number of highly skilled workers to evaluate risk and price specialized insurance policies that cannot

be handled by the automated system.

This is not the only way to organize the “production’ of insurance. One company employs two kinds of skilled

clerical workers--customer service representatives who sell insurance and respond to customer questions and

complaints, and claims representatives, who process nonroutine as well as routine claims. Both jobs begin with 5

weeks of classroom training followed by 3 to 6 months of on-the-job training; thereafter, workers may take

additional training courses at company expense to qualify for more responsible positions. In 1984, 4 years after

instituting this approach, the 2,300 workers in the firm’s main office handled a greater volume of business than 5,000

workers at the previous sales peak.

1A sample of German hotels averaged 4.01 gaest-nights per employee, compared to 2.06 in Britain. SJ. Prais, Mlerie Jarvis, and Karin

Wagner, “Productivity and Vocational Skills in Servkxs in Britain and Germany: Hotels,” National Institute Economic Review, November

1989, pp. 52-72.

%leenAppelbaum and Peter Alb@ “ComputerRationalization and the Transformation of Work Lessons from the Insuran ee Industry,”

The Transformation of Work? Stephen Wood, ed. (London: Unwin Hymaq 1989), pp. 247-265.

(Continuqd on next page)
30 ● U.S.-Mexico Trade

Box 2-B—A High-Wage, High-Productivity Service Sector-(Continued)

In the U.S. economy as a whole, many clerical occupations are dead-end jobs. They need not be. Clerical work

spans an enormous range of skills, from those of receptionist, to bookkeeping, mastering word processing and

spread sheet software, desk-top publishing, and making travel arrangements. The gaps between steps on the office

job ladder could be bridged by most employees with a modest amount of structured training and experience. To

grasp the potential benefits, imagine what it would be like to routinely call any large organization (a bank, insurance

company, department store, or government agency) confident that the person at the other end of the phone would

be both competent and courteous.

Unstable Jobs, Small Firms, and Multiemployer Institutions

The contrast between low-wage and high-productivity strategies is unusually stark among small service

employers with high turnover. Low-wage employers deskill jobs and use the spot market or temporary help agencies

to fill gaps and find replacement workers. The unionized construction industry suggests an alternative. Like many

people in the service sector, construction workers have little job security or employer-specific know-how, and move

frequently from job to job. Yet this does not prevent unionized construction workers from achieving high

productivity, high wages, and a degree of employment security?

Construction trade unions, in cooperation with associations of unionized construction firms, facilitate higher

productivity by creating institutions that provide workers with training and promote their mobility across firms.

Unionized construction workers must complete multiyear apprenticeships which are administered jointly by unions

and employers. While no single employer would be willing to train workers who are so mobile, construction unions

negotiate agreements that require all firms that employ workers in a particular trade in a local area to pay for training.

In addition, construction trade unions maintain hiring halls that refer workers to available jobs in the local area.

Collective bargaining agreements often require employers to contact the union when seeking workers and to give

preference to workers referred by the union. Union hiring halls provide workers with a degree of employment

security and reduce the cost to employers of locating skilled workers. Finally, construction trade unions negotiate

portable employee benefit packages to which all unionized employers in an area contribute.

The apprenticeships, hiring halls, and portable employee benefits found in the unionized construction industry

could be models for service industries characterized by small employers and high turnover. Similar arrangements

have existed in the past for occupations including waitress.4 Unions and employer associations, independently or

jointly, could also create well-marked pathways for occupational advancement that would encourage workers to

improve their capabilities. For example, multiemployer agreements could provide that workers were paid according

to their level of knowledge or skill. Among other benefits, this would make it easier for skilled workers to move

between small and large service sector fins.

g~ue ~d~ pr employ= has ~n estimated at 44 to 52 percent higher (undefeated) or 17 to 22 percent higher (deflated) fOr tiow

construction workers compared with their nonunion counterparts. Dale Belman, “Unions, the Quality of Labor Relations, and Firm

Perfo rmanee,” Unions and Economic Competitiveness, Lawrence Mishel and Paula Voos, eds. (Armonk, NY: M.E. Sharpe, 1992), pp. 41-107.

d~ro~y Sue Cobble, “Organizing the Postindustrird Workforee: Lessons from the History of Waitress Unionis~” Industria/ andLubor

Relations Review, vol. 44, 1991, p. 419.

DOMESTIC OPTIONS invested in human resource development (see ch. 5,

table 5-3). The United States also has fewer proIssue Area A: Promoting a Productive grams than Japan and Europe directed at keeping

Economy (table 2-2) small firms technologically and organizationally up

to date. A productive future for the United States Today, the U.S. labor market adjustment system calls for institutions adapted to the 1990s, not the reflects both a decade of retrenchment and the . ..

origins of this system as a way of providing income 1930s.

support for semiskilled workers on temporary layoff.

The U.S. Government spends far less than European Option 1: Approve a Modified Version of the

countries and Canada on adjustment. Most of this High Skills, Competitive Workforce Act of

money is spent on income maintenance rather than 1990
. .

Chapter 2--Policy issues and Options . 31

Table 2-2—issue Area A: Promoting a Productive Economy

Options Advantages Disadvantages

1. Approve a modified version of the High

Skiils, Competitive Workforce Act of 1990

Encourages training and work reorganization. Would not immediately compensate workers dislocated by a NAFTA.

(s.

1a.

1 b.

1790/H.R. 3470).

Foster certification of occupational

skiils by establishing uniform

standards, as called for in S. 1790/

H.R. 3470.

Standardized curricula would improve worker

mobility and ensure employers of qualifications.

Standardization could eliminate some currently effective local or firm-specific training programs.

Businesses might push for narrow occupational definitions.

Implement a modified version of the Levy generates revenues for workforce de- May be difficult to identify best uses of

Ievy in S. 1790/H.R. 3470, requiring training trust funds.

employers to spend an amount equal

to at least 1 percent of payroll on

training or else contribute this amount

to a trust fund.

velopment without adding to federal spending.

Trained workers need less adjustment assistance if laid off.

Levy-fundedtraining might meet the needs

of large and influential employers to the

disadvantage of other firms.

1 c. Encourage creation of State and local

Employment and Training Boards (ETBs)

to coordinate training programs and

match workers with job vacancies, as

called for in S. 1790/H.R. 3470.

ETBs could help employers find qualified

workers or train them if necessary.

If not carefully managed, might result in

cutbacks or elimination of local employment and training programs for the disadvantaged. Reduces costs of unemployment insurance

and welfare by matching workers to available

jobs.

2. Establish a comprehensive worker adjustment system by providing quicker

response and long-term income support

through the Economic Dislocation and

Worker Adjustment Assistance program

(EDWAA) and enhanced unemployment

insurance coverage and benefits.

Provides more displaced workers with services and income cushion during job search.

Puts them back to work with better skills.

EDWAA enhancement could cost several

billion dollars annually.

Job placement could be a bottleneck.

Higher UI payroll taxes needed.

Some people might take advantage of

increased benefits to avoid working.

3. Expand the Trade Adjustment Assistance

program (TAA).

Expanded TAA coverage would provide many

NAHA-displaced workers with comprehensive assistance.

Would not cover many workers affected

indirectly.

Decisions on eligibility would inevitably

be somewhat arbitrary.

4. Award nationally recognized “Certificates

of initial Mastery” to encourage young

people to improve their basic skills.

Basic skills provide foundation for continuing

learning.

Could lead to expensive, bureaucratic testing process without significantly improving school-to-work transition. Certification would encourage employers to

provide further training.

5. Broaden and deepen linkages among

firms, in both manufacturing and services.

Encourages dynamic industrial networks that

can create jobs and help boost productivity

and competitiveness,

5a. Support a national network of business

modernization centers, servicing smaller

firms.

Would help upgrade basic competence of

smaller firms.

Some firms or sectors might “capture”

the centers to the disadvantage of others.

5b. Catalyze formation of muiti-employer

horizontal industrial networks.

Encourages cooperation among firms tot heir

mutual benefit. Helps insulate United States

from competition with low-wage countries.

Cooperation may lead to collusion.

6. Create a Regional and Community Adjustment Corporation to respond to temporary dislocations and chronic unemployment through economic redevelopment

emphasizing direct job creation.

Provides alternatives to low-skill, low-wage

work.

Initial costs high (although partiaily offset

by reduced welfare spending and provision of needed services). Enhances productivity through improvements

in infrastructure and public services. Transition to private-sector jobs could be

slow. Could provide training certification, and stepping stones to good private-sector jobs.

SOURCE: Office of Technology Assessment, 1992,
32 ● U.S.-Mexico Trade

Three provisions of this proposed legislation (S.

1790 and H.R. 3470) could raise U.S. human

resource investments and productivity growth:

1. certification of occupational skills;

2. requiring all firms with at least 20 employees

to spend 1 percent of their payroll on training

or pay the equivalent into a State training trust

fund; and

3. encouraging creation of State and local Employment and Training Boards (ETBs).

la: Certify Occupational Skills-Standardized

occupational credentials can bean important tool for

encouraging industry to define jobs broadly, for

providing lower level workers with deeper training,

and for making ‘‘nonprofessional’ occupations

more attractive. In Germany, young people who

complete a 3- to 4-year apprenticeship and pass a test

gain certification in one of some 450 nationally

recognized occupations. Curricula and tests are

nearly uniform across the country, encouraging

small firms to share the costs of training through

local business associations. Young people enter

apprenticeship programs because they will earn a

widely recognized credential. Skill certification

helps foster career ladders within and across companies, providing workers with upward mobility and

further enhancing commitment. The broad skills and

worker motivation that result from its skill certification system give Germany a productive and flexible

economy (see the hotel example in box 2-B).*

Recognizing the potential benefits of skill certification, the Departments of Education and Labor held

a series of regional hearings in April and May of

1992 to explore the establishment of standards.

Although an important first step, DOL’s Office of

Work-Based Learning, which organized these hearings, lacks both statutory authority and a secure

funding base. More important, the process begun by

the hearings could lead toad hoc cooperation within

particular industries, occupations, or regions rather

than a comprehensive national system. This would

place limits on geographical and intersectoral mobility and lead to variations in the quality of certification. A decentralized process might also leave out

workers themselves. Combined with a focus on

particular sectors, the result could be definition of

narrow, "industry-specific ” skills rather than broader

occupations that would contribute more to the

flexibility of the economy and to worker opportunity. To avoid this danger, S. 1790/H.R. 3470 would

create and fund a National Board for Professional

and Technical Standards, made up of representatives

from business, labor, and government. The board

would develop uniform curricula and certification

tests.

lb: Training Levy-As written, S. 1790/H.R.

3470, while they call for firms to “train or pay,”

place no restrictions on the type of training that

would qualify. Flying executives to sessions in

Hawaii could suffice. Congress may want to modify

the bill’s language to emphasize training of frontline workers, recognized as a priority in the bill’s

criteria for distributing funds raised by the levy.

Congress could also direct firms that wished to be

exempt from the levy to prepare annual workforce

development plans‘‘ in conjunction with employee

representatives showing, for example, the ways in

which training would provide lower level workers,

over time, with certifiable skills and internal opportunities for advancement. These plans might be

reviewed by State-level Employment and Training

Boards, which would distribute funds collected by

the levy to qualifying programs.

1c: Employment and Training Boards--Section

601 of S. 1790/H.R. 3470 authorizes $50 million for

grants to States to develop coordinated systems for

administration of Federal, State, and local employment and training programs. A network of State and

local Employment and Training Boards (ETBs)

could provide the backbone for such a system.

Similar to Canada’s recently constituted Labor

Force Development Boards, ETBs could be composed of representatives of employers, labor, government, educational institutions, and disadvantaged workers.3 ETBs could:

z Smdies of ~tched Gem and British rnetiworking, furniture-making, and apparel plants likewise demonstrate that both p3dUCtiVity md

product quality are higher because of Germany’s training system. Worker Training, ibid., p. 88,

3 ~s. option diff~s from the @s@tiOn’s ‘‘Jobs 2000” proposal, which calls for oversight by currently existing Private Industry councils

(PICS). PICS lack adequate worker representat.ionj reducing pressure to create apprenticeships or other long-term credentialed &air@ that is most

important to U.S. productivity growth and worker opportunity. Many PICS lack broad-based business representation as wel~ leading to domina tion by

a few employers who sometimes use funds as subsidies for “mining” carwash attendants or hotel maids. See Job Traini”ng Partnership Act: Inadequate

Oversight L.eaves Program VuZnerab/e to Waste, Abuse, and Mismanagement, GAO/HRD-91-97 (Washington DC: U.S. General Accounting OffIce,

July 1991).
——

Chapter 2--Policy Issues and Options . 33

Help streamline the array of around 45 Federal

education, employment, and training programs

that currently spend about $17 billion per year.4

Coordinate the growing number of State training programs aimed at employed workers.

Help catalyze the creation of training consortia

in which firms share the costs and benefits of

training.

With strong linkages to local labor markets,

ETBs could--directly and through new industry and occupational training institutions that

grew from them-take over the functions of the

existing Federal-State Employment Service

(ES). At present, the ES is peripheral to the

operation of most local labor markets-its

offices typically place fewer than 20 percent of

job-seekers in permanent jobs, and those jobs

pay only half the average wage in the community.

To complement a role in job placement, ETBs

could provide interest and ‘aptitude testing,

comprehensive job counseling, and training to

unemployed well as to employed workers.

Option 2: Enhance EDWAA and UI—A Comprehensive Displaced Worker System

Option 1 would establish a flexible U.S. training

and adjustment system intended to shorten spells of

unemployment and increase employer investment in

human resource development. It does not directly

address the problems of workers who lose their jobs,

as a result of trade with Mexico or for other reasons.

At present, the United States has three major

programs that serve displaced workers. The Economic Dislocation and Worker Adjustment Assistance program (EDWAA), available to all displaced

workers, provides occupational counseling, job

search assistance, training, and some needs-related

income support for workers in training. When

possible—for example, upon 60-day advanced notification of plant closing or mass layoff under the

1988 Worker Adjustment and Retraining Notification Act (WARN)--EDWAA provides comprehensive onsite ‘‘rapid response’ services to workers

who are about to be laid off. The second program,

Trade Adjustment Assistance (TAA), provides eligible trade-displaced workers with funding for all

‘‘reasonable training expenditures and income

support for up to 78 weeks when combined with

Unemployment Insurance (UI) benefits. The third

program, UI itself, complements TAA and EDWAA

by providing some displaced workers with income

maintenance. UI only serves about 50 percent of

displaced workers (and around 40 percent of all

unemployed workers). Many of these people exhaust their benefits before finding a job. For

recipients, weekly UI benefits in 1990 averaged

$161, 37 percent of previous earnings.s

Each of the three major elements of the U.S.

worker adjustment system has its limitations. Despite EDWAA’s stated goal of ‘‘rapid response, ’

administration is highly uneven across States and

localities. 6 Some local areas do not enroll workers

until 3 to 6 months after layoff.7 Because EDWAA

provides only limited funds for income support, and

UI generally runs out at 26 weeks, EDWAA training

typically lasts no more than 12 to 16 weeks, often

less. 8 While TAA offers longer term training and

income support, it covers few workers-only 25,000

in 1991, less than 1 percent of the 2.7 million

workers who were unemployed for 6 months or

more.

9 A second problem results from the need for

certification of eligibility before services can be

delivered: while this process has been streamlined

4 IWS tot~ ~cludes 2. I Dep~ent of Education programs funded at $11.1 billion (including $4.4 billion in Pen Grants md $3.5 billion ti student

loans) and 9 DOL programs (primarily under the Job Training Partnership Act) tided at $3.8 billion. Training Programs: Information on Fiscal Years

1989 and 1990 Appropriations (Washington, DC: U.S. General Accounting Office, 1989).

5 William J. Curmingti AFL-CIO, Statement before the Semte Finance Committee on Unemployment Lnsurance Problems, Apr. 23, 1991.

6Afier the Cold War: Living With Lower D.#ense Spending, (Washington DC: Office of khoIogy Assessment, Febw 192), P. 77.

7 $*s~dy of he Implementation of tie &onofic Dislocation ad Worker Adjusment Assist~ce Act nme H Fhtigs,’ Social pohcy Research

Associates and Berkeley Planning Associates, May 1992, p. 8. On the importance of rapid service delivery for helping displaced workers fmd new jobs

quickly, see Technology and Structural Unemployment: Reemploying Displaced Adults (Washington, DC: Ofice of Technology Assessment, February,

1986).

8Aft er the Cold War, op. cit., foomote b, P. 85.

g Sheldon FricdrnruL ‘‘lkrms of Adjustment: It’s No Cure for a Bad Trade Pact, But Victimized Workers Need Aid, ” Northeast-Midwest Economic

Review, August 1992, p. 8. One reason is that ‘I&l covers only workers who lost their jobs as a direct result of import competition. In the 1988 trade

ac~ Congress extended eligibility to workers in supplier and service firms who were indirectly affected by imports, but no money has been available

for benefits. TAA has never covered workers who lose their jobs when plants close and production moves abroad.
34 ● U.S.-Mexico Trade

somewhat, it still impedes rapid response.l0 The low

coverage in the third program, UI, prevents it from

compensating for the limits of EDWAA income

support.

Initially, the administration took the view that

EDWAA was adequate for aiding NAFTAdislocated workers.

11 In June 1992, however, DOL

acknowledged that neither TAA nor EDWAA would

be sufficient to deal with NAFTA dislocations, and

that a new NAFTA-specific adjustment program

might be needed.l2 Then, in August, the president

proposed increasing EDWAA funds to provide

long-term training and income support for what

would be a small fraction of displaced workers

(including some of those displaced by NAFTA). A

NAFTA-specific adjustment program, in any case,

might be ineffective because of slow delivery of

services as a result of the time required to certify

workers as NAFTA-displaced. On equity grounds, a

NAFTA-specific program would be a further example of making services a function of the cause of

worker displacement. The many indirect impacts of

trade with (and immigration from) Mexico would

make defining who was NAFTA-displaced especially tricky. Should suppliers to factories that lose

business to imports be covered? What about workers

displaced (at least proximately) because investment

moves south rather than trade moving north? Or

workers who lose jobs because Mexican farmers or

manufacturing workers are displaced and then migrate to take jobs in the United States?

Most fundamentally, the impacts of NAFTA

displacement will be transmitted quite rapidly

through the U.S. labor market as a whole. The U.S.

labor market for less educated workers increasingly

resembles a spot market in which the impacts of

displacement are immediately felt by all similarly

skilled workers (because of declining union coverage, the breakdown of internal labor markets, and the

falling real minimum wage). As a result, the basic

NAFTA adjustment issue is what an agreement

will do to job opportunities for the entire bottom

half of the U.S. labor market. Any improvement in

domestic adjustment programs to cope with NAFTA

pressures, therefore, should serve all workers. Any

such improvement would be more likely to function

effectively in combination with other options designed to change the structure of the lower end of the

U.S. labor market. Without such complementary

changes, even long-term training may yield meager

returns.

OTA’s review of existing U.S. adjustment programs suggests that a more effective system would

combine (and improve on) the rapid response of the

EDWAA program while providing long-term income support to workers as in the TAA program.

This could be achieved through a combination of the

following mechanisms:

●

●

Increase funding for EDWAA (budgeted at

$527 million in 1991) so that, in combination

with other measures, workers can obtain income support and training funds for longer

periods-preferably up to 18 months as in

TAA. If EDWAA enrollment tripled and the

share of workers receiving long-term training

grew to 50 percent as a result of the availability

of income support, these changes would cost at

most $2.4 billion.13 This is a small fraction of

the over $30 billion cost of displacement to

manufacturing workers in the 1983 to 1989

period. (See ch. 4.) It is likely to be a small

fraction of the cost of displacement due to

NAFTA. Funding for an expanded program

could come from general revenues, a payroll

tax, or from earmarking tariff revenues. (See

Option 3 below.)

To cushion the impact of displacement and

reduce the need for post-UI income maintenance from an expanded EDWAA program,

Congress could bolster the UI system in several

ways. It could raise average UI benefits to the

level recommended by the National Commis10 WARN’.S 60-day Plmt closkg md mass layoff notification provisions have increased the number of workers for whom cetilcation k r~uested

before displacement. In addition, DOL has shortened the time between certification application and determination of eligibility. Still, even workers in

large plants that received advanced notice are usually not ruled eligible for TAA until roughly a month after layoff. Personal communication with Walter

Comon, Mathematical inc., August 1992. Training follows still later.

11 Bengt wi150T “use Best of Tfi, EDWAA to Help viCtiIDS of Trade pact, Officials SaY) “ Employment and Training Reporter, Aug. 7, 1991,

pp. 983-985.

12 * ‘Adfifis~ation Begins Considering Worker Adjustment PrOgrUII for N~A, ’ Inside U.S. Trade, June 26, 1992, p. 1.

13 EDWAA emol]ed 187,000 workers in fiscal 1991-roughly 15 percent of all displaced workers. Only about 20 to 30 percent of EDWQ

participants enter long-term mining. The $2.4 billion estimate assumes that long-term training lasts 18 months on average, with the first 6 months

supported by UI and the last 12 months supported by making income maintenance generally available through EDWAA.
Chapter 2--Policy Issues and Options ● 3 5

sion on Unemployment Insurance-50 percent

of lost wages. It could use the total unemployment rate rather than the much lower insured

unemployment rate to trigger the extension of

benefits beyond the basic 26 weeks. To pay for

greater coverage, the Federal Government could

raise the wage base used to assess UI taxes—

which currently ranges from $7,000 in some

States to over $14,000 in a few—and the tax

rates themselves. Increasing the money in State

unemployment funds would reduce pressure to

tighten eligibility and help increase the fraction

of workers covered.

. Congress could direct DOL to provide financial

incentives for State EDWAA programs that

respond rapidly. Disbursement of a portion of

available funds, for example, could be made

dependent on average time lapse between

notice of layoff and provision of key services.

A number of additional changes might further

improve a comprehensive displacement system.

Since income maintenance at UI levels (even if

raised to 50 percent) would often be insufficient to

meet workers’ needs (e.g., mortgages) and enable

them to enter extended training, a loan system could

be established that lends workers funds to bring

them up to, say, 70 percent of their previous wage

(the maximum wage replacement level under the

TAA program before 1981). Such loans might also

be available for expensive training that is not fully

covered by an expanded EDWAA,14 A well designed revolving fund might not need new Federal

funds if loans were balanced against repayments.

TAA could also be amended to provide dislocated

workers with health care-the average premium for

medical insurance available to workers is $3,200 per

year, nearly 40 percent of the average unemployment benefit. 15 As a result, lack of medical insurance

often prevents workers from enrolling in long-term

training and forces them to take jobs with little

opportunity for upward mobility.

The structure of a comprehensive system might

differ from the existing EDWAA model by having

the ETBs, once set up, replace Private Industry

Councils (PICs) in linking EDWAA training and job

search programs with local labor market needs and

opportunities. With ETBs helping seed new, multiemployer training programs and serving as labormarket intermediaries, their participation in a comprehensive displacement service would help channel

displaced workers in directions that offer real

income and career opportunities.

Option 3: Enhance TAA

If Congress does not enact a comprehensive

adjustment program, it could, at a minimum, compensate the workers most immediately affected by

trade liberalization with Mexico. Unlike the option

above, this would not be the kind of systemic change

that pushes the United States towards a highproductivity development path. Nor would it protect

workers in sectors not directly exposed to trade

competition who would be hurt by competition for

jobs with those more directly affected.

One way to compensate NAFTA-affected workers would be to bolster the TAA program as a whole.

To reduce the time required for certification, to limit

the scope for administrative discretion that prevents

workers from obtaining benefits, and to increase the

number of workers served industrywide and areawide certification could be considered as a complement to firm- and plant-level certification. Medical

insurance could be incorporated within an expanded

TAA program (see above). A trust fund financed by

existing tariffs would provide one source of funds

for expanding TAA. (A new import fee, as called for

in the 1988 trade act, could be seen as a trade

barrier.) Congress called for the creation of such a

trust fund in 1974 as well as 1988, but DOL has not

acted on these directives.

Option 4: Certify Basic Skills

To prepare for work in high-productivity firms,

new labor market entrants need basic skills in

reading, writing, and arithmetic, as well as the ability

to work in groups, solve problems, and communicate

effectively. The Commission on the Skills of the

American Workforce recommended that all 16-yearolds who passed a test on such skills be awarded a

‘‘Certificate of Initial Mastery. ’ A nationally recognized credential would help those choosing to enter

the labor market after high school and encourage

14 ELMly in 1992, President 13ush proposed that all workers be provided a credit card providing them @ aining loans. Frank Swoboda, “Bush to Propose

Sweeping Changes in Job Training,’ Wu~hington Post, Jan. 17, 1992, p. B1. LQan repayments could be based on future earnings, much like the pilot

program in the recently enacted Higher Education Act (S. 1150).

15 Sheldon F1-i~~, ‘‘Tkxrns of Adjustment, ’ Op Cit., fOOtOOte 9
36 ● U.S.-Mexico Trade

their employers to provide further training, knowing

it would build on a good foundation.

Option 5: Promote Business Modernization Among

Small and Medium-Sized Manufacturers and

Service Firms

The active labor market policies discussed above

focus on workers. To achieve the productivity levels

necessary to maintain its living standards, the United

States also needs to promote the dynamism of its

employers. Such efforts should focus on small and

medium-sized enterprises (SMEs), which have fewer

resources than large firms and less experience to

draw on. Because small companies are less likely to

move production abroad, the United States is likely

to capture the benefits of support provided to them.

Furthermore, SMEs as a class and the service sector

as a whole have become a drag on U.S. productivity

growth and the competitiveness of large U.S.

firms. l6 Because low-wage countries, including

Mexico, often have limited technological and human

resource endowments—and low productivity beyond the plants of large multinationals-highperforming small firms could pay a pivotal role in

slowing the flight of investment and jobs out of the

United States. At present, operating as isolated

establishments, using outdated technology and organizational practices, they often fail to play this

role.

Our foreign competitors foster dynamic small and

medium-sized manufacturers in two complementary

ways. The first is through industrial extension

services that provide firms with assistance on basic

organizational and technological matters. Japan, for

example, supports a national system of 185 technology extension centers that provide R&D services

and technical assistance, testing, training, and advice to manufacturing companies with up to 300

employees.

17 Denmark has established business and

government-funded technology service centers in

each of its counties. The second approach involves

employer-led cooperation to create either of two

types of industrial networks. Vertical networks bring

suppliers that sell to large companies into associations that facilitate cooperation among their members (e.g., Japanese keiretsu). Horizontal networks

of mutually dependent small firms pool resources to

share overhead costs (e.g., on marketing overseas)

and subcontract to each other to fill orders beyond

the capacity of individual firms. In northern Italy, for

example, networks of cooperating small firms employ advanced technologies and highly skilled

workers to produce a wide variety of high quality

goods matched to customer needs.18 In Denmark, the

government spent $25 million-equivalent to about

$1 billion if scaled to the size of the U.S. economy—

to seed the development of industrial networks.19 By

1991, in a program started 2 years earlier, one in four

Danish firms had links to at least one network.

In the context of international competition, declining manufacturing employment, and successful

experiences in other countries, the United States has,

over the past decade, expanded its efforts to assist

small manufacturers. By 1991, 23 States had established industrial extension programs. Five States

now share the cost of Manufacturing Technology

Centers (MTCs) with the Commerce Department.20

After installing automated equipment developed in

conjunction with the Great Lakes Manufacturing

Technology Center (MTC), co-funded by the State

of Ohio, an innercity Cleveland plant making

connectors for car radio antennas increased its

market share and maintained its employment levels.

The company had originally planned to relocate this

work to Mexico in order to meet demands by

General Motors for lower costs,

16 Skce the e~iyI$)70s, value added per employee in plants with fewer than 500 employees has been growing at only two-thirds tie rate h linger

pk-mts. Lmuis G. Tomatzky and Daniel Luri& “’Ikchnology Policies and Progr ammes in Manufacturing: Toward Coherence and Impact+’ International

Journal of Technology J4anagernenf, special issue on strengthening corporate and national competitiveness through technology, vol. 7, 1992, pp.

141-157. Imw productivity in producer services, health care, and education also hurts the competitiveness of U.S. manufacturers.

IT competing Economies: America, Europe, and (he Pacific Rim (Washington DC: Office of ‘Ikchnology Assessment, OCtOber 1991), p. 48; l’hiliP

Shapir% “Ussons from Japan: Helping Small Manufacturers, ” Issues in Science and Technology, spring 1992, pp. 66-72.

16 Michael J. Plore and Chles Sabel, The Second Industrial Divide (New York NY: Basic Books, 1984). For more examples daO @YtiCXd

comparison of horizontal and vertical networks see Michael Best, The New Competition: Institutions of Industrial Restructuring (Cambridge, MA:

Harvard University Press, 1990).

19 S~ A. Rose~eld, Technology Innovation and Rural Development: L?ssonsfiom Italy and Denmark (Washington DC: Aspen Wtitute for

Humanistic Studies, December 1990); personal communication with Niels Nielsen, Danish lkchnological Institute, Dec. 5, 1991.

20 SM competing Economies Op Clt,, foomote 17, pp. 47-48, where, a SiIIIil~ option is discussed in more detail. centers Codd, for example, help small

companies acquire new technology through leasing of capital equipment. On links between technical assistance and human resource practices, see Worker

Training, op. cit., foomote 1, pp. 60-64.
—-—..—

Chapter 2--Policy Issues and Options ● 37

Despite these and other positive examples, U.S.

industrial extension programs remain small in scale

and narrow in scope. In 1990, they helped about 3

percent (1 1,800) of the 350,000 U.S. manufacturers

with fewer than 500 employees.21 In contrast to

programs in other countries, industrial extension in

the United States has been narrowly defined. Typically, U.S. programs focus on ‘‘hmdware’ technology and business advice while paying little attention

to shopfloor organization and work methods. Not

much effort has been focused on stimulating cooperation among firms themselves to create dynamic

industrial districts .22 One danger of a NAFTA is that

it might weaken efforts to construct dynamic industrial networks in the United States at a critical,

embryonic stage by encouraging SMEs to turn their

attention to Mexico. To prevent this, and to encourage modernization, a NAFTA could be complemented by two options that build on existing state

and Federal efforts.

5a: A Nationwide Network of Business Modernization Centers—To provide basic assistance to all

manufacturing and service employers with less than

500 workers, and to insulate current State efforts

from recessionary cutbacks, the Federal Government could work with the States to expand existing

industrial extension services into a network of, say,

120 centers. To provide services to perhaps 7 percent

of the Nation’s SMEs annually might cost about

$500 million initially .23 The program could be

cost-shared with the States to encourage the local

‘‘ownership’ needed for success. If the centers

proved effective and gained strong support from

their constituents, federal funding could be increased by redirecting funds already spent for

business assistance-including, possibly, Small Business Development Centers now supported by the

Small Business Administration ($55 million per

year) that primarily support low-skill, minimumwage job creation. Other programs that might be

consolidated include the DoD Procurement Assistance Centers, Trade Adjustment Assistance Centers,

and Economic Development Administration University Centers.

To overcome the existing emphasis on hardware

technologies, the centers should provide services

including assistance on work organization, training,

management, and product/process design and development. Planning for human resource consulting

could be coordinated with Employment and Training Boards (ETBs), should those be established

(Option 1c).

5b: Catalyze the Formation of Multiemployer

Horizontal Industrial Networks. SMEs, especially in

dynamic industry segments (e.g., development of

computer software) almost always cooperate informally in ways essential to their collective survival.

In the U.S. context, the weakness of industry

associations and strength of entrepreneurial individualism tend to make alliances to address cooperative

concerns unstable (one reason some countries,

including Germany and Mexico, require companies

to aggregate into industrial chambers). Building on

and learning from the experiences of State Governments and MTCs, the Federal Government might

seek to help institutionalize employer-led cooperation to create dynamic, high-wage, industrial networks. One way to start would be a pilot program of

perhaps $100 million to support overhead sharing by

SMEs on cooperative efforts to develop and diffuse

organizational and human resource knowledge. Networks could be cost-shared with States and participating employers. The Federal and State contribution could diminish over time---successful networks, in which firms come to recognize the mutual

benefits of their investments, should be selfsustaining. Lessons from a successful pilot program

could be used to define ways for business and

government to transform existing industry associations from lobbying organizations into institutions

that promote continuous industrial upgrading among

smaller firms.

Option 6: Create a Regional and Community

Adjustment Corporation

To reduce pressures that may lead depressed

regions to accept any and all job-creating investments, Congress could create a quasi-public Regional and Community Adjustment Corporation.

2] Shapira, “Lxxsons from Japan, ” op. cit., footnote 17,

22 one exception is in Oregon, where the State Government helped create a consortium of wood products fi-.Ajler the Cold War, op. cit., foomote

6, pp. 183-184. For more examples, see Gregg A. Lichtenste@ “A Catalogue of U.S. Manufacturing Networks,” Gaithersburg, MD, Department of

Commerce, National Institute of Standards and Ttxhnology, Apr. 20, 1992.

23 OTA earlier es~ated tie cows of serving 7 percent of manufacturing SMES at $120 to $480 million annually. Cornpeh”ng Economies, op. cit.,

footnote 17, p. 48.
38 ● U, S.-Mexico Trade

The Corporation would direct funds to poorer

communities and regions, including those affected

by a NAFTA. To limit pork-barrel projects, funding

could be allocated based on objective factors such as

per-capita income, unemployment, and economic

growth rates. With oversight by a board representing

business, labor, education, and State and local

government, the Corporation could help localities

formulate and implement comprehensive economic

development programs, including direct job creation

where necessary.

Public-sector jobs might be designed to rebuild

the Nation’s deteriorating infrastructure (which has

been linked to the slowdown in U.S. productivity

growth) and increase quality and productivity in

public services (e.g., educational aides in classrooms, freeing teachers to spend more time with

students and less on administrative tasks). Publicsector jobs could have a limited duration (say, 2

years) and be linked with reforms to the U.S. training

system, so that workers have greater access to

structured training, certification, and greater career

mobility. If the United States and Mexico agreed to

form a binational Commission on Environment and

Infrastructure (as suggested below), the Regional

and Community Adjustment Corporation could

create jobs in construction and environmental cleanup

in the border region.

Even in the short run, most of the costs of

public-sector job creation would be offset by savings

in welfare expenditures. One set of estimates placed

the net cost of providing public jobs to all the

unemployed (in 1986) willing and able to work at

less than $30 billion, before accounting for the value

created by their labor.24 In the longer run, direct

public job creation should yield other benefits too. It

might reduce the social costs of unemployment,

including child and spouse abuse, mental and

physical illness, and crime. For example, arrest rates

among youths participating in federally funded jobs

programs in the late 1970s were 50 percent lower

during periods of employment, resulting in savings

in criminal justice costs, property losses, and personal injury estimated at more than $1,000 per

participant.

Issue Area B: Curtailing Low-Productivity

Strategies (table 2-3)

The options just described would encourage and

assist workers, employers, and communities to

move toward a high-skill, high-productivity growth

trajectory. Congress may also want to make pursuit

of the low-productivity alternative more difficult,

through policy options such as those discussed

below.

Option 1: A U.S. Social Charter

As a first step, Congress could declare its intent to

curtail low-productivity, low-wage strategies in a

U.S. Social Charter. The Charter might include both

a list of social goals and a statement of principles on

which to base future policymaking. Examples of

provisions that might be considered include:

●

●

●

●

a restatement of the longstanding U.S. goal of

full employment, perhaps defined as the right to

a stable job that pays above-poverty wages;

a statement of the right to training and education throughout working life;

reaffirmation of workers’ rights to organize and

bargain collectively; and

in light of the social tensions arising from the

growing gap between rich and poor, reduction

of income inequality (higher incomes at the low

end of the distribution also create incentives for

employers to increase productivity) .25

An annual report on progress toward achieving the

goals of the U.S. Social Charter would provide an

occasion for reviewing progress and updating goals.

Option 2: Discourage Low-Wage Strategies

Through Wage and Tax Policies

2a: Increase the Minimum Wage—With its April

1991 increase to $4.25 per hour, the minimum wage

in the United States rose to an inflation-adjusted

level that was 73 percent of the 1968 peak and 80

2.I p~lp H~ey, Secun”ng the Right tO Employment: Social We~are Policy and the Unemployed in the United States @bXtOKL NJ: ~ceton

University Press, 1989), p. 49. Direct expenses for job creation were estimatedas$112 billion (net of taxes generated by now-employed workers), with

offsetting welfare savings placed at $83.5 billion.

M ~ 1975, the top 20 ~ment of U.S. households had 7.4 times the income of the bottom 20 percent; in 1990, the ratio was 9.6 to 1 (based on Census

Bureau data from September 1991).
Chapter 2--Policy Issues and Options . 39

Table 2-3-issue Area B: Curtailing Low-Productivity Strategies

Options Advantages Disadvantages

1. A U.S. Social Charter.

2. Discourage low-productivity strategies

through wage and tax policies.

2a Raise the minimum wage and strengthen

enforcement of this and other labor

standards.

2b. Promote sectoral wage setting through

collective bargaining and “extension

laws.”

2c. Narrow the difference between earnings of top executives and hourly workers.

3. Discourage State and local “bidding wars”

to recruit new industry.

3a. Reduce federal funds for community

and regional economic development

in proportion to incentives provided by

States and localities.

3b. Tax businesses on the value of State

and local incentives.

Helps map out a high-skill, high-productivity

future.

Increases worker commitment to the job.

Encourages firms to reorganize production

and upgrade their workforces to cover costs.

Reduces welfare costs, helps working poor

support families.

Reduces low-wage competition within industry sectors.

Creates personal incentives for managers to

raise the pay of lower-level workers.

A “gentlemen’s agreement” among governors and State economic development officials could stop the drain of revenues better

used for other purposes.

Forces cities and States to make explicit

choice between federal funds or incentives to

attract new businesses.

Does not require self-discipline by States.

A statement of principles and goals would

have little short-term impact.

Could raise average U.S. labor costs.

Some employers might move production

to Mexico or other low-wage countries.

Wage increases could be greater than

warranted by productivity y improvements

in some companies or plants.

Creates incentives for executive compensation packages that would skirt the rules.

If one State broke the agreement, others

would feel compelled to follow.

SOURCE: Office of Technology Assessment, 1992.

percent of the minimum wage in 1978.26 The falling

real value of the minimum wage contributes to the

increasing number of employed people living below

the poverty line and decreases the attractiveness of

work compared to welfare.

One alternative would be to raise the minimum

wage over time (say, 3 years) to perhaps 60 percent

of the average hourly nonsupervisory wage-this

would have been $6.20 in 1991.27 As a complementary step, it might be desirable to strengthen DOL

enforcement of the minimum wage and other fair

labor standards. The number of inspectors responsible for enforcing labor standards-878 as of June

1991—has fallen to lower levels than that at any

time since 1980.28 Detected child 1abor violations of

the Fair Labor Standards Act have been on the rise

since 1985.

Deficiencies in the U.S. health care system also

encourage U.S. firms to compete through low-wage,

low-skill strategies. As discussed in box 2-C, the

United States has lost high-wage, high-benefit auto

industry jobs to Canada because Canada’s health

26 Cdcu]ated Using the perso~ consumption expenditure component of the gross domestic product deflator from Economic Report of the President

(Washington DC: U.S. Government Printing Office, 1992), p. 302. Using the Consumer Price Index as the deflator, the 1991 minimum was 68 percent

of the 1968 level and 77 percent of the 1978 level.

Some economists have argued that raising the minimum wage causes employers to lay off less skilled workers, but higher wages also stimulate

consumption. Recent studies provide no evidence that the 9&ent minimum wage increase between April 1990 and April 1991 led to layoffs. Lawrence

F. Katz and Alan B. Krueger, “TIM Effect of the Minimum Wage on the Fast Food Industry, ” Working Paper No. 3997, National Bureau of Economic

Research, Cambridge, MA, February 1992; David Card, ‘‘Using Regional Wriation in Wages to Measure the Effects of the Federal Minimum Wage,”

Working Paper No. 4058, Nationat Bureau of Economic Research, Cambridge, MA, April 1992,

27 III 1991, the minimum wage stood at 4.0 percent of average manufacturing wages, excluding overtime, compared with 56 percent in 1968. Bas~

on hourly wages reported in Emploj’ment and Earnings, January 1992.

28< ‘~bor’s child ~~r Enforcement Efforts: Developments After Operation Childwatck Statement of Sarah F. Jagger, Director for OpemtiOm,

Human Resources Division [U.S. General Accounting Office], Before the Subcommittee on Employment and Housing, Committee on Government

Operations, House of Representatives, Redwood City, CA, Aug. 7, 1991,” GAOn-HRD-91-44, pp. 8-9.
40 ● U.S.-Mexico Trade

Box 2-C—Health Care Costs

Decades of Federal support for biomedical research have given the United States unmatched health care

technology, but at prices that have caused growing concern. The Nation now spends 11.2 percent of its gross national

product (GNP) on health care, more than any other country. Canada spends 8.6 percent of GNP on health care;

German Y, 8.2 percent; Japan, 6.8 percent; and Mexico, 1.7 percent. Spending the most has not given the United

States the best health, at least as measured by such indicators as life expectancy at birth (where the United States

ties with Israel for fifteenth place), mortality rate (eleventh, tied with Australia), or infant mortality (tied with several

nations for thirteenth place).l

High health-care costs affect U.S. competitiveness in several ways. First, they increase the cost of U.S. products

relative to those made in other countries. As pointed out in chapter 7, health care costs for U.S. automakers exceed

those in Germany and Japan by two to three times, adding several hundred dollars to the cost of a car made here.

Within the United States, the health care system reduces the cost competitiveness of the Big Three U.S. automakers

relative to ‘transplants’ because the latter can hire a young workforce and be assured of substantially lower health

insurance costs. Finally, the current system favors low-wage, low-benefit jobs within the United States, and

movement of high wage jobs outside the country, as illustrated by shifts in production within the integrated U.S.

and Canadian auto industry. Since 1980, Canada has increased its share of high-wage auto assembly jobs to 16

percent of total U.S. and Canadian employment, in part because large unionized employers pay substantially less

for health care under Canada’s comprehensive national health care system. By contrast, in the restructuring

following the U.S.-Canada Free Trade Agreement, it appears the United States will gain primarily low-wage auto

parts jobs in companies providing limited health care that therefore have little cost disadvantage compared to

Canadian parts producers.

IH~~n f)~elop~~ Report 1991 (New Yo~ NY: Oxford University Press, 1991), tibles 1, 17, 32, ~d 38; w.M Wodd Rt$owctt$

1992-Z993 (New York NY: Oxford University Press, 1992), table 16.3, pp. 250-251. Relative standings on these indicators probably refleet

differential access to care—an issue OTA is examhdng in the assessment Does Health Insurance Make A Difference?, scheduled for publication

in the fall of 1992. See also Canadian HeaZth Insurance: Lessonsfor the UnitedStates (Washington DC: U.S. General Accounting Office, June

1991), p. 7.

care system puts less of a burden on manufacturers 2. “extension laws” that apply the basic terms of

that provide good benefits. More generally, highwage, high-productivity employers subsidize lowwage U.S. firms because many people holding

low-wage jobs rely on health care benefits available

to other family members. As it considers proposals

for health care reform, Congress may want to

consider approaches that would deter employers

from competing by providing few or no health

benefits.

2b: Promote Sectoral Wage Setting—As discussed in chapter 4, few institutions in the United

States limit interfirm wage competition, which can

push an entire industry toward low-wage strategies.

There are two general approaches to industry wage

setting: .

1. collective bargaining on a sectoral basis between employer associations and committees

of union representatives, as in Germany; and

a central agreement negotiated between unions

and employers to other firms in a designated

industry.

Both approaches leave room for significant flexibility in wage setting. Sectoral agreements, for example, could permit firms to establish pay-forknowledge ladders, or increase wages if their profits

rise.

Congress could encourage sectoral wage-setting

by giving the National Labor Relations Board

(NLRB) the power to require all unionized firms in

an industry to bargain together, either nationally or

within a geographical area, perhaps on the basis of

a petition from a specified fraction of the relevant

employers or unions. Congress could also empower

the NLRB to extend the key economic terms of a

collective agreement to nonunion employers in the

same industry and region, who might otherwise

undermine high-wage, high-productivity strategies.

As an exploratory option, Congress could begin by

directing DOL to identify industry/region combina1
Chapter 2-Policy Issues and Options ● 41

tions in which sectoral wage setting might be tried

on a pilot basis (perhaps with Federal funds for

industrywide training as an incentive).

2c: Tax Policies to Promote Worker Commitment--Historically, the top marginal tax rate in the

United States has been lower than in most other

advanced industrial economies. One justification for

this has been the “trickle down” view—that entrepreneurs create most wealth and that low marginal

rates will provide incentives leading to more income

for everyone. Industry studies and international

comparisons suggest that contemporary wealth creation also has a substantial “trickle up’ component.

That is, efficiency improvements depend on widely

diffused skills, worker commitment, and organizational competence. Very high ratios of executive to

hourly pay can undermine commitment and cooperation.

Over the past decade, ratios of executive to hourly

pay in the United States have risen to unprecedented

levels: in 1960, the chief executive officers (CEOe)

of the largest 100 U.S. nonfinancial corporations

earned 40 times as much before taxes as hourly

workers; by 1990, the ratio had risen to 95.29 Many

proposals have been made that would have the effect

of narrowing this gap. One approach would build on

the precedent of Internal Revenue Service rulings

that prevent corporations from deducting “excessiv e or ‘ ‘unreasonable’ compensation from taxable revenues. Total compensation above some multiple of the earnings of the lowest paid worker in the

corporation would be deemed ‘ ‘unreasonable, ’ and

could not be deducted as a business expense.

Although companies might find a way around even

a carefully crafted law, such measures would nonetheless have a dampening effect, and add the weight

of public policy to the negative publicity to which

many corporate leaders have already been exposed.

An alternative would be an income tax surcharge

on individual earnings that exceed some multiple of

the lowest wage in the firm. Such measures would

give top executives a personal incentive to raise the

wages of their low-level employees. In the context

of NAFTA, furthermore, managers would share in

any benefits achieved through lower consumer

prices while suffering less risk of displacement than

lower level employees. It does not seem unfair to ask

them to pay more in taxes. By accompanying an

agreement with increases in human resource investments funded through a NAFTA tax surcharge, the

United States would lay the basis for trickle-up

productivity growth that benefits all citizens.

Option 3: Discourage State and Local “Bidding

Wars” To Recruit New Industry

During the 1980s, as Federal economic development aid and revenue-sharing dropped, States and

cities launched new economic development efforts.

Although some—for example, the State industrial

extension programs discussed above—provided

forward-looking models for Federal policies, the

primary focus has been on attracting industry and

jobs through tax abatements, subsidies—new roads,

industrial parks-and even relaxation of environmental and workplace health and safety standards.

Despite periodic flurries of interest in science parks

and high-technology development, many State and

local programs seem to operate on the premise that

any job is a good job.30

Often, State and local officials ‘bid’ against each

other. Companies are more than happy to get what

they can from these bidding wars, even though they

may have already decided where to put their plant.

The bidding drains tax revenues that could be used

for productivity-enhancing services such as education. Nor do the expected benefits necessarily arrive.

Between 1977 and 1988, for example, when rural

southern counties succeeded in attracting new factories based in part on tax incentives, they continued

to experience high unemployment and declining real

per-capita income. Urban areas in the South, which

spent more on education and infrastructure, attracted

more and better paying jobs.31

As a first step toward ending bidding wars, the

Secretary of Commerce could convene a meeting of

State economic development directors to try to reach

an agreement to stop the practice. If an initial

agreement could be reached, it would be in the

interests of the States to keep to it, since all would

benefit. (Mexico, which sought to make discipline

on regional subsidies part of a NAFTA, would

29 Robefl Reich { ‘Suite Greed, ’ American ProsPecf, winter 1992, pp. 14-16. For more detail, see Graef Crystal, In Search of Excess (New York

NY: Nortou 1992). The proposal for excluding “unreasonable” compensation from allowable business expenses comes from Reich.

~oAfter the Co!d War, op. cit., footnote 6, pp. 178-184.

31 sw Roscnfeld md E&vwd Bergman, Making Connections (Research Triangle Park NC: Southern Growth Policies Board, 1989), p. ix.
42 ● U.S.--Mexico Trade

Table 2-4-issue Area C: Participation in a Productive Economy

Options Advantages Disadvantages

1. Create a private-sector, multi-constituency

Labor Market Productivity Center to encourage worker participation, work reorganization, and labor-management cooperation.

2. Establish Employee Participation Committees (EPCs) to consult with employers on

issues of worker participation and productivity improvement.

3. Extend union representation.

3a. Make discharge for union activity

subject to damage awards.

3b. “instant” certification elections.

3c. Permit supervisors to form their own

independent unions.

3d. Foster “network unions” of workers in

vertically linked firms.

4, Encourage worker voice institutions in

small firms and the service sector.

Helps build consensus. Could provide technical assistance and trained facilitators for

strengthening cooperative labor relations.

Creates voice channels for workers not represented by unions.

Expands channels for communication with

management and helps assure workers that

their interests will be protected if they participate in productivity improvement programs.

Places rights to representation on a par with

other employment rights.

Reduces scope for confrontational campaign

tactics.

Encourages supervisors to act as middlemen

and team builders rather than overseers.

Discourages suppliers from competing with

one another by cutting wages.

Promotes cooperation among workers in

companies that do business with one another.

Improves job security for workers and creates mobility ladders, while making it easier

for firms to locate qualified workers.

Without worker and management commitment, might have Iittle impact.

Employers might oppose.

Workers might not actively participate.

Wages and/or job protections won by

unions could reduce competitiveness.

Could lead to costly litigation.

Some employers would object.

Supervisors might feel cut off from both

management and workers.

Shifting relationships among firms could

make it difficult to define network unions.

Use of “secondary pressure” could be a

blunt instrument for cementing relationships.

SOURCE: Office of Technology Assessment, 1992.

presumably welcome such an agreement-and might

make concessions elsewhere in exchange.) To reduce the temptation to break the agreement, Congress could consider the following two possibilities.

3a: Reduce Federal Funds for Economic Development in Proportion to Industrial Recruitment

Incentives-The Federal Government distributed

about $6.4 billion to cities and States for community

and regional economic development in 1990.32

Congress could encourage compliance with an

agreement to curb bidding wars by directing the

administration to reduce funds from these budget

categories in proportion to the dollar value of

incentives provided by cities and States to attract

new businesses.

3b: Make State and Local Tax Incentives Subject

to Federal Taxation—Alternatively, Congress could

modify Federal tax law so that tax abatements

provided by States and localities to businesses

would be treated as part of corporate income for

Federal tax purposes.

Issue Area C: Partcipation in a Productive

Economy (table 2-4)

In recent years, unions, employers, and government officials in Mexico (and Canada) have begun

to debate reform of their labor laws. The United

States might benefit from a similar debate. The

National Labor Relations Act (NLRA, also known

as the Wagner Act), passed in 1935, remains the

cornerstone of the U.S. system of worker representation. The Act reflects its times-it was written when

the U.S. economy was largely self-contained and

only tangentially exposed to international competition, and when large companies pursuing mass

production strategies with mostly male workforces

dominated U.S. manufacturing, The Wagner Act

3zAfter the Cold War, op. cit., fOOtllOtc 6. P. 173.
. .

Chapter 2--Policy Issues and Options ● 43

also reflects the adversarial labor relations of that

era, in which employers and unions battled long and

hard. Today, employers and workers in the United

States confront foreign firms that in many cases

benefit from labor-management cooperation. Moreover, the service sector of the U.S. economy has

grown so that it far surpasses manufacturing, while

women have entered the workforce in large numbers. The new economy calls for a new approach,

with workers enlisted in the effort to improve

productivity in all sectors,

Option 1: Create a Labor Market Productivity

Center

To encourage participative forms of work organization and help define consensus on institutional

innovations for supporting high-productivity strategies, Congress could consider creating a new Labor

Market Productivity Center. The Center—governed

by a multiconstituency private sector board, including business and organized labor—would support

research, education, and information dissemination.

As chapter 4 points out, the United States lacks

national institutions for bipartite or tripartite consultation on labor law and other labor policy issues.

Canada established a bipartite (labor-management)

Labor Market Productivity Center in the mid- 1970s

that has proved its value in supporting research and

dialogue on restructuring labor relations and labor

market institutions. If Congress chose to create such

an organization here, it could direct the Center to

begin by examining methods for increasing worker

participation. Specifically, Congress might direct

the Center to develop a proposal for filling the U.S.

‘‘representation gap’ ‘—the absence of unions or

substitute forms of employee representation in most

workplaces—within a year after signing of a

NAFTA.

In a related step, Congress could put DOL’s

Bureau of Labor-Management Relations and Cooperative Programs on a statutory footing and restore

its funding. Created by the Secretary of Labor in

1980, and funded at about $5.7 million in fiscal

1991, the Bureau has been zeroed out in DOL’s

budget request for fiscal 1993.33 The only part of the

Federal Government with the specific mission of

promoting labor-management cooperation, the Bureau has an experienced staff with a wide range of

contacts among unions and employers. This expertise could be lost at a time when a NAFTA promises

to create new tensions between labor and management.34

Option 2: Create Employee Participation Committees

Despite a great deal of talk, worker participation

programs remain relatively rare in U.S. industry.

Some nonunion firms have established them, often

as part of efforts to remain nonunion. Firms with

strong unions facing intense competition have sometimes established programs as part of efforts to

improve productivity and quality, as illustrated by

the case of Xerox Corp. (box 2-D). But probably no

more than 10 to 15 percent of U.S. firms have made

serious commitments to worker participation as part

of efforts to adopt flexible, high-productivity work

organization .35

To encourage more firms to move in this

direction, Congress could consider calling for Employee Participation Committees (EPCs) at all firms

with more than, say, 25 workers.36 Unlike labor

unions, EPCs would not have the right to bargain

collectively, but they would have consultation rights

and thus provide workers with a voice on the way

firms treat and deploy their employees. In some

33 unpublished memorandum prep~ed @ the Bureau of Labor-Management Relations ad Cooperative ~ofTams

34 Although swre~ of ~~rLw M~ln ~oun~ed (Ina speech to tie Natio~~bor.Management conference, Washington DC, May 27, 1992)

that DOL will form a new agency to take the Bureau’s place, no action has yet been taken and some staff members have already resigned.

Congress might also consider restoring $1 million in funding for grants by the Federal Mediation and Conciliation Service (FMCS), money that

was cut from that agency’s fiscal 1992 budget. Although tic chief mission of the FMCS is to resolve labor disputes, the grants program has helped diffuse

cooperative relationships and encourage productivity programs. See, for example, Margaret Hilton and Ronnie Straw, ‘‘Cooperative Training in

Telecommunications Case Studies, ’ Monthly Lubor Review, May 1987, pp. 32-36.

35 Worker Training, op. cit., footnote 1, ch. 4.

Among small firms, worker involvement programs that succeed in raising productivity seem to be more prevalent in union than in nonunion firms.

Adrienne E. Eaton and Paula Voos, “Unions and Contemporary Innovations in Work Organization, Compematiow and Employee Participation, ”

Unions uneconomic Competitit’eness, Lawrence Mishel and Paula Voos, eds. (New York NY: M.E. Sharpe, 1991).

36 TIIC tem is bormwcd from WeiIcr, who also suggests 25 as a reasonable cut-off for requiring an EPC. Scc Paul C. Weilcr, Governing the

Workp/ace: The Future of Labor and Employment Lun (Cambridge, MA.: Harvard University Press, 1990), p. 285. The rest of this discussion of EPCs

draws heavily from pp. 282-295 of Weiler.
44 ● U.S.-Mexico Trade

Box 2-D—Unions and Productivity

Many economists argue that labor unions, by raising wages above market-clearing levels, interfere with the

efficient allocation of resources. Such an analysis neglects the potential productivity-enhancing effects of unions.

Unions may be particularly important today, because the ability of U.S. firms to pay high wages and avoid direct

wage competition with countries such as Mexico depends on fundamental changes in the way firm develop and

use human resources. Unless companies move away from narrow jobs, hierarchy, and centralized authority, they

will find it increasingly difficult to keep production in the United States. Nonunion companies may make only

cosmetic changes because managers feel threatened by increases in the skills and authority of hourly workers. If

union representatives press employers to define competitive strategies that will provide high pay and job security,

meaningful change should be more likely to follow.

The history of cooperation and conflict between Xerox and the Amalgamated Clothing and Textile Workers

Union (ACTWU) illustrates the positive role a union can play.l At the end of the 1970s, Xerox began to lose market

share in photocopiers, dropping from 18.5 percent of U.S. sales in 1979 to 10 percent in 1984. By 1988, Xerox had

managed to rebuild its market share to 13.8 percent. ACTWU, which represents 4,500 workers at Xerox’s main

production facility in Webster, New York played a central role in the turnaround through its involvement in

programs of labor-management cooperation that significantly increased the company’s labor productivity.

A quality-of-work-life (QWL) program initiated in 1980 marked the beginning of formal cooperative

undertakings between Xerox and the ACTWU. The QWL program put production workers together in teams with

supervisors, managers, and engineers. Given its slumping business, Xerox laid off workers during 1980 and 1981.

In 1982, the company announced it would subcontract some of the Webster plant’s production. Union leaders

argued that layoffs and subcontracting would erode the trust that had begun to develop between production workers

and managers. By threatening to withdraw union support from the QWL program, they persuaded management to

establish a joint labor-management team to explore ways of keeping wiring harness production in-house. The study

team’s recommendations reduced production costs by 28 percent, avoiding the need for subcontracting. During this

ISLX me following publications ilom the Bureau of Labor-Management Relations and Cooperative Programs, mp-ent of Labor,

Washington DC: Institutionalizing and Dijk.ring Innovations in IndktrialRelations (1988); The Changing Role of Union Leaders (1988); The

Changing Role ofFirst-L”ne Supervisors andMiaUle Managers (1988). Also, Joel Cutcher-Gershenfe14 “l%errnpact on Economic Performance

of a Transformation in Workplace Relations,” Industrial and Labor Rehions Review, vol. 44, January 1991, pp. 241-26Q and H. Garrett

DeYoung, “Back from the Brink: Xerox Redefines Its Notion of Quality,” Electronic Business, Oct. 16, 1989, pp. 18-22.

respects, EPCs would resemble the works councils in the implementation and enforcement of legislated

found in Germany and other European countries.

EPC representatives at each workplace could

be elected by vote of all employees (excluding top

managers). In unionized companies, union representatives could serve as EPC representatives. In a

multiestablishment firm, a companywide EPC could

be established; in such cases, and in large single

plants, worker representatives could be elected on a

proportional basis from major occupational groups.

EPC members would need time off the job and the

financial resources to be effective. To ensure a

genuine dialogue on the issues most vital to worker

interests, employers would have to give EPCs some

business information--+. g., on projected employment levels and investment decisions—and access

to upper level managers.

EPCs could share responsibility for the annual

workforce development plans discussed above (Issue

Area A, Option 1). They might also be given a role

employment standards (e.g., health and safety, the

minimum wage). H.R. 3160, the OSHA reform bill,

incorporates some aspects of this option. Section

201 of H.R. 3160 would direct firms with 11 or more

full-time employees to establish joint workplace

health and safety committees, and specifies the

committees’ rights to information on health and

safety matters. If implemented, H.R. 3160 would be

a first step toward filling the U.S. representation gap.

It could also help counter pressures for downward

harmonization of health and safety standards following from a NAFTA.

Although EPCs would extend and help institutionalize worker voice and participative management, they would not substitute for labor unions.

Unlike the committees, which would be purely

consultative, unions can pressure employers to

reorganize work and pursue high-productivity strategies. In addition, through their political activities,
—

Chapter 2-Policy Issues and Options ● 45

same period, the union persuaded management to build a new toner plant in Webster rather than in a low-wage

southern State. Working together on plant design and equipment, union and management representatives achieved

lower costs and higher projected productivity than the targets for the southern plant,

In their 1983 contract, Xerox and the ACTWU agreed to establish similar study teams before taking decisions

on outsourcing in the future. Four of five study teams subsequently formed were able to find ways of retaining work

at the Webster plant. The 1983 contract also included a no-layoff guarantee for all Webster production employees.

Both provisions were extended in the 1986 contract.

In 1986, union and management greatly increased the scope of their cooperative efforts. They agreed to

implement a gainsharing plan and redesigned the company’s program for controlling absenteeism. They also

established Business Area Work Groups, composed of production workers, engineers, supervisors, and union

officials who meet on a biweekly basis to discuss performance, safety, and other workplace issues, along with

‘‘organizational effectiveness networks’—joint union-management groups that act as trainers, facilitators,

consultants, and change agents. The ACTWU played an integral role in making Xerox a U.S. model of

high-productivity, flexible manufacturing. In 1989, the company won the Federal Government’s Malcolm Baldrige

National Quality Award.

The union-in this case the United Auto Workers (UAW)--also plays a central role in General Motors’ Saturn

division, an attempt to “reinvent” a giant corporation. Saturn’s strategy centers on three elements: advanced

technology, including innovations in production methods; highly experienced workers, carefully selected from

GM’s ranks; and extensive union involvement in shopfloor decisionmaking (and in some cases beyond the shop

floor). The Saturn contract, which differs from other GM contracts, puts all production workers on salary, with a

portion of their pay linked to productivity, quality, and profits.2 UAW representatives participate in performance

reviews of managers. Production workers can deal directly with suppliers to solve quality problems. Joint

union-management teams attack productivity bottlenecks, including product design features. Customer satisfaction

has been extraordinarily high, and Saturn’s Tennessee plant has been unable to keep up with demand. Perhaps most

important, the UAW’s involvement at Saturn illustrates potential for plant-level performance improvement that may

prove harder to replicate in Mexico than classic lean production.3

2~’sa~,9* B~iness Week, Aug. 17, 1992, pp. 8691.

3’~~e Auto ~d Electro~cS Swtom iII IJ$h4exico Trade and Investment,” report prepared foro~ under contict No. 13-1815 by ~leY

Shaiken, May 1992, p. 59.

unions can help shape policies for upgrading the saria1 one. Congress could reaffirm the Wagner

skills, jobs, and earnin gs of large groups of workers

and help make a case for investments in training and

labor market adjustment programs on a national

level.

Option 3: Extend Union Representation

Unions now represent only 12 percent of the

private sector U.S. workforce, compared with about

17 percent a decade ago, limiting their ability to

work with management for improving productivity.

One reason for union decline has been the scope

provided under U.S. law for employer opposition

during the period between the filing of a petition for

a certification election and the time of the election

(ch. 4). By contrast, in most provinces in Canada, if

50 or 55 percent of the workers sign union cards, the

union is automatically recognized. In the United

States, unions often must generate collective anger

against the company to win certification, so that the

union-management relationship begins as an adverAct’s protection of workers’ rights to organize and

bargain collectively in a variety of ways.

3a: Make Discharge for Union Activity Subject

to Damage Awards—At present, the only remedies

available to workers freed for pro-union activity

during a certification campaign are reinstatement

and back pay. Discharged workers have no right to

sue for such damages as the loss of a house or car.

Nor can they collect punitive damages. Given the

steady broadening of legal rights to sue in cases of

wrongful dismissal for employment discrimination,

violation of an employee’s right to privacy, and so

on, the very limited remedies in cases of discharge

for union activity seem increasingly anomalous.

Existing penalties have not prevented the growing

use of discharge to deter workers from forming

unions.

3b: Instant Elections—Holding certification elections shortly after unions filed petitions—perhaps
46 ● U.S.-Mexico Trade

within 5 days, as in British Columbia and Nova

Scotia—would reaffirm the right to organize. Some

employers would object to this proposal on the basis

that: 1) it restricted their free speech rights to

campaign against the union; and 2) it would deprive

workers who opposed union formation of resources

that employers might provide to counter those

provided by the union to its supporters. On the first

issue, Congress would have to decide whether

employers should have the central role they now

enjoy in workers’ decisions to form an independent

union. On the second, Congress would have to

weigh the possibility that workers will make an

uninformed decision to join a union against the

evidence that extended campaigns allow time for

employer intimidation that can undercut employee

rights to organize.

3c: Extend the Protections of the NLRA to

Supervisors —The Taft-Hartley amendments explicitly deny the protections of the NLRA to frost-line

supervisors (e.g., foremen). Employers sought the

amendments because they did not want supervisors

to have divided loyalties in mass production systems

that relied on foremen to discipline the workforce

and maintain an uninterrupted flow of output. In

participative organizations, the supervisor’s role

undergoes a dramatic shift. Instead of sergeants on

the company’s side in an adversarial setting, firstline supervisors are supposed to act as team builders,

facilitators for problem-solving, and skills developers. They should have divided-or rather dual—

loyalties and serve not only as management’s voice

on the shop floor but as the worker’s voice off it. As

long as supervisors remain subject to top management authority, however, they can be forced to

implement policies that cause workers to withdraw

their cooperation. Helping supervisors insulate themselves from higher management through formation

of their own, separate bargaining units would

encourage the transition to more participative organizational practices.

3d: Foster the Creation of ‘Network Unions"—

Large employers pursuing low-wage strategies often

provide a small core of workers with job security and

relatively high wages, supplementing them with

contingent workers (e.g., temporary employees) and

purchasing as much as possible from low-wage

suppliers. Treating workers outside the core as a cost

instead of a resource undermines their commitment

to performance improvement. Moreover, the security and high wages of core workers come, to some

extent, at the cost of greater insecurity and lower

wages for others, including workers in supplier

fins.

To give employees of small supplier firms more

representation and more security, Congress could

encourage the formation of “network unions”

whose members come from vertically related fins;

as tighter relations between companies and their

suppliers blur the separation between the two,

worker representation might do the same. One way

of promoting this would be to legalize contracts that

foster unionization of suppliers+. g., clauses barring outsourcing to suppliers that refuse to stay

neutral in union certification campaigns. At present,

clauses such as these are illegal because of TaftHartley amendments restricting “secondary pressure. ” Section 8(e) of the Taft-Harley Act, however,

permits a union and an employer in the construction

industry to agree that the employer will ‘‘cease

doing business with any other person” (including

nonunion contractors). This clause could be extended to other sectors.

Option 4: Create Institutions for Worker “Voice”

in the Service Sector

The options above would encourage worker

participation in large establishments and in small

manufacturing companies through network unions

anchored in large core fins. Such policies would

work less well in firms without stable supplier

relationships and in small, high-turnover service

establishments-for example, in retailing. This is a

significant limitation: small firms and the service

sector have been creating most new jobs, exhibit low

productivity growth, and generally pay low wages.

Multiestablishment labor market structures could

reduce the number of low-wage, dead end jobs in

small firms and the service sector, and help increase

productivity. As discussed in box 2-B, earlier in the

chapter, such structures would increase job security

and career opportunities for workers in broadly

defined occupations (e.g., clerical workers, waitresses).

One option for moving toward a high-skill,

flexible service and small-firm sector would be to

create multiestablishment EPCs. This could be done

administratively through a tripartite National Board

for Professional and Technical Standards, currently

under consideration by Congress in S. 1790/H.R.

3470 (Issue Area A, Option 1). The Board could

define a set of broad occupations, in some cases
Chapter 2--Policy Issues and Options ● 4 7

overlapping industry jurisdictions (e.g., retail food

service workers, custodial workers, clerical workers). The NLRB would then supervise elections to

multiemployer occupational EPCs from all establishments in a local area. Alternatively, multiemployer EPCs could be worker-initiated: if a certain

fraction (say, 10 percent) of employees within a

self-defined industry/occupation group requested

the formation of an EPC within their geographical

area, the NLRB would supervise an election of

committee representatives.

Multiemployer EPCs could encourage multiemployer training in the service sector. They could also

establish service sector ‘hiring halls, ’ which would

provide a restaurant or women’s clothing store with

an accredited and experienced employee. Such labor

market intermediaries would help reconcile employment volatility in small firms with job security for

workers. Multiemployer EPCs could also be stepping stones to geographically based occupational

unions.

CONTINENTAL OPTIONS

As the United States becomes more integrated

with the world economy, it has less influence over

the incentive structures of firms that employ its

citizens and sell in its markets, Thus, in addition to

reexamining domestic policies, Congress may wish

to consider continental policies to accompany the

freer flow of goods and capital within North

America under a NAFTA.

Following the logic of the domestic policy

options, the continental options discussed below and

summarized in table 2-5 serve three functions:

Table 2-5—Continental Policy Options

Options Advantages Disadvantages

1. Negotiate a North American Social and

Environmental Charter including a statement of principles and a plan for implementing them.

la. Create a North American Commission

for Labor and Social Welfare with a

permanent staff drawn from the three

countries.

2. Manage continental trade and investment.

2a Negotiate a Continental Auto Pact with

Japan to restore and maintain balanced trade, or a Global Auto Pact

also involving the European Community.

2b. Continental investment policy.

2c, Link trade and worker rights in the

apparel industry.

3. Establish a Binational Commission on

Border Environment and infrastructure.

4. Provide technical assistance to Mexico on

workplace health and safety issues.

Provides a vehicle for promoting upward

harmonization and a new social consensus

in North America.

Furthers the goals of a charter, building on

the foundation laid by information exchange

under the U.S.-Mexico Memorandum of Understanding on labor issues.

Reduces short-term pressures that can undermine labor-management and interfirm cooperation

Stabilizes an open trade regime through

pragmatic resolution of key trade tensions,

possibly under GATT auspices.

Accelerates transfer of high value-added

production to North America and purchases

from independent U.S. parts suppliers by

transplants.

Encourages high-value-added production in

North America without shieiding North American producers from competition.

Limits low-wage strategies and encourages

rising labor standards in the most labor

intensive of all manufacturing industries.

Could provide a vehicle for the United States

and Mexico to agree upon funding mechanisms independent of annual budget appropriations, such as a “green tax” on U.S.

investment in the region or on goods crossing

the border.

Starting point for actions to promote upward

harmonization. Reduces likelihood of “social

dumping.”

Mexico might oppose.

Might be opposed by business.

Could be seen as a threat to sovereign y,

particularly by the Mexican government.

Capture by special interests could lead to

mismanaged trade.

Could become slippery slope to Fortress

North America

Some developing countries would oppose.

Might be viewed as a trade barrier.

An income tax surcharge on maquiladora

profits would probably generate opposition from business interests in both countries.

(Continued on nexf page)
48 ● U.S.-Mexico Trade

Table 2-5-Continental Policy Options-Continued

Options Advantages Disadvantages

5. Provide financial assistance for Mexican

development through a North American

Regional Development Bank and/or North

American Structural Funds.

6. Establish North American works councils

7.

in firms with more than 1000 employees

and more than 100 employees in each of

two NAFTA countries.

Trilateral dispute resolution on labor issues.

8. Shorter work time.

9. Create a Commission on the Future of

Political Democracy in North America.

.- . . . . . . . . . . . Helps Mexico rake living standards, thus

reducing competition with U.S. workers and

pressures for emigration.

Provides mechanism for negotiated resolution of labor tensions among the three countries.

Should help lessen government influence

over Mexican unions.

Improves enforcement of existing labor laws

in each country.

Helps sustain public scrutiny of labor standards and labor rights.

Helps achieve full employment and would

probably raise output per hour.

Helps manage workforce contraction in industries where total work hours are already

declining.

Reduces GDP growth rate needed for full

employment.

Encourages Mexico’s transition to pluralist

democracy and greater protection of human

rights.

Helps focus attention on underrepresented

groups. Furthers ties among regional-level

political bodies in the three countries.

Could be expensive.

Could lead to wasteful pork barrel projects in Mexico.

Likely to be opposed by the Mexican

government and some employers.

Could be hard to define mutually acceptable principles and procedures, given likely

opposition by one or more governments.

By reducing output levels, could put North

America at a competitive disadvantage.

Difficult to enforce in small firms

Could lead to increases in moonlighting

by those with more time.

Could generate opposition in all three

countries because of fears of loss of

national political authority.

SOURCE: Office of Technology Assessment, 1992.

1.

2.

3.

to encourage high-productivity strategies within

the United States and Mexico;

to discourage low-wage strategies; and

to promote worker participation and consultation.

The options would create incentives for Mexico to

move beyond a policy of attracting investment

through low wages, low labor standards, and lax

environmental enforcement.

Option 1: A North American Social and Environmental Charter

In Europe, movement toward EC 92 has been

accompanied by negotiation of a European Social

Charter, followed by an Action Plan and “directives” designed to implement the charter’s principles. In Canada, the recently negotiated draft constitution includes a Social Charter that affirms

environmental protection and workers’ rights. In the

U.S. Congress, H.R. 4883, the North American

Environmental, Labor, and Agricultural Standards

Act of 1992, proposes that a NAFTA be accompanied by negotiation of a trilateral, enforceable set of

threshold protections for workers’ rights and environmental quality.

Negotiation of a Social and Environmental Charter by the United States, Mexico, and Canada could

bean important step toward a high-productivity path

for all three countries. In particular, it could provide

a checklist of social and environmental principles

against which actual practice in North America

could be measured as economic integration proceeds. It might also become a vehicle for further

definition of national and North American institutions necessary to implement a high-productivity

strategy.

Negotiations and implementation could begin

with health and safety standards, later perhaps

expanding to include a continental minimum wage

scaled to the level of development in each country or

subnational region, as well as such provisions as
Chapter 2--Policy Issues and Options ● 49

continental works councils and trilateral enforcement of worker rights (Options 6 and 7 below). A

charter could acknowledge North-South differences

and the implications of these differences for migration and each nation’s capacity to protect and

enhance the environment and natural resources,

while stating that action to protect and improve the

environment would benefit all citizens of North

America, not just those who live near areas of

environmental degradation. Recognition of the right

of all people to a long and healthy life, to education

and training, and to decent living standards could

underpin common North American policies towards

refugees, asylum-seekers, and other categories of

immigrants. By explicitly establishing the linkage

between trade, investment, and social issues, the

charter would provide an alternative to previous

models for trade negotiations, which ignore or

distance trade and investment from their broader

social impacts.

The definition and implementation of a Social and

Environmental Charter might proceed in three stages:

a statement of general principles incorporated into a

NAFTA preamble or a parallel agreement signed

before the NAFTA vote in Congress; negotiation

over a specified time period-perhaps 2 years-of

an extended Social and Environmental Charter; and

subsequent definition of implementation and enforcement mechanisms. The later stages in the

process could take place under the auspices of a

North American Commission for Labor and Social

Welfare.

la: A North American Commission for Labor and

Social Welfare—The initial fast track debate over

labor and environmental standards and their relevance to a NAFTA led the U.S. and Mexican

Governments to begin a number of informationsharing activities on environmental and labor matters (box 2-E). One approach to sustaining and

deepening the dialogue on labor issues would be to

create a North American Commission for Labor and

Social Welfare. With a staff composed of civil

servants from the three countries, the commission

could be given administrative responsibility for

trilateral labor immigration policies (including, e.g.,

several of the options listed below). To give the

commission autonomy and perspective, it would

need its own budget and a mandate to address issues

Box 2-E—The DOL-STPS Memorandum of Understanding

In May 1991, the Mexican Ministry of Labor and Social Welfare (STPS) and the U.S. Department of Labor

(DOL) signed a Memorandum of Understanding (MOU).1 The DOL-STPS memorandum calls for information

sharing and other forms of cooperation in areas including: child labor; health and safety; employment statistics; and,

since the September 1991 meeting of the U.S.-Mexico Binational Commission, under whose auspices the dialogue

takes place, worker rights, labor-management relations, and the informal or “underground” economies of both

countries. The results to date have included jointly drafted papers comparing health and safety and child labor

regulation in the two countries, a conference on health and safety in the steel industry, and a series of papers on the

informal sector.

MOU activities and the personal contacts established between the two labor bureaus provide a foundation for

future activities. But, while it is impossible to interview officials in the Mexican STPS without recognizing their

commitment to social welfare and their sophisticated understanding of labor market and industrial relations issues,

MOU information exchange has so far skirted the core questions concerning Mexican labor relations. In particular,

MOU activities have not led to any change in the positions taken by the administrations of both countries in the face

of criticism of the Mexican labor situation: both governments maintain that Mexico has strong labor laws and both

avoid any discussion of the relationship between the Mexican Government and Mexican labor unions. As discussed

in chapter 4, the reality of basic labor freedoms in Mexico does not necessarily match the rhetoric. This is a complex

issue, and the analysis later in OTA’s report does not necessarily indicate that fears of U.S. workers are justified

or that Mexican worker rights are weaker in general than U.S. rights. But acknowledging the potential weaknesses

in Mexico’s system of labor protection--and that of the United States—are necessary first steps in adapting these

systems to continental interdependence.

l~e text of fie MOU app~s in me adminis~atim’s action plan on labor and environmental issues, “Response of the~“ “stration

to Issues Raised in Connection With the Negotiation of aNort.h American Free Trade Agreemeng” May 1, 1991. Canada and Mexico later signed

a similar MOU.
50 ● U.S.-Mexico Trade

from the perspective of the welfare of workers in all

three countries. At a minimum, a NAFTA or parallel

agreement might charge the commission with producing an annual report that addresses three issues:

1. the current status of labor rights and standards

in each country;

2. major labor market trends; and

3. migration.

The U.S. members of the Commission could be

charged with writing a short assessment of the joint

annual report, noting any sharp disagreements with

their Mexican and Canadian counterparts.

Option 2: Manage Continental Trade and Investment

A NAFTA that made it easier for Asian firms to

use Mexico as an export platform for shipping into

U.S. markets might be good for Mexico but harmful

to the United States. Most of the discussion about

how to ensure that NAFTA leads to U.S. and

Canadian coproduction with Mexico has been

framed in terms of rules of origin-i.e,, what level of

North American content would be required for

goods to move tariff-free among the three countries.

Rules of origin will vary by sector, with higher

required content levels in sensitive cases, including

autos and apparel. But given the low level of most

U.S. tariffs, some producers might choose to pay

duties rather meet required levels of North American

content (even though few of those levels promise to

exceed 65 percent).

Rules-of-origin for sensitive sectors could be

complemented with a negotiated transition to common external trade policies. In cases where imports

from outside North America threaten the long-term

viability of U. S., Mexican, or Canadian industries,

common external policies could include negotiation

of continental managed trade. Together with complementary policies designed to foster restructuring

within North America, continental managed trade

would provide U. S., Mexican, and Canadian firms

and their employees with critical breathing space. In

considering this option, Congress would have to

weigh the benefits of managing continental trade

and investment against the drawbacks. All such

policies risk outcomes that are ineffectual or counterproductive because ‘‘managed trade’ could become ‘politicized trade, ’ driven by special interests

rather than what makes economic sense. One result,

for instance, could be “capture” by multinational

firms whose interests diverge from those of their

workers and the three countries generally.

2a: A Continental (or Global) Auto Pact—In the

near term, the United States, Mexico, and Canada

might consider negotiations with Japan (and the EC)

on trade in autos and parts. Although U. S., Mexican,

and Canadian automobile production is now approaching levels of performance achieved in Japan

(ch. 7), the collective North American trade deficit

in autos and parts seems unlikely to shrink quickly

in the absence of trade management because of

commitments by Japanese automakers to their

workers and suppliers in Japan. Imports from Japan

lead to greater excess capacity in North America,

contributing to layoffs, downward pressure on

wages and labor standards, and intense supplier

competition. These work against long-run strengthening of the U.S. and continental industry.

Following the EC’s example, the United States

might consider combining a NAFTA with negotiation of a Japan-North America Auto Pact.37 Such a

pact could seek Japanese investment in North

America in proportion to sales. This might be

accomplished in a variety of ways, including 80

percent ‘‘net local content’ or trade balancing

provisions (as proposed by the Canadian Auto Parts

Manufacturers Association and the Canadian Auto

Workers). Unlike restrictions on imports, such an

approach permits compliance through balanced

shipments between blocs--e. g., exports from North

America to Japan.

The United States, Mexico, and Canada could

alternatively or in addition propose a Global Auto

Pact between Japan, the EC, and North America,

perhaps under the auspices of the General Agreement on Tariffs and Trade (GATT). A global pact

would seek to ensure balanced interbloc trade, and

stabilize trade and investment rules for the world

industry over an extended period.

Within North America, the proposed NAFTA

would permit Mexico and Canada to retain a degree

of protection for their national markets over transition periods of 8 to 10 years. In this context, the

United States might consider seeking reciprocal

37 me Ec-Jap~ auto a~eement Combhes restrictio~ on imports witb ]ocal content requirements. Cornpf?fingEconon”es, Op. Cit., fooblote 17, pp.

205-208.
Chapter 2-Policy Issues and Options . 51

protections-e. g., local content rules for transplant

assemblers—that would help assure independent

U.S. parts firms that their sales would not continue

to melt away. Such safeguards could help parts

suppliers, in particular, construct dynamic industrial

networks domestically, rather than simply move to

Mexico.

2b: Continental Investment Policy--Since joining GATT, Mexico has been liberalizing its restrictions on trade and investment. With a NAFTA, this

process would continue, One result may be accelerated investment in Mexico by Japanese firms.

Although these investments might transfer Japanese

technology and organizational practices to Mexico,

they would also intensify the pressures on established U.S. and Canadian firms (and Mexican firms).

If they could, Japanese companies with plants in

Mexico would bring in components and capital

equipment from Asia rather than the United States or

Canada. And a Mexico open to Japanese investment

could lead to bidding wars pitting country against

country for Japanese plants.

The range of options for regulating direct investment on a continental basis includes:

1.

2.

3.

limits on new investment when substantial

excess capacity already exists, possibly coupled with incentives for Japanese investment

in modernization of existing facilities;

establishment of continental discipline on

subsidies for new investment, aimed at limiting bidding wars (and complementing Option

3 under Issue Area B); and

guidelines to ensure that Japanese manufacturers transfer technology-intensive, high value-

-added production to North America.

Because all three of these alternatives stop short of

limits on Japanese market share, they would not

directly reduce the competitive pressures on North

American producers to improve their own performance.

2c: Link Trade and Worker Rights in the Apparel

lndustry-For several decades, low-wage competition in the labor intensive garment industry has been

indirectly governed by the Multi-Fiber Arrangement

(MFA, ch. 9). With liberalization of apparel trade

under the Caribbean Basin Initiative, NAFTA, and

possibly GATT itself, apparel production could well

gravitate to regions where workers are habitually

exploited. Given the mobility and global dispersion

of this industry, NAFTA would be too limited an

instrument to have much effect. In this light,

Congress could instruct the administration to pursue

negotiations within the Organization of American

States or GATT on trade and worker rights in the

apparel industry. Any future liberalization of U.S.

import quotas for apparel could be linked to the

creation of multilateral institutions for monitoring

worker rights in producing countries.

Option 3: Create a Binational Commission on

Border Environment and Infrastructure

NAFTA negotiations focused attention on environmental problems along the U.S.-Mexico border, leading to parallel discussions on the environment and the Integrated Environmental Plan for the

Mexican-U.S. Border Area discussed in chapter 6.

The Plan is short on funding, vague on enforcement,

and lacks deadlines. Estimates of the sums needed to

clean up the region run in the billions of dollars, far

more than either government has committed. To

ensure that environmental issues continue to get

high-level attention once the NAFTA debate is over,

and that adequate funding for border improvements

will be available, Congress could instruct the

president to pursue an agreement with Mexico to

establish a binational commission to determine

needs and priorities and arrange financing. H. Con.

Res. 325, for example, calls for a commission that

would obtain funding by issuing bonds backed by

both governments to be repaid by a mutually

agreeable method, perhaps a tax on U.S. investment

in Mexico’s border area, Other alternatives include

debt-for-nature swaps—basically, forgiveness of

debt in exchange for a commitment to safeguard or

improve the environment.38

Option 4: Technical Assistance on Workplace

Health and Safety Issues

Mexico has fewer workplace health and safety

regulations than the United States, and they tend to

be considerably less detailed. In part, the differences

reflect Mexico more collaborative and less sanctions35 Inapfivate Commercia] swap, a nongove~en~l group buys commercial bank debt at a discounted rale and returns it to the debtor co~~, which

agrees to dedicate funds to environmental protection. In the public sector equivalen~ such as the Enterprise for the Americas Initiative, the U.S.

Government forgives debt+. g., repayment for food Sent to a foreign coun@y. see H. Willims m, “Btiing on he Fu~re, ” Nu~re co~~ena~cy,

vol. 42, May/June 1992, pp. 24-26.
52 ● U.S.-Mexico Trade

oriented approach to improving health and safety. In

some cases, they also reflect lack of the expertise and

resources needed to develop detailed standards and

measure levels of workplace exposure. One noncontroversial way for the United States to foster higher

health and safety standards in Mexico would be for

the Occupational Safety and Health Administration

(OSHA) to provide Mexico with technical assistance--

for instance, through OSHA’s training programs for

workplace health and safety personnel.

Option 5: Provide Loans and Aid for Balanced

Economic Development in Mexico

Mexico has high levels of unemployment and

underemployment, a rapidly growing labor force,

and a foreign debt of over $100 billion-a combination suggesting that Mexico might continue trying to

attract capital inflows through lax social regulation

and low-wage policies.

In the EC, the potential for economic integration

to increase income inequality and spur migration

from poor economies to wealthier regions precipitated two complementary policies:

1.

2.

increases in structural funds that redistribute

money to poor or depressed parts of the

community; a n d

an effort to implement minimum communitywide labor standards and communitywide

labor-management negotiation to foster higher

standards in less affluent countries.

The Bush administration has argued that the EC

negotiated a wide range of supra-national political

and social agreements because it is establishing an

economic and political union, which includes free

movement of labor. The United States, Canada, and

Mexico, on the other hand, are proposing only a

narrow trade agreement. But differences in percapita gross domestic product (GDP) are greater

within North America than within the EC. The

United States and Canada have per-capita GDPs

about 10 times that of Mexico, while the EC’s richest

260 million people have incomes about 2.5 times

those of its poorest 80 million. In addition, legal and

illegal labor flows from Mexico to the United States

are higher than emigration from Spain, Greece, and

Portugal to the rest of the EC.

A North American Development Bank (NADB),

launched with capital contributions from all three

countries, could provide loans for infrastructure and

social spending in Mexico, including environmental

improvement, rural employment creation, labor

market, and health and safety programs, that would

accelerate upward harmonization of Mexican wages

and social standards and permit appreciation of the

Mexican peso.39 A second possibility would be

structural funds that distribute aid for similar purposes. In Europe, structural funds provide financial

aid to poorer countries that have been asked to

accept continent-wide minimum social standards

(and gradual introduction of a single currency) that

limit their ability to attract investment through low

wages and lax environmental regulation.40

Congress may want to defer consideration of

structural funds, both because of resource constraints in the United States and because Mexico

may not be able to absorb and put to effective use

substantial additional funds in the short run (and

instead might be tempted to use them to maintain the

power of the ruling Partido Revolucionario Institu -

tional). In the medium term, structural funmds would

make it easier for Mexico to join in negotiating

continental environmental and labor standards, while

support for continental structural funds might emerge

in the United States if they were understood as a

mechanism for ensuring the improvement of standards in Mexico, thus relieving pressure on U.S.

workers.

Option 6: Establish North American Works

Councils

In light of EC 92, the European Commission has

proposed establishing European Works Councils in

companies that employ more than 1,000 workers in

the community, and more than 100 in two or more

member countries. North American Works Councils

formed on a similar basis could have two major

39 For one pro~s~ ~ong these lines, see Albert Fishlow, Sherman Robinson, and Radl Hinojosa-Oje@ “prOpOSrd for a Nofi ~eric~

Development Bank and Adjustment Fund,’ Business Mexico, April 1992, pp. 47-50. While their proposal would include no direct aid, they suggest

capitalizing the bank in a way that reduces Mexico’s debt obligations. This could be done by giving commercial banks that hold Mexican debt NADB

shares in exchange for writing off equal amounts of debt valued at the secondary market rate.

@ Bm~ on Pmt fo~u]as used 10 ~locate structural aid to poorer European countries, Mexico would be receiving roughly $10 billion

annually-about 4 percent of its GDP. Instead, Mexico has been paying debt service of roughly $10 billion annually, at the cost of infrastructure and

social investments essential to mising its productivity and social standards. The EC has pledged to double the size of its structural funds between 1993

and 1997.
Chapter 2--Policy Issues and Options ● 53

benefits. First, regular meetings between U. S.,

Canadian, and Mexican workers should be a help to

independent union leaders in Mexico seeking to

negotiate the consensual modernization of Mexican

industrial relations. Second, continental works councils could lay groundwork for the harmonization of

Mexican, U. S., and Canadian labor standards, helping allay fears by U.S. and Canadian workers of

being undercut by Mexico, while giving Mexican

workers confidence that they would share in the

benefits of productivity growth. Continental wage

rules might also help stabilize bargaining in smaller

firms by establishing a target wage increase considered affordable by employers and fair by workers.

Over the long term, sectoral wage agreements might

evolve in Canada, the United States, northern

Mexico, and the Mexico City region, with continental agreements establishing links between wage

increases in each region.

Option 7: Trilateral Dispute Resolution on Labor

Issues

Critics of Mexican labor relations argue that,

despite the laws on the books, weak enforcement and

arbitrary government action hold down wages and

result in inadequate protection of basic rights and

health and safety standards in Mexico. Over time,

U.S. workers fear, weak labor protection in Mexico

could lead to competitive erosion of U.S. practices.

This concern has prompted proposals for bringing

enforcement of labor rights and standards under a

dispute resolution procedure established by or in

parallel with a NAFTA.41

The present administrations in both the United

States and Mexico oppose incorporating labor rights

and standards into a NAFTA or a separate trilateral

dispute resolution system, suggesting that this could

infringe on national sovereignty. (Even critics of the

Mexican Government’s worker rights record sometimes state reservations about delegating authority

on labor issues to a body that might be dominated by

the United States.) Nonetheless, in other areas where

the dividing line between domestic and continental

issues is grey-e.g., the two major ‘‘capital rights, ’

protection for intellectual property and resolution of

investment disputes—issues of sovereignty did not

prevent NAFTA negotiations over possible bilateral,

trilateral, or third-party dispute resolution.

As a starting point for dispute resolution mechanisms, a panel could be established with at least

three recognized authorities on labor relations from

each country. The panel could hear cases from

several categories of complainants+. g., those who

believe their rights have been violated, those who

believe they face unfair competition because of

inadequate labor protections in one of the other

countries, or groups acting on behalf of either of

these parties.42 In additon, a small “public defender’s’ office could be set up to help those

without other resources bring cases before the panel.

At the beginning, a panel might have little or no

power to impose frees or other sanctions, but could

be charged to review the consistency of labor

enforcement with each countrys own laws. Over

time, a common set of principles-some of them

defined by reference to standards of the International

Labor Organization (ILO)--rnight be laid down in a

NAFTA preamble, a parallel agreement on labor

issues, or a continental social charter. With common

principles in place against which cases would be

reviewed, panels could then, following the precedent

set by ILO committees of experts, issue periodic

reports measuring each country’s practices against

those principles. Over time, dispute panels might

take on enforcement powers. They might, for

example, be given the authority to deny NAFTA

trade preferences to a company or a sector in

violation of labor standards. Alternatively, NAFTA

signatories could delegate to panels the power to

levy punitive or compensatory damages.

Option 8: Shorter Work Time

Reducing the length of the work week and

increasing the length of vacations and other forms of

leave--e. g., for training--could help increase the

total number of North American jobs, reducing

unemployment and increasing job security and

promotion opportunities. These steps should increase productivity on a per-hour basis, because

41 Se, for ex~ple, Michael S. Barr, Robert Honeywell, and Scott A. Stofel, ‘‘Laborand Environmental Rights in the Proposed Mexico-United States

Free Trade Agreement, ” Houston Journal of Internurionulbw, vol. 14, fall 1991, pp. 1-84; also Ann Weston with Nona Grande% “Social Subsidies

and Trade with Developing Countries, ’ Worldng Paper, North-South Institute, Ottaw% Canad% December 1991.

42 me de@s of tis option are drawn from three sources, Barr, Honey-well, and Stofel, ibid., pp. 79-82; H.R. 4883, tie Nofi tierica

Environmental, Labor, and Agricultural Standards Act of 1992; and the operating procedures of the Committees of Experts and Committee on the

Freedom of Association of the International Labor Organization.
54 . U.S.-Mexico Trade

output generally declines more slowly than hours

worked. 43 Training leaves or sabbaticals would

contribute to lifelong learning, resulting in a more

flexible workforce. Shorter work hours could confer

environmental benefits by reducing the rate of

economic growth necessary to achieve full employment—particularly desirable in Mexico, with its

rapid labor force growth.

In recent years, work hours in the United States

and Mexico have been increasing—a tendency that

a NAFTA could reinforce because employers, workers, and officials in each country would fear a loss of

production if they independently cut work time.

Continental negotiations leading to sectoral agreements or legislation might solve this problem, and

enable each country to shorten work hours without

suffering a competitive disadvantage.

Option 9: A Commission on the Future of

Political Democracy in North America

OTA’s analysis indicates that the most fundamental threat to economic performance and social

stability in North America stems from high levels of

inequality in Mexico and the United States, and the

possibility that neither country will invest adequately in the education and skills of its workers. A

NAFTA could increase the danger if it led to further

decline of political power among the lower income

groups that lost the most ground during the 1980s.

While the future of political democracy in North

America is an enormously sensitive issue, it is also

an enormously important one. To address it, Congress could ask the administration to negotiate the

establishment of a trilateral Commission on the

Future of Political Democracy in North America.

Focusing on the long term, the commission could be

asked to analyze prospects for enhancing democracy

in each country. The commission could also be

asked to examine the extent to which continental

integration threatens to erode national political

authority, as well as prospects for expanding authority at regional and continental levels.

In a high-productivity future, the importance of

regional concentrations of production is likely to

grow in all three countries. Regional-level associations—for example, groups of States in the United

States-could prove critical to nurturing industrial

networks. Many such groups-for example, the

Northeast-Midwest Institute and the Western Governors’ Association—already exist, and have shown

interest in possibilities for regionally integrated

production. The Western Governors’ Association

already meets on a regular basis with premiers from

Canadian provinces and governors from Mexico’s

border states. At the same time, dispute resolution,

continental managed trade, and other North American institutions that grow out of NAFTA and

subsequent negotiations inevitably imply some redistribution from national to trinational authorities—

issues that would have to be addressed at some point

as economic integration proceeds.

In politics and culture, as in industrial development, economic integration can accentuate the

weaknesses of trading partners or their strengths. By

self-consciously seeking a North America that

combines the commitment to individual liberties of

the United States with the emphasis on social justice

found in Mexico and Canada, it should be possible

to ensure that the strengths, not the weaknesses, will

predominate.

43 Juliet Schor, The @erworked Anencan (New York, ~: Basic Books, 1992)
Chapter 3

Mexico's Needs:

Growth and Development
Contents

Page

SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

INDUSTRIALIZATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..” 58

U.S.-Mexico Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .58

State-led Development . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

Indigenous and Export-Oriented Industries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64

Maquiladora Plants: Offshore Assembly in Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65

Agriculture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67

CRISIS AND AFtERMATH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .68

MEXICO’S ALTERNATIVE FUTURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69

Politics and Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69

Infrastructure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70

Two Paths . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70

CONCLUDING REMARKS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72

Boxes

Box Page

3-A. Measuring Quality of Life.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

3-B. Mexico’s Industrial Policies: Import Substitution and After . . . . . . . . . . . . . . . . . . . . . . 63

3-C. Japanese Maquiladoras . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66

3-D.0rganized Labor and the PRI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69

Figures

Figure Page

3-l. U.S. Imports of Manufactured Goods by Origin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60

3-2. U.S. Imports from Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62

3-3. U.S. Exports to Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . 62

Tables

Table Page

3-1. Development Indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

3-2. U.S.-Mexico Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

3-3. U.S.-Mexico Trade unmanufactured Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

3-4. Sectoral Policies in Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63

3-5. Distribution of Mexico’s Non-Agricultural Urban Employment . . . . . . . . . . . . . . . . . . . 64

3-6. Perceptions by Japanese Managers on Producing in Mexico . . . . . . . . . . . . . . . . . . . . . . 66

3-7. Profile of Mexico’s Maquiladora Sector, 1990 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67

3-8. Mexico’s Federal Spending on Education and Health . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68

3-9. Alternative Paths for Mexico’s Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
Chapter 3

Mexico’s Needs: Growth and Development

SUMMARY

This chapter gives a snapshot of Mexico’s economy entering the 1990s, highlighting the differences

between its export-oriented firms, many of them

foreign-owned, and the much larger number of

Mexican-owned companies that produce wholly or

primarily for domestic consumption. The best companies are world class in productivity and quality;

many of the rest have had trouble competing with the

imports flooding into Mexico’s markets since deregulation and the opening of the economy—

fundamental changes in government policies responding to the devastating economic ‘‘crisis’ of

the 1980s. The chapter concludes with a brief

exploration of possible economic futures for Mexico, all tied to political choices.

The United States is the wealthiest nation the

world has ever seen. Mexico, though not one of the

poorer countries in the Third World, still is only

partially industrialized. During the 1980s, Mexico’s

inflation averaged more than 70 percent per year, the

peso lost 99 percent of its value against the dollar,

and real wages dropped by some 40 percent. Low

wages and underemployment drove growing numbers of Mexicans across the border into the United

States. Today, per-capita income in Mexico is little

more than one-tenth of that in the United States.

Despite the vast differences between Mexico and

the United States, one part of Latin America, the

other with its political heritage and legal traditions

rooted in England, their futures are inseparable.

Millions of Mexicans have crossed the border to

work. Already, the United States is home to the

second largest Spanish speaking population in the

world. U.S. companies ship parts south to be

assembled for sale in the United States. Polluted air

and water cross even more easily than people and

goods. These links will grow, with or without a

North American Free Trade Agreement (NAFTA),

as will debate over the possible outcomes of the pact

for the people and the economies of the United

States and Mexico.

The debate over NAFTA reflects diverging views

of Mexico current industrial capabilities and future

economic prospects. At one extreme are those who

believe Mexico will soon be able to produce most

manufactured products as well as the United States,

and will suck investment south to the detriment of

U.S. workers. At the other extreme are those who

believe that competition will decimate the bulk of

once-protected Mexican industry. The truth is more

complicated.

Without too much oversimplification, Mexico’s

industries and economy can be divided into traditional and modem sectors. The traditional sector

includes:

1.

2.

3.

Farmers who produce for home consumption

and the local market, many of them on small

plots of ejido land that was formally owned by

the state and could not be sold prior to reforms

now underway.

A very large number of smaller enterprises,

employing less than 250 people each and

accounting for about half of total employment.

An informal sector including many selfemployed workers and unregistered rnicroenterprises (1-15 employees)---street vendors,

garbage pickers who reclaim glass and metals

for recycling, and small retailers and manufacturers who avoid dealings with the government.

In recent years, the modem sector has expanded,

including:

1.

2.

3.

Export-oriented farmers who ship winter fruits

and vegetables to the United States.

A number of relatively large and sophisticated

Mexican firm and industrial groups, the

best-known based in Monterrey.

Mexican subsidiaries of U.S. and third-country

fins, most of them labor-intensive assembly

plants registered under Mexican law as exportoriented maquiladoras. In addition, companies including Ford, Nissan, and IBM operate

non-maquila plants producing high-quality

goods to world standards for sale in Mexico

and for export.

Mexico’s economic future will be determined by

the evolution of both the traditional and modem

sectors. Important factors include:

1. The ability of Mexico to move beyond maquiladora-like manufacturing. As Mexico climbs

–57–
58 ● U.S.-Mexico Trade

2.

3.

4.

5.

the ladder of development, it will become

attractive as a production site to a broader

group of U.S.-based firms-so long as Mexican wages remain low.

Mexico’s imports from the United States, of

both capital goods for its factories and consumer goods for those Mexicans with rising

living standards.

Mexico’s ability to provide jobs for millions of

today’s unemployed and underemployed, and

absorb refugees from agriculture.

Rising wages that could dampen emigration to

the United States, particularly if accompanied

by more equal distribution of the benefits of

economic growth.

The resolve, financing, and technical ability to

curb pollution of air, land, and water on both

sides of the border.

For more than 50 years, Mexico sought to guide

economic development through trade protection,

subsidies, state ownership, and controls on foreign

investment. Business agreed to stay out of politics in

return for the profits available in a sheltered economy. Labor provided votes for the ruling political

party, the Partido Revolucionario Institucional (IRI);

in turn, government helped PRI-affiliated ‘official’

unions gain recognition from employers and gave

them a share of PRI political positions. Agricultural

workers were promised land.

Prospects for continued recovery from the 1980s

economic crisis seem good, but Mexico still lacks

many of the ingredients for a vibrant industrial

economy. Shortages of skilled workers and experienced managers limit Mexico ability to absorb and

utilize technology from abroad, as do poor transportation and communications. Longstanding accomodations among government, business, and labor

shattered during the crisis. The government has

opened the economy, but in the process many

smaller firms have failed. Declining real wages and

the growth of the largely nonunion maquiladora

sector have diminished the influence of organized

labor. The government has abandoned its former

policies, but it is not clear what the new policies will

be.

Continued laissez-faire policies and reliance on

low wages to attract investment would suggest a

future Mexican economy that looks much like the

current maquiladora sector. A second future would

draw more heavily on Mexico’s past history of

government guidance and traditional views of social

justice to encourage integrated manufacturing networks linking domestic and foreign firms in the

name of better jobs for more workers. That might

also mean better jobs for U.S. workers because

Mexico would become a more attractive market for

U.S. goods and services, rather than a haven for

low-wage plants supplying the United States.

INDUSTRIALIZATION

Given rapid population growth, Mexico’s labor

force will double in the next 20 years. The birth rate

has come down in recent years, but, as discussed in

chapter 6, the Mexican economy will need to create

more than a million jobs a year to stay even, and

would need to grow even faster to make a dent in

unemployment and underemployment. New jobs

imply foreign investment, bringing technology,

managerial skills, and linkages to the international

economy through multinational fins. This is the

fundamental reason Mexico’s government seeks a

NAFTA.

In 1990, Mexico’s economy was the 13th largest

in the world, slightly smaller than that of India,

slightly larger than that of Korea, and about 4 1/2

percent as large as that of the United States.1 The

country’s citizens live better than gross domestic

product (GDP) figures and rankings suggest (box

3-A). But the averages also mislead. Large differences in quality of life separate rich and poor in

Mexico, more so than in most countries, even the

United States.

U.S.-Mexico Trade

Mexico trades primarily with the United States,

while U.S. trade is spread among many countries. As

figure 3-1 shows, Mexico currently supplies 6

percent of U.S. imports of manufactured goods

(accounting for two-thirds of all Mexican exports),

while taking 9.2 percent of U.S. exports (likewise

accounting for about two-thirds of Mexican im1 WorldDevelopment Report 1992: Development and the Environment (New York NY: Oxford University Press, May 1992), pp. 222-223. Because

India has about 10 times as many people as Mexico, and Korea about half as many, Mexico’s gross domestic product (GDP) per capita was about $2,500

(putting it in the World Bank’s upper-middle-income developing country group), compared with $350 in India and $5,400 in Korea. (The rankings by

size exclude the former Soviet Union.)
Chapter 3---Mexico’s Needs: Growth and Development ● 59

Box 3-A—Measuring Quality of Life

In recent years, the United Nations Development Table 3-l-Development Indicators

program (UNDP) has sought to define indicators of Rank among 160 countries” GDP rank

socioeconomic development going beyond such minus

measures as gross domestic product (GDP) per Rank by GDP Rank by HDI HDI rank

capita, life expectancy, infant mortality, education, Japan. . . . . . . . . . . ..3. 1 2

and nutrition. The aim: to develop measures of United States. . . . . . 6 7 - 1

personal choice, political freedom, gender equality, Canada. . . . . . . . . . . 10 2 8

(West) Germany. . . . 11 14 - 3

income distribution, and environmental quality that Hong Kong. . . . . . . . 25 25 0

can stand alongside the more familiar indicators.lSingapore. . . . . . . . . 26 37 -11

Not all have yet been incorporated in the UNDP’s South Korea. . . . . . . 44 35 9

quantitative rankings: the Human Development Mexico. . . . . . . . . . . 65 45 20

Index (HDI) is composed of life expectancy at birth, Thailand. . . . . . . . . . 88 66 22

Egypt. . . . . . . . . . . . 104 114 -lo

average educational level, and purchasing power India. . . . . . . . . . . . . . 132 123 9

parity (a measure of GDP per capita weighted by the Nigeria. . . . . . . . . . . . 138 129 9

relative basket of goods the national currency will aBas~ on cJata for 1988.

buy). KEY: GDP= Gross Domestic Product; HDI-Human Development Index.

HDI values have been compiled for 160 coun- SOURCE: Human f2eve/opment Report 7991 (New York, NY: Oxford

University Press, 1991), pp. 119-121.

tries. As discussed below, Mexico ranks substantially higher on HDI than on income (table 3-l). In contrast, the United States has about the same ranking on both

measures.

Comparing rankings based on GDP per capita to those based on HDI gives a rough indication of how well

governments translate economic growth into quality of life. The UNDP’s 1991 report notes, for example, that the

HDI rank of 26 countries is 20 or more places below their rank as measured by per capita income, suggesting that

these countries have the wealth to provide better lives for average citizens. As table 3-1 shows, Mexico ranks 20

places higher in terms of HDI, meaning that when factors such as education and life expectancy are considered,

quality of life in Mexico exceeds the level that would be expected based solely on national income. However,

adjustments for equity in income distribution, which the UNDP has not yet calculated for the full set of countries,

depress Mexico’s ranking more than that of the United States; the top quarter of Mexicans have per capita incomes

averaging 20 times those in the bottom quarter, compared with a disparity of 10 to 1 here. On the UNDP’s recently

developed Human Freedom Index, the United States ranks high, while Mexico falls in the medium group.

IHumn Development Rep~rt 1990 and Human Development Report 1991 (New York NY: Oxford u~v~siv press, 1~ ~d 1~lt

respectively).

ports). Table 3-2 includes the trade figures for vehicles and parts is growing substantially faster

agricultural products and oil and gas, as well as

manufacturing. These figures show that United

States has had a growing surplus in manufacturing

since 1988, but an overall deficit until 1991 because

of oil and gas imports, Agricultural trade has been

small compared to manufacturing trade, although

imports from Mexico have accounted for more than

10 percent of all U.S. agricultural imports in recent

years, and U.S. exports to Mexico 5 to 6 percent of

all U.S. agricultural exports.

Figures 3-2 and 3-3 plot the constant dollar trends

for the sectors covered in more detail later in OTA’s

report, with table 3-3 showing the actual figures for

selected years. Trade in apparel and in motor

than total trade in manufactured goods. Increases

occur on both the import (figure 3-2) and export

(figure 3-3) sides because much of the trade involves

exports of parts to Mexico for assembly, followed by

shipment back to the United States for final sale.

State-Led Development

Mexico’s economy developed slowly before World

War H and rapidly thereafter. Starting about 1940,

Mexican industry grew behind a thicket of barriers

to trade and foreign direct investment (FDI). Mexico

sought to be self reliant, building its own industries

and growing its own food. GDP grew faster than the

population, with per-capita income rising at more

331-019 0 - 92 – 3 : QL 3
60 ● U.S.-Mexico Trade

Figure 3-1(a)—U.S. Imports of Manufactured Goods by Origin

15.7% /

Asian

7.50/0

Mexico

Other 6.00/0

Asian N

14,80/~

1983 1991

TOTAL: $171 billion TOTAL: $393 billion

Figure 3-l(b)—U.S. Exports of Manufactured Goods by Destination

Mexico

4.3°/0

Japan

7.3% M 11111

27. 1°/o

1983

TOTAL: $149 billion

Asian

1 0.4%

Mexico

Other 9,2%

20.4% - . . . .......,.:.::::::

r 1

Canada

T

21 .8%

NICs

Japan

9.00/ o “4111111 1111

WI

w

 I I I1I

I I I I I I

IJ-- I I LV

Europe

29.30/.

1991

TOTAL: $345 billion

SOURCE: Of fioe of Technology Assessment, 1992, based on official statistics of the U.S. Department of Commerce.

than 3 percent per year from 1940 to 1980 (about the During the period of import substitution industrisame as the rate of population growth).2 Sheltered alization (ISI, box 3-B), millions of people moved

businesses earned high profits, including foreign- from rural areas to cities, many of them taking jobs

owned companies (e.g., the major U.S. automakers) in manufacturing; more than 70 percent of Mexico’s

allowed to remain under grandfather clauses. If population now lives in urban areas.3 As a stable

industries were inefficient, the government subsi- working class emerged in larger cities, self- and

dized purchases of consumer goods including food family employment declined; the estimated fraction

and gasoline. of the economically active population working in the

2 GDP ~crw~ at an anmml rate of 6 1/2 percent from 1%5 to 1980, but from 1980 to 1990 averaged only 1 percent per year. World Development

Report 1992, ibid., p. 221.

3 Defm~ ~ having more than 2,500 inhabitants. Saul Trejo Reyes, “Mexican-Amaican Employment Relations: The Mexican ContexC”

U.S. -iU~”co Relations: Labor Market Interdependence, Jorge A. BUStarnante, Clark W. Reynolds, and Radl A. Hinojosa Ojeda, eds. (Stanford, CA:

Stanford University Press, 1992), pp. 257-268.
. . —.

Chapter 3--Mexico’s Needs: Growth and Development ● 61

Table 3-2—U.S.-Mexico Trade

First 4 months

(January - April)

1983 1984 1985 1986 1987 1988 1989 1990 1991 1991 1992

Billions of current dollars

U.S. Imports from Mexico

Manufacturing. . . . . . . . . . . . . . . . . . . $6.7 $8.9 $9.6 $10.8 $13.9 $17.5 $19.4 $21.3 $22.9 $6.7 $8. 4

Agriculture. . . . . . . . . . . . . . . . . . . . . . 0.8 0.9 1.0 1.3 1.0 0.9 1.4 1.5 1.4 0.8 0.6

Oil and gas. . . . . . . . . . . . . . . . . . . . . 8.0 7.0 7.1 3.4 3.6 3.0 4.1 5.0 4.5 1.5 1.2

Other a

. . . . . . . . . . . . . . . . . . . . . . . . . 1.2 1.2 1.5 1.9 1.8 1.9 2.3 2.5 2.4 0.8 0.8

Total (all commodities). . . . . . . . . $16.8 $18.0 $19.1 $17.3 $20.3 $23.3 $27.2 $30.2 $31.2 $9.8 $11.0

U.S. exports to Mexico

Manufacturing. . . . . . . . . . . . . . . . . . . $7.2 $10.0 $11.8 $11.3 $13.3 $18.6 $22.5 $26.1 $31.1 $9.0 $12.2

Agriculture. . . . . . . . . . . . . . . . . . . . . . 1.5 1.5 1.1 0.6 0.7 1.1 1.4 1.3 1.2 0.5 0.7

Oil and gas. . . . . . . . . . . . . . . . . . . . . 0.1 0.2 0.2 0.1 0.1 0.1 0.2 0.2 0.1 0.1 0.1

Other, . . . . . ... , . . . . . . . . . . . . . . . . 0.3 0.4 0.5 0.4 0.4 0.8 0.9 0,8 0.9 0.3 0.4

Total (all commodities). . . . . . . . . $9.1 $12.0 $13.6 $12.4 $14.6 $20.6 $25.0 $28.4 $33.3 $9.9 $13.3

Balanceb

Manufacturing. . . . . . . . . . . . . . . . . . . $0.5 $1.0 $2.2 $0.5 $(0.6) $1.2 $3.0 $4. 8 $8.2 $2.4 $3.8

Agriculture. . . . . . . . . . . . . . . . . . . . . . 0.7 (0.7) (0.3) 0.2 (0.0) (0.1) (0.2) (0.3) 0.1

Oil and gas. . . . . . . . . . . . . . . . . . . . . (7.9) (6.8) (6.9) (3.2) (3.5) (2.9) (3.9) (4.8) (4.3) (1.5) (1.1)

Other, . . . . . . . . . . . . . . . . . . . . . . . . . (0.9) (0.8) (0.9) (1.5) (1.3) (1.1) (1.3) (1.7) (1.6) (0.9) (0.8)

Total (all commodities). . . . . . . . . $(7.7) $(6.0) $(5.5) $(4.9) $(5.7) $(2.6) $(2.2) $(1.8) $(2.1) $0.1 $2.3

NOTES: Data series used in this table and elsewhere in this report begins in 1983 because trade figures for earlier years are reported by the U.S. Department

of Commerce on a different, noncompatible basis. Because Mexmo’s economic crisis began before 1983, data for the late 1970s, if available, would

provide a more informative set of statistics.

Totals may not add because of rounding.

alncl~es raw mining materials and Iivestcck.

bparentheses ¬e negative U.S. trade balance (imports from Mexico greater than exports to Mex~o).

SOURCE: Office O( Technology Assessment, 1992, based on official statistics of the U.S. Department of Commerce.

Table 3-3—U.S.-Mexico Trade in Manufactured Goods

Electrical machinery,

Autos equipment, and supplies Apparel Food

All manufactures and parts (SIC 37) (SIC 36) (SIC 23) (Sic 20)

Imp. Exp. Bal. Imp. Exp. Bal. Imp. Exp. Bal. Imp, Exp. Bal. Imp. Exp. Bal.

Billions of 1991 dollars

1983. . . $8.7 $8.5 $(0.1)

1984. . . 11.5 11.6 0.2

1985. . . 12.5 13.8 1.3

1986. . . 13.4 13.2 (0.3)

1987. . . 15.7 14.8 (0.9)

1988. . . 18.5 19.6 1.2

1989. . . 20.1 23.1 3.1

1990. . . 21.4 26.4 5.0

1991 . . . 22.9 31.1 8.2

$1.0 $1.1 $0.0

1.4 1.5 0.1

2.2 2.0 (0,2)

2.2 1.5 (0.7)

3.0 1.8 (1.3)

3.1 2.2 (0.9)

3.1 2.9 (0.2)

4.2 4.0 (0.2)

4.5 4.3 (0.2)

$2.3 $1.6

2.8 2.3

3.0 2.3

3.3 2.4

3.9 2.8

4.9 4.0

5.8 4.7

6.2 5.2

6.8 5.8

$(0.7)

(0.5)

(0.7)

(0.9)

(1.1)

(0.9)

(1.0)

(1.1)

(1.0)

$0.3 $0.2 $(0.1)

0.4 0.2 (0.2)

0.4 0.2 (0.2)

0.6 0.2 (0.4)

0.7 0.2 (0.5)

0.8 0.3 (0.5)

1.0 0.5 (0.5)

1.2 0.5 (0.7)

1.5 0,7 (0.8)

$0.4 $0.4

0.4 0.5

0.5 0.6

0.6 0.5

0.8 0.4

0.7 0.8

0.8 1.2

0.9 1.1

0.9 1.6

$0.1

0.1

0.1

(0.1)

(0.3)

0.1

0.4

0.2

0.7

First four months:

1991. . $6.6 $9.0 $2.4 $1.2 $1.0 $(0.2) $1,9 $1.7 $(0.2) $0.4 $0.2 $(0.2) $0.3 $0.5 $0.2

1992. . 8.4 12.2 3.8 1.7 1.8 0.1 2.4 2.2 (0.2) 0.6 0.3 (0.3) 0.3 0.6 0.3

NOTE: Parentheses denote negative U.S. trade balance.

a[ncludes SIC (standard Industrial Classification) categories 20-39.

SOURCE: Office of Technology Assessment, 1992, based on official statistics of the U.S. Department of Commerce.
62 ● U.S.-Mexico Trade

Figure 3-2--U.S. Imports from Mexico

35

30

25

m

~

75

u 20

z

m

%

a 15

c

,—o

z

10

5

0

la

El

❑

El

❑

1983 1984 1985 1986 1987 1988 1989 1990 1991 1992a

al 992 annualiz~ b~~ on first four months.

SOURCE: Office of Technology Assessment, 1992, based on official statistics of the U.S. Department of Commerce.

Figure 3-3—U.S. Exports to Mexico

1983 1984 1985 1986 1987 1988 1989 1990 1991 1992a

al 992 annualiz~ based on first four months.

Agriculture/food

Autos and parts

Electrical/electronics

Apparel

Oil and gas

Other manufactures

Other imports

❑

El

Es

❑

El

Agriculture/food

Autos and parts

Electrical/electronics

Apparel

Other manufactures

Other exports

SOURCE: Office of Technology Assessment, 1992, based on official statistics of the U.S. Department of Commerce.
Chapter 3---Mexico’s Needs: Growth and Development ● 63

Box 3-B—Mexico’s Industrial Policies: Import Substitution and Afterl

Most of Mexico’s industrial policies originate in the executive branch; neither legislature nor the courts have

much influence. During the period of import substitution industrialization (ISI), Mexico generally provided higher

levels of protection to consumer products industries, particularly nondurable, than to capital goods firms. Licenses

were required for many imports (indeed for all, by 1982). These barriers began to come down after Mexico joined

the General Agreement on Tarrifs and Trade (GATT in 1986.

Table 3-4 includes selected examples of policies during the era of ISI and state-led growth lasting through the

middle 1980s. Mexico nationalized (“ Mexicanized”) many industries during the decades following the 1910-1917

revolution. In others, including automobile production, the government permitted foreign ownership under

successive mandates, decrees, and plans. With few exceptions, foreign firms could enter only as minority partners

in joint ventures with Mexican investors. Petroleum has been an extreme case, with prohibition of foreign ownership

written into Mexico’s constitution. Even here, however, downstream petrochemical production has been partially

opened to foreign participation in recent years, as Mexico sought to tap foreign capital and know-how.

Table 3-4-Sectoral Policies in Mexico

Autos and parts

Mexico began requiring import licenses for automobiles in 1944. The first auto decree, issued in 1962, prohibited

imports as of 1964, forcing companies that wanted to sell in Mexico to assemble locally. Successive decrees modified

various requirements, limiting entry by additional firms, requiring high levels of domestic content, controlling prices,

and establishing performance requirements-e. g., exporting in proportion to local sales (after 1978). “Official”

imports of used cars have been tightly limited to encourage domestic production. Since the mid-1970s, these

regulations have led to steadily increasing exports to the United States of autos and parts (mostly engines and wiring

harnesses) from the Big Three U.S.-based firms, along with Nissan and Volkswagen. The latest decree, issued in

1989, liberalized the rules substantially (see ch. 7).

Electronics

For many years, Mexico relied on trade barriers to encourage local production of TVs and other consumer products.

These barriers began to come down in 1987. Policies toward the computer industry were more complex. The first

computer decree, issued unofficially in 1981, sought foreign investment in some segments of the industry (e.g., small

computers and peripherals) through a combination of import barriers, investment restrictions, local content

requirements, and incentives including tax credits and low-interest loans. Starting in 1985, policies were progressively

liberalized (ch. 8).

TelMex, the monopoly telecommunications supplier, used its purchasing power to favor firms with domestic

production facilities. Until 1987, TelMex’s “Buy Mexico” policy was reinforced by a combination of tariffs and import

licensing. At the same time, expansion of the telephone network and conversion to digital equipment created a market

for advanced equipment. TelMex itself was sold by the government in 1991 to an international consortium.

Petrochemicals

Pemex, the state-owned oil monopoly, still has the exclusive right to produce “primary” petrochemicals (e.g.,

ammonia, propylene), but the definition of secondary products (e.g., polypropylene) has been expanded, permitting

foreign firms up to 40 percent shares in joint ventures. By the end of 1991, the primary list, reserved for Pemex, had

been cut to 19 products, compared with more than 100 in 1986. Wholly foreign owned firms can produce downstream

tertiary products (such as antifreeze or molded polypropylene auto parts).

Agriculture and Food

Price supports and controls, production subsidies, and import barriers still apply to many food products, although

government subsidies to agriculture (irrigation, Iow cost diesel fuel, fertilizers and pesticides) have been declining (ch.

10). CONASUP0 (Compañía Nacional de Subsistencias Populares), the government’s agricultural marketing and

food distribution arm, buys wheat and milk in the United States for sale at subsidized prices, purchases domestic

production at supported prices, runs food processing plants, and distributes to nearly 2,000 retail food outlets. Despite

the decline in subsidies, the costs for supporting production and consumption of corn and tortillas (staple crop of small

farmers and staple food for lower income groups) came to about $1 billion in 1991.

SOURCE: Office of Technology Assessment, 1992.

l“Mefic~ bdus~ policy,’ report prepared for OTA under contract No. 13-0315 by Thomas H. Kelly, Dec. 28, 1991. Also see, in

general, Review of Trade and Investment Liberalization Measures by Mexico and Prospects for Future United States-Mexico Relations -Phase

I: Recent Trade and Investment Reforms Undertaken by Men”co and Implications for the United States, USITC publication 2275 (Washington,

DC: U.S. International Trade Commission April 1990).
64 ● U.S.-Mexico Trade

Table 3-5-Distribution of Mexico’s Non-Agricultural Urban Employment

1940 1960 1980 1989a

Higher nonmanual. . . . . . . . . . . . . . . . . . . . . . . . . . .

Employers, independent professionals

Managers, technical/professional employees

4.5%

3.3

1.2

9.4%

1.4

8.0

13.4940

3.5

9.9

14.OYO

NA

NA

Lower nonmanual. . . . . . . . . . . . . . . . . . . . . . . . . . . .

Office workers

Sales workers

14.1

8.5

5.6

20.2

12.9

7.3

21.6

16.7

4.9

22.7

15.7

7.0

Small entrepreneurs. . . . . . . . . . . . . . . . . . . . . . . . . . NA 0.5 4.6 3.7

Self-employed and family workers. . . . . . . . . . . . . . 37.9 20.5 18.6 22.0

Wage workers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Transport

Construction

Industry

Services (personal, repair)

32.8

4.7

3.3

19.5

5.3

41.9

4.8

6.4

21.6

9.1

36.5

2.5

8.3

14.5

11.2

32.6

2.3

2.6

16.0

11.7

Domestics. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.7

100%

7.5

100%

5.3

100%

4.8

100%

NOTES: Totals may not add because of rounding.

NA - not available.

a~~ on data from seven cities (Mexico City, Guadalajara, Monterrey, Tljuana, Ciudad Juarez, Nuevo Laredo and

Matamoros), roughly comparable to eariier data from national censuses.

SOURCE: Bryan R. Roberts, “The Dynamics of Informal Employment,” paper prepared under contract with the U.S.

Department of Labor, Bureau of International Labor Affairs, January 1992, p. 19.

informal sector (or “underground economy”) fell

from 57 percent in 1950 to 40 percent in 1980.4

During the 1970s, employment grew rapidly in

social and producer services (table 3-5), contributing

to the growth of a new white-collar middle class—

managers and clerical workers, technicians and

teachers, nurses and physicians-many in the public

sectors

2,000 or so maquiladoras, plus hundreds of thousands of mostly small firms producing for the

domestic market. Monterrey, in northern Mexico, is

home to a number of large conglomerates that

dominate the country’s steel, cement, petrochemical, consumer goods, packaging, and glass industries. But small companies-some 700,000, 85

percent of them tiny microenterprises--dominate

Mexico’s economy.6 Leaving aside the “Monterrey

Group,’ most of Mexico’s large firms have been

foreign owned (auto and computer manufacturers) or

state owned (Pemex, TelMex until its recent privatization).

Indigenous and Export-Oriented Industries

Today, Mexico has a relatively small but flourishing group of export-oriented fins, centered on the

4 M~uel Castells end Alejandro portes, “World Underneath: The Origins, Dynamics, and Effects of the Informal Economy,” The Informal

Economy: Studies in Advanced undLess DeveZoped Countries, Alejandro Portes, Manuel Castells, and Lauren A. Bentoq eds. (Baltimore, MD: Johns

Hopkins University Press, 1989), pp. 11-40. Uopoldo Solis, “Social Impact of the Economic Crisis,” Mexico ’s Searchfora New Development Strategy,

Dwight S. Brothers and Adele E. Wick, eds. (Boulder, CO: Westview, 1990), pp. 43-52, gives a somewhat lower estimate for the size of the informal

economy during the 1980s, putting it at about one-third the size of the official economy. In Guadalajar& one recent estimate is that 40 percent of those

working in manufacturing maybe doing so informally (including the self-employed). Bryan R. Roberts, “Employment Structure, Life Cycle, and Life

Chances: Formal and Informal Sectors in Guadalajw’ Portes et al., eds. The Informal Economy (above), pp. 41-59. A forthcoming volume prepared

by the U.S. Department of Labor and the Mexican Ministry of Labor will provide an ovenfiew of estimates of the size of Mexico’s informal sector

according to various deftitions.

S Agustfi Escobar Latapi and Bryan R. Roberts,, ‘‘Urban Stratilcation, the Middle Classes, and Economic Change in Mexico,’ Social Responses

to Mexico’s Econornk Crisis of the 1980s, Mercedes Gonzales de la Rocha and Agustfn Escobar Latapi, eds. (La Jell% CA: University of Califor@

Center for U.S.-Mexican Studies, %n Diego, 1991).

s J~e Luis PZUMI% &nerd JXr@m for Training and Productivity, Ministry of Labor, personal communication JSQWMY 1992

Mexico resembles Thiwan in that large fms account for only a small fraction of total GDP (14.3 percent for the 10 largest fu in Taiwm 14.7

percent in Mexico). Korea’s chaebol, in contrasg dominate that country’s economy, with the 10 largest accounting for63.5 percent of GDP. Gary Gereffi,

“Big Business and the State,’ Manufacturing Miracles: Paths ofIndusm”alization in LarinArnerican andEastAsia, Gary Gereffl and Donald L. Wymaq

eds. (Princetom NJ: Princeton University Press, 1991), pp. 9@109.
Chapter 3--Mexico’s Needs: Growth and Development ● 65

The capabilities of Mexico’s small-firm sector

may not improve rapidly because there are few

established channels for diffusing technical knowledge, managerial expertise, best practices, and other

skills needed to become more competitive. Trade

associations have so far been largely political and

lobbying organizations; the government itself has no

active technology policy. The multinational corporations (MNCs) that account for 45 percent of

Mexico’s exports function in isolated enclaves,

training their workers but relying on imported

materials and components.

Maquiladora Plants:

Offshore Assembly in Mexico7

A number of large U.S.-based firms have manufactured (or at least assembled) in Mexico for the

Mexican market for many years-Ford since 1925,

General Motors since 1935. They have developed

sales and distribution channels, sometimes buy parts

locally, and make minor design changes for the

Mexican market. In contrast, maquiladora plants

operate like the offshore production facilities found

in many other developing countries. Production

tends to be simple and labor intensive. Workers need

few skills, only a willingness to perform routine

tasks at what is often an intense pace. Normally,

MNCs seek to minimize their investments in such

plants, transferring no more technology than necessary and retaining the ability to pull out quickly,

Often, they simply contract with a local firm.

Mexico has accepted this kind of investment, with

the view that bad jobs are better than no jobs.

Mexico’s government established the maquiladora program in 1965, intending to use the country’s

low-wage labor and proximity to the United States

to build export platforms that create jobs and earn

foreign exchange. Maquila plants could bring in

equipment, raw materials, and semifinished items

duty free as long as they were used to fashion

products for shipment back to the United States,

which in turn levied duties only on the value added

in Mexico. (Ch. 9 describes how the tariff system

works for apparel.)

At first, maquiladoras had to be located within 20

kilometers of the border; although there are several

medium-sized Mexican cities along the border (from

Photo credit: Twin Plant News

Workers crimping connectors in a TRW maquiladora in

Reynosa.

Tijuana on the west coast, across from San Diego, to

Matamoros on the east coast, next to Brownsville,

Texas), this part of Mexico was largely undeveloped

at the time. Later, restrictions on maquila location

were relaxed. The maquila sector grew rapidly

beginning in 1982, as devaluation of the peso

depressed Mexican wages relative to U.S. wages. By

the end of 1991, 2,000-plus maquilas, employing

more than 450,000 people, produced more than a

third of Mexico’s exports of manufactured goods.

While maquilas produce for the U.S. market (they

can now also sell some of their output within

Mexico), they need not be U.S. owned. Mexican

entrepreneurs operate many as contract facilities;

about 70 are owned and operated by Japanese firms

(see box 3-C), a somewhat larger number by

European companies. As table 3-7 shows, electronics and auto parts-e. g., assembly of TV sets and

automobile wiring harnesses-account for more

than half of maquiladora employment and valued

added.

Because rnaquiladoras serve primarily as branch

or satellite plants, they have brought little in the way

of technology and skills to Mexico. On average, they

buy less than 2 percent of their parts and components

from Mexican firms, and even import cardboard

boxes for packaging from the United States, claiming that Mexican firms cannot meet quality (e.g.,

7 M. &@=S villme~, ~fllco’S Jfwuiladora ~~dwfv, CRS Repofi 91.706 E (was~to~ Dc: congressional Research Serviee, Sqt. 27, 1991);

“The Maquiladoras: Present Status, Future Potential, ’ report prepared for OTA under contract No. H3-7040 by Leslie Sklair, December 1991; ‘‘NA.FIA

and the Electronics Industry in Mexico, ’ report prepared for OTA under contract No. H3-7200 by Patricia A. Wilsoq February 1992.
66 ● U.S.-Mexico Trade

Box 3-C—Japanese Maquiladorasl

Cumulative Japanese direct investment in

Mexico stands at about $1.8 billion, far less than

U.S. investment ($19 billion) and also far less than

Japanese firms have invested in, say, Brazil. The

majority of the 100 or so Japanese maquilas

assemble consumer electronics products, chiefly

television sets for shipment to the United States, or

else supply parts to these firms. Most of the plants

operated by companies including Sanyo, Hitachi,

Sony, and Matsushita are in Tijuana, in part for ease

of shipping components from Asia and exporting

finished products to the United States, but also

because Japanese managers much prefer living in

San Diego to the alternatives. (Many components

for TVs come from newly industrializing countries

in Asia, although Japan still supplies some parts and

most production equipment.)

In consumer electronics particularly, Japanese

investment in Mexico represents a response to U.S.

trade policies as much as a search for low-cost

assembly labor. When the United States negotiated

import quotas in the form of “Orderly Marketing

Agreements” (OMAs), first with Japan (in 1977)

Table 3-6-Perceptions by Japanese Managers on

Producing in Mexico

Advantages

●

●

●

●

●

●

●

●

●

●

Cheap labor

Transportation cost savings for shipment of finished goods to

the United States

No unions or weak unions (in maquiladoras)

Lack of labor market regulations regarding minorities, gender,

age

No lawyers

Tax system more lenient than in the United States

Improving network of Japanese suppliers (in Tijuana)

Electricity costs one-third those in the United States

Contribution to North American content

Special tariff provisions

Disadvantages

● High workforce turnover and absenteeism

● Poor infrastructure

● Fear of possible political instability

● Shortages of managers, engineers, and technicians

● Border crossings time consuming

● High inventory levels needed

● law educational levels and poor "socialization” of workers

● Hard to recruit Japanese managers to work in Mexico

SOURCE: “Japanese-Owned Maquiladoras in Mexim,” report prepared

for OTA under contract No. H3-7145 by Martin Kenney and

Richard Florida, April 1992, table 9.

and later with South Korea and Taiwan, Japanese and other Asian TV manufacturers not only began shipping from

existing plants in countries not covered by the OMAs, but also set up shop in the United States and in some cases

Mexico. Sanyo, for example, entered U.S.-based TV production in 1976 by purchasing the private-brand

manufacturer Warwick, a major supplier to Sears. At that time Warwick already had a maquiladora in Tijuana. A

few years later, Zenith-today the only remaining U.S.-owned TV manufacturer-moved much of its production

to Mexico and Taiwan. Both Sanyo and Zenith are now in the process of consolidating their North American TV

operations in Mexico.

Despite the example of Sanyo, there are few signs that Japanese firms will substantially increase their rate of new

investment in Mexico. In interviews, Japanese managers repeatedly stress the difficulties of producing high-quality

output in Mexico, pointing to a workforce relatively poorly qualified compared to that in low-wage Asian countries,

to the lack of suppliers and poor infrastructure, and to difficulties in communicating in either Spanish (which very

few Japanese speak) or English (a second language on both sides). Few companies have tried to introduce a full

range of production techniques associated with Japanese practices elsewhere (work groups, quality circles and

kaizen, job security). Table 3-6 summarizes the views of Japanese firms on manufacturing in Mexico.

To solve the supplier problem, Japanese end-product manufacturers have encouraged their Asian suppliers to

establish maquilas of their own, but these firms, too, have been reluctant. Japanese managers seem universally

unhappy if asked to take posts in Mexico (and increasingly even to go to the United States, which many view as

a detour from preferred career paths). At the same time, Japanese multinationals seem less willing than American

firms to delegate to Mexican managers.

14$J~p~e*-~~ Mac@ladoras in ~fico, ‘‘ report prepared for OTA under contract No. H3-7145 by Martin Kemey and Richard

~Olid& Apti 1992.
Chapter 3--Mexico’s Needs: Growth and Development . 67

Table 3-7—Profile of Mexico’s Maquiladora

Sector, 1990

Number of Number of

Products plants employees

Electronic and electrical equipment

and components. . . . . . . . . . . . . . . . . . 501 161,000

Auto parts, transportation equipment. . . 158 100,000

Apparel. . . . . . . . . . . . . . . . . . . . . . . . . . . . 289 42,000

Furniture. . . . . . . . . . . . . . . . . . . . . . . . . . . 265 25,000

All other. . . . . . . . . . . . . . . . . . . . . . . . . . . 707 118,000

1,920 446,000

SOURCE: “The Maquiladoras: Present Status, Future Potential,” report

prepared for OTA under contract No H3-7040 by Leslie Sklair,

December 1991, table 3, p 57 (based on data compiled by the

Mexiean Government).

printed graphics) and delivery standards.8 The steel,

insulation, piping, and furnishings in factory buildings--

along with the production equipment---comes from

abroad.

When the maquiladoras began growing rapidly,

they drew on a rural labor force, in part comprised of

migrants from southern Mexico, with little or no

experience of industrial discipline.9 Even in the

mid- 1980s, the average maquiladora employee had

only 3 years of basic education. With further growth,

rising wages, and a slow increase in the number of

technical jobs, maquiladoras have drawn labor from

a wider region and levels of education have increased to about the national average of 6-plus years.

The proportion of white- and grey-collar workers

(e.g., administrators, technicians, quality-control

inspectors) in the maquiladora sector has increased

from about 14 percent in the 1970s to 18 percent

today—far lower percentages than common in U.S.

industry. High turnover stems from low wages, poor

working conditions, and the ease with which workers can get an equivalent job in another maquila or

cross the border into the the United States. Generally

speaking, maquila owners and managers prefer to

live with turnover rates that may exceed 20 percent

per month rather than move away from the border,

with its easy access to the United States.l0

Maquila-like production will not solve Mexico’s

employment problems. Despite the labor intensive

nature of their operations, maquiladoras created

only about half a million new jobs during the 1980s,

a period in which Mexico’s labor force grew by a

million people each year.

Agriculture

About 26 percent of Mexico’s labor force remains

in agriculture. Considering that agricultural output

has fallen from 14 percent of GDP in 1965 to about

9 percent today, this high percentage indicates the

low productivity of Mexican agriculture.11 A longstanding policy of granting usage rights to small

plots of land called ejidos, to which the state retained

ownership, has helped preserve a fragmented and

inefficient system. Through trade protection and

price supports, the government sought to keep

ejidatarios, small farmers, and agricultural laborers

on the land. At least 2 million peasant farmers

continue to grow corn and beans-staple foods

before the Spanish arrived. More than two-thirds

cannot produce enough for their own families12

Today, Mexico cannot feed itself; food imports

tripled during the 1980s.

The changes to the ejido system will remove one

of the government’s principal sources of social

control; the promise of expanded ejido lands (e.g.,

through expropriation of large private holdings) has

for many years served to dampen unrest among the

rural poor. By withdrawing its longstanding promise

of land, the government will satisfy those who gain

title to their ejidos, while leaving those still waiting—

perhaps 2 1/2 million-with few prospects except to

8 meP-~xceptions Me tie petr~hemi~ and food processing (or agro-maquila) sectors, both of which source more of tieir inPu~ in Mexico.

See Jairne Zabludovsky, “Trade Liberalization and Macroeconomic Adjustment,” Mexico’s Search for a New Development Strategy, Dwight S,

Brothers and Adele E. Wiclq eds. (Boulder, CO: Westview, 1990), table 3, p. 196.

g ~~ pWaWph ~aw~ on Jorge c~lto, “Mercados de Trabajo en la Industria Maquiladora de Exportaci6n” @bor Markets in the Assembly

Pkmt Exporting Industry], unpublished report, El Co/egio de la Frontera iVurte, Tijuana, 1991.

10A recent Sumey fomd Iltfle indication of p~s t. move t. the inte~or in ~c event of a N-.J~ Gilbrmti Rich ~d David Hurlbut, Free Trade

With Mexico: Whaf’s[n /t For Texas?, U.S.-Mexico Policy Report No. 1 (Austin, TX: University of ‘Rxas, Lyndon B, Johnson School of Public Affairs,

1992), pp. 40, 41. For exceptions to this patte~ see ch. 9 on apparel.

11 world DOelopment Report ]991, Op, ~it,, foo~ote 1, p. 223; ForeignAgn”cul~re 1990-9] (w~hington, Dc: Dep~ent of Agriculture, Foreign

Agricultural Service, August 1991), p. 82.

12 Satiago ~vy ad Swedcr Vm wijnberge~ “Tr~ition problems in &onomic Reform: Agricul~e ~ the Mexico-us Free Trade Agreemen~”

Economy-Wide Modeling of the Economic Implications of a FTA w?ith Mem”co and a NAFTA with Canada and Men”co, Addendum to the Report on

Investigation No. 332-317 Under Section 332 of the Tariff Act of 1930, USITC Publication 2508 (Washington DC: U.S. International Trade

Cornrnissiow May 1992), pp. 299-357.
68 ● U.S.-Mexico Trade

Table 3-8-Mexico’s Federal Spending on

Education and Health

Share of all central government spending (percent)

Year Education Health

1982. . . . . . . . . . . . . . .

1983. . . . . . . . . . . . . . .

1984. . . . . . . . . . . . . . .

1985. . . . . . . . . . . . . . .

1986. . . . . . . . . . . . . . .

1987. . . . . . . . . . . . . . .

1988. . . . . . . . . . . . . . .

1989. . . . . . . . . . . . . . .

1990. . . . . . . . . . . . . . .

13.2%

10.9

12.3

11.5

9.1

8.3

9.0

11.7

13.9

1.3%

1.2

1.5

1.4

1.3

1.2

1.3

1.5

1.9

SOURCE: Governmentancf/%anda/ Statistics Yearbook f991(Washington, DC: international Monetary Fund, 1992), Mexieotable3.

work as agricultural laborers or move to urban areas

in search of other work.13

CRISIS AND AFTERMATH

Mexico’s new middle class had a hard time during

the 1980s, as did almost all Mexicans except the

wealthy who could send capital abroad to protect

against inflation.14 The “crisis” began in 1981,

when the price of oil-then Mexico’s largest export—

began to fall and interest rates on Mexico’s foreign

borrowings to rise. The price of Mexican crude had

doubled between 1979 and 1981, when a barrel

brought as much as $37. Projecting future prices as

high as $50 a barrel for state-owned oil, the

government increased spending levels faster than

revenues, borrowing billions of dollars from foreign

lenders.

Oil revenues began to slide, gradually at first, as

the government’s budget deficit rose. In 2 years,

external debt more than doubled, from $40 billion in

1980 to $91 billion in 1982.15 As the 1980s

progressed, public sector spending dropped, squeezing social programs, including education and health,

while the government steered scarce funds to

managing the debt crisis (table 3-8). When thenPresident Lopez Portillo nationalized the banks, the

progressive deterioration in relations between government and business reached a breaking point.

Mexico’s balance of payments went deeply negative. The peso fell from its 1981 value of about 25 to

the dollar, passing through 250 to the dollar in 1985

on the way to 3,100 to the dollar at the beginning of

1992. Unemployment and underemployment rose,

while wages and living standards dropped. Mexico

stock market crashed in 1987, like many others,

tier-easing the already high rate of bankruptcies,

particularly among smaller fins.

Following an agreement with the International

Monetary Fund in 1986, Mexico embarked on a

stabilization program. The 1987 Economic Solidarity Pact (Pacto de Solidaridad Econ6mica) and its

successors provided for predictable devaluation of

the peso. As the policies of austerity and opening

(apertura) brought inflation rates down (to 17

percent in 1991), economic growth gradually resumed and capital began flowing back into the

country. After 1989, commercial lenders forgave a

small portion of Mexico’s debt and extended new

loans under a plan developed by U.S. Secretary of

the Treasury Nicholas Brady. Other exports began

taking the place of oil, which accounted for about 70

percent of Mexico’s total exports in 1982, but only

30 percent in 1988.

Entering office in 1988, President Carlos Salinas

de Gortari accelerated Mexico’s opening to trade

and investment, which had begun with accession to

the General Agreement on Tariffs and Trade-a step

that required an end to ISI policies. The PRI (box

3-D) had nearly lost the 1988 elections, despite its

well-honed ability to ‘‘manage” the electoral process; Salinas knew that without economic recovery

his party’s control could end. In August 1990, he

formally requested talks with the United States on a

free trade agreement, hoping to encourage investment by foreign firms and create new jobs for a

rapidly growing labor force.

A cautious fiscal and monetary policy and reductions in trade barriers leading to increased import

competition reinforced the wage and price controls

under the Pacto to contain inflation. Real wage

declines slowed, and then wages began to rise,

although unemployment remains in the range of 18

to 20 percent or higher and as much as half of the

13 me 2 Ifl million fi~e is from Tim Golde~ “The Dream of Land Dies H~d in Mexico, ’New York Times, Nov. 27, 1991, pp. Al, A1O.

14 More @$11 billion 1eft tie COUKItry in 1981, and perhaps $40 billion during the period 1980-84. Estimates for the decade m a whole range Up

to $80 billion. For a comparison of five estimates of capital flight, see Rudiger Dombusch, ‘‘Mexican Debt,” Mexico’s Search for a New Development

Strategy, Dwight S. Brothers and Adele E. Wick eds. (Boulder, CO: Westview, 1990), table 11, p. 165.

15 mid., pp. 141-169. Most of Mexico’s external debt was owcxt by the government, and mostly to foreign comfnercid b-.me government

suspended payments on its foreign debt in August 1982.
-.

Chapter 3-Mexico’s Needs: Growth and Development ● 69

Box 3-D-Organized Labor and the PRI1

Mexico has been a one-party state since 1929, in part because of votes assured through the longstanding

alliance between the PRI-affiliated (or “official”) labor movement and the national political leadership. The

post-revolutionary Mexican social pact provided the unions incorporated into the PRI with preferential treatment

in union registration proceedings and a share of the PRI’s elected offices. Union members received

government-subsidized housing, health care, and basic foodstuffs. When opposition elements threatened

PRI-affiliated unions, several Mexican presidents have employed force against them. For the government, the

official unions provided abase of mass electoral support. In periods of economic instability, such as the 1980s, the

labor leadership’s capacity to contain rank-and-file wage demands and control worker opposition helped the

government manage the macroeconomy and reduce inflation.

Since the 1930s, the PRI-affiliated labor movement has been dominated by the Confederaci6n Trabajadores

de Mexico (CTM), formed in 1936 by socialist Vicente Lombardo Toledano. The CTM drifted to the right when

President Avila Camacho replaced Toledano with the more conservative Fidel Velasquez. Velasquez, now 92,

remains the head of the CTM and the most powerful labor figure in Mexico. On various occasions since Velasquez

came to power, radical or independent elements of the Mexican labor movement have challenged CTM dominance

and advocated pressure on the PRI for policies more favorable to workers. On each of these occasions, divisions

among dissident unionists, the use of state power to weaken opposition, and overtures to moderate elements in

opposition coalitions served to re-establish the dominance of the pragmatic mainstream of the Mexican labor

movement.

l~s ~x &aws from KeViIIJ. ~dde~oo~ “Shte-hbor Relations in Mexico: The Changing Economic and Political Contem’ unions

and the State in Mexico, Kevin J. Middlebroo~ ed. (La Jolla, CA: University of California-San Diego, Center for U.S.-Mexican Studies, 1991).

workforce may be underemployed. 16 Lacking unem- NAFTA would help solidify his reforms, making it

ployment insurance, and with such high levels of

unemployment and underemployment, it is possible

that half of Mexico’s labor force lives below the

official poverty line.

MEXICO’S ALTERNATIVE

FUTURES

Politics and Policy

President Salinas, who cannot succeed himself,

has until 1994 to lock in the new economic policies

he helped put in place as planning and budget

minister in the preceding administration.17 If his

policies are seen as failing, the government and the

PRI risk political backlash. Although Salinas will

probably pick his own successor—just as he was

chosen in 1986 by then-President de la Madrid-a

harder to return to past policies and practices.

Mexico is trying not only to open and modernize

its economy, but also to define a new set of

accommodations among government, business, and

labor. The 30-year understanding between government and business, which broke down with the

crisis, called for the private sector to stay out of party

politics in return for trade protection, subsidies, and,

in effect, guaranteed high profits. Under the 1987

Pacto, business interests acquiesced in the continued opening of the economy, while labor settled for

wage increases that initially lagged behind inflation.

For its part, the government promised to contain

spending, raise controlled price levels for products

including gasoline, electrical power, and fertilizer,

and reduce the size of a state-owned sector that had

16 me offlcl~ Wmplowent fiwa me much lower, but do not include IU~ ~e~ or disco~ag~ jo~s~lcers, while counting anyone who works

an hour ormoreper week among the employed. Also see Michael J.D. Hopkins, ‘‘Employment Forecasting and the Employment Problem: Conclusion”

Employment Forecasting: The Employment Problem in Indus~”alized Countries, M.J.D. Hopkins, ed. (I_mdon: Pinter, 1988), pp. 210247; and Trejo

Reyes, ‘ ‘Mexican-American Employment Relations: The Mexican Context, ” op. cit., footnote 3.

17 Wt is probably enough ttie. The experiences of a wide range of developing countries suggest that after 5 or 6 years liberalized trade md industi~

policies are unlikely to be reversed. Michael Michaely, Demetris Papageorgiou, and Armeane M. Choksi, Liberalizing Foreign Trude, Volume 7: Lessons

of Expen”ence in the Developing World, Demerns Papageorgiou, Michael Michaely, and Armeane M. Choksi, eds. (Cambridge, MA: Basil Blackwell,

1991), p. 33.
70 ● U.S.-Mexico Trade

numbered more than 2,000 companies .18 The Pacto

has also given business greater and more formalized

access to the policymaking process, for instance

through representation on the Comisión de Seguimiento y Evaluación del Pacto, which monitors price

and wage levels and administers the Pacto. While

many in Mexico will probably continue to look to

the government to lead if not guide the economy, it

is not clear that government-at least under Salinaswill exercise the powers it retains. The Pacto has

given Mexico a window of relative stability in which

to rebuild, but the future form of Mexico’s industrial

policy has yet to take shape.

A long list of issues will demand the government’s attention in the years ahead. With apertura,

Mexican industry must learn to compete against

imports and the products of new plants under foreign

ownership. Productivity levels must rise, and costs

fall. Mexican- and foreign-owned companies must

generate new jobs to keep pace with a swelling labor

force driven by the country’s still-high birth rate and

the reform of the ejido system, which will force

subsistence farmers and farm laborers off the land

and into Mexico’s already overburdened cities.

Mexico must depend on foreign enterprises for

long-term investments in productive economic sectors and for inflows of technology. Finally, Mexico

needs massive investments in infrastructure-roads,

ports, and railroads; electrical power and communications networks; water and sewage facilities-if it

is to attract the investments its economy needs to

grow.

Infrastructure

In OTA interviews, many managers in Mexico

reported that rail transportation bordered on unusable. Telephone service is expensive and unreliable,

new lines take months to install, and businesses pay

for more lines than they would otherwise need

because repairs take so long. Rural areas, which are

attractive to firms seeking low-cost labor and

reduced turnover, often have little or no telephone

service. 19

Under such circumstances, larger Mexican firms

and affiliates of U.S. producers have significant

advantages. They can, for instance, operate their

own fleet of trucks or set up private communication

systems. Xerox’s plant in Aguascalientes has a

satellite link to Xerox’s domestic communications

network. Indeed, until the Mexican telecommunications network is upgraded, large companies will

usually have better communications with the United

States than with other parts of Mexico.

Infrastructure problems are more than annoyances. They raise the costs of doing business and

thereby slow the development of Mexico’s economy. The government has programs in place for

upgrading the infrastructure, including large

planned investments in the telecommunications grid

(see ch. 8). Service has been improving. In interviews, managers noted that telephone repair personnel now may show up on the same day they are

called. Despite complaints about the roads, shipments eventually get through. Many highways are

being rebuilt, and private investors are financing a

number of new toll roads.

Two Paths

Over the years ahead, Mexico (like the United

States) could follow one of two broad development

paths, as summarized in table 3-9. The first path,

characterized by market-oriented policies and continued deregulation—and thus labeled laissez-faire

in the table—would extend and expand the policies

of the 1980s, when the Mexican Government sought

to attract FDI through low wages. The second or

‘‘developmental’ path would link elements of

Mexico’s recent market-oriented approach with

policies that reflect the country’s traditions of social

policy and state intervention in the economy.

Because the impacts on U.S. jobs and job opportunities will depend on how the Mexican economy

18 By be end of 1992, Mexico hopes to ~ve privatimd all but about 30 companies. Susan Kaufman purce~, “Mexico’s New ~onomic vi~i~,”

Current History, February 1992, pp. 54-58. Mexico’s two largest banks, and a number of smaller fwcial imtitutions, were reprivatized in 1991, the

rest in 1992. Tim Goldem “Mexico Sells Off Last Of 18 Banks at Big Profit” New York Times, July 7, 1992, p. D2. Favored Mexican businesses appear

to have gained substantially from privatization. See, for example, “Benefits to Business Supporters of PRI Cited, ” Daily Report: Lain Amerz”ca,

FBIS-LAT-92-049, Foreign Broadcast Information Service, Mar. 12, 1992, pp. 10-14, translated from E.ste Pais, January 1992.

19 The manager of an apparel firm based in Aguascalientes visited for OTA had recently setup a factory in an adjacent rural area where there were

no telephones. He kept in touch with his factory by radio. Another producer had built a plant in a small town with only one telephone+m the plaza

in the center of town. At the time of the interview, he communicated with this factory by asking whoever answered to walk down the street and have

the factory manager call him back. ‘‘The Effect of a North American Free Trade Agreement on US Apparel Employment and Industry Structure, ” report

prepared for OTA under contract No. 13-0165 by Thomas Bailey and Theo Eicher, May 1992.
Chapter 3--Mexico’s Needs: Growth andllevelopmenl ● 71

Table 3-9—Alternative Paths for Mexico’s Economy

Laissez-Faire Developmental

Government role Continues to shrink, as the influence

of market-oriented technocrats and

business interests grows.

Parallels in other countries

Sectoral industrial policies

Trade policy

Regional policies

Human resource policies

Labor policy

Implications for Mexico

United States, Britain.

Limited to cases where broad consensus favoring government involvement

exists (e.g., oil and petrochemicals,

telecommunications).

Continued lowering of barriers.

Left primarily to state and city governments.

Federal government continues to support basic education but does not

pursue aggressive worker training programs.

Organized labor loses influence as

union coverage declines, government

selectively withdraws support, and employers co-opt existing unions.

Industrial development follows a maquiladora-like model, with limited productivity growth and little rise in real

wages. Mexico remains a site for

labor-intensive branch plants operated by or for multinationals. Domestic firms, likewise, seek to compete

with imports primarily through lowwage strategies.

Implications for U.S. jobs and Threats to U.S. jobs greatest in laborjob opportunities intensive sectors like apparel. Slow

growth in Mexican market limits

imports from the United States, hence

creation of new jobs here. Large numbers of Mexicans continue to emigrate

to the United States.

Political forces, corporatist heritage, and social policy

traditions lead to emphasis on quality of working life,

human resource development, and diffusion of the

benefits of economic growth to poorer groups and

regions.

Germany, Sweden, South Korea, Singapore.

Moderate degree of industrial targeting--e.g., to attract

foreign investment, support small- and medium-sized

firms, channel investment capital.

Selective trade protection within limits set by GAIT and

NAFTA discipline.

Federal government steers resources and development

assistance to poorer states and cities.

Government provides steady increases in support for

public education, with special programs for poorer

regions and population groups (e.g., peasants, Indians). Vocational-technical education expands, along

with training programs developed in cooperation with

industry and unions, complemented by retraining for

displaced workers, especially former agricultural workers.

Independent unions expand with government support;

“official” unions become more democratic. Organized

labor supports “negotiated flexibility” at the plant level

(see ch. 4). Labor standards gradually rise.

Broader based development, with multinationals investing in a growing number of world-class plants

relying on sophisticated technology and flexible forms

of work organization, as well as labor-intensive production. Domestic firms pursue a greater range of strategies for growth and competitiveness, emphasizing

technological upgrading and skill-based products/

processes. With political opening, and growing technological and financial resources, environmental protection becomes a higher priority.

Some U.S. jobs and job opportunities lost in higherwage, higher-skill sectors/occupations. Mexico buys

more U.S. capital goods as well as consumer goods,

thus creating some good new jobs here. With rising

wages and living standards in Mexico, and better

opportunities at home, emigration slows.

SOURCE: Office of Technology Assessment, 1992.

develops over the next several decades, the table

serves as a guide to much of the rest of the report.

Two major variables distinguish the developmental path from laissez-faire. First, the Mexican

Government would, over time, define anew but still

activist role for itself in development. As a result,

policy attention and financing would be directed to

bottlenecks such as human resource limitations or

backward organizational practices that might otherwise constrain development and leave Mexico

heavily dependent on foreign firms. Second, Mexico

would establish a new ‘‘social pact’ with labor—

one that would sustain commitment to flexibility,

productivity, and quality improvement-rather than

accept or accelerate labor’s declining influence.

The path that Mexico ultimately follows will

depend on which of two factors with deep roots in

the country’s history prevails. These two factors are

the country’s tradition of social solidarity, reflecting

the heritage (and mythology) of revolution, and

Mexico’s older and still strong authoritarian and

patriarchal traditions. The structure of the PRI, with
72 ● U.S.-Mexico Trade

its three ‘‘sectors”—labor, peasants, and an amalgam of middle-class interests called the popular

sector—reflects the Mexican notion of society, in

which the group takes precedent over the individual.

The role of party and government leaders is then to

define consensus among the groups. The strength of

extended family ties also illustrates the country’s

social traditions, as does Mexico’s high ranking on

the quality of life indicators discussed earlier in the

chapter (box 3-A). The hierarchical side of Mexico

is reflected in high levels of income inequality, the

subservient place of women and people of Indian

ancestry, the many decades of one-party rule, and the

lack of democracy in Mexico’s labor unions (as

discussed in the next chapter).

Mexico’s social traditions are alive and well.

Elaborate tripartite structures linking labor, government, and business oversee labor-management relations, the minimum wage system, and profit sharing.

During the crisis, government called on its control

mechanisms to enforce austerity. Afterwards, spending on education rose, some of it directed to making

Mexico more competitive but some also at improving rural schools in poor villages. The government’s

new “Solidarity” program directs resources to

social and infrastructure needs in poor and rural

areas. With World Bank money, the Labor Ministry

has established a training and industrial extension

program to help Mexican workers and businesses

adjust to international competition (ch. 5). The

mayor of Mexico City has created an urban development program to bring commercial and clean

industrial jobs to some of the poorest areas of the

city. In the wake of apertura, modest programs have

been established to help small-and medium-sized

firms obtain financing or upgrade their technology.

The Mexican government and the World Bank are

discussing irrigation projects that would help more

farmers move into labor-intensive fruit and vegetable production, thus easing the employment problems that might result from the combination of

edjido reforms and freer trade in crops like corn.

But the central question—which path will Mexico

take?--has no clear answer. Fifty years of regulation

and protection have left the country with a bureaucracy accustomed to intervention, Although spending

on education has risen, the government has not

demonstrated a commitment to human resources—

and to raising the necessary tax revenues—

comparable to that in industrializing countries in

Asia. Except for a few MNCs, neither government

nor employers have paid much attention to the

critical grey- and blue-collar technical and managerial skills essential to broad-based development. In

labor relations, it is not clear whether Mexico will

find a new consensus that generates virtuous circles

of high worker commitment, high productivity, and

rising wages. Achieving such a consensus requires

a more independent union movement, hence loss of

power by current union leaders—and government

and PRI officials-particularly if independent unions join with other parts of civil society to demand

political liberalization. Finally, the government and

its market-oriented technocrats may believe that

wage controls and weak unions are needed to limit

inflation, attract foreign capital, and achieve longterm growth.

The pace of Mexican development remains uncertain. In contrast with Korea, Taiwan, and Hong

Kong—whose economies are dominated by domestic enterprises--only a handful of Mexican-owned

and -operated firms have proven themselves in

world markets. There are few analogs in Mexico to

Korea’s chaebol (large conglomerates, including

Hyundai and Samsung) or the many dynamic

smaller firms in Taiwan. The dense, flexible networks of small companies in Taiwan and Hong

Kong have helped those countries move into higher

value-added production in response to changing

demand. At the same time, government-initiated

income redistribution and land reforms—part of

post-World War II restructuring in Japan, Korea, and

Taiwan-fueled domestic consumption and accelerated development in Asia. Taiwan also redistributed

industrial assets that had been in the hands of the

Japanese. Moreover, while popular wisdom links

Asian development to labor repression, land reforms

raised rural incomes, forcing manufacturing firms to

pay higher wages to attract workers.

CONCLUDING REMARKS

To become a full-fledged participant in globalization, Mexico must help its workers learn to function

in the sophisticated technological and organizational

context of complex international production networks. Failing that, Mexico will remain primarily a

site for labor-intensive branch plants. Today, Mexico competes for jobs with such countries as

Thailand and Indonesia; if it fails to improve its

human resources, it will find itself competing with

a poorer group of Third World countries.
Chapter 3-Mexico’s Needs: Growth and Development ● 73

Mexico cannot develop through “maquilaza- and Eastern Europe and the breakup of the Soviet

tion. ’ Since his election, President Salinas has Union, and with Japan focused on the Pacific Rim

visited Europe and Japan, as well as the United and its trade disputes with the United States, Salinas

States, seeking investments that can help modernize has found himself with little choice but to look

Mexico’s economy. With European governments northward. Hence his proposal for trade talks with

preoccupied with the new democracies of Central the United States.
Chapter 4

Two Traditions, One Continent:

Labor Relations and Labor Markets in

Mexico and the United States
Contents

Page

SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .77

MEXICO’S LABOR RELATIONS SYSTEM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78

Tripartite Structures and Labor-Management Committees . . . . . . . . . . . . . . . . . . . . . . . . . . 79

Union Formation in Practice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .79

Wages and Wage Setting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80

Shopfloor Relations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .81

THE FUTURE OF MEXICAN INDUSTRIAL RELATIONS . . . . . . . . . . . . . . . . . . . . . . . . 82

LABOR RELATIONS IN THE UNITED STATES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86

The New Deal and After: Labor Relations in the Era of Mass Production . . . . . . . . . . . 86

The Decline of the Post-War Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88

Workers in Trouble: Consequences of Labor Market Restructuring . . . . . . . . . . . . . . . . . 91

CONCLUDING REMARKS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93

Boxes

Box Page

4-A. The Origins of the Mexican System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . 78

4-B. Negotiated Flexibility at TelMex . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83

4-C. Flexibility in the Mexican Auto Industry: Three Cases . . . . . . . . . . . . . . . . . . . . . . . . . . 84

4-D. Labor Rights and Union Decline: A U.S. Representation Gap? . . . . . . . . . . . . . . . . . . . 89

4-E. Worker Aspirations, Labor Market Opportunities, and Social Stability . . . . . . . . . . . . 93

Figures

Figure Page

4-1. Income by Level of Education and Occupation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91

Tables

Table Page

4-1. Union Coverage in the United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88

4-2. Government Spending on Labor Market Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90

4-3. Worker Displacement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
Chapter 4

Two Traditions, One Continent:

Labor Relations and Labor Markets in Mexico

and the United States

SUMMARY

This chapter compares labor relations and labor

markets in Mexico and the United States. These will

have a powerful influence on whether the two

countries follow a high- or low-productivity path.

The

●

●

●

●

●

following conclusions result:

The differences between the systems of labor

protection in the United States and Mexico are

systemic, linked to differences in political

structure and history. No simple claim that

Mexican labor protection is less adequate than

U.S. protection or that Mexican labor protection is strong can capture the complex reality of

interactions among government, labor, and

business in Mexico.

That said, there is a sense in which government

intervention in Mexican labor relations violates

U.S. conceptions of individual rights. To take

the clearest example, Mexican workers rarely

choose their own unions. In addition, the

exercise of government power frequently compromises workers’ freedom to bargain collectively and strike.

From 1983 to 1988, the Mexican Government

used its control over labor unions to achieve

reductions in real wages of about 40 percent.

While wages have recovered somewhat since

1988, if wage controls become part of a

long-term strategy for attracting foreign investment, pressures on competing U.S. workers

would increase.

Despite the limitations on worker rights in

Mexico, labor is more embedded in politics and

society than in the United States. In the

individualistic United States, unions are sometimes seen as a “third party, ” a remnant of a

more primitive managerial era. In Mexico,

workers collectively are viewed as one of the

pillars of society. With some exceptions along

the border, the presence rather than absence of

a union is regarded in Mexico as normal and

expected.

In the United States, unions represent 16

percent of the workforce. This compares with

. .

●

It

35 percent in the 1950s. While the proposed

North American Free Trade Agreement (NAFTA)

has so far focused the spotlight on Mexican

labor rights, some observers view the decline in

union membership in the United States as a

consequence of inadequate protection of workers here from employer intimidation.

Union decline and the globalization of the U.S.

economy--of which NAFTA negotiations are

a reflection-have hit U.S. workers hard. Imports and offshore production have displaced

some directly. Displaced manufacturing workers frequently suffer substantial wage cuts. The

future seems especially grim for workers with

modest levels of educational attainment and

skill.

is in the context of the vulnerability of U.S.

workers that a NAFTA and the prospect of ‘accelerating economic integration with Mexico have become

so controversial. OTA’s analysis indicates that the

growing interdependence of the labor relations

systems of both countries could have mutually

beneficial or mutually destructive results.

A mutually destructive interaction would hurt

workers in both countries. In that scenario, employers and the state in Mexico would come to adopt the

U.S. view that multiemployer unions are a ‘‘third

party,” while competitive pressure from Mexico

further weakens the labor market position of lessskilled workers in the United States. Fueled by

movement of capital to Mexico and Mexican workers to the United States, such an outcome would

reinforce economic inequality in both countries and

help entrench low-wage, low-productivity strategies

throughout North America. Many of the policy

options discussed in chapter 2 are intended to avoid

these outcomes.

A mutually beneficial synthesis would combine

U.S. views of individual rights with Mexican views

of collective rights. U.S. recognition that elected

representatives, including union officials, should be

accountable to their constituents would be combined

with the Mexican view that workers should have

collective representation. Mexico’s structures for

–1 i–
78 ● U.S.-Mexico Trade

Box 4-A—The Origins of the Men-can System

Mexican industrial relations emerged from a series of political bargains struck during and after the 1910-1920

revolution. The alliance between worker organizations and the governing political coalition culminated in 1938 with

labor’s formal incorporation into what is now the Partido Revolucionario Institutional (PRI, see box 3-D, ch. 3).

From labor’s perspective, in the context of a predominantly agricultural economy and employer opposition, alliance

with the state provided a more rapid means of gaining strength than collective action; if government intervention

in union formation and dispute resolution implied loss of autonomy, the power of government to force employers

to accept unions seemed to justify the trade-off. Moreover, labor’s place in the dominant political coalition meant

substantial influence in shaping the legal foundation of labor relations--the 1931 Mexican federal labor law (which

builds on Article 123 of the 1917 Mexican constitution).

The principles embodied in Mexico’s constitution and federal labor law include:l

. Labor standards are intended to provide a balance and social justice in the relations between employees and

employers.

. Both workers and employers have the right to organize for the defense of their respective interest--e.g.,

by forming unions and professional associations.

. Strikes are legal when they have as their purpose the achievement of ‘equilibrium’ among the factors of

production.

. Work must guarantee employees and their families a decent living.

. Permanent (planta) workers (as opposed to temporary or eventuates employees) fired without cause are

entitled to additional severance pay.

. Employers are obligated to train their workers.

. Discrimination is prohibited on the basis of sex, race, age, religious or political beliefs, and social standing.

. Social security should include protection against disability, old age, death, involuntary unemployment,

sickness, and accidents. Child care services are also provided for in the social security article of Mexico’s

constitution.

● Labor standards are mandatory and workers’ rights are irrevocable (i.e., may not be superseded by

agreements between management and labor). Any renunciation of workers’ rights is void. Ambiguities in

labor standards are to be construed in workers’ favor.

l~s ~t is drm ~m~. 123 of tie Mexiw constitution and from the principles listed in N6stor de Buen Lmanaand Carlos de Bum

U-A Primer on A4tzrican Lubor Luw (Washington, DC: Department of Labor, Bureau of International Labor A@irs, 1991).

workplace labor-management consultation and na- ‘‘comparable to those in the United States, Europe,

tional tripartite consensus-building on social issues

would also contribute to a positive synthesis.

MEXICO’S LABOR RELATIONS

SYSTEM

U.S. labor unions fear that low labor standards and

weak enforcement in Mexico would divert postNAFTA investments to Mexico, placing downward

pressure on U.S. labor rights and standards. In

response, the Bush administration argued in its

“Action Plan” on labor and environmental issues

that Mexico has “strong labor protections” that are

and other industrialized countries. ’

Mexican laws cover a broader range of labor

standards than U.S. laws, mandating severance pay,

vacation pay, maternity leave, and profit sharing

(Mexico does not have an unemployment insurance

program). Mexico’s federal labor law also establishes several basic principles that are more favorable to workers than U.S. statutes (box 4-A). The

questions raised in the NAFTA debate concern the

force of these laws and principles. NAFTA proponents offer the law itself as evidence that Mexico has

adequate labor rights; critics argue that the law is

irrelevant to the practice, in which, they claim, the

government, “official unions” (e.g., the Confedera1 “Response of tie Atis~tion to Issues Raised in Connection With the Negotiation of a North American Free Trade Agreement”, May 1, 1991,

sec. 3, p. 1. For a lengthier defense of Mexican labor rights, see “ 1991 GSP Annual Review: Worker Rights Review Summmy, Case 001-CP-91:

Mexico,” OffIce of the U.S. Trade Representative, GSP Information Center, WaAingto~ DC, November 1991.
Chapter &Two Traditions, One Continent . 79

ción de Trabajadores Mexicanos, or CTM, affiliated

with the long-dominant Partido Revolucionario

Institutional), and employers do not respect basic

labor rights and standards.

Mexico’s system of labor relations springs, not

from the U.S. notion of society as an association of

free individuals, but from a so-called “corporatist”

view of society as comprised of groups: workers,

peasants, employers, and the middle-class “popular

sector. In the United States, the group is seen as

subordinate to the individual, while in Mexico the

individual is seen as part of a group. It is the

responsibility of the Mexican state to mediate

among major social groups to achieve social peace

and social justice.

Tripartite Structures and Labor-Management

Committees

The Mexican view of society and the state-labor

alliance of the 1920s and 1930s underly the tripartite

structures which, together with the Ministry of

Labor and Social Welfare (Secretaría del Trabajo y

Previsión Social, STPS), have responsibility for

implementing labor law and mediating conflicts.

Conciliation and arbitration boards at federal and

state levels, with equal numbers of labor and

business members plus a government representative,

have broad authority over union registration and

strikes.3 These powers give the boards considerable

influence over the character and composition of the

union movement as a whole.4 To initiate an authorized strike, a union must file a petition with the

appropriate conciliation and arbitration board, addressed to the employer, 6 to 10 days in advance. The

board may declare the strike illegal (inexistente) for

a variety of reasons, including a finding that the

union has not complied with registration requirements, or that a collective bargaining agreement

already exists.

In addition to conciliation and arbitration boards,

Mexican law provides for tripartite commissions

that determine the minimum wage and annual profit

sharing disbursements. Ad hoc commissions address

issues such as labor law reform, discussed in a later

section. In the workplace itself, federal law requires

bipartite labor-management commissions on training and on health and safety.

In its tripartism and capacity for high-level

consultation between unions and the government,

the Mexican system of labor regulation resembles

that of northern Europe (e.g., Sweden, Germany,

Austria). However, Mexico’s government has more

power relative to labor than in Europe, while union

leaders—with the support of the state-generally

have more control over the rank-and-file. The end

result, according to some analysts, has been that the

Mexican labor-government link is more a means for

enlisting lower class support for the governing elite

than a means for social-democratic negotiations

Union Formation in Practice

Nearly all U.S. industries have some nonunion

plants; unions gain their influence one workplace or

one company at a time. In Mexico, manufacturing

firms of any size (100 or more employees) outside

z Francisco Zapat4 “Labor and Politics-The Mexican Pamdox, ’ bbor Autonomy and the State in Lain American, Edward C. Epsteti ed.

(Bostoq MA: Unwin HymaIL 1989); Kevin J. MiddlebrooL “State-Labor Relations in Mexico: The Changing Economic and Political Contex~”

Unions, Workers, and the Stare in Mexko, Kevin J. Middlebrook, ed. (La Jolla, CA: University of California, San Diego, Center for U.S.-Mexican

Studies, 1991), pp. 1-25; and Graciela Bensus@ “Union Freedom: Real or Apparent Change in the Labor Scene,” Modernidad yLegislacion Luboral,

Graciela Bensus4nand Carlos Garcfa, eds. (Mcxico CW: uniVerSjtidAUfbnO~ ~efiopollruw 198% [~lated @DeannaH~Ond~ cIWWSSiOnal

Research Service].

3 me la~r mem~r5hip5 of ~c boards (and o~er ~p~te Smctwes above we p}ant level) reflect tie dominance of the offlciid UIliOOS. Victor

Manuel Durand Ponte, “The Confederation of Mexican Workers, the Labor Congress, and the Crisis of Mexico’s Social Pacti ” Unions, Workers, and

(he Stare in Mexico, Kevin J. Middlebrook, ed. (La Jolla, CA: University of California+ San Diego, Center for U.S.-Mexican Studies, 1991), p. 91.

4 on paper, regismtion rqu~5 o~y tit a don pre5ent a membership list inchlding at least 20 active workers, a COPY of i~ by-~ws, ~d a c~fl~

copy of the minutes of the general meeting at which the union was constituted and its board of directors elected. Nestor de Buen Lozano and Carlos de

Buen Unna, A Primer on Mexican L.ubor Luw (Washington DC: Department of Labor, Bureau of International Labor Affairs, 1991), p. 28.

5 ~urence whiteh~d, ‘Mexico’s Economic Prospects: Implications for State-Labor Relations, ’ Unions, Workers, and the State in Mexico, Kevin

J. Middlebrook ed. (La Jolla, CA: University of California, San Diego, Center for U.S.-Mexican Studies, 1991), pp. 57-84. According to Middlebrook

in the same volume, p. 9:

. . . the postrevolutionary state’s unchallenged control over coercive force and its well-developed administrative capacity place the national

political leadership in a position to define (and redefiie) the terms of the alliance, while the labor movement’s structural weaknesses

(comparatively small worker concentrations per fii and low overall levels of unionization . . .), and organizational weakness (poorly

developed representational structures in many enterprise-level unions), and fractional divisions place labor in a generally subordinate

position in decision making on wage levels, income policies, and economic development strategies-issues that directly affect workers.
80 ● U.S.-Mexico Trade

the maquila sector are normally unionized.6 The

only question is which union will gain recognition,

a choice usually made by national labor leaders,

government officials, or employers, not by workers.

In industries governed by a national, industrywide

contract (’‘law contract’ or contracto ley) the

relevant national industrial union or regional federation becomes the representative. A contracto ley

may be established at the request of unions representing at least two-thirds of the unionized workers

in an industry in a given area. Once negotiated, it

applies to all firms in the industry, including

nonunion establishments. According to the Mexican

Ministry of Labor, contracto /eyes currently cover

about 150,000 workers.

Where labor has been weak, as in much of

northern Mexico, employers have more influence

over union selection. Monterrey, the largest northern

industrial center, has a tradition of ‘‘white’ unions

affiliated with individual enterprises or industrial

groups. In maquiladoras on the northern border, a

few cities—notably Matamoros, which has a strong,

centralized CTM organization-are heavily unionized. Otherwise, labor authorities have generally

accommodated maquiladoras that sought to operate

nonunion or establish ‘‘protection unions. ’

The evidence suggests that the Mexican Government and official unions have often used their power

to block independent union formation.8 In an OTA

interview, an official of the Mexican Labor Ministry,

while denying charges of manipulation, did acknowledge that independent unions often have

difficulty in complying with registration requirements. In disputes over union registration, the threat

of unemployment, coupled with lack of unemployment insurance, make independent activists vulnerable to legal delaying tactics and offers of severance

pay. Official unions use contractual “exclusion

clauses’ ‘—which require employers to fire workers

who are forced out of the union-to forestall

independent, rank-and-file challenges. One source

estimates that only about 5 percent of unionized

workers are free from control of the PRI.9

Wages and Wage Setting

From the 1940s until the crisis, Mexico had a

stable relative wage structure, reflecting the influence of collective bargaining and minimum wages.10

As well as wage increases from about 1950, Mexican unions obtained substantial improvements in

non-wage benefits, including housing, education,

health, and social security. But with large parts of the

population in agriculture, and small firms in the

informal sector not paying their social security

obligations, Mexican health, pension, and housing

funds cover only 40 to 50 percent of the population. ll

6 mere me ~0 reliable ~~ on ~on mem~~hip fi Mexico. R@S&atiOn ~COr& held at feder~ ~d local conciliation boards and the unions’ OWIl

membership figures both suggest that somewhat less than one-third of Mexico’s workers belong to unions. Roughly one third work in the infomm.1 sector,

with another third consisting mostly of managerial and technical workers. (OTA field visits suggest that skilled workers are more often defined outside

the bargaining unit in Mexico than in the United States, reducing union leverage.)

7 ~otection ~o~ provide crnployc~ With “protection con~acts,’ under whic& for a price, the union registers with the authorities-thereby

impeding independent union registration-and then permits the employer wide latitude in setting wages, benefhs, and working conditions. Workers

might not even know they belong to a union.

Seeking to attract foreign investmen~ government officials have reportedly pressured national union leaders not to undetie major efforts to

organize maqui/adoras. According to OTA interviews with the managers of a muquila in a sparsely populated border area, ‘Companies choose the union

when they start. . . . You’re better off. . . . Otherwise you’ll get one that will make trouble. . ..” In this case, management bought a union affiliated with

one of the major federations; the managers of this maquila acknowledged that it was easier for the~ as small independent contractors, to select their

own union than it would be for larger, more visible plants.

8 Kevin J. Middlebrook, “State Structures and the Politics of Union Registration in Post-revolutionary Mexico, ” Comparative Politics, vol. 23,

1991, pp. 459-478. Middlebrook also notes that the Mexican government has favored different urdon federations at different times to ensure that none,

including the tTI’M, gained too much power. For details on formal rationales for denying independent union registration in 20 cases, see Arturo Alcdde,

“State Obstacles to the Right of Union Association” A40dernidid y Legislation Lubora/, Graciehi Bensus4u and Carlos Garcf& eds. (Mexico City:

Universi&d Aut6noma Metropolitan, 1989) [translated by Deanna Hammond, Congressional Research Service].

9 R~eY D. Anderson, ‘‘ Mexico,” Lutin American Organization$, G.M. Greerdleld and S.L, Maran, eds. (New Yor~ NY: Greenwood Press, 1987),

p. 522.

10 Before the CIisis, the minimum wage directly determined paychecks for 40 percent of the workforce. From 1939 to 1950, average pay declimxi,

as consemative union leaders accepted the need for savings and investment to stimulate economic growth. From the early 1950s to the early 1970s, wages

rose steadily. Zapata, “Labor and Politics, ” op. cit., footnote 2, p. 176; Jeffrey Bortz, “The Effects of Mexico’s Postwar Industrialization on the

U.S.-Mexico Price and Wage Comparison” and Peter Gregory, “CommenG” U.S.-Mexico Relations: Labor Market Interdependence, Jorge A.

Bustarnan te, Clark W. Reynolds, and Raul A. Hinojosa Ojed4 eds. (Stanford, CA: Stanford University Press, 1992), pp. 214-242.

11 Nora Lustig, “Mexico at the Threshold of Prosperity,” unpublish~ &aft, Septem&r 1991.
. . . . . .

Chapter 4--Two Traditions, One Continent . 81

During the crisis, real wages fell dramatically.

Devaluation raised the cost of imports and pushed

consumer prices up by 60 percent in 1982 and 100

percent in 1983. As inflation accelerated, government officials looked to wage controls as a means of

reducing inflation and expanding exports while

limiting imports. The tripartite national minimum

wage commission held increases below inflation so

that real minimums—which had already declined 20

percent from 1977 to 1982—fell by a further 22

percent in 1983 and 50 percent from 1983 to 1988.12

Wage reductions led the CTM and independent

unions to file some 14,000 strike petitions in 1983.13

To contain the protests, federal officials persuaded

other PRI-allied union federations to oppose CTM

mobilization efforts; the government also withdrew

recognition from some independent unions. Conciliation and arbitration boards generally ruled strike

petitions inexistente. 14 The government also inter--

vened against striking workers on highly visible

occasions—at TelMex (the nationwide telecommunications company) in 1984 and 1987, at Mexicana

de Aviation (one of two major airlines) in 1982 and

1987—in some cases resorting to violence.l5

The 1987 economic solidarity pact (Pacto, ch. 3)

ushered in a period of less openly conflictual efforts

to control wages and bring down inflation. Under the

Pacto, the Labor Minister sometimes calls in company and union negotiators to urge them to agree to

noninflationary increases.l6 In the maquiladora

sector, wages were controlled to a considerable

extent even before the crisis—usually by local

employers acting together. Instead of increasing

wages to reduce turnover, many employers have

taken the view that bidding up wages would simply

mean similar turnover at higher wage levels—hence,

according to maquila managers in Tijuana, employers agree to hold wages at low levels.17

Shopfloor Relations

Historically, Mexican manufacturing managers,

like their U.S. counterparts, were content to push

workers for greater effort. Committed to scientific

management and mass production, they made no

effort to improve productivity by tapping workers’

skills. But rather than the ‘‘Fordist’ practices

common in the United States—machine-pacing, job

standards set through time and motion study, and

large numbers of supervisors-smaller, less bureaucratic Mexican firms often relied on piece rates.

Supervisors, sometimes union members, agreed to a

price and took responsibility for distributing wages

and overseeing production.

18 Delegation of authority to supervisors and work groups gave union

officials and informal shopfloor leaders in some

plants a more central role in hiring and production

management than their counterparts in the United

States.

Mexican labor relations began to change in the

1960s and 1970s, as a result of independent unions

and the growth of maquiladoras. Independent unionism emerged out of a complex of economic and

political developments. Economically, when Mexico’s rapid development and increasing scale of

production intensified the pace of work and tightened shopfloor customs in large Mexican plants,

workers sought to replace systems of informal

control (augmented by one appointed union delegate

per plant or several plants) with direct election of

larger numbers of shop representatives. Politically,

12 As wages fe~, tie wage she of natioti income declined from 40 percent in 1981 to 27 percent h 1989. Ibid., We ~.s.

13 Durand Ponte, “The Confederation of Mexican Workers, the Labor Congress, and the Crisis of Mexico’s Social Pac~” op. cit., footnote 3, p. 100.

14 ~ejm~o Alvarez Bejar, ‘‘The Economic Crisis and the Labor Movement in Mexico, ” Unions, Workers, and the State in Mexico, Kevin J.

Middlebroo~ ed. (La Jolla, CA: University of California, San Diego, Center for U.S.-Mexican Studies, 1991), p. 45.

15 ~vwez Beju, ibid, p. ~, Smtes tit ‘‘u~on activists were ~SaSSiMted in A~r-Mex ~d Refescos p~cu~ i.D 1982, ~d h dissident teachers’

movements near Mexico City in 1982, Oaxaca in 1985, and Chiapas in 1987. ”

lb According to ‘‘The Auto and Electronics Sectors in U.S.-Mexico Trade and Investment” report prepared for OTA under contract No. 13-1815

by Harley Shaikem May 1992, pp. 44-45:

The Mexican Government also exercises considerable pressure both on the auto companies and the official unions not to violate the

government’s overall wage guidelines. . . “We even get help from the government making sure that we don’t settle too high” a Verde

[Verde is the pseudonym of an auto plant] manager commented, ‘‘because of the economic reforms and the fact that we are so visible. ’

He also speculated that the government had pressured the union into granting the company an extension in the most recent round of

bargaining in 1992. “We suspect. . the government was putting [pressure] on the CTM to settle at a low level because of [our] visibility, ’

he added. An industrial relations manager at Azul [another auto plant] confiied a similar pattern. . . “The Labor ministry takes an active

part in negotiations, especially in companies our size. And they steer the level of increases. ”

17 ~ley s~ew Persoti communication, July 1992.

18 Fr~cisco Zapat~ personal communicatio~ JMNEWY 1992.
82 ● U.S.-Mexico Trade

a wave of student unrest in the late 1960s, echoing

that in other parts of the world, led to a bloody

confrontation between students, the police, and the

army. As part of later efforts to repair relations with

the left, labor authorities more readily registered

independent unions. In other plants, the threat of

affiliating with independent unions enabled workers

to pressure the CTM to accept greater local democracy,

During the same period, nonunion maquiladoras

emerged in the north. In the 1980s, as Mexico sought

to accommodate itself to the pressures of international competition, their labor practices seemed to

some a possible direction for Mexican labor policy

as a whole.

The economic crisis deepened the challenge to

traditional Mexican industrial relations. In its wake,

employers have sought greater flexibility to deploy

workers and to lay them off. Some began seeking to

include workers in programs to improve productivity and quality. Restructuring has taken place in

different ways in different parts of the economy:

●

●

●

Unilaterally in the face of worker and union

resistance at traditional, often state-owned

establishments. 19 With strikes protesting reorganization and privatization typically ruled

illegal, workers and unions have eventually

accepted privatization and bargained over severance pay. In the reorganized workplace,

managers have taken at least some control from

unions over hiring, work assignments, and

promotions.

Sometimes, though not commonly, through

more negotiated, ‘‘consensual” restructuring,

the best known example being at TelMex (box

4-B).

Through new investment at greenfield sites—

e.g., Japanese electronics maquilas, IBM’s

computer facility in Guadalajara, and a number

of export-oriented automobile engine and assembly plants built in the 1980s. These plants

have no unions or unions with little shopfloor

presence.

At TelMex and elsewhere, employers and the

government remain tom between the unilateral

imposition of ‘‘flexibility’ and negotiations over a

more truly participative workplace that might ultimately prove more productive. The three paths by

which Mexican companies have sought flexibility

suggest three possible outcomes of restructuring:

1.

2.

3.

autocratic shopfloor regimes, in which a rollback of union influence, protective labor laws,

and work rules gives management unilateral

control (as in the United States in the 1920s);

a durable regime of negotiated flexibility; and

Japanese-style “lean production” with employers seeking cooperative labor relations in

a context of weak unions or no unions.

Box 4-C includes examples of each.

THE FUTURE OF MEXICAN

INDUSTRIAL RELATIONS

For the past several years, Mexico has been

debating labor law reform.20 At its core, the debate

is about which of the above models of workplace

flexibility will predominate, and the future role of

unions, if any, beyond the workplace. Employer

proposals could be read as an attempt to generalize

the practices found in maquilas. For companies,

flexibility means relaxation of substantive labor

standards such as severance pay and greater use of

temporary labor. Employers’ associations also seek

an end to the legal priority given to more senior

workers over more skilled ones. Reformist labor

groups favor greater union independence from the

government, mandated collective bargaining, and

participation in personnel decisions by workplace

committees, as found in most European countries.

Official unions, the government, and the PRI are

divided about reform. Union independence and

expanded worker associational rights could reduce

labor support for the PRI. Some PRI leaders also fear

instability if unions are granted greater autonomy

too quickly. Other factions within government and

the official unions believe they cannot maintain their

legitimacy and rebuild the economy unless unions

become more accountable to their members.

A commission on labor law reform created by

President Salinas after his inauguration has yet to

deliver public recommendations. Union and government sources in early 1992 suggested that ‘‘now is

19 For details on several cases, see Daniel IaBotz, The Mask of Democracy: Labor Suppression in Mexico To&y mosto~ MA: SOUth ~d Press,

1992).

20 ~s Ovmlew of tie la~r law refom debate is breed on Bensus@ “Union Freedom,’* op. ~it, footnote 2.
Chapter 4--Two Traditions, One Continent . 83 —

Box 4-B—Negotiated Flexibility at TelMex

During 1987, with preparations for the privatization of TelMex underway, government officials began

negotiations with the Telephone Workers Union (the telefonistas), hoping to avoid the labor conflicts that had

surrounded the sale of AeroMexico and other state-owned enterprises. In doing so, the government was able to take

advantage of ties between the telefonista leader, Francisco Hernandez Juarez, and Mexican President Salinas, as well

as the particular character of this union and the conditions in the industry.

Hernandez Juarez became president of the telefonistas in 1976, following a successful effort to dislodge the

official leadership and establish an independent union. In the course of the next 12 years, the telefonistas called 8

strikes over wages and workplace issues. Towards the end of this period, confronted with the limits of working

outside the system, the telefonistas joined the Congreso del Trabajo (CT), Mexico’s umbrella union organization,

to which all major federations and many nonaffiliated unions belong.

Since Salinas came to power, Hernandez Juarez and the telefonistas have had generally cooperative

relationships with the government. From Hernandez Juarez’s perspective, seeking accommodation with Salinas

made sense because the union had little bargaining power. For the government, Hernandez Juarez represented anew

brand of labor leader who might prove instrumental in modernizing state-labor relations. At the same time, TelMex

appeared set for a period of substantial new investment following privatization. Cooperative relations with its skilled

workforce would be needed to upgrade the nation’s telecommunications system (see ch. 8, box 8-B).

In negotiations, the government was able to get the telefonistas to accept privatization and support efforts to

improve productivity and service in exchange for several commitments:

1. workers would not be laid off without union consultation and, at a minimum, severance pay of 5 months

plus 40 days per year of service for regular (planta) workers;

2. workers would be trained for new positions; and

3. workers would receive 5 percent of the stock of the privatized company.

Still unclear at TelMex is exactly what the rights and responsibilities of labor will be within a more flexible

private company. In 1989, before privatization, a contractual provision giving the union rights to information and

consultation on modernization (e.g., introduction of new technology, work reorganization) was ‘‘brutally

mutilated, ’ restoring unilateral management authority in most aspects of restructuring.l Since then, a new clause

has given more limited rights back to the union.

lmque de h G- To1edo, “Productive Restructuring of the ContractUral Model and of Unionism in Mexico,” Sindicalismo A4em”cano

de Los 90’s, Jose Woldenberg and Carlos Garcia, MIS. (Mexico City: Instituto de Estudios Para La Tran.ricion Democratic and Friednch Ebert

Stiftung, 1990) [translated by Deanna Hammond, Congressional Research Service].

not the time” for reform. NAFTA, the opening to in efforts to improve productivity, equitable sharing

foreign investment, and the transformation of the

ejido system give the government enough to worry

about. No doubt the Salinas administration also fears

that a reform proposal could be read in the United

States as a weakening of labor standards or an

implicit acknowledgement of the current extent of

control over labor relations by the state and official

unions.

of the benefits, and the acceptance of unions as

“legitimate coparticipants in the development of

companies. It stresses the role of the sectors—

labor, business, and peasant organizations-in implementing ‘‘a broad social movement for production’ and a ‘‘new work culture. ” On paper, the

accord looks like the outline of a move towards

negotiated flexibility. What remains unclear is

Instead, the government, labor, employers, and whether Mexico’s new set of principles will mean

peasant groups negotiated a National Accord on any more than its old set.

Raising Productivity and Quality.2l Signed May 25, Developments in Mexico over the past two

1992, the accord emphasizes the need to improve decades suggest two institutionally distinct systems

human resources and calls for worker participation spanning the range of possible outcomes. The first:

21 d ‘~cord on Productivity, Quality Concluded, ’ Daily Report: Lutin Amen”ca, FBIS-LAT42-I 19, Foreign Broadcast Information Sewice, June

19, 1992, translated from Excelsior, May 27, 1992.
84 ● U.S.-Mexico Trade

Box 4-C—Flexibility in the Mexican Auto Industry: Three Cases

Autocratic Shop Floor Relationsl

In the Mexican auto industry, ironically, a Japanese firm provides the clearest example of flexibility as a vehicle

for authoritarian management. Hokkaido--pseudonym for a factory complex northwest of Mexico City that

produces engines, transmissions, transaxles, and stampings--performs nearly as well as sister plants in Japan. The

facility employs an unusually high level of salaried, nonunion personne1--42 percent of the workforce of 2,700

(including several hundred Japanese nationals). A compliant CTM union with no shopfloor presence represents the

rest of the workers, towards whom Hokkaido pursues what might be called a maquila strategy: workers perform

narrowly defined jobs at an intense pace for wages one-third lower than at other Mexican auto plants.

Turnover in 1990 was 100 percent. Asked why workers quit, one manager answered, “The pay is poor, the

work is heavy, and the company always asks for more. ’ One Mexican executive said, “basically what we have in

this plant is a modern form of slavery; it’s a kind of peonage the way people are treated.”

Negotiated Flexibility

Sealed Power Mexicana (SPM), a joint venture between Sealed Power-U.S. and Condumex, a diversified

Mexican auto parts firm, provides a sharp contrast to Hokkaido. SPM’s Naucalpan plant, near Mexico City, makes

piston rings-a product demanding high precision and consistent quality. For many years, supervisors had exercised

arbitrary authority and demanded favors from workers in return for better treatment. The company frequently

violated its CTM contract-sometimes failing, for instance, to pay for overtime and vacation periods-and was

unresponsive when workers complained.

The local union cut its ties to the CTM in a 1979 election, voting 274 to 1 to become independent and to join

the iron and steel industry section of FAT (Frente Autentico del Trabajo, the Authentic Front of Labor), setting the

stage for several years of adversarial relations with SPM management. In the mid-1980s, under pressure from Ford,

a major customer, the company tried to unilaterally impose a total quality control (TQC) program. Ten months

before a deadline set by Ford for achieving top quality (Ql) status, SPM managers came to the union to ask for help.

The union agreed to support TQC provided product quality targets were accompanied by quality of life for workers

both on the job and outside the plant.

Reorganization at SPM included a shift to participative management, with workers taking more responsibility

while supervisors acted as teachers and facilitators. The company achieved Ford’s Q1 status and, in 1990, General

Motors’ “Level 3“ classification qualifying SPM to export to the United States. For their cooperation, workers have

achieved what a union leader in early 1992 termed “the best contract in Mexico.”

Lean Production: Cooperation Without Negotiation?

Many managers, particularly in companies facing new competitive pressures, would prefer workers to support

company goals, as at SPM, while management retains unilateral authority, as at Hokkaido. A number of

export-oriented engine and assembly plants operated by U.S. automakers in northern Mexico began with the goal

of emulating Japanese practices, transcending both Taylorism and the adversarialism of Big Three-UAW relations

in the United States. Unlike Hokkaido, these plants have attempted to develop and diffuse skills on a scale

unprecedented in Mexico--the classic example being Ford’s Hermosillo facility, where managers have

experimented with rotating production workers between the assembly line and skilled, craft jobs that would beheld

by 4-year apprentices in the United States.3 At least initially, their unions have been compliant.

~s account is based on “Total Quality, Case 3: Sealed Power Mexican&” Mexico City, Mexican Institute for Tbtal Quality Control,

nd; an OTA interview with Benedicto Martinez, union leader at Sealed Power Mexicarw Jan. 31, 1992; and Maria de 10S hgeles Pozas,

“Modernization of Labor Relations in Companies of Monterey,” University of California San Diego, Center for U.S.-Mexican Studies,

forthcoming [translated by Deanna Hammo@ Congressional Research Service].

3$$~ Auto ~d EICC@OniCS Sectors in U.S.-Mexico Trade and hIVestIMnt,” Op. cit., foo~ote 1.

I

I

an enterprise union/nonunion model, in which the European lines. The two possibilities differ along

role of labor atrophies beyond the workplace level. four dimensions: type of union; workplace relations:

The second possibility is social corporatism on wage setting; and labor’s role at sectoral and
Chapter &Two Traditions, One Continent ● 85

Management control and worker cooperation may prove to be an unstable combination in Mexico, with auto

plants-and Mexico as a whole--ultimately swinging toward negotiated flexibility or autocratic management.

Workers achieving U.S. productivity and quality levels have argued that they should be paid more like U.S. workers.

Conflicts over wages have contributed to high turnover and growing ambivalence about cooperation with

performance improvement programs.4 Another context where management has sought both cooperation and greater

managerial authority is Ford’s Cuatitlan factory, near Mexico City.s With the consent of the CTM, the company

reorganized the plant along the lines of its flexible northern factories. As Cuatitlan reached full production, workers

resisted what they saw as tighter discipline on the shop floor and an increase in workload The leader of a group

of 1,000 dissident workers, Raul Escobar, called the change one that “puts the union to the side and establishes a

unilateral relationship where, in effect, the company imposes everything. “6 When workers sought to switch their

union registration and gain the right to elect the leader of the national Ford union, conflict with the CTM followed,

leading to the death of one of the dissidents in early 1990. A year and a half later, in a highly controversial election,

Cuatitlan workers voted to reaffiliate with the CTM by 1,325 to 1,112.

No matter what version of the episode one accepts, the events at Cuatitlan point to three possible opponents

of a transition to negotiated flexibility:

1. the leaders of official unions, many of whom would lose their place and power

2. government officials, either because they believe autonomous unions would hurt the economy or because

losing control over unions would jeopardize the PRI politically; and

3. employers reluctant to cede managerial prerogatives.

The recent discharge of 14,200 workers at Volkswagen’s huge Mexican complex and the annulling of the contract

between VW and the independent union there raise further questions about the prospects for negotiated flexibility.7

AB~a~ Pacfo Wage Controls make employers less willing or able to share the benefits of productivity with workers, incr~ing mover

of workers with scarce skills, and underminingg worker commitment some analysts see the Pacto as an increasing obstacle to the diffusion of

cooperative workplace relations in Mexico-particularly in Monterrey. Pozas, ‘Mode “rmzation of Labor Relations in Companies of Monterey,’

op cit., footnote 2; and Lourdes Melgar, “Emerging Alternative Forms of Economic Development” paper presented to the Annual meeting of

the Latin American Studies Association Washington.j DC, Apr. 4-6, 1991.

5~.s ~wut is ~sed on POLW, ibid,, p. 18; an O’E4 interview with a former elected representative at the ph@ Jan. 31, 1992; ~d Daniel

LaBoIz, The Mask of Democracy: Labor Suppression in Mexico Today (Bostoq MA: South End Press, 1992).

6Pozas, ibid., p. 15.

7~CMefico: Mend@ the people’s C~,” The Economist, August 22, 1992, p. 31. According to this article, “managemen~ having talked

to the Labor Ministiy, said it would rehire most, but not all, of the sacked workers, on tbe company’s terms. ”

national levels. The two outcomes carry differing as a stepping stone from the rigid wage system of the

implications for U.S. workers who might find 1970s to decentralized “market-determined” wage

themselves competing for jobs with Mexico.

In the enterprise union/nonunion alternative, the

number of nonunion firms and employer-dominated

unions would grow under the influence of conservative government labor policies and foreign investment. Large firms would emulate lean production

practices pioneered in Japan, although worker commitment and training might be limited to a minority

of workers (as at Hokkaido, box 4-C). Smaller firms

would pursue low-wage strategies with autocratic

shopfloor relations. Wages would be set at the

enterprise, not the industrial or national level. In

retrospect, wage regulation during the crisis-with

falling minimum wages, together with greater interindustry wage differentials-would come to be seen

setting. A diminished role for labor nationally would

mean less stress on equity in education and training,

social security, labor market, and regional development policies.

In the social corporatist alternative, government

would encourage unions that were more responsive

to their members. The negotiated flexibility seen

emerging at TelMex, Sealed Power Mexicana, and

some companies in Monterrey would spread. Companies and workers would benefit from increasing

productivity and rising wages. Unions would regain

influence over sectoral, regional, and national wage

setting. As well as minimum wages, modified forms

of sectoral contracto leyes might emerge. At the

national level, democratic social corporatism would
86 ● U.S.-Mexico Trade

mean greater distributional equity in labor and social

policies.

Despite the current emphasis on the market as

Mexico deregulates, and the defensiveness of unions, social corporatism remains a possibility because labor is so deeply embedded in Mexican

society. Even among employers, the U.S. notion that

unions are a‘ ‘third party’ is uncommon. Moreover,

Mexico has a much broader set of concertation

structures—from mixed commissions in the

workplace, to contracto leyes, to tri-partite minimum wage and profit sharing commissions and the

new productivity accord itself-than the United

States. In the Congreso del Trabajo, Mexico also has

an umbrella labor organization that might, if democratized, provide a unified voice for labor at national

political levels, as in European social democracies.

But it is not clear whether business and especially

the political elite will grant labor the independence

necessary for such an outcome; union democracy

and social corporatism could mark the end of the

one-party state.

The U.S.-Mexico economic relationship would be

easier to manage if Mexico develops in a social

corporatist direction. Rising wages and greater

equity, along with better education and training

leading to greater opportunities at home, would help

slow emigration and increase demand for U.S.

exports. (In Spain, infrastructure and human resource investments paid for in part by European

Community structural funds created opportunities

and expectations sufficient to reduce emigration

nearly to zero, even while the German-Spanish wage

ratio remained around three to one.) By contrast, an

enterprise union model with stagnant wages would

cause even more Mexicans to cross the border and

slow market growth in Mexico. The enterprise union

outcome also implies low labor standards for a

greater portion of the Mexican economy. Under

social corporatism, in contrast, Mexican workers

would seek industrywide or national policies to keep

small firms and the informal sector from undercutting their standards-and by extension, U.S. standards in labor-intensive industries. The strength of

unions in a democratic social corporatist Mexico

would also facilitate negotiation of continental rules

discouraging low-wage strategies.

LABOR RELATIONS IN THE

UNITED STATES

The New Deal and After: Labor Relations in

the Era of Mass Production

Like Mexico, the United States is in transition

from a mass production economy driven by domestic demand to a new structure adapted to competition

in a regionally and globally integrated economy.

This entails changes in the industrial relations

system that developed from legislative initiatives

and political conflicts in the New Deal and World

War II eras. That system included the following

features: 22

●

●

●

•

●

●

Employer hostility to unions. Many U.S. employers are more strongly opposed to unions

than their counterparts in Western Europe,

Mexico, and even Canada.

Adversarial labor-management relations. Rhetorically, and often in practice, relations between

employers and unions have been governed by

an implicit assumption that one side’s gain is

the other’s loss.

Exclusion of workers from efforts to improve

performance. Compared to Japanese, European, and even Mexican employers, U.S. firms

tend to be more deeply committed to the

principles of scientific management and to

systematic efforts to deskill jobs.

Decentralized bargaining. Collective bargaining generally takes place at the firm or plant

level, rather than on a sectoral or geographic

basis.

Exclusive representation and a rigid union]

nonunion distinction. Laws in Mexico and in

many industrialized countries grant union representation on the request of small numbers of

workers and/or provide legal support for sectorwide collective bargaining. Such an approach

limits wage competition between union and

nonunion firms, and thus employer opposition

to unions. By contrast, U.S. policies calling for

exclusive representation by majority vote, along

with decentralized bargaining,heighten competition between union and non-union fins.

A relatively weak and decentralized union

movement. Labor in the United States is farther

22 This .mnmary draws heavily from Ray Marshall, “Unions and Competitiveness,” Empowering Workers in the Global Economy: Conference

Proceedings (Toronto, Ontario: United Steel Workers, October 1991).
Chapter 4--Two Traditions, One Continent ● 87

●

The

removed from centers of political power than in

most Western European countries and Mexico.

Together with a recent tendency to label unions

as just another special interest group, this limits

potentials for political trade-off at the national

level (e.g., wage restraint in exchange for more

active labor market policies).

Limited government involvement in labormanagement issues. The U.S. Government

rarely seeks centralized bipartite or tripartite

consultation on policies affecting the labor

market or the economy as a whole.

Legislative Framework

With the Great Depression of the 1930s creating

demands for action to alleviate economic distress

and counter the power of large corporations, Congress passed the three legislative pillars of postwar

Us.

1.

2.

3.

labor regulation:

The National Labor Relations Act of 1935

(NLRA, also known as the Wagner Act)

provided Federal protection for workers’

rights to organize and bargain collectively,

barred firing of workers for union activity, and

outlawed company unions.

The Fair Labor Standards Act of 1938 (FLSA)

established national standards for hours of

work, minimum wages, and child labor.

The American Social Security Act of 1935

(ASSA) created a national contributory oldage pension system, the foundation of the

current social security system. This legislation

also established state-provided unemployment

insurance (UI) and Aid to Dependent Children

(ADC, later Aid for Families with Dependent

Children, AFDC).

New Deal labor and social security legislation

reflected a balance between the preferences of

northern liberals and the emergent labor movement

on one side, and southern Democrats and low-wage

employers on the other. In the case of the minimum

wage and UI, employers in the industrial north

joined with labor to win a uniform national standard

that protected both groups against low-wage, southern competition.23

Conflict between advocates of national standards

and ‘‘states rights” recurred periodically, shaping

the 1946 revision of the NLRA, when Republicans

and southern Democrats passed the Taft-Hartley Act

over President Truman’s veto. Taft-Hartley provided a legal basis for intraindustry wage differentials that are large compared to other countries,

making it easier for employers to pursue low-wage

strategies in small, rural, and southern plants. With

limited exceptions for the construction industry, the

law barred “secondary pressure” such as boycotts

or picketing by employees of one establishment

aimed at others, as well as collective agreements

restricting sourcing from nonunion firms. These

prohibitions on secondary pressure contrast with

Mexican contracto ley provisions and European

legislation facilitating sectorwide collective bargaining or the extension of the terms of major

collective agreements to other employers (nonunion

as well as union) in the same sector. Taft-Hartley

also allowed States to prohibit the union shop

(collective agreements requiring all workers in an

establishment to join the union) and removed

first-line supervisors (e.g., foremen) from bargaining units, ensuring, at least formally, that these

pivotal “men in the middle” would remain on the

side of management.

Postwar Shopfloor Relations and Wage

Bargaining

Most large U.S. manufacturing firms eventually

made pragmatic decisions to recognize unions,

shifting their attention to shaping labor relations in

ways that would preserve their freedom of action.

They had two major priorities: ensuring that unions

did not infringe on management’s prerogative to run

the business; and avoiding the work stoppages that

were so expensive in interconnected, mass production industries. To achieve these goals, U.S. manufacturers, led by General Motors (GM), made two

primary concessions to unions. Large employers

granted annual increases in real wages roughly

paralleling productivity increases, while suppleZJ In some southern industries, the new minimum wage was higher than the previous wages of 70 percent of the workers. Gavin Wright, Old Souzh,

New Soufh (New York, NY: Basic Bock, 1987). When it came to social security provisions, southern opponents of national standards managed to retain

considerable discretion for States over benefit levels, eligibility, and administration. They also supported health care providers in pressuring President

Roosevelt to withdraw health insurance provisions from the 1935 social security act.
88 ● U.S.-Mexico Trade

menting these with periodic improvements in nonwage benefits. Employers also accepted contracts

specifying detailed job classifications and senioritybased work rules that limited scope for arbitrary

supervision.

Employers accepted this system because it

meshed with business strategies of the mass production

●

●

era:

Contractual increases in real wages complemented mass production by sustaining consumer demand. Despite the absence of Europeanstyle centralized bargainin g, real wage increases diffused through ‘‘pattern bargaining,’

in which unions in individual plants or companies sought to match the gains achieved at core

firms like GM. Periodic increases in the minimum wage helped low-wage workers maintain

their incomes relative to those in unionized

manufacturing sectors.

So long as expanding markets limited need to

lay off workers or move them among jobs,

contractual work rules tied to narrow job

classifications did not appear to impair efficiency. Enforcement of work rules off the shop

floor via a multistep grievance procedure and

third-party arbitration-rather than via work

stoppages—minimized disruptions of production.

While they won restrictions on arbitrary supervisory actions, unions gained no role in management.

Rather, the United States adopted the doctrine of

‘‘retained management rights’ ‘—that management

had full prerogatives over matters not explicitly

covered in the contract. The axiom ‘‘management

acts and the union grieves” captured the essence of

postwar U.S. labor relations. With unions in a

reactive role and production workers confined to a

narrow range of deskilled tasks, the adversarial

system left labor out of efforts to improve productivity. Government, moreover, had a more limited role

in collective bargaining, dispute resolution, and

wage regulation than in many European countries or

Mexico. 24

Table 4-l—Union Coverage in t he United States

Union members as

percentage of

employed workers

1983 1991

Industry group

Agriculture. . . . . . . . . . . . . . . . . . . . . .

Mining. . . . . . . . . . . . . . . . . . . . . . . . . .

Construction. . . . . . . . . . . . . . . . . . . .

Manufacturing. . . . . . . . . . . . . . . . . . .

Durable goods. . . . . . . . . . . . . . . . .

Nondurable goods. . . . . . . . . . . . .

Transportation and public utilities. . .

Wholesale and retail trade. . . . . . . . .

Finance, insurance, and real estate. .

Services. . . . . . . . . . . . . . . . . . . . . . . .

All private nonagricultural wage

and salary workers. . . . . . . . . . . . .

Occupational group

Managerial and administrative. . . . . . . . .

Professional. . . . . . . . . . . . . . . . . . . . . . . .

Technical and support. . . . . . . . . . . . . . .

Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Administrative support, including clerical.

Service occupations. . . . . . . . . . . . . . . . .

Precision production, craft, and repair. . .

Operators, fabricators, and laborers. . . .

Machine operators, assemblers,

and inspectors. . . . . . . . . . . . . . . . .

Transportation, materials moving. . . .

Handlers, equipment cleaners, helpers

and laborers. . . . . . . . . . . . . . . . . . .

Agriculture, forestry and fishing. . . . . . . .

3.4%

20.7

27.5

27.8

29.2

25.9

42.4

8.7

2.9

7.7

16.8Y0

8.10/0

24.0

13.3

6.7

15.0

15.3

32.9

35.5

36.9

38.5

29.5

5.5

2.1%

15.0

21.1

20.3

21.9

18.0

31.2

6.7

2.4

5.7

11.970

6.40/.

21.7

11.7

5.2

13.5

13.9

25.9

26.3

26.8

28.4

23.6

5.0

SOURCE: Department of Labor, Bureau of Labor Statistics, March 1992.

The Decline of the Post-War Structure

Since the 1960s, the institutional framework of

U.S. labor relations has frayed badly. Beginning

with difficulty in organizing workers in the expanding service sector and in the South, union coverage

has fallen to only 12 percent of the private nonagricultural labor force (table 4-l). Facing growing

international competition, U.S. firms took advantage

of widening gaps between union and nonunion

wages to locate new, nonunion plants in low-wage,

rural areas. Given the decline of union coverage to

pre-Wagner Act levels-and the possibility that this

U Although some presidents rmortti to jawboning to end strikes or curb wage increases, routine involvement by the executive -ch entailed little

more than appointments to the National Labor Relations Board (NLRB) and the judicimy. One observer argues:

The fact that the role of government in this country remains largely hidden. . . means that the rules dominate the spirit-there is no forum

for building of public agreement or shared vision. Indeed, the NLRB avoids public involvement or debate in its proceedings. Unlike most

regulatory agencies, it holds no hearings . . . the NLRB is resolutely unreflective, and the framework as a whole continues to develop by

patchwork additions.

Charles Heekscher, The New Unionism: Employee Involvement in the Changing Corporation (New York NY: Basic Books, 1988), p. 52.
Chapter 4--Two Traditions, One Continent ● 89

Box 4-D—Labor Rights and Union Decline: A U.S. Representation Gap?

Does declining union coverage reflect worker preferences, employer opposition, or both? Since the mid-1950s,

U.S. employers have campaigned more aggressively prior to elections, taking advantage of the scope permitted them

under the NLRA. By the 1970s, advising corporations on how to remain “union-free” had become a thriving

cottage industry.l Paul Weiler has argued that employer intimidation has played a substantial role in generating what

he calls the “U.S. representation gap. ”2

A 1988 Gallup poll found that 70 percent of workers believed that “employers sometimes harass, intimidate,

or fire employees who openly speak up for a union. Forty percent believed their own employer would use such

tactics on them. Employer campaigns against unions rely on a combination of legal delays, extensive use of

management free speech rights to discourage union support, and-whether deliberately or not—violations of

Wagner Act protections (“unfair labor practices”). One common delaying tactic is to dispute the bargaining unit

defined by a union. “Free speech” rights give employers many avenues for persuading workers that union

formation would not serve their interests; unions, in contrast, have very limited rights of access to workers.3 Weiler

has estimated the fraction of union supporters fired illegally during certification campaigns at 1 in 20.4 Penalties

are light if the courts find employers have violated the law: workers fired for union activity are entitled only to back

pay minus earnings in the interim. Back pay awards average around $2,000; if the company seeks delays,

reinstatement can take years.

Other analysts have challenged Weiler’s emphasis on management opposition in explaining union decline,

pointing out that charges of unfair labor practices are filed against employers in only about 30 percent of elections

that unions lose.5 They argue that union decline reflects worker preferences: once unions became large bureaucratic

organizations, their appeal as a rank-and-file movement for social justice diminished, while male-dominated

industrial unions did not adapt well to increases in working women and an expanding service sector.

IMCH B. fiee~ and James L. Medoff, What Do Unions Do? (New Yorlq NY: Basic BOOkS, 1984).

2S=, ~st ~endy, wti C. Weila, Go~er~n8 the Wor@lace: The Fu~re Of ~bor ad Employment L.UW (Cambridge, MA: Hiuvti

University Press, 1990).

3U~om my enter employer prop~ d- c~lcation c~p~gns o~y Whm th~ have “no otk reasonable’ means of

communication-e.g., to contact isolated groups of loggers working and living on company land. In January 1992, the Supreme Court ruled that

the opportunity to run local radio ads or hold up signs from an adjacent highway constituted “reasonable” means of communication with workers

at a retail store in a shopping center. Thus, the union could not campaign from the parking areas held in common by employers in the cxmtex.

While union supporters among the workforce have access to their fellow workers during break time and at the beginning and end of a shiftj open

campaigning exposes them to possible recrimhations.

4Weiler, Governing the Workplace, op. cit., foomote 2, pp. 238-239.

5Ro&fi J. ~onde ~Bed D. Me~r, ‘{H~d Times for Unions: Another ~k at thc Si@lcance of ~p]oycT Illegalities,”

University of Chicago LuwReview, vol. 58,1991, p. 953. Lalonde and Melzer also argue that Weiler oveMates the prevalence of illegal discharge

for union activity. A response by Weiler follows their article.

may reflect employer intimidation-some observers percent from 1981 to 1987 as the industry restruchave suggested that the NAFTA debate concerning

labor rights is one-sided, and that scrutiny of Mexico

should be complemented by a hard look at the rights

of U.S. labor to associate, organize, and bargain

collectively (box 4-D).

As union membership fell, other pieces of the

postwar labor market structure eroded. Industrywide

pattern bargaining gave way to wages set in local

and regional labor markets, with growing variations

within sectors. The process took three decades in

some cases (auto parts), only a few years in others.

Real wages in meatpacking dropped by nearly 30

tured around nonunion plants (ch. 10, box 10-C).

Union decline also contributed to erosion of the

social policies supported by labor. Between 1968

and the mid-1980s, the U.S. minimum wage declined by one-third in real terms. UI payments and

spending on labor market adjustment, never high by

international standards, declined to levels well

below those in most other industrial nations (table

4-2).

On the shop floor, as union power declined and

international competition rose, companies restructured in ways paralleling recent changes in Mexico.

Large, nonunion firms pioneered the “managerial-
90 ● U.S.-Mexico Trade

Table 4-2-Government Spending on Labor Market Programs

Government spending as a fraction of gross domestic product, 1990-91

Unemployment Employment Youth

insurance services programs Training Totala

United States. . . . . . . . . . . 0.60 % 0.08 % 0.03 % — 0.857.

Canadab

. . . . . . . . . . . . . . . 1.57 0.21 0.02 0.09 2.08

West Germanyc

. . . . . . . . . 1.14 0.22 0.04 0.38 2.18

Britain. . . . . . . . . . . . . . . . . 0.80 0.14 0.18 0.22 1.49

Sweden. . . . . . . . . . . . . . . . 0.59 0.21 0.05 0.47 2.25

Spaind. . . . . . . . . . . . . . . . . 2.33 0.12 0.08 0.10 3.21

Japan . . . . . . . . . . . . . . . . . 0.32 0.02 — 0.03 0.45

akdudesot hercategories not listed individually,

%989-90.

C1990.

‘1989.

SOURCE: OECD Employment Out/oOk(Paris: Organization for Economic Cooperation and Development, 1991), pp.

239-249.

ist" model, seeking greater flexibility .25 By broadening job responsibilities, creating work groups, and

investing in training, such firms seek employee

contributions to performance improvement. Managerialist firms also place limits on the arbitrary

exercise of administrative power to avoid undermining worker commitment to the firm’s goals. Some

have created internal job ladders and made explicit

or implicit promises of job security. As in Mexico,

questions remain about the durability of cooperation

in the absence of independent worker representation

and about the proportion of employees to which

management-led cooperation would apply.

In other sectors of the economy, growing numbers

of immigrant workers and the vulnerability of

less-educated native-born U.S. workers have reinforced low-wage strategies. Examples include not

only meatpacking, but many service sector jobs,

which, if less routine and less dangerous, pay wages

near the legal minimum and offer little prospect of

upward mobility.

Among unionized fins, competition from imports and nonunion rivals and emulation of Japanese

production methods have spurred departures from

traditional models. As in Mexico, substitution of

flexible work arrangements for traditional union

protections has sometimes followed negotiation,

sometimes been unilaterally imposed in the context

of plant closing threats.

As unions’ capacity to protect workers on the job

declined, the U.S. Government expanded its regulation of the labor market, beginning with passage of

civil rights and antidiscrimination laws in the

1960s. 26 The Occupational Safety and Health Act

(OSHA) followed in 1970 and the Employment

Retirement Income Security Act (ERISA), intended

to safeguard pensions, in 1974. More recently, the

courts have expanded employee rights by reinterpreting existing legislation (e.g., reading freedom

from sexual harassment into the law). Through

wrongful dismissal litigation, they have also scrutinized personnel practices such as mandatory random

drug testing. In theory, expanding individual employee rights has the advantage over unionism of

protecting all workers. In practice, close and detailed

regulation by government may offer the worst of

both worlds: for employers, it creates uncertainty

and expense;

resources and

provides little

for most workers, who lack the

knowledge to enforce their rights, it

meaningful protection.

25 Ibid. See ~so ~oms Koc~ H~ Katz, ~d Robert McKemie, The Tran#ormation of American Industrial Relations New York+ ~:Basic

Books, 1986), ch. 3.

26 paul C. Weiler, Governing the Workplace: The Future of Labor and Employment I.xw (Cambridge, w: H~md Univmslty fiess, 1990), pp.

14-17.
Chapter 4--Two Traditions, One Continent ● 91

Figure 4-1—income by Level of Education and Occupation

Figure 4-1(a)--Annual Earnings by Level of

Educationa

~ 40 ,

z

~ 35 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

r’. a 1973 = 1979 m 1987

~ 30 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

I

o

I UI 25 --- -o—

. . . . . . . . . . . . . . . . . . . .

. .

. .

.

—

Figure 4-1(b)—Annual Earnings by

Occupationa

~ 40 , I k=

* 35 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

r. m 1973 = 1979 ~ 1987 a): 30 -. .. .--. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

z

~ 25 I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . .

. .

. .

. .

—

< High School H S graduate College graduate Handlers, Operators

service workers

awhite males with full-time, year-round jobs.

Managers,

professionals

SOURCE: McKinley L. Blackburn, David E. Bloom and Richard B. Freeman, ‘The Declining Position of Less Skilled American Men,” A Fufure of Lousy Jobs ?

7he Changing Structure of U.S. Wages, Gary Burtless, ed. (Washington, DC: Brookings, 1990).

Workers in Trouble: Consequences of Labor

Market Restructuring

Wages

By nearly any measure, living standards for most

Americans have fallen over the past several decades.27 Wage declines have been greatest for the

over half of the workforce without a college

education. Real hourly wages for production and

nonsupervisory workers--currently 63 percent of

the employed civilian workforce—peaked in 1972,

and have since dropped back to the levels the of

mid- 1960s. Wages for men without a high school

diploma declined by 23 percent between 1979 and

1991, for women by 11 percent. Wages fell for male

college graduates, too, by 2.3 percent.

At the same time, income inequality has grown:

managers and professionals have done relatively

better than blue-collar workers; so have those with

higher levels of education (figure 4-l). Wage gaps

have also opened within the ranks of the blue-collar

workforce. The range in earnings among people with

similar levels of education (and age) in similar

occupations and similar industries grew during the

1980s. With the breakdown of pattern bargaining in

industries like auto parts, workers in independent

firms earn much less than those in captive suppliers

operated by the automakers themselves (ch. 7).

Unemployment and Underemployment

For four decades, unemployment and underemployment have been slowly increasing. A little over

3 percent in 1951, unemployment stood at close to

8 percent in mid-1992—nearly 10 million people in

a labor force of 128 million. The United States also

has a growing number of underemployed—

including those who take part-time jobs because that

is all they can get and casual workers in the informal

economies of large cities. Most ‘contingent” workers--

without formal or long-term ties to an employer—

live without health insurance and retirement plans,

In 1990, the total of the unemployed (6.8 million);

involuntary part-time workers (5.4 million); and

those earning wages insufficient to support a family

of four at the poverty level (14.4 million) came to

26.6 million, some 21 percent of the labor force.

The total has risen since then, and would be higher

still if workers who had involuntarily accepted

temporary jobs were included. (The government

‘y Competing Economics: America, Europe, and the Pacific Rim (Washington, DC: Office of Technology Assessment, October 1991), p. 4; W. Norton

Grubb and Robert H. Wdson, “Trends in Wage and Salary Inequality, 1967 -88,” Monthl> Lubor Re\’iew, June 1992, p. 35.

331-d19 o - 92 - ~ : Q~ 4
92 ● U.S.-Mexico Trade

Table 4-3-Worker Displacementa

Displacements Duration of unemployment Change in earnningsc

Number Annual Less than Greater than Reemployed Greater than up to

per year rate 6 months 6 months at time of surveyb

50°A decline 50°A decline Increase

Industry (thousands) (percent) (percentage of displaced workers) (percentage of workers)

All industries. . . . . . . . . . . . .

All manufacturing. . . . . . . . .

2,026

834

NA

3.7 %

75%

70

2 5 %

30

78%

77

14%

15

46%

48

41%

37

Agriculture. . . . . . . . . . . . . . .

Meat products

and canned fruit. . . . . . . .

Apparel, excluding knits. . . .

Computers and peripherals.

Communication equipment.

Electrical machinery. . . . . . .

Autos and parts. . . . . . . . . .

24 0.9 80 20 71 11 47 42

24

49

16

17

51

51

4.1

4.9

2.5

3.1

3.7

4.8

72

68

83

61

72

60

76

73

82

69

72

75

28

32

17

39

28

40

11

7

10

14

12

25

53

61

54

45

40

51

36

33

35

40

48

23

NA = Not available.

%ver the period 1979-1989.

%Vithin 05 years.

cAmong workers who found new jobs.

SOURCE: Office of Technology Assessment, 1992, based on data from Michael Podgursky, “Changes in the Industrial Structure of Job Displacements:

Evidence from the Displaced Worker Surveys,” final report to the U.S. Department of Labor, Bureau of International Labor Affairs, August 1991.

collects information neither on such workers nor on

those in the informal economy.)

Displacement

Between 1985 and 1989, 9.2 million workers lost

their jobs due to plant closings or layoffs.28 Workers

in industrial sectors threatened by a NAFTA have

already been hit hard (table 4-3). The displacement

rate (total displacements divided by average industry employment) was 4.1 percent in durable goods

manufacturing during the 1979-1989 period, 4.8

percent in autos and parts, and 4.9 percent in the

apparel industry.

Falling wages, inequality, and a decline in good

entry-level jobs have aggravated the problems faced

by displaced U.S. workers. Only half of those who

lose their jobs due to plant closings or permanent

layoff get unemployment insurance; of those that do,

about 40 percent exhaust their UI benefits before

finding a new job.29 Large-scale layoffs create

waves of disruption in surrounding communities.

Local businesses and supplier firms cut back,

eliminating job opportunities that might otherwise

exist and weakening the local economy so that

redevelopment becomes more difficult.30 Unemployment takes a heavy toll on individuals and

families, including physical and mental stress,

which can lead to spouse and child abuse, substance

abuse, and illness. As many as one-quarter of

displaced workers lose their health insurance along

with their job. Local governments may be trying to

increase social services in response to individual and

family stress at a time when their tax base is

shrinking.

Although many displaced workers quickly find

new jobs, others face lengthy periods of unemployment. As shown in table 4-3, one-quarter of all

workers (including managers and professionals) laid

off between 1979 and 1989 were unemployed for

more than 6 months. Displaced workers with substantial prior job experience took two to four times

longer to find new employment than others.31 Nearly

15 percent of displaced workers surveyed in 1988

n Michel p~W@, ‘‘changes in the Industrial Structure of Job Displacements: Evidence from the Displaced Worker Survey s,’ f~ report to

the U.S. Department of Labor, Bureau of International Labor Affain, August 1991. Workers also quit their jobs voluntarily. In the third quarter of 1990,

for example, the total of 6.8 million unemployed included 3.3 miIlion who had been laid off, plus nearly 1 million more who had quit to search for a

better job despite the recession and a difficult labor market; the rest of the unemployed were people seeking to enter or reenter the job market. Joseph

R. Meisenheimerll, Earl F. Mellor, and Leo G. Rydz.ewski, “Job Market Slid in Early 1991, Then Struggled to Find Footing, ” iUonthly Lubor Review,

February 1992, p. 15.

29 p~w~, ibid., p. 42.

~Af..er the Cold War: L“ving with Lower Defense Spending (Washington DC: OffIce of ‘Ikchnology Assessmen4 February 1992), P. 153.

31 ~c~el Podgursky and Paul Swti, “Duration of Joblessness After Displacemen~” Industrial Relations, vol. 26, 1987, pp. 213-226.
Chapter 4--Two Traditions, One Continent ● 93

Box 4-E—Worker Aspirations, Labor Market Opportunities, and Social Stability

Social stability depends in part on job opportunities that correspond at least roughly to aspirations. Such a

match no longer exists in most U.S. cities, leading to high levels of unemployment among young, less-skilled male

workers, many of whom earn their living in the informal economy or turn to crime. The mismatch between

aspirations and employment opportunities could worsen in the future for two reasons: the number of high-wage jobs

for which less-educated workers can qualify will continue to dwindle, and, by comparison with their parents, fewer

immigrants and women may be willing to accept “secondary jobs”—low-wage, low-prestige jobs with little

prospect for advancement.

Traditionally, first-generation immigrants filled many of these secondary jobs, along with young people and

married women. For all three groups, the social connotations of secondary jobs matter relatively little. The identity

of new immigrants tends to remain linked to their status at home (and to dreams of return migration).l Unlike their

parents, the children of first-generation immigrations have few dreams of going home and no first-hand memories

of an even poorer life; they often reject secondary jobs that their parents found acceptable. As a result, labor force

participation rates in poor, immigrant Hispanic neighborhoods, which have typically been high (in contrast to

ghettos), will probably fall. One example comes from the Houston neighborhood of Magnolia Park where today

the children of Mexican immigrants, as well as new immigrants, are stuck in jobs as gardeners, janitors, and

babysitters. 2 Labor force participation rates have declined, drug use is beginning to rise, and the birth rate among

Hispanic teenagers in Houston is now three times that for whites and 15 percent higher than that of black teenagers.

There are two ways to reduce the social strains resulting from mismatch between worker aspirations and the

jobs being created in the U.S. economy. During the 1980s, the United States tried, with only limited success, to force

workers to accept secondary jobs by cutting unemployment benefits and social support for able-bodied workers.

The second is to turn toward the kinds of policies OTA analyzes in chapter 2, seeking to transform secondary

employment opportunities into better-paying, more stable jobs with meaningful prospects for on-the-job training

and advancement. Because the service sector is very large and still growing, any such approach would have to focus

on this part of the economy (see box 2-B in ch. 2).

l~c~el J. Piore, fiirds o~Passage (New York, NY: Cambridge University press, 1979).

2S= & WO-pm series, ‘‘Without a Ladder: the Mexican Immigrants. Parl One: Mexicans Come to Work but Find Dead Ends. Part Two:

Generational Cbasm hads to Cultural Thrmoil for Young Mexicans in U.S.,’ New York Times, Jan. 19, 1992, sec. 1, p. 16 and Jan. 29, 1992,

p. A-16.

had become so discouraged that they withdrew from Implications

the labor force.32

Sixty percent of all displaced workers who find

new jobs suffer losses in earnings compared with

their previous employment (again including managers and professionals). Manufacturing workers lose

more than others, on average earning 10 percent less

when re-employed. Workers displaced from highwage, semiskilled jobs in former union strongholds—

such as auto and steel—tend to lose the most. Over

a 10-year period, manufacturing workers laid off

during the mid- 1980s suffered income losses averaging $36,000 each, including lost wages during

Taken together, the trends outlined above point to

growth in low-wage labor markets offering little

prospect of job security or on-the-job training and

advancement. If these trends continue, they will

aggravate social ills already widespread in the

United States (box 4-E). More workers will become

discouraged and drop out of the labor market, while

others will be unable to support their families.

Welfare dependency, crime, and social unrest will

increase.

CONCLUDING REMARKS

periods of unemployment and lower wages and Over the last several years, rhetoric in both the

benefits once reemployed .33 United States and Mexico has pictured workers as

32 Diane E, Hem, “Worker Displacement Still Common in the Late 1980’ s,’ Monthly L.ubor Ret’iew, May 1991, p. 8. Herz, unlike Podgursky

(footnote 28), removes displaced work~rs with less than 3 years tenure from the displaced workers survey sample.

33 Podgursky, ‘‘Changes in the Industrial Structure of Job Displacements: Evidence from the Displaced Worker Surveys, ’ op. cit., footnote 28.
94 ● U.S.-Mexico Trade

valued resources whose cooperation is needed for

improving productivity. The reality for workers in

both countries has included falling real wages,

displacement, greater pressure to produce, and the

loss of formal and informal protections against

arbitrary management authority. From the company

perspective, declining wages and benefits, and the

loss of on-the-job protections, reflect necessary

adjustments to new competitive forces—in effect,

the end of earlier, more isolated industrial economies. Few firms see much contradiction between

asking workers to make concessions and calling on

them to participate in a team effort to compete.

Employers have felt that, once workers understand

the new realities of international competition, they

will accept the compromises necessary to protect

their jobs and future income. In the background, for

many managers, is a vague idea of Japanese enterprise unionism.

But Mexico and the United States are not Japan.

It is hard to envision Mexico’s traditions of social

solidarity transformed into some notion of ‘ ‘company as family,” and just as hard to see U.S.

individualism transformed in this way. Each country

has a history of broad-based unionism-usually

adversarial, periodically militant-that will endure

even if the institutional power of organized labor

continues to decline. Most important, economic

conditions in Mexico and especially the United

States are nothing like those in Japan in the early

1950s, when the model of enterprise unionism

emerged. Japan’s phenomenal growth rates brought

employment security, promotion opportunities, and

rapid wage increases for workers in large, core fins.

These rewards will not be available to cement a

management-led model of labor-management cooperation in the United States.

The danger in the United States and Mexico is that

employer efforts to have it both ways—unchallenged control as well as worker cooperation—will

end up reinforcing North American adversarialism.

Workers without the power to negotiate differences

in constructive ways will withdraw their effort and

cooperation in ways that may not be visible. A

NAFTA that contributed to the recognition of this

danger and initiated a concerted attempt to avoid it

could prove a turning point in North American

development.
Chapter 5

Mexico's Workers:

Bonanza for U.S. Companies?
Contents

Page

SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97

COMPETITION FOR JOBS: MEXICO AS A LOCATION FOR PRODUCTION . . . . 98

Why Companies Go Abroad . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . 98

Choice of Technologies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98

MEXICO’S HUMAN RESOURCES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100

Education and Training . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100

Mexico Compared with Developing Countries in Asia . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105

CONCLUDING REMARKS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108

APPENDIX 5A: Economic Models as Predictors of NAFTA Impacts . . . . . . . . . . . . . . . . 109

Boxes

Box Page

5-A. Globalization and Offshore Production . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99

5-B. Basic Education in Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101

5-C. Training and Industrial Adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104

Figures

Figure Page

5-1. Indicators of Technological Capacity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107

Tables

Table Page

5-1. Production in Mexico as Viewed by U.S.-Based Firms . . . . . . . . . . . . . . . . . . . . . . . . . . 98

5-2. International Production . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99

5-3. Average Educational Levels for Mexicans Aged 15 and Above . . . . . . . . . . . . . . . . . 101

5-4. Vocational-Technical Education in Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102

5-5. Engineering Graduates by Country, 1989 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105

5-6. Education in Mexico Compared With Asian Developing Countries . . . . . . . . . . . . . . 106
Chapter 5

Mexico’s Workers: Bonanza for U.S. Companies?

SUMMARY

This chapter compares Mexico’s workers with

their counterparts in the United States and Asia.

Mexican workers have generally poor levels of

education and training. But so do many millions of

U.S. workers, both older blue-collar workers and

young people with a high school education or less.

The proposed North American Free Trade Agreement (NAFTA) is controversial in part because of

fears that it would aggravate the impacts of ‘globalization’ on U.S. workers, especially those in traditional manufacturing jobs.

From Mexico’s perspective, the fundamental

intent of a NAFTA is to attract new foreign

investment. This could affect U.S. workers both

directly and indirectly. It might encourage U. S.-

based firms to:

1. transfer existing production from the United

States to Mexico, or

2. build new factories in Mexico that would

otherwise have been located at home.

At the same time, firms based in Japan, Europe, and

elsewhere might find it attractive to locate plants in

Mexico to serve the U.S. market, some of which

might otherwise have been built in the United States.

In doing so, some U.S. jobs and job opportunities

would inevitably be lost. While a NAFTA would

also stimulate job creation in U.S. firms that serve

Mexican markets through exports, the rate at which

exports grow will depend in part on the ability of

Mexican workers and unions to win wage increases

reflecting true productivity improvements (ch. 4).

Immigrants from Mexico, finally, compete with

U.S.-born workers for jobs. As discussed in the next

chapter, a NAFTA could increase immigration in the

short and medium terms before rising wages and

living standards in Mexico slowed the flow of

migrants northwards.

Mexico’s future development will depend heavily

on its capacity to absorb technology and management practices accompanying foreign investment,

and Mexicos human resources will be critical in this

process. After decades of import substitution industrialization (ISI), Mexican industry is backward and

Mexican workers are poorly prepared by U.S.

standards. A NAFTA would force Mexican firms to

become more efficient or go out of business. As

Mexican productivity improves, the labor market

will absorb fewer new entrants relative to output. At

the same time, increasing productivity will make

Mexican workers better able to compete with U.S.

workers. If wages increase to reflect productivity

improvement, Mexican workers will become better

customers for U.S. goods and services. But if an

excess supply of labor holds down wage increases

while productivity improves, more jobs will flow to

Mexico at the expense of U.S. workers.

So far, Mexico has made only limited progress in

building the foundations for continued development.

By Third World standards, Mexico has a reasonably

well-educated labor force, but compared with Asian

countries like South Korea, Mexico has not put a

high priority on human capital. Today, Mexico is

short of skilled workers, experienced managers, and

entrepreneurs. Most fundamentally, Mexico confronts the dilemma of all industrializing countries:

its advantages lie in cheap labor at a time when

cheap labor is becoming less important in many

types of manufacturing-which is no consolation

for U.S. workers who find themselves competing for

the same kinds of lower skilled jobs.

No one knows what the balance of the job creating

and job destroying effects of a NAFTA might be. As

explained in appendix 5A, at the end of this chapter,

there are too many uncertainties for quantitative

predictions. For example, the impacts in the United

States will depend in part on how work is organized.

Currently, many U.S. manufacturers rely on lowskilled workers in narrowly defined jobs, exactly the

kind of jobs most at risk. None of the many

economic models that have attempted to predict the

impacts of a NAFTA include the full range of

relevant factors, which go well beyond those mentioned above. All suffer from assumptions that

cannot be independently validated-notably, future

levels of investment and its impacts on Mexico’s

productivity growth. Thus, the models provide little

insight useful for policymakers seeking to understand the ways in which a NAFTA might be ‘good’

or ‘‘bad’ for the United States.

-97-
98 ● U.S.-Mexico Trade

COMPETITION FOR JOBS:

MEXICO AS A LOCATION FOR

PRODUCTION

U.S.-based firms produce in Mexico for two

major reasons—access to markets and access to

cheap labor. Table 5-1 summarizes industry views of

Mexican investments. The advantages and disadvantages listed in the table will shift, for instance, as

educational levels in Mexico improve, or environmental enforcement becomes more stringent (ch. 6).

The dynamic nature of these changes is one reason

future levels of investment cannot be predicted with

any confidence.

Why Companies Go Abroad

U.S.-owned firms locate plants abroad for two primary reasons: to serve foreign markets and to reduce

costs of delivered products (box 5-A). Companies

put up plants for processing tomatoes or freezing

broccoli near growing regions (ch. 10). Governments may require companies to manufacture locally in order to sell into their markets, as Mexico did

during the years of ISI. Or a company may feel it

necessary to manufacture inside a market to understand what customers want and need; as noted in

chapter 8, Hyundai is moving most of its personal

computer operations from Korea to the United

States—the world’s most demanding market for

such products.

For commodity-like products where little differentiation is possible, price competition has driven

many labor-intensive operations to developing countries. Offshore production has been common not just

for low-end television receivers (many of which are

now made in Mexico), but for high-technology

integrated circuit chips (for which assembly moved

to Southeast Asia in the 1960s and 1970s). Little

high-technology work has gone to Mexico because

the country’s infrastructure (water, electricity, transportation) and workforce skills and discipline are

poor compared to countries like Singapore, and

because products like chips can easily be shipped by

air. Now, with automation, some assembly has

moved back to the United States. For other products,

bulky or heavy in relation to their value (e.g., TV

sets), transportation costs are a major factor in

location of production (ch. 8).

Table 5-l—Production in Mexico as Viewed by

U.S.-Based Firms

Advantages Disadvantages

●

●

●

●

●

●

Low wage/benefit costs for

“unskilled” and “semiskilled”

workers.

Trainable workforce averaging

about 6 1/2 years of schooling, with higher educational

levels among younger workers in urban areas.

Unions pliable in many parts

of the country.

Proximity to United States

eases many logistics problems.

Lax enforcement of environmental and workplace

health and safety regulations,

at least until recently.

Growing domestic market.

●

●

●

●

●

●

High turnover and lack of

previous industrial experience

among production workers.

Can be difficult to hire grey -

collar technical workers,

administrators, and managers with training and experience.

In principle, Mexican labor

law gives unions considerable power.

Poor transportation, communications, utilities, and other

services.

Traditionally intrusive government contributes to uncertain business climate.

Lack of local suppliers.

SOURCE: Office of Technology Assessment, 1992.

Choice of Technologies

Technological change also affects jobs and job

opportunities, in both number and skill requirements. Productivity improvements-greater output

with fewer workers-can entail much more than

simply automation of the production process. Companies redesign products so they are easier to build.

They reorganize to improve efficiency, product

quality, and responsiveness to customer needs--on

the shop floor and through corporate wide reorganizations involving computer-aided manufacturing

and ‘‘lean production. ’

Make-or-buy decisions—whether a company

chooses to produce parts, components, and subassemblies itself or purchase them outside-depend

on a company’s technological capabilities and

strategic choices. Generally speaking, end-product

manufacturers prefer to reserve high value-added

production for themselves, while purchasing relatively standardized items. Nonetheless, in recent

years these familiar patterns have been in flux.

Automakers have been asking first-tier suppliers to

undertake more design and development work, and

to deliver parts of guaranteed high quality on a

just-in-time basis. Electronics firms develop products in which the essential functions are incorporated in chips purchased from suppliers, so that the

end-product manufacturer of, for example, a desktop

computer or a FAX machine is best viewed as a
Chapter 5--Mexico’s Workers ● 99

Box 5-A--Globalization and Offshore Production

Put simply, globalization entails:

. “Offshore’ ’production in low-wage Locations consistent with needs for quality, flexibility, and on-time

delivery. Mexico is the only large, low-wage economy close to the United States.

● Development of products for worldwide rather than national markets.

Factory location decisions require balancing production costs (including wages and benefits for skilled workers,

administrators, and managers, as well as production workers) against transportation, communications, and other

indirect expenses. To the extent that products must be tailored for local markets, costs of technical and marketing

activities must be considered as well. Energy costs differ from country to country, along with environmental

regulations and political stability. Multinational corporations (MNCs) seek to manage their exposure to currency

fluctuations. Local and national governments sometimes grant tax holidays to attract jobs.

Generally speaking, Mexico has suffered in its ability to attract manufacturing investment because of its poor

infrastructure and lack of local suppliers and service firms (e.g., tool and die shops). It may take twice as long to build

a factory and get it into production in Mexico as in the United States, even though the total costs are about the same.

Only in unusual cases does cheap labor in a country like Mexico make it attractive to shut down an efficient U.S.

plant and move. But when companies have excess capacity, perhaps because of declining market share, they close

less productive facilities. Inefficient capacity can normally be traced to some combination of:

● outmoded equipment and/or plant layout and design, driving up costs and/or driving down quality;

● outmoded managerial, organizational, and labor practices, so that productivity, up-time, quality, and/or

delivery suffer (even though hourly direct labor costs might be competitive);

● long distances to customers and/or suppliers, which raises transportation costs and precludes

just-in-time production.

Strategy as well as costs guide location decisions. Within the United States, companies have moved south and

west not only in search of lower wages, but also in search of ‘right-to-work’ laws and a labor force likely to remain

nonunion. Internationally, a company may believe that early entry into a country will enable it to preempt rivals,

preserving a large part of the market for itself. This was one motive for investments by U.S. auto firms in Mexico

during the 1920s and 1930s. Table 5-2—lnternational Production

Today, firms adding production capacity to

serve the North American market might see strategic Type Motives Mexican examples

advantages in placing efficient new capacity in Unaffiliated- Take advantage of low- Many maquiladoras

Mexico. OTA’s interviews indicate that this is a contract with cost foreign Iabor while engage in contract

particular concern for some companies in the U.S. local firm. preserving flexibility production for U.S.

auto parts industry. Many parts suppliers have old through short-term companies while U.S.-

tracts. based agribusiness plants and find themselves with excess capacity firms contract with

because their traditional customers--the Big Three Mexican farmers.

U.S. auto firms--have lost sales to Japanese automakers who buy primarily from suppliers at home or

transplant suppliers in the United States (ch. 7). If a

parts firm sees itself as burdened with poor labormanagement relations and an inflexible workforce,

and believes it can organize production more

efficiently in a new plant, it might well choose to

invest in Mexico. In OTA interviews, managers of

auto parts firms characterized by limited economies

of scale, high capital costs per unit of output, easily

shipped products, excess U.S. capacity, little proprietary technology, and corporate cultures resistant to

change expressed considerable concern over the

threat posed by new entrants setting up in Mexico.

Wholly owned Market access—to

affiliate. avoid trade barriers,

provide responsive delivery and customer

service, or tailor product attributes to local

renditions. Labor cost

advantages may be secondary or irrelevant.

Strategic partner- Partners typically motiship (or alliance). vated by differing combinations of costs, market access, financing,

and technology. Strategic alliances may or

may not involve equity

Automobiles and corn

puters during import

substitution industrialization.

Joint venture announced in 1991 between Vitro (Mexico)

and Corning (U. S.)

to make and market

household glassware

products.

Overseas production operations take many forms. links.

Table 5-2 outlines three of these. SOURCE: Office of Technology Assessment, 1992.
100 ● U.S.-Mexico Trade

systems integrator-in the extreme as little more

than an assembler of purchased components. As

such examples suggest, the collection of skills and

capabilities needed in a world-class manufacturing

firm extends well beyond low-wage production

labor. It is in technologically based skills and

managerial expertise that the United States excels

compared to Mexico. The question then becomes:

how fast can Mexico improve?

MEXICO’S HUMAN RESOURCES

Given the competitive imperatives of cost, quality, and flexibility, employers increasingly balance

labor quality against labor costs in deciding whereto

locate plants. MNCs seek workers with basic skills,

acquired through education, good enough that they

can be trained in the fro’s production technologies

and operating procedures. To compete for foreign

direct investment (FDI) with other low-wage countries-and to compete through local production with

the imports now entering its own markets-Mexico

will need to improve its human resource base.

Because no more than 50 to 60 percent of Mexican

children enroll in secondary school, compared with

95 percent here, the disparity in workforce skills

between Mexico and the United States will not close

in the near future.l But education is only a starting

point. On the shop floor and in the front office,

practical skills and experience count for more than

years of schooling.

Some of the needed skills are relatively easy to

learn. A factory technician maybe reasonably good

at his or her job after 3 or 4 years. For other kinds of

work—planning and managing factory production,

developing new products, negotiating with distributors or bankers-3 or 4 years is only a start. Because

Mexico has relatively small numbers of people

entering these kinds of career paths, the country will

be limited for years by lack of experienced people.

That is one reason why know-how acquired through

FDI is so important for Mexico.

Historically, Mexico has voiced strong commitments to education, but it has not followed through

with sustained efforts to improve the quality of its

workforce. Recent policy initiatives have been

modestly funded, partly because of the economic

crisis. Current education and training programs

seem inadequate to deal with a large and complex

problem-o ne that will continue to grow because of

Mexico’s rapidly increasing labor force.

To improve its human resource base, Mexico

must:

●

●

●

raise the average level of education of its

population, improving literacy and other basic

skills for those already in the blue-collar

workforce, as well as young people;

increase its pool of workers with vocationaltechnical training in grey-collar skills (toolmaking, equipment repair and maintenance,

quality control); and

train more college graduates for white-collar

jobs in engineering, administration, and management (computer programmers, accountants,

financia1 planners).

Education and Training

Average educational levels of Mexican workers

are much lower than those here (box 5-B). Mexico

spends about $70 per elementary school student per

year, compared with $4,070 in the United States.*

While U.S. employers and politicians are concerned

about ‘functional’ or “marginal’ literacy, Mexico

still has a large number of absolute illiterates who

cannot read or write their own name. In 1992, 12

percent of the population was illiterate, 14 percent of

children of school age were not in school, and 6.7

million adults had no education at all.3 Despite a

long series of government literacy programs, Mexico’s 1990 report to United Nations Educational,

1 Digest ofEducation Statistics (Washington, DC: Department of Educatiou Office of Educational Research and hnprovemen~ 1988), pp. 340341.

Only about 6 percent of young Mexicans enter college, although admissions standards are almost nonexistent and tuition at the national university

the equivalent of about 6 cents. “Students Close U. of Mexico to Protest ‘Ibition Increase,” ChronicIe of Higher Education, July 8, 1992, p. A35. A

proposed increase to nearly $700 per year would close off higher education to many students from the lower classes.

2 CCSWApp~~ Repofl: Mefico -Eduwtion RO@~” worldBa& WashingtO~ DC, Aug. 28, 1991, p. 41; Digest ofEducation ~tatistic.r,

1991 (Washingto~ DC: Department of EducatioU National Center for Education Statistics, 1991), p. 155. The U.S. figure is the average for both

elementary and secondary students.

3 ~&w ca~ome, ‘‘School Reforms Spark Debate, ’ TheNews [Mexico City], May 21, 1992, p. 4. Also see “ReportonEducation in Mexico,”

Mexico Ministry of Public EducatiorL paper prepared for Foxty-S~ond Meeting of the International Conference on Educatio% Oenevw Switzerland,

September 1990. Illiteracy in the United States is about 1/2 percent. Estimates for both countries are based on self-reporting of complete inability to read

and write, and probably understate true levels of illiteracy.
Chapter 5--Mexico’s Workers . 101

Box 5-B—Basic Education in Mexico

The Federal Education Ministry controls Mexico’s system of free public schools, paying 70

percent of the costs (with the rest paid by the states).

Education is not only free but in principle compulsory for all children aged 6 to 15, although, as

shown in table 5-3, educational attainments do not

yet reflect that much schooling. The crisis of the

1980s forced many children out of school and into

the labor market.l Public expenditures on education

fell (see ch. 3, table 3-8), and teachers’ salaries

Table 5-3-Average Educational Levels for Mexicans

Aged 15 and Above

Years of

Year schooling completed

1970/71 . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4

1980/81 . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.4

1989/90 . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.3

SOURCE: Nora Lustig, “Mexieo at the Threshold of Prosperity,” unpublished draft, September 1991, table 111.8.

along with them.

The figures in table 5-3 conceal considerable variation by age (younger people have more schooling than older

people), socioeconomic status (children in poor families often leave school at an early age to help earn money for

the family), gender (boys get more education than girls), geography (urban children stay in school longer), and race

(Indian and mestizo children get less education). Thus, a U.S. automaker opening anew engine plant in Mexico was

able to hire the cream of the local labor force-half of the 1,500 people applying for 149 slots as technician trainees

had had 9 or more years of school.2

Like many other countries, Mexico continues to suffer from discrimination against women and minorities.

Unless educational opportunities improve, Mexican women will continue to find work predominantly as domestics,

in personal services, in the apparel industry, and doing simple, unskilled jobs in maquilas or maquila-like plants.

Closing the gender gap would help Mexico tap the skills it needs to industrialize rapidly. Better educational

opportunities for farmers and farm workers, many of whom are Indians-and practical training in agricultural

technologies--could help Mexico improve its agricultural productivity and cope with the problems that reform of

the ejido system will bring. But differences in wealth and population density between northern and southern states

will make this difficult. Although millions of poor families have moved to Mexico’s large cities, the worst poverty

remains in the countryside. Low population densities in rural areas hamper efforts to maintain adequate schools.

Teachers prefer urban areas, and sometimes resign if assigned to a village school. For U.S. firms considering Mexico

as a production site, variation in levels of education creates an incentive to locate in the northern two-thirds of the

country.

INora Lustig, “Economic Crisis, Adjustment and Living Standards in Mexico, 1982-85,” World Development, vol. 18, 1990, pp.

1,325-1,342. In interviews, teaehers note that the cost of school materials and uniforms are a burden for many flmil.ies, whiIe primary-aged

students sometimes work to help with family finances. Susan Rippberger, ‘Insiders’ Peqeetives on Strengths and Weaknesses of the Mexiean

E!dueation Systenq” unpubW repor4 1988, pp. 5-6.

%arley Sh&kenand Stephen Hexzenberg,Automation andGlobalProduction (LaJoWCA: CenterforU.S.-Mexican Studies, University

of Califon@ San Diego, 1987), p. 10. The MIT International Motor Vehicle Project found ears produced at Ford’s Hermosillo, Mexico, factory

had the best quality of those from any high-volume assembly plant in the worlq it was, they said, the result of a young, motivated, and intensively

trained workforee that “embraced lean production with the same speed as American workers at the Japanese transplants in North Ame.riea.”

James P. WornaelL Daniel T Jones, and Daniel Roos, The Mach-ne That Changed The World: The Story oftin Proakction (New York NY:

Har@%llina, 1991), p. 87.

Glee up and running, mukinationals that had initially looked for high school graduates started hiring junior high school gmluates more

typical of the hfexiean labor force as a whole. ‘‘The Auto and Electronics Sectors in U.S.-Mexico Trade and Investment,” rqmrt prepared for

OTA under eontmet 13-1815 by Harley Shaike~ May 1992, p. 5.

Scientific and Cultural Organization stated that The Vocational-Technical System

“illiteracy is a serious problem to which a solution Duriring the 1980s. Mexico’s government declared

has not yet been found.’ an ‘Educational Revolution, ’ with special attention

d‘ ‘Report on Education in Mexieo, ‘‘ ibid., p. 90. President&hevarria(1970- 1976) renewed and refocused government efforts to combat illiteracy,

but his National System of Adult Education (SNEA) failed to attract absolute illiterates, and dropout rates were high. SNEA programs included “cultural

missions” to rural communities involving local teachers, telesecondary school offerings, and mobile libraries. Daniel A. Morales-Gomez and Carlos

Alberto Torres, The State, Corporatist Politics and Educational Policy Making in Mexico (New York, NY: Praeger, 1990), pp. 107-135.

Echevarria’s successor, President Lopez Portillo launched a new initiative, the Nationat program for Literacy T raining (PRONALF), which relied

heavily on temporary employees and volunteer university students to avoid the teachers union. Reductions in illiteracy over this period appear to result

more from the growing reach of the public school system than from PRONALF,
102 ● U.S.--Mexico Trade

to vocational educations But technical training in

Mexico remains weak. Many young people drop out

or fail in primary and middle school, reducing the

numbers who get advanced training of any sort,

while most Mexicans-like their U.S. counterparts—

view vocational training as inferior to academic

education. Despite heavy investments in secondary

vocational education over the past two decades,

about 60 percent of Mexico’s 2 million high school

students take college preparatory courses, while

another 20 percent attend dual-track vocational and

preparatory high schools (most of whom then go on

to a university). Only 20 percent enroll in vocational

schools leading directly to work.6

The current vocational education system evolved

from crafts schools created in the 19th century and

agricultural schools established in the 1920s. Today,

three groups of vocational-technical schools coexist

somewhat uneasily:7

1.

2.

3.

Dual-purpose technical high schools. Some are

operated by the National Technological Institute (established in 1937) and its network of

colleges, while others are overseen by the

Secretariat of Public Education (SEP). Graduates of these schools can go on to attend

college and most do so.

Schools known as Centros de Enseñanza

Terminal (CETS, dating from 1958), originally intended for those going directly into the

labor market. Most of the 163 CETS centers

have evolved to become similar to the dualpurpose technical high schools. Only 40 percent of the young people enrolled in these two

types of schools are preparing to go directly to

work, while 60 percent are on a dual-purpose

track (table 5-4).

In 1978, with fewer than 5 percent of Mexican

students (at all levels) enrolled in technical

Table 5-4—Vocational-Technical Education in Mexico

Enrollment Graduates

School or program (1989/90) (1989/90)

Dual-purpose technical high

schools. . . . . . . . . . . . . . . . . . . . 383,200 82,400

Terminal technical schools (CETS

and others). . . . . . . . . . . . . . . . . 262,100 72,900

CONALEP. . . . . . . . . . . . . . . . . . . 155,300 33,200

Total. . . . . . . . . . . . . . . . . . . . . . 800,600 188,500

SOURCE: Staff Appraisal Report: United Mexican States, Third T&n&l

Training Project (CONALEP Ill) (Washington, OC: World Bank,

1991), p. 8.

fields, the government established a quasiautonomous agency under SEP known as

CONALEP. A network of 250 CONALEP

centers offers 3-year training programs in

about 90 occupations (in fields ranging from

agriculture to health care and tourism). CONALEP training qualifies graduates for work,

rather than advanced education. Three World

Bank loans, totaling $323 million, have helped

CONALEP grow rapidly.8 By the 1989/90

school year, CONALEP enrolled nearly 20

percent of the 800,600 young people enrolled

in one of Mexico’s three vocational education

programs (table 5-4). Recently, CONALEP

has offered more short courses and evening

courses, in part because many young people

cannot afford to spend 3 years studying rather

than working.9

Despite the growth in CONALEP, both Mexican

and foreign firms complain of inadequate skills in

the workforce. Shortages of technical and professional workers have pushed up salaries in maquiladoras.10 In Guadalajara, electronics firms have been

unable to hire mid-level technicians trained in

quality control methods.11 To alleviate such shortages and cope with the rising unemployment, the

5 Wayne Riddle, “Education Concerns, ” North American Free Trade Agreement: Issues for Congress (Washington DC: Congressional Research

Service, July 12, 1991), p. 46.

G ‘ ‘Report on Education in Mexico”, OP. Cit., fOOtrlOte 3, p. 91.

7 Victor L. Urquidi, “lkchnical Education in Mexico: A Preliminary Appmisal,” Prospects, vol. 12, 1982, p. 115.

fI Jaime Luis padifl~ Director Gene~ for Training and Productivity, Ministry of Labor and Social Welfare, persoMI communication% Jm. 16, 1992;

Juan pravd~ World Bank, personal comrnunicatio~ Feb. 6, 1992.

CONALEP programs are closely job-related, overseen by indus~ boards and employ part-time teachers from industry. The Ministry of Education

claims that 62 percent of CONALEP graduates fiid jobs within 3 months of graduation 84 percent in the specialties for which they have trained,

compared with 52 percent of CETS graduates and 25 percent of university engineering graduates.

g Ing. Di~om Guerra, Director General, CONALEP, persorud cornmunicatiom my 19, 1992.

10 “The Maquiladoras: Present Status, Future Potential,” report prepared for OTA under contract No. H3-7040 by bslie Sklair, December 1991,

p. 22.

114 ‘NAFTA and the Electronics Industry m Mexico, ’ report prepared for OTA under contract No. H3-7200 by Patricia A. Wilson, February 1992.
.—

Chapter 5---Mexico’s Workers . 103

Ministry of Labor and Social Welfare (STPS)

launched a pilot program in 1984 to retrain displaced

workers, expanded the next year with the help of an

$81 million World Bank loan. About half of all

retraining has taken place at CONALEP centers,

with STPS paying tuition and the minimum wage for

enrollees in 1 to 6 month courses.

Worker Training

Most company training in Mexico takes the form

of on-the-job instruction and short in-plant courses

(box 5-C). Although the Mexican constitution guarantees workers the right to employer-provided

training, the government did not follow through on

this promise until 1978, when it enacted Article

153-A of the federal labor law. This article requires

companies and their employees (through unions,

where they exist) to jointly develop training plans, to

be submitted to STPS for approval, and provide

graduates with certification of their skills. During

the first several years after passage of Article 153-A,

STPS concentrated on informing companies of the

new law and urging compliance.]2

With the opening of the economy, and the

anticipation of pressure on small and medium-sized

fins, STPS officials decided that active training

assistance would be needed; as in the United States,

most smaller firms did little or no training and had

no experience to draw on. In addition to the

CONALEP program for retraining displaced workers mentioned above, STPS initiatives included:

● upgrading of the Public Employment Service;

. research on the impact of retraining and on-thejob training programs; and

. the CIMO program described in box 5-C.

STPS put more than $100 million into these efforts.

About 12,000 small and medium-sized firms have

participated in the CIMO program, in sectors including metalworking, electronics, garments, textiles,

shoes, furniture, and tourism. Some 70,000 people

have received training, and the government is

planning to expand the program. Funding promises

to be the principal obstacle: large numbers of

workers, supervisors, and managers need training in

depth, requiring longer and more costly programs

than have been common in Mexico. In 4 years, when

anew World Bank loan for CIMO runs out, given the

Mexican Government’s limited resources, the private sector would almost certainly have to pay much

of the cost.

Higher Education

Except for inexpensive consumer goods, Mexican

firms make few products of their own design. To

move into more complex production and more

demanding markets, both indigenous firms and the

subsidiaries of MNCs will need capable engineers

and managers. During the past decade, engineering

enrollments in Mexico’s public and private colleges

and universities grew faster than enrollments in any

other field, reaching 342,000 in 1990-nearly as

many as in the United States.

13 It takes 5 or 6 years

to earn the equivalent of a bachelor’s degree in

engineering, and attrition is high. Even so, Mexico

graduated 28,200 engineers in 1989, two-thirds

more than in 1979—and nearly half as many as the

United States (table 5-5).14 Mexico lags further

behind in its stock of engineers, with 4,3 engineers

per thousand people in 1989, compared with 11.6 in

the United States.

About half of Mexico’s engineering students

enroll in polytechnic institutes; the remainder study

at colleges and universities. The National Polytechnic Institute was intended to supplement a university

system strongly oriented toward the humanities.

Graduates of either polytechnics or universities

become licensorios in an engineering discipline (or

in such related areas as marine technology, business

administration, architecture, or economics).

12 Large firms-and unionized firms-are more likely to comply than smaller establishments. Agustfn Ibarra, General Director of Employmen~

Ministry of Labor and Social Welfare (STPS), personal communication, January 1992. Article 153-A requires that labor contracts in unionized companies

specifj trainin g to be provided.

13 undergrad~teemol~cnts inu,s. engineering schools have been declining since 1983, when they peaked at 441,000. The 1989 tow was 378,000,

to which some 128,000 engineering technology students should probably be added for comparisons with otber countries. .Science & ,?O@neen”ng

Indicators 1991, loth ed. (Washington, DC: National Science Board, 1991), p. 234.

14 EIES@dodelArtede la lngenie~’a en M&rI”co y en elMundo (Mexico City: Academia Mexicana de Ingenien”a, 1991). Graduation raleS for engineers

in Mexico are the lowest among all academic disciplines, with, in 1989, only 8.4 percent of the students enrolled in engineering programs graduating,

compared with 11.8 percent in nonengineering fields.

Mexico compares less well with the United States if scientists are included, graduating 31,900 at both undergraduate and gmduate levels in

engineering and the natural sciences in 1990, compared with almost 250,000 in the United States. This comes to about 3.9 graduates per 10,000 in the

Mexican populatio~ compared with about 10 per 10,000 in the United States.
104 ● U.S.-Mexico Trade

Box 5-C-Training and Industrial Adjustment

Skills and Training of Mexican Manufacturing Workers

A 1988 survey of Mexican manufacturing establishments found that most workers had quite limited skills.l The

profile:

● unskilled workers, 20.1 percent;

. semiskilled workers, 24.9 percent;

● skilled workers, 32.5 percent;

● technicians, 14.9 percent; and

● professionals, 7.5 percent.

Half the workforce (49.9percent) reported no more than a primary school education (i.e.,6 years or less of schooling),

one quarter had had some secondary school, and just 15.6 percent had earned a high school diploma. Another 8

percent reported college or university degrees (with 0.6 percent having completed postgraduate studies). The study

concluded that about 20 percent of those surveyed lacked adequate training, with 23 percent of semiskilled workers

and 27 percent of unskilled workers rated as poorly prepared for their jobs. Small companies reported the largest skill

deficits.

Plant managers commonly responded to skill deficiencies with short courses on an ad hoc basis for selected

employees. Forty percent of workers surveyed had received some job-related training.2 Three out of five workers

reported courses lasting less than a month, 26 percent courses lasting 1 to 3 months, and the remainder 4 months or

longer. Mexican firms rely primarily on internal trainers (51 percent) and other workers (37 percent) for instruction;

there has been little involvement by private training centers (6 percent), secondary schools and technical institutes

(2 percent), or government training centers (1 percent).3

Training and Adjustment: The CIMO Program

During the ISI period, when customers had no choice but to accept the goods produced by Mexican firms, neither

employers nor government Worried much about training. Most large fins, as in the United States, organized work

around simple, unskilled tasks. Today, Mexican companies not only face competition from imports, but many would

like to export their goods. This means achieving world-class standards. To help them, STPS, backed by World Bank

loans, created the Capacitación Industrial de la Mano de Obra (CIMO) program.4 CIMO operates 26 training centers,

staffed by a total of 90 “promoters,” whose job is to analyze the needs of local industry and identify companies’

immediate training needs.

In Tlaxcala, for example, Mexico’s least populous state, CIMO promoters have worked with small fins,

including a number of apparel shops in which managers had little familiarity with modern production practices. The

promoters found volunteers willing to allow a consultant into their shops. In two shops visited by OTA, the consultant

had helped managers master the basics of standardized garment production under the “bundle system” (ch. 9).

In a very different setting, the large industrial city of Puebla, local promoters worked with Volkswagen to

upgrade the local supplier base. The first stage of this undertaking, funded jointly by VW, the suppliers, and CIMO,

focused on defining training needs for supervisors, skilled workers, and key production employees (e.g., total quality

control, just-in-time inventory management). Most of the subsequent training programs lasted a few days to a few

weeks. A planned second stage may evolve into a more comprehensive industrial extension program, including

technical and business assistance.

l~~cwotierf$ticw &IpwSoMI OCM J Req~i~”entOS de Capacitaci6n en Establecimientos ~an@aetureros ~m”canos,” r~”~to

Nacionalde Estadiktica, Geograjla elnformdtz”ca (INEGI), Mexico City, 1991. The survey covered 3,189 plants in sectors including text.b

and appare~ paper, printing, plastic% metal fabrication and food products.

2111is ii=CXCXMS t&wpenxmt of U.S. workers who reported ina 1983 survey by bB~ of Labor Stadatics that they had received

some tmining for their current job. See Wor&er Training: Competing in the New Internatz”onalEconomy (Wasbi@on, DC: CM&c of ‘lkdmology

Asscssmeng September 1990), pp. 227-228. Moreover, tmining was more evenly distributed among occupational groups than in the United

States, where managers and professionals arc more likely to get tmining than unskilled or semiskilled workers.

3M~i~ra~ ~fi m~~y Iower skill levels than found by tlw survey discussed above. s= for e-let Jo= c~o,

“Mercados de Trabajo en la Inddsm”a Maqdadora de ~ortaci6n” &abor Ma&4a in the Assembly Plant Exporting Industry], mpuW

repom El Colegio de kzFronteraNorte, Tim 1991. Carillo’s 1991 survey of maqu”lb plants in the auto parts, electronics, and apparel sectors,

located in Juarcz Tijuaq and Monterrey, found that more than threeqartm of wo*crs bad noqUbfi@iOIIS “ and W= pOlfO_ unskikd

tasks, half of them assembly. Most tmining was done rntcrnall~ only 29 of 43 technical schools surveyed had any relationship with local

maqau”ladoras.

4AWS~- General-tor of Employmeq Ministry of Labor and Social Welfme (S~), ~~~~“catio~ lanuary 1992.
—

Chapter 5--Mexico’s Workers ● 105

Table 5-5-Engineering Graduates by Country, 1989

Number of Graduates per

graduates 10,000 population

South Korea. . . . . . . . . . . . 28,141 6.70

Japan. . . . . . . . . . . . . . . . . 77,009 6.62

Singapore. . . . . . . . . . . . . . 1,452 4.84

Taiwan. . . . . . . . . . . . . . . . 7,994b

4.0

Mexico. . . . . . . . . . . . . . . . 28,193 3.32

France. . . . . . . . . . . . . . . . . 16,658 2.97

United States. . . . . . . . . . . 67,214 2.70

West Germany. . . . . . . . . . 9,579 1.55

India . . . . . . . . . . . . . . . . . . 28,500 b

0.34

aBa~elor’Slevel equivalent

%966.

SOURCES: El Estado del Arte de la Ingeniena en Mtifxico y en el Mundo

(Mexico City: Academia Mexbana de /ngenieria, 1991), p.

153; and Science & Engineering Indicators 1991, IOth ed.

(Washington, DC: National Science Board, 1991), p. 263.

At the graduate level, about 5,300 students were

enrolled in engineering programs in Mexico in 1990,

compared with 109,000 in the United States.15 U.S.

graduate engineering programs enrolled some 38,000

foreign nationals in 1990, but most came from Asia

and very few from Mexico. Data from the U.S.

National Science Foundation (NSF) indicate that as

a fraction of national populations, Mexican students

received only one-tenth as many doctoral degrees in

engineering and science from U.S. institutions

between 1960 and 1988 as Korean students, and

one-fortieth as many as those from Taiwan.

Academic training is only a starting point for the

development of industrial competence. OTA’s interviews with managers in Mexican firms-MNCs like

IBM or Hewlett-Packard (H-P), as well as Mexicanowned companies-indicate that the country’s universities and technical institutes graduate capable

bachelor’s level engineers.

16 H-P’s plant in Gua -

dalajara, once strictly an assembly site for impact

printers and personal computers, now conducts

some design and development. Graduates of local

universities fill most of H-P’s engineering positions.17

But there are relatively few such jobs in Mexico

today. A recent survey in Guadalajara found that

IBM and H-P were the only two foreign-owned

electronics firms conducting R&D.18 In 1988, 350

students applied for internships at IBM; the company found 150 qualified for positions, but could

only hire 20. It appears that, while Mexico graduates

engineers in considerable numbers, many have

trouble finding technical positions and leave engineering. Some go to work as skilled production

workers or enter nontechnical fields such as accounting and marketing.

Effective deployment of Mexico engineers must

seemingly await demand. Mexican industrial policies and tax laws provide few incentives for MNCs

to conduct R&D locally, while Mexican-owned

firms rarely pursue technology-intensive lines of

business (with the primary exception of the steel and

petrochemical industries). Mexico’s R&D expenditures are significantly lower than other developing

countries. According to NSF, Mexico invested 0.2

percent of its gross national product in R&D in 1987,

compared with 1.4 percent for Taiwan and 1.8

percent for South Korea. The government pays for

almost all of Mexico’s R&D, often in educational

institutions that have little contact with industry. So

far, then, it appears that Mexico has not been able to

generate a self-sustaining technological infrastructure; the country has a surplus of academically

educated engineers and a shortage of those tested

and tempered by experience.

Mexico Compared with Developing

Countries in Asia

Might Mexico nonetheless follow the trajectory

of East Asia’s newly industrializing countries (NICs)---

Korea, Taiwan, Hong Kong, Singapore--which

moved rapidly from reliance on low-wage, low-skill

production into more sophisticated manufacturing?

How does Mexico match up today with Indonesia,

Thailand, and Malaysia (sometimes referred to as

the newly industrializing economies, NIEs, to distin-

~5ElE~~ad~ &lArte & [a Irrgenieria en M&ico Yen el Mundo, ibid., p. 151; Science& Engineering ]ndicators ]99], Op. cit., fOO@lOIe 13, p. 239.

Eighty-seven percent of the Mexican students were enrolled in master’s level programs, the rest at the doctoral level. Whereas engineering students

comprise 32 percent of totat emollients in Mexican universities, graduate engineering students comprise only 12 percent of the graduate student

population, a percentage that has declined in recent years.

16 most w of IBM’s pe rmanent workforce in Guadalajara consists of engineers, mostly electrical and mechanical, many of whom have been

recruited from local universities. Harley Shaike~ Mexico in the Global Economy: High Technology and Work Organization in Export Industn’es (La

Jolla, CA: University of California, San Diego, Center for U.S.-Mexican Studies, 1990), p. 110.

17 “NAITA and the Electronics Industry in Mexico, ” op. cit., footnote 11; and OTA interviews.

la ‘‘NAFrA and the Electronics Industry in Mexico, ’ ibid.
106 ● U.S.-Mexico Trade

Table 5-6-Education in Mexico Compared With Asian Developing Countries

Mexico Korea Singapore Malaysia

Spending on education

As a percentage of GNP (1986). . . . . . . . . . . . . . . . . . . . 2.8% 3.0% 5.0% 7.9%

As a percentage of federal budget (1989/90). . . . . . . . . 11.7 19.6 18.1 5.3

Percentage of age group enrolled (1986-88)

Primary grades. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 990/. 100% 100% NA

Secondary (all) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 86 69 57

Secondary technical. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.6 15.9 NA 1.7

College/university. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15.2 37.7 NA 6.7

Science and engineering majors as percent

of higher education students. . . . . . . . . . . . . . . . . . . . . . . 36%O 31% 29% 34%

Average years of schooling in the adult population (1988) 6.2 8.Oa

6.Oa

7.0

NA= Notavailable.

alg~

SOURCES: Average years of schooling-Gewge Psacharopoulos and Ana Maria Arriagada, “The Educational

Composition of the Labor Force: An international Update,” unpublished paper, January 1992.

Government spending— M~XiCO, Government and Financial statistics Yearbook 7991 (Washington,

DC: International Monetary Fund, 1992), Mexico table 3; others, Steven SchIossstein, Asia’s A/ew’Litf/e

Dragons: The Dynamic Emergence of Indonesia, Tha’land, and Malaysia (Chicago, IL: Contemporary

Books, 1991), p. 24.

Other entries—Hwnan Development Report 7991 (New York, NY: Oxford University Press, 1991), pp.

146, 148.

guish them from the more advanced NICs)? The

NIEs, in particular, have developed in large part

through foreign investment, much of it Japanese,

while the Salinas administration hopes that welcoming foreign capital will speed Mexican development.

Education

Table 5-5 showed that Mexico graduates as many

engineers as Korea, and many more than Taiwan or

Singapore (though not on a per-capita basis). Table

5-6 shows that Mexico also compares reasonably

well with Asian NICs and NIEs in primary and

secondary education, although it spends the least.

Mexico’s dropout rates also tend to be high--45

percent from elementary school, 48 percent from

technical secondary education—while Taiwan and

Hong Kong graduate 80 percent of those enrolled in

secondary education.19

Industrial Structure

In the Asian NICs, in several European countries,

and in Japan, communication and cooperation within

corporate organizations (for example, between manufacturing engineers and production workers) and

among companies have been critical factors in the

spread of best practices and in the development of

flexible networks of manufacturing firms.20 Generally speaking, these channels and networks are

poorly developed in Mexico.

Monterrey, home of many of Mexico’s most

dynamic companies, is one exception. There, longstanding family ties have contributed to the formation of manufacturing networks.21 At the same time,

foreign firms have pushed local enterprises to

improve quality through reorganization and training.

Monterrey firms that have been leaders in flexible

work organization include Conek, a Caterpillar

affiliate, and Metalsa, a supplier to Mexico’s foreignowned automakers. But most companies that reorIg Jose DOmin@ez, world B@ personaf communication April 1992; Steven Schlossste@ The End of the Amen”can century New York NY:

Congdon & Weed, 1989), p. 250. On the relationship between education and economic grow~ see Robert J. Barre, “Economic Growth in a Cross

Section of Countries,” Quarterly Journal of Economics, vol. 106, 1991, pp. 407-443,

ZO S=, for ex~ple, Paul Hirst and Jonar.ba.n Zeitlin, eds., Reversing Industn”al Decline? Industrial Structure and Policy in Bn”tain and Her

Competitors (Oxford, UK: Berg, 1989); Robert E. Cole, Strategies for Learning: Small-Group Activities in American, Japanese, and Swedish Industry

(Berkeley, CA: University of California Press, 1989).

21 I.mrdes Melgar, “Emerging Alternative Forms of Economic Development: The Industrialimtion Process of Monkrrey, Nuevo krL” paper

presented at the knual Meeting of the Latin American Studies Association, Washington DC, Apr. 4-6, 1991, pp. 11-12; Maria de 10S Angeles Pozas,

“Moderniza tirm of Labor Relations in Companies of Monterrey, ” University of California, San Diego, Center for U.S.-Mexican Studies, forthcoming

[translated by Deanna Haremend, Congressional Research Service].
Chapter 5--Mexico’s Workers ● 107

United States

Canada

Mexico

Korea

Taiwan

Hong Kong

Singapore

Indonesia

Thailand

Malaysia

Figure 5-1—indicators of Technological Capacitya

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . ,, .,, . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

l-=’. ‘. . ‘. /, ‘/’. ;’.’.”/’ ‘ ‘ ‘ ‘ ‘ //‘ ‘ ‘

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

,. .,,

r a

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

m

EI/

n

National orientation/strategy

Socioeconomic infrastructure

Technological Infrastructure

Productive capacity

-1 5 -1 -05 0 0 5 1 15 2 2.5

National orientation/strategy is intended to indicate “directed action to achieve technological competitiveness” based on government

policies, government-business relations, and social values.

Socioeconomic infrastructure incorporates measures of capital formation, inward direct investment, and spending on education.

Technological infrastructure incorporates measures of R& D spending, alliances involving multinational enterprises, technical personnel in

the labor force, and investments in capital stock (e.g., telecommunications infrastructure, computers).

Productive capacity is based on such measures as manufacturing productivity and investments in machine tools and other manufacturing equipment.

aNormallzed t. median values of zero for 29 countries, based on surveys of expert opinion conducted in 1990 and statistical data for the late 1980s.

SOURCE: Alan 1-. Porter andJ. David Roessner, “Indicators of National Competitiveness in High Technology Industries,” Executive Summary, Phase I Report,

and Phase II (Final) Report under National Science Foundation Award Number 8808909, Georgia Institute of Technology, May 1991.

ganized work or introduced modern quality control these lines, the Ministry of Commerce (SECOFI)

practices have done so on a piecemeal basis, and recently initiated economic development planning,

remain committed to methods rooted in Taylorism in cooperation with business chambers and labor, in

and ‘‘scientific management. ” each of the 31 Mexican States.**

Although manufacturing networks are poorly Technological Capacity and Organizational

developed, Mexico’s institutional structures-labor Competence

unions, business and industrial chambers at the Figure 5-1 presents a set of broad comparisons of

local, State, and national levels--could become technological capability among Mexico, the United

vehicles for dissemination of government-to- States and Canada, and the NICs and NIEs. Each of

business assistance and interfirm cooperation. Along the four indicators is itself a normalized composite

22 The ‘Ikchnological Institute of Monterrey supported development of the plan for the state of Chihuaha by evaluating the needs of business and

industry sector by sector. Lalmr unions, the state government, and CANACINTRA (the association of small manufactumrs) participated in formulating

the plan itself, and have signed a formal agreement to implement it. Luis Miguel Pando L.cyv% General Director, CANACINTRA, pemonal

communication, May 20, 1992.
108 ● U.S.-Mexico Trade

based on statistics (e.g., levels of education, capital

stock in industry) and expert opinion (e.g., evaluations of openness to foreign investment, managerial

capabilities). While any such set of indicators will be

open to question on almost innumerable grounds,

there is little alternative for attempting extensive

cross-country comparisons.

Mexico’s profile on the four indicators in figure

5-1 is much like that of the NTEs but indicates that

Mexico is well behind the Asian NICs. To the extent

that competition for jobs depends on level of

economic development, Mexican workers will be

competing against their counterparts in Indonesia

and Thailand rather than those in the United States

or Japan.

To improve its capabilities, Mexico must improve

its human capital at many levels. The country needs

capable farmers and bankers, skilled production

workers, experienced technicians and engineers,

able managers, and sensible administrators. Japan’s

postwar economic performance reflects a stress on

skills over knowledge, and on organizational knowledge and skills over those of individuals. This is a

lesson that the Asian NICs appear to have learned,

but Mexico has not yet grasped. Traditionally, a

small elite received a good education on classical

European lines, with much of the rest of Mexico’s

school-age population largely neglected. This pattern has begun to change, but countries like Korea

have viewed education and training in more nearly

‘‘universal’ terms for decades, and thus built strong

foundations for continuing development.

The pacing factors in Mexico’s development thus

promise to be institutional and organizational. Human

capital must become embedded, taking on the form

of organizational capital, before it can contribute to

productivity growth. The recent troubles of the

domestically oriented portion of Mexico’s economy

suggest that it will take time for Mexico to move

beyond the “branch plant” stage of development,

regardless of how much know-how might be available in principle through direct investment by

multinational firms.

CONCLUDING REMARKS

With or without a NAFTA, Mexico’s economic

structure promises to change rapidly in the years

ahead. New jobs will require new skills. Companies

will have to adapt to competition or close their

doors. The adjustment pressures on Mexico will be

even greater than those on the United States.

Mexico’s government has launched a series of

initiatives aimed at improving workforce skills

through adult literacy programs, modernization of

the vocational education system, and worker training. However, it is not clear whether these programs

will succeed.

Mexico’s earlier choices in education and training

leave it in the 1990s with a relatively modest

capacity to absorb sophisticated technologies and

business practices. This means that large numbers of

Mexicans will have to improve their knowledge and

skills as the economy develops. It also means that

whatever impacts economic integration with Mexico has had on U.S. workers in the past, these are

likely to be dwarfed by future effects—positive or

negative-particularly if Mexico succeeds in improving its capabilities in relatively sophisticated

manufacturing.
Appendix 5A

Economic Models as Predictors of NAFTA Impactsl

More than a dozen economic models have been used

to estimate how trade agreements among the United

States, Mexico, and Canada might affect national

income, exports and imports, and jobs gained or lost.

Such models can be constructed in a variety of ways.

Some deal with two of the three countries, some with

all three, some with three plus the rest of the world. At

best, the results are suggestive. None of the quantitative

models and predictions reviewed by OTA provide a

useful guide to policy choices.

Predictions from all the models depend on arbitrary

assumptions+. g., the prices that Mexico can expect

for its oil in the future, or levels of investment in

industry. The predictions of the models are no better

than the assumptions. It can be very difficult to decide

whether a given assumption is ‘‘good’ or ‘ ‘bad. Of

the necessary assumptions, those dealing with investment are by far the most important. There is no way to

model or otherwise generate quantitative predictions

for future levels of either foreign or domestic investment (with or without a NAFTA). Investment levels

can only be assumed. In fact, many of the models have

assumed there will be no change in Mexican investment after a NAFTA, even though Mexico wants an

agreement in large part to attract new investment.

Many of the models also suffer from dependence on

input data that are old or of questionable accuracy or

both. These problems are particularly severe on the

Mexican side. For instance, Mexico’s government

reports values for imports from and exports to the

United States that differ substantially from the U.S.

figures; some of the reasons are known, and adjustments can be made, but this accounts for only a portion

of the discrepancies.2

Results

Most of the modeling suggests relatively little

impact on U.S. or Canadian gross domestic product

(GDP), trade, or jobs as a result of lower tariffs, with

greater changes in Mexico because its economy is so

much smaller. Typical results suggest that a NAFTA

would have broad if small benefits-growth in both (or

all three) countries, with only minor negative impacts.

Several sets of results—particularly those that disaggregate the economies into a number of sectors, so that

impacts on, say, the apparel industry can be isolated—

show larger impacts, including losses in U.S. jobs.

When predicted impacts are small, one of the reasons

is usually that potentially important factors have been

omitted (usually because the model cannot incorporate

them). Many models, for example, fail to account for

nontariff barriers (NTBs), even though Mexico has

relied heavily on these over the years, and they have

become even more important with reductions in

Mexico’s previously high tariffs. In principle, non-traderelated government policies-e. g., dealing with domestic price controls, subsidies, taxation, preferential

credit, and the many other tools of economic and

industrial policies—should also be incorporated, but

rarely are. Again, given that Mexico has had a heavily

regulated economy until recently, such factors carry

particular weight; a NAFTA should properly be viewed

in the context of a larger package of economic reforms

in Mexico.

Types of Models and Limitations

A simple extrapolation of past trends is itself a

model. But such a model can say nothing about what

would happen if the United States and Mexico reduce

their tariff levels, lower NTBs, or otherwise alter

] This discussion is based primarily on presentations at the Symposium on Economy-Wide Modeling of the Economic Implications of a FTA with

Mexico and a NAIWA with Canada and Mexico, U.S. International Trade Commissio~ Washingto~ DC, Feb. 24-25, 1992. For the conclusions of the

staff of the U.S. International Trade Commission concerning models and results presented at that symposi~ see Economy-Wide Modeling of the

Economic Implications of a FZA with Mexico and a NAFTA with Canada and Mexico, Report on Investigation No. 332-317 Under Section 332 of the

l%iff Act of 1930, USITC Publication 2516 (WashingtorL DC: U.S. International Trade Comrnissio% May 1992). The papecs themselves are included

in Economy-Wide Modeling of the Economic Implications of a FZA With Mexico and a NAFTA with Canada and Mexico, Addendum to the Report on

Investigation No. 332-317 Under Section 332 of the Tariff Act of 1930, USITC Publication 2508 (Washingto~ DC: U.S. International Trade

Commissio% May 1992). For a useful review, see also Gregory K. Schoepfle and Jorge F. Perez-Lopez, ‘‘U.S. Employment Effects of a North American

Free Trade Agreement: A Survey of Issues and Estimated Employment Effects,” draft dated Feb. 12, 1992 prepared for 1992 Joint Meeting of the

Association of Borderland Scholars and Rocky Mountain Council of Latin American Studies, El Paso, TX, Feb. 20-22, 1992, Also see the papers

presented at the conference on NAFTA: An Assessment of the Research Brookings Institution Washington, DC, Apr. 9-10, 1992.

2 Mexico leaves shipments to and from maquiZa plants out of its accounts. For a discussion of misreporting of trade data in the context of capital

fligh~ see David Barkin, Distorted Deve/opntent: Mexico in the World Economy (Boulder, CO: Westview, 1990), pp. 58-71.
110 ● U.S.-Mexico Trade

policies affecting trade and investment: after all, the

purpose of the policy changes is to change the trend.

More sophisticated models represent the economies

through systems of equations-sometimes more than a

thousand. These equations relate variables such as

investment, productivity, employment, exports and

imports, and GDP to one another. Models involving

only a few equations can sometimes be solved without

a computer. Such models rarely make use of empirical

data, or indeed numbers of any sort; they are purely

theoretical.

Computer-based models come in a number of

varieties. Their common characteristic is that they

involve too many equations----a equations of too much

complexity-to be solved except with a computer.

These equations might, for example, specify the

relationships between rising income levels in Mexico

and demand for goods ranging from autos to ice cream.

The more an economy can be disaggregated—i. e., the

greater the number of sectors the model treats independently-the more detailed the predictions. The price is

greater complexity. Even the most complicated U. S.-

Mexico models include only two dozen sectors or so.

High levels of aggregation mean that the model may

not distinguish demand for mainframe computers from

that for chemical process equipment.

Some computer models are static, meaning that they

produce estimates of the one-time change resulting

from, say, a reduction in tariffs. A static model, in other

words, calculates the increment in GDP or trade or

employment resulting from the tariff change, without

saying anything about the process of adjustment to the

new tariff levels within either economy, or about the

continuing path of either economy afterwards. The

results are limited to a before-and-after comparison.

Dynamic models, in contrast, can include representations of ongoing adjustment processes. A prediction of, for example, a 1 percent annual increase in

Mexico’s GDP expected to continue (and compound)

indefinitely is far more meaningful than a prediction of

a one-time increase. But dynamic modeling is much

more difficult; almost all NAFTA predictions have

been based on static models. For an indication of the

complexities encountered in the dynamic case, consider the effects of a NAFTA on FDI in Mexico. First,

it would be necessary, or at least desirable, to have a

model that would predict FDI as a function of NAFTA

provisions (e.g., North American content requirements), real interest rates in Mexico and elsewhere, and

other relevant variables. New investment, in turn,

would bring with it new technology and improved

managerial practices. As a result, Mexico’s rate of

productivity growth should increase. This, in turn,

would make some Mexican industries more competitive, altering Mexico’s patterns of trade with both the

United States and third countries. No current model

incorporates these dynamics, even in crude approximation.

Moreover, many computer-based models, because

of their structure, make use of only a single year’s data

for “calibration.’ While other types of models incorporate equations fit to lengthy time series, models

calibrated on a single year cannot hope to reveal the

impacts of a change in underlying conditions.

Finally, even the simpler computer-based models are

complicated enough that only an expert, with considerable expenditure of time, can interpret the results. The

more complicated models, which one would expect to

be more useful because they are able to account for

more variables, tend to be opaque even to those who

have developed them. That is, the results simply

emerge; the analyst must take them or leave them. If

predictions seem counter-intuitive or otherwise surprising, and the model incorporates hundreds of

equations-any of which might change under a given

NAFTA scenario-it will generally be impossible to

explain these predictions. The only choice is to try to

make sure that the equations are individually correct,

properly linked, and the computer coding free of errors.

Because no one can understand a complex economic

model in its entirety, it can be difficult or impossible to

tell whether a particular model-based forecast of

NAFTA impacts has been “tweaked” to give results

supporting a particular advocacy position.

Note that there is a major difference between

economic modeling and the equally complex mathematical models employed in the physical sciences. In

most cases, models representing physical systems can

be checked, debugged, and validated by comparing

their predictions against empirical results. The very

complex computer programs used to simulate flow

around an airplane wing are verified and tuned based on

both wind tunnel experiments and flight tests of

prototype aircraft. It is true that, in a sense, a NAFTA

would be an “experiment.” However, it would be an

experiment that ran only once, with many of the critical

parameters outside the control of the modelers (e.g.,

decisions made by private investors). Under these

circumstances, it is difficult to determine how well a

given model actually performed.

Assumptions

The results of economic models are highly sensitive

to assumptions. These may be hidden to all except
-—

Appendix 5A--Economic Models as Predictors of NAFTA Impacts ● 111

those skilled in complex computer calculations and

intimately familiar with the particular model, Many

economists who work with models are more interested

in theory and/or in modeling itself than in a NAFTA or

its impacts; they may have little interest in realistic

assumptions if that would make other tasks more

difficult. But even where modelers seek realism, the

structure of the model often works against this.

Development of more sophisticated models will permit

some of the restrictive assumptions listed below to be

relaxed or removed. But even then, the problem of

validating the results will remain.

In addition to investment levels, discussed above,

many other assumptions must be made even in the most

sophisticated models currently available.3 Not all of

these assumptions feature in every model; but every

model is subject to some of them:

Perfect Competition. The model assumes many

firms, none of which have market power. In

reality, only a few firms compete in many of the

industries in question-for instance, automobile

production. In such cases, companies have considerable power to engage in strategic behavior and

to set prices, whereas in a perfectly competitive

setting, all companies become price takers.

Homogeneous Products. While gasoline is gasoline (within grades), automobiles differ, and

automakers develop strategies based on product

differentiation. Few models incorporate such

behavior.

Exchange Rates. The slow unexpectedly response

of the U.S. current account to dollar depreciation

during the latter part of the 1980s shows how

poorly exchange rate shifts are understood. But

even if the effects of changes in the value of the

peso relative to the dollar could be incorporated

into a model linking the two economies, no one

knows how to predict the future value of either

currency (which will depend on factors including,

for instance, the U.S. budget deficit),

Employment. Many models require restrictive

assumptions concerning labor markets. For instance, the model may be able to calculate the

number of jobs created or destroyed only at an

assumed fixed percentage of unemployment—not

a very useful result.

● Migration and Demographics. A NAFTA could

result in large numbers of Mexicans leaving the

agricultural sector to seek other jobs. Some may

migrate to the United States. If U.S. firms found

it easier to hire low-cost, unskilled Mexican

immigrants, this might reduce their incentives to

shift production to Mexico. None of this can be

modeled at present. When migration or immigration can be included at all, this is through more or

less arbitrary assumptions (e.g., that the number of

Mexicans entering the United States after a

NAFTA will increase or decrease by a certain

number).

If economic models seem of little use for forecasting,

one reason is that many were not developed for such

purposes. Many models have been built to explore the

ramifications of this or that set of theoretical postulates.

Economists who build and exercise models could help

policymakers by running their models with differing

sets of assumptions chosen to investigate the significance of factors such as investment levels, oil prices, or

migration. Few have attempted this, in part because

their interests are in modeling rather than in policy

outcomes.

Summary

By and large, the results of economic models suggest

little reason to fear overall loss of large numbers of U.S.

jobs. Few analyses have suggested large impacts of any

sort, particularly on the United States-as opposed to

Mexico, with its much smaller economy. But to a

considerable extent, such results are built into the

theoretical frameworks and assumptions of the models.

Nor can models reveal much about sectoral impacts,

still less regional impacts. Almost anything that

economic models say about NAFTA outcomes that

seems plausible might be said without their aid. But

because only a few experts can comprehend the innards

of such models, their results too easily acquire an air of

scientific authority. In the future, modeling of complex

economic systems may lead to results of use to

decisionmakers concerning events such as a NAFTA.

This is not the case today.

3 Most NAFTA-related projections have been based on computable generat equilibrium (CGE) models, a relatively new species of great power but

with the corresponding drawback of highly restrictive assumptions built into the theories on which the models are based. For an extensive discussion

of the limitations resulting from these assumptions, see James O. Stanford, “C.G.E. Models of North American Free Trade: A Critique of Methods and

Assumptions, ’ Testimony to the U.S. International Trade Commission Public Hearing on Economy-Wide Modeling of the Economic Implications of

Free Trade, Investigation No. 332-317, April 1992,
Chapter 6

The Border:

A Boundary, Not A Barrier
Contents

Page

SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

IMMIGRATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Immigrants From Mexico: Legal and Illegal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Competition for Jobs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Factors Influencing Immigration From Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

ENVIRONMENTAL ISSUES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The Scope of the Problem . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Environmental Protection in Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Environment and the NAFTA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

CONCLUDING REMARKS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

115

116

117

119

121

123

123

126

127

130

Boxes

Box Page

6-A. Evolution Of U.S. Immigration Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118

6-B. Conservation . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124

6-C. Enforcement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127

6-D. Major U.S.-Mexico Agreements Related to the Environment . . . . . . . . . . . . . . . . . . . 128

Figures

Figure Page

6-1. Country Sources of U.S. Immigrants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116

6-2. Wage Differentials Between Immigrants and Native-Born U.S. Workers . . . . . . . . . 116

6-3. Age Distributions in Mexico and the United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121

Tables

Table Page

6-1. Foreign-Born U.S. Residents by Major Sending Country . . . . . . . . . . . . . . . . . . . . . . . 116

6-2. Legal and Illegal Immigrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .116

6-3. Legal Immigrants From Top Five Countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119

6-4. Intended Residence of Legal Immigrants From Mexico Entering in 1990 . . . . . . . . . 119

6-5. Occupational Profiles for Mexican-Born and Native Workers . . . . . . . . . . . . . . . . . . . 120
Chapter 6

The Border: A Boundary, Not A Barrier

SUMMARY

This chapter deals with immigration from Mexico

to the United States and environmental problems

along the border. The boundary between the United

States and Mexico stretches for 2,000 miles; at most

points, people can cross almost as easily as polluted

air. It will be easier to improve the environment than

to slow immigration; short of establishing a police

state along the border, there is no way the United

States can stop the flow of migrants. Only socioeconomic development in Mexico that reaches into the

lowest classes will slow that flow appreciably.

For many years, large numbers of Mexican

workers have been coming to the United States,

legally or illegally, in search of higher wages and a

better life. If economic growth in Mexico leads to

meaningful gains in wages and living standards,

some of the pressure to emigrate will abate. But

Mexico’s income distribution is heavily skewed

toward the wealthier classes. Should the benefits of

a North American Free Trade Agreement (NAFTA)

go to those who are already well off, there might be

little if any slowing of emigration. Moreover, a

NAFTA could lead to increased emigration in the

short-term by creating rising expectations in Mexico

that could not be quickly satisfied-or simply by

creating new jobs near the border to serve as

jumping-off points for migrants.

Improvements in wages and living standards

promise to take decades rather than years, given

Mexico’s rapidly growing population and already

high levels of unemployment and underemployment. The Mexican economy would have to grow at

rates in the vicinity of 10 percent annually to create

enough well-paying jobs to keep people content at

home. This is substantially faster than the country

was able to achieve even in the relatively prosperous

1950s and 1960s. The United States has little choice

but to prepare to absorb and put to work continuing

inflows of Mexican immigrants. When people have

moved to the United States and want to work, it

makes sense to maximize their productive contributions to the U.S. economy.

Serious environmental problems exist on both

sides of the U.S.-Mexican border. Although the

United States is far from blameless, most pollution

sources lie in Mexico. Mexican cities, for example,

dump some 20 million gallons of raw sewage each

day into the Rio Grande--a river the two countries

share. Similarly, much of El Paso’s polluted air

comes from Ciudad Juarez. Because Mexico is poor

and the United States is rich, because pollution

sources in the 250,000 square mile Border Area

affect residents in both countries, and because

Mexico’s pollution problems are worse in other parts

of the country, it seems likely that over the next

several decades the United States will have to bear

a majority of the border clean-up costs.

Mexico has announced an ambitious program to

deal with environmental degradation, both along the

border and in its large interior cities. Generally

speaking, the country has relatively strict standards

on the books (although officials are still writing

regulations to implement a comprehensive environmental protection law passed in 1988). As in so

many cases in Mexico, the salient questions concern

enforcement and financing, rather than the letter of

laws and regulations. Today, the country lacks

capabilities for enforcement: the government employs fewer than 200 environmental inspectors, and

budgets less than 1 percent as much for its environmental agency as does the United States. Public

pressure for environmental protection and improvement is just beginning to build.

Stricter controls and enforcement will almost

certainly accompany industrial development in Mexico. Countries that can afford to protect their

environments and their populations generally do so;

there is no reason to expect Mexico to be an

exception. If the country was something of a haven

for polluters in the past, that will change. But even

the United States, which spends a great deal of

money on environmental protection, and which has

many years experience, has failed to do a very good

job of setting priorities and managing cleanup. Still,

there is much the United States could do to help

Mexico with technical assistance and money, particularly where pollution spills across the border.

Because Mexico is only beginning to attack its

environmental problems, and lacks technical expertise, in many cases there is not even baseline

–115–
116 ● U.S.-Mexico Trade

Figure 6-l-Country Sources of U.S. Immigrants

Latin America

Table 6-l—Foreign-Born U.S. Residents by Major

Sending Country

18%

Asia

4%

Other

20/0

Canada

17%

1941-195 0

Europe

America

1981-198 9

NOTE: Totals may not sum to 100 percent due to rounding.

SOURCE: Statistical Yeartwok of the knrnigration and Nafur&dization

Service (Washington, DC: U.S. Immigration and Naturalization

Service, 1990), pp. 3-4.

information on the severity of existing pollution

problems and pollution sources. By providing technical and financial assistance, the United States can

help ensure that a NAFTA will serve to raise, not

inadvertently lower, Mexico’s levels of environmental protection. The greatest need is for a steady,

predictable stream of funds for control and cleanup

in the border region, so that planners will not be

hostage to the vagaries of the budgetary processes in

the two countries. The greatest danger is that

government bodies in both countries might turn

away from their commitments to improving the

border environment once a NAFTA were implemented.

Number of U.S. residents

(thousands of people and percentage

of all foreign-born residents)

1980 1990

Mexico. . . . . . . . . . 2,199 15.6 % 4,447 20.67.

Germany. . . . . . . . . 849 6.0 % 1,163 5.4 %

Philippines. . . . . . . 501 3.6 % 998 4.6 ‘/o

Canada. . . . . . . . . . 843 6.0 % 870 4.0 %

United Kingdom... 669 4.87. 765 3.570

Cuba. . . . . . . . . . . . 608 4.3 % 751 3.570

Korea. . . . . . . . . . . 290 2.170 663 3.1 %

Italy. . . . . . . . . . . . . 832 5.9 % 640 3.070

Vietnam. . . . . . . . . 231 1.6 % 556 2.67.

China. . . . . . . . . . . 286 2.0 % 543 2.5 %

Totalb

. . . . . . . . . 14,080 100 % 21,632 10070

~he 10 countries iisted comprised the 10 largest senders as determined

by both the 1980 and 1990 censuses. The census does not ask whether

immigrants have Iegai status, but appears to count one-half to two-thirds

of undocumented resident aliens (see Jeffrey S. Passel, “Undocumented

Migration,” Annals of the Amekan Academy of Political and Social

Scx”ence, vol. 487, 1986, p. 187).

%otal represents a//foreign-born U.S. residents.

SOURCE: 1980 and 1990 U.S. Census Special Tabulations.

IMMIGRATION

The United States, a nation of immigrants, continues to admit more migrants than any other country.

In earlier years, most came from Europe (figure 6-l).

Today, they come predominately from Latin America and Asia, most of all from Mexico (table 6-l).

Many enter illegally (table 6-2).

Immigrants may fill jobs that would otherwise go

to native-born citizens; on the other hand, they may

accept work that natives refuse, such as some kinds

of agricultural labor, or provision of household

services. Whether or not Mexican immigrants compete for jobs with native-born citizens, immigrants

Table 6-2—Legal and Illegal Immigrants

New immigrants Immigrants as

(from all countries)

(millions)

percentage of

labor force at

Decade Legal Illegala

beginning of decade

1970s. . . . . . 4.5 1.3 6.7%

1980s. . . . . . 5.9 2.5 7.3%

aEstimated.

SOURCE: John M. Abowd and Richard B. Freeman, “Introduction and

Summary,” immigration, Trade, and the Labor Market, John M.

Abowd and Richad B. Freeman, eds. (Chicago and London:

University of Chicago Press, 1991), table 1, p. 5.

I This section draws heavily on ‘Trends in Mexiean Migration and Economic Developmeq’ report prepared for OTA under contract No. H3-7 140

by Sussn Christopherson and Marie R. Jones, December 1991. Information not othenvise cited comes from this report.
. . .

Chapter 6-The Border . 117

who work contribute directly to the U.S. economy

through their labor. They also pay taxes, while

absorbing social services-health care, welfare payments, public schools, and so on.2 Although immigrants with high levels of education, skill, and

experience tend to raise overall U.S. human capital

levels, most of those entering from Mexico have low

levels of education.

Immigrants From Mexico: Legal and Illegal

U.S. laws limit entry by people wishing to live and

work here through a complicated system of numerical quotas based on national origin, family relationships, and occupational skills. The Immigration and

Naturalization Service registered about 600,000 new

residents during each of the first 8 years of the

1980s. 3 The level rose to about 1 million in 1989 and

1.5 million in 1990 as a result of the amnesty

provisions of the Immigration Reform and Control

Act (IRCA) of 1986, which permitted many undocumented immigrants to qualify for permanent residency (box 6-A). With the amnesty in effect,

Mexican immigrants grew from around 10 percent

of newly registered immigrants to 37 percent in 1989

and 44 percent in 1990 (table 6-3).

Estimates of undocumented immigration are by

nature far less reliable, but the total number of illegal

residents is thought to be in the range of 2 to 3

million, increasing at about 200,000 annually. Mexicans make up an estimated two-thirds to threefourths of the undocumented population, with many

of the others from elsewhere in Latin America.4 As

discussed below, there is little evidence that IRCA

has reduced illegal entries.

While the stereotypic undocumented Mexican is

male, the proportion of single women has increased

in recent years, and U.S. Government estimates

indicate that women comprise about half the undocPhoto credit: Roberto Cordoba for the New York Times

In the Tijuana River levee preparing to climb the metal

barricade under the lights; hundreds cross this barrier into

the United States every night.

umented population. Moreover, IRCA has made it

easier for men who entered in earlier years to bring

their families here.

As indicated by table 6-4, most legal entrants from

Mexico settle in California, with Texas a distant

second. Moreover, most reside in a few large

metropolitan areas, especially Los Angeles. Undocumented workers tend to stay closer to the border;

indeed, some commute to work in the United States

daily from homes in Mexico. More than half a

million undocumented aliens may be sojourners

who live and work in the United States for a time,

save money, then return to Mexico.s

2 Most ~~te~ ~ugge~t he ~e[ of pawen~ to ~d claims on gov~ent by immigr~~ is sW. undocumented aliens in ~xfis, for example,

were found to contribute a net surplus to the State treasury, while six city governments, which bore the burdens of health care and educational costs,

showed net drains on revenues. Since the State surplus exceeded the deficits incurred by local governments, the overall impact was positive, Sidney

Weintraub, “Illegal Immigrants in Texas: Impact on Social Services and Related Considerations,” International Migration Reviewt, vol. 18, 1984, pp.

733-747. Other studies have found a net loss. See R. W. Gardner and L. F. Bouvier, ‘‘The United States, ’ Handbook on International Migration, W.

J. Serow et af., eds. (New York, NY: Greenwood Press, 1990), p. 356.

3 s~ari~fiCa/ yearbook of the r~~ig~~fi’o~ andNa~ra/ization s~~i~e, ]990 (washin@o~ DC: U.S. hnmigration and Naturalization SemlCe, 1991),

p. 52.

d K.A. Woodrow and J.S. Passel, “Post IRCA Undocumented Immigration to the United States: An Assessment Based on the June 1988 CPS, ”

Undocumented Migration to the United States. IRCA and the Experience of the 1980s, F.D. Bean, B. Edmonston, and J.S. Passel, eds. (Washingto&

DC: Urban Institute Press, 1990), pp. 33-76. Also D.G. Papedemctriou, ‘‘South-North Migration in the Western Hemisphere and U.S. Responses, ” paper

prepared for the Ninth Seminar on Migration of the lntematioml Organization for Migration (IOM), Geneva, Dec. 4-6, 1990, p. 11.

5 See Jeffrey S. Passel, ‘ ‘Undocumented MigraLiom ” Annals of the American Academy of Political and Social Science, vol. 487, 1986, pp. 181-200.
118 ● U.S.-Mexico Trade

Box 6-A—Evolution Of U.S. Immigration Lawl

1882

High unemployment on the west coast in the late 1870s leads to passage of the Chinese Exclusion Act, barring

entry by Chinese laborers. Little prior law or policy had dealt explicitly with immigration.

1906-1907

A “Gentlemen’s Agreement” signed with Japan limits entry to family members of Japanese residing in the

United States.

1920s

1921 brings the Quota Act, followed by the National Origins Act of 1924. New entrants permitted in proportion

to distribution of residents by birth or national origin as determined in the 1920 census, subject to an annual ceiling

of 154,000 total immigrants. Northern and Western European nations get 82 percent of the quota Southern and

Eastern Europe 16 percent.

1952

The Immigration and Nationality Act (INA) reaffirms quotas based on national origin, with very restrictive

annual limits for some countries (e.g., 185 Japanese, 105 Chinese, and 100 persons each from Egypt and New

Zealand). INA also establishes a preference system based on skill levels and family ties.

Mid-1960s

Amendments to INA passed at the height of the civil rights movement replace the previous quota system, based

on the existing racial, ethnic, and national origin composition of the U.S. population, with three major preference

groups:

● Immediate relatives of U.S. citizens, exempt from numerical limits.

. Refugees, subject to numerical limits determined annually through consultation between Congress and the

administration.

. Up to 270,000 entrants based on a 6-category preference system emphasizing family reunification, with a

ceiling of 20,000 from any one country.2

1986

With a great deal of public attention focused on illegal immigration, Congress passes the Immigration Reform

and Control Act. IRCA penalizes employers who knowingly hire undocumented workers, while allowing qualifying

undocumented aliens already in the country to apply for amnesty and eventual citizenship. To qualify,

undocumented aliens must have lived in the United States since January 1, 1982, or have worked harvesting

perishable crops at least 90 days during specified periods from 1983 to 1986. About 3.1 million people,

three-quarters of them Mexicans, applied for legalization.3

1990

In another major revision of the law, the Immigration Act of 1990 (P.L. 101-649) raises the immigration ceiling

to 700,000 for fiscal years 1992-94, then sets a cap of 675,000 beginning in fiscal 1995 (480,000 family-sponsored,

140,000 based on employment needs, and 55,000 to increase “diversity’’).4

1 S= R. W. @&XX and L. F. Bouvier, ‘‘The United States,’ Handbook on Znternationd Migration, W. J. Serow et al., eds. (New York,

NY: Greenwood Press, 1990), pp. 341-362,

2 me pNference ~stem put more wei~t on ftily reunifi~tion than on labor market qtditlctions. Professionals ad ~eir i.mme~te

family (spouses and children) were limited to 10 percent of the total (27,000 visas). Skilled or unskilled workers in short supply in the United

States (and their immediate family) fell in another category, also subject to the 10 percent limitation. The remaining four categories included

people c1 aiming various kinds of family relationships; for example, unmarried adult children of U.S. citizens and their childre~ a category

allocated 20 percent or 54,000 visas.

3 sm~o Df~.Brique@ ~d Sitiey Wein@ub, Regio~l ~~SectoralDme[opment in Maico as Alter~tives to Migration (Boulder, CO:

Westview, 1991), p. xi.

4 Statistical yearbook oj the Immigration and Naturalization Service, 1990 (Washingto~ DC: U.S. Immigration ~d Natitition

Service, 1991), p. A.1-20.

As a percentage of the total, the employment-based preference under the 1990 revisions remains about the same as established in the

mid- 1960s--close to 20 percent-but the qualifications in terms of education and skill have been raised.
Chapter 6--The Border ● 119

Table 6-3—Legal Immigrants From Top Five Countries

1985 1989 1990

Number Percent Number Percent Number Percent

(thousands) of total (thousands) of total (thousands) of total

Mexico. ...,..... 61 11% Mexico. . . . . . . . 405 370/0 Mexico . . . . . . . . . . . . . . 679 4 4 %

Philippines . . . . . . 48 8% El Salvador. . . . . 58 5% El Salvador . . . . . . . . . . 80 5%

South Korea . . . . . 35 6% Philippines . . . . . 57 5% Philippines . . . . . . . . . . . 64 4%

Vietnam . . . . . . . . 32 6% Vietnam . . . . . . . 38 3% Vietnam . . . . . . . . . . . . . 49 3%

India . . . . . . . . . . . 26 5% South Korea.... 34 3% Dominican Republic. . . 42 3%

Totala. . . . . . . . . 570 100% Total . . . . . . . 1,090 100% Total . . . . . . . . . . . . . 1,536 100%

a_fotals represent a//legal immigrants.

SOURCE: Stafistica/ Yearbook of the Immigration and Naturalization Service, 7990 (Washington, DC: U.S. Immigration and Naturalization Service,

1991), Pp. 52-53.

Competition for Jobs

Mexicans with schooling and skills have little

incentive to emigrate because wage structures in

Mexico reward skilled and professional workers

disproportionately.6 It is mostly the less skilled who

tend to migrate. Three-quarters of Mexican immigrants have less than a high school education,

compared to one-quarter of native-born U.S. citizens; only 2 percent of Mexican immigrants have

completed college. Although the differences are

slight, undocumented aliens tend to be younger than

legal immigrants, less literate in Spanish, and less

likely to speak or read English.

Direct competition for jobs with native-born

workers takes place primarily in the local labor

markets of cities with large immigrant populations.

Within these areas, competition centers on lowskilled jobs, as suggested by table 6-5.7 Native-born

men appear to be competing with Mexican immiTable 6-4-intended Residence of Legal Immigrants

From Mexico Entering in 1990

Percent of all

Number legal Mexican

(thousands) immigrants

Total. . . . . . . . . . . . . . . . . . . . . 679 1 00%

Top five States. . . . . . . . . . . . . 626 92

California. . . . . . . . . . . . . . . 420 62

Texas. . . . . . . . . . . . . . . . . . 131 19

Illinois. ., . . . . . . . . . . . . . . . 47 7

Arizona. . . . . . . . . . . . . . . . . 18 3

New Mexico. . . . . . . . . . . . . 8 1

Top five metropolitan areas. . . 426 63

Greater Los Angelesa. . . . . 303 45

Chicago. . . . . . . . . . . . . . . . 42 6

Houston, . . . . . . . . . . . . . . . 35 5

San Diego. . . . . . . . . . . . . . . 26 4

Dallas. . . . . . . . . . . . . . . . . . 19 3

alncluding ~s Angeles/~ng Beach, Anaheim/Santa Aria, and Riversicfei

San Bernadine.

SOURCE: Statistic/ Yearbook of the /remigration and Naturalization

Service, 1990 (Washington, DC: U.S. Immigration and Naturalization Service, 1991 ), pp. 79, 83.

6 George J. Borjas, “The Economic Consequences of Mgration,’ paper presented at Annual Meeting of the American Association for the

Advancement of Science, Chicago, Feb. 7, 1992. In countries like Sweden, with relatively flat income distributions, it is skilled workers that have the

greatest motivation to migrate

Incentives to migrate from Mexico to the United States depend not only on income but on income relative to others in a local area. Sec Odcd Stark

and J. Edward T&ylor, De?no,qraphy, vol. 26, 1989, pp. 1-14. While immigrants are responding to the wage differential between the two countries, most

migrants do not come from the poorest regions in Mexico, and most have jobs in Mexico before they emigrate.

7 Indirect effects can also be significant. For instance, fewer native-born citizens may migrate to Los Angeles if they conclude that immgrants have

depressed the job market there. Migration within Mexico can also affect U.S. jobs. For example, migration from Mexico’s intenor to maquilu plants

on the border can cut into U S. Jobs and job opportunities directly, as well as provide a stepping stone on a journey whose final destination IS Los Angeles

or Houston.

Labor force participation rates arc hlghcr for undocumented aliens than for either legal immigrants or natives, They are especially high for illegaf

immigrant women, 64 percent of whom work cmtsidc the home. Ixo Clu~vez, “Settlers and Sojourners: The Case of Mexicans in the United States, ”

Human Orgurrization, vol. 47, 1988, pp. 5-108.

Occupational distributions appear to be similm for Icgal and illegal immigran~s. More than a third of undocumented Mexican males and some 40

percent of undocumented Mexican fcmalcs work in manufacturing (but only 10 percent of native-born women), while agriculture and mining together

employ only about 15 percent of male and 10 pcrccnt of fcmale undocumented immigrants, Increming numbers of undocumented Mexican workers,

both men and women, have also found work in personal services and in restaurants. Sce Passcl, ‘‘Undocumented Immigration, ’ op. cit., footnote 5.

Many U.S. farmers, especially those growing fruits and vegetables, claim they depend heavily on undocumented workers to fill jobs no onc else

will take, ‘ ‘Agricultural Issues in U,S.-Mcxico Economic Integration, ’ report prepared for OTA under contract No. 13-0310 by B. Kris Schulthies and

Gary W. Williams, April 1992.
120 ● U.S.-Mexico Trade

Table 6-5-Occupational Profiles for Mexican-Born and Native Workers

Mexican-born workers Native workers

1988 Percent change, 1988

1980, All Men Women All 1980-88 (All) Men Women All

Operators, fabricators, and laborers. . . . . . . . . . . . . 44% 35.1 % 37.3% 35.8% -1 9% 21 .7% 8.7% 15.8%

Service workers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 15.6 25.0 18.5 5 9.5 18.3 13.5

Precision production, craft, and repair. . . . . . . . . . . 15 22.5 6.4 17.5 19 20.0 2.3 11.9

Farming, forestry, fisheries, . . . . . . . . . . . . . . . . . . . 13 17.6 8.2 14.7 11 5.1 1.3 3.4

Technicians, sales, and administrative support. . . . 7 4.7 17.3 8.6 17 19.1 44.8 30.8

Managers and professionals. . . . . . . . . . . . . . . . . . . 3 4.5 5.9 4.9 63 24,5 24.6 24.6

SOURCES: Mexican-Born Workers, 1980- Census of the Population, 1980 (Washington, DC: Bureau of the Census, 1980, table 255(b); 1988 -Spm”a/

Studies Series, P-23, No. 17 [Washington, DC: Bureau of the Census, 1988). Native Workers, “Current Population Survey,” unpublished tables,

Bureau of the Census, Washington, ~C, June 1988.

grants for manufacturing jobs. The picture is somewhat different for women. Mexican-born women

tend to find work in sectors where overall employment is declining, including personal services and

nondurable goods industries such as apparel. Because many native-born women have moved into

sales and administrative or ‘‘super-clerical’ positions in service industries, competition between

Mexican-born and native-born women for jobs may

be diminishing.

On average, wages for recent immigrants are more

than 20 percent below those for native workers, and

Mexicans earn lower wages than immigrants from

other countries (figure 6-2).8 It makes little difference whether or not the new immigrants have legal

status. In local labor markets, Mexican immigrants

depress wages to some degree. (New immigrants are

most likely to depress wages for older immigrants,

since both old and new are likely to seek similar

work.) But competition for jobs in local labor

markets is not the only source of impacts on U.S.

jobs and job opportunities.

Immigration increases the overall supply of lowskilled workers in the United States directly. Trade

(with Mexico and with other countries) has the same

effect indirectly if the United States imports goods

produced by low-skilled foreign workers while

exporting goods produced by higher skilled labor,

Under these circumstances, trade will displace

low-skilled jobs in the United States, creating an

.

Figure 6-2-Wage Differentials Between Immigrants

and Native-Born U.S. Workers -

Mexico ““

,,

,,

,,,

,,,!

Cuba “’”

,,,

.—c .! ,.

,,,

,.,

,,,

,,, “~ Philippines : :- ( : ~

,! ,..

z Korea : ;~

,,,

,,.

*

,,.

,,.

,,.

E Canada :;:!

,.

= .!. !.

.

,,.

,.

5 U, K. : \ : \

,,,

,.,

,,,

W. Germany ;;;;

,,,

-50 -40 -30 -20 -lo 0 10 20 30 40

Wage gap, 1980 (percent)

SOURCE: George J. Borjas, Friends or Strangers: The Impact of immigrants on the U.S. Economy (New York, NY: Basic Books,

1990), p. 232.

‘‘excess’ of low-skilled labor. Both immigration

and trade can thus drive down wages for low-skilled

U.S. workers. Estimates based on input-output

tables suggest that, in 1988, immigration (from all

countries) and trade (with all countries) had, together, increased the effective supply of high school

dropouts in the United States by 28 percent for men

and 31 percent for women .

9 Combining these

estimates with reasonable assumptions about the

substitutability of dropouts and graduates indicates

that trade and immigration flows may explain 30 to

50 percent of the approximately 10-percent decline

in the relative weekly wage of high school dropouts

between 1980 and 1988 (see ch. 4, figure 4-l).

Because Mexico is the largest source of U.S.

8 The wage gap between immigrants and mtive workers similar in age and educational attainment was 22 percent in 1980: it has been increasing;

immigrants earned 2.6 percent less in 1940, 11 percent less in 1960, and 15 percent less in 1970. One reason is that earlier waves of immigrants from

developed countries in Europe were more likely to have skills in high demand in the U.S. labor market. George J. Borjas, ‘‘Immigrants in the U.S. Labor

Market: 19080,” American Economic Review, vol. 81, 1991, pp. 287-291,

9 George J. F30rjN, Richard B. Freem and hwrence F. ~~? “On the Labor Market Effects of Immigration and Trade, Working Paper No. 3761,

National Bureau of Economic Research, Cambridge, MA, June 1991. In 1988, immigrant workers increased the supply of high school dropouts by

approximately 25 percenc the supply of high school graduates by 6-7 percent and the supply of college graduates by 10-11 percent,
Chapter 6--The Border . 121

Figure 6-3-Age Distributions in Mexico — —

and the United States

70+

60-69

50-59

Q

~ 40-49

m

g 30-39

a

20-29

10-19

0-9

70+

60-69

50-59

a

~ 40-49

m

g 30-39

a

20-29

10-19

0-9

15 10 5 0 5 10 15

Male Female

Percent population

1’

[’ I

l’- 1

United States

I

I I ! I

r r 1 1 I ! 1 I {

10 8 6 4 2 0 2 4 6 8 10

Male Female

Percent population

SOURCE: United Nations.

immigrants, and because Mexican immigrants have

lower skills on average than immigrants from

elsewhere, immigration from Mexico would probably account for something over half of the effect of

all immigration on the relative wages of U.S. high

school dropouts.

10 Immigration thus appears to have

had significant impacts on employment and wages

for U.S. workers, even if those impacts can be

estimated only roughly.

Factors Influencing Immigration

From Mexico

Migration from Mexico to the United States

responds to three major influences:

. income inequalities within Mexico, plus demographic and socioeconomic differences between the two countries;

● migration networks that have matured and

become entrenched over the past several decades; and

● U s . immigration policy.

Given the cumulative impacts of these factors, there

seems little likelihood that migration will slow

appreciably over the next two decades. The United

States could not unilaterally stop entry by illegals

short of militarizing a 2,000-mile border. There is

little the Mexican Government can do to stop

migration without dramatically improving living

standards for the many millions of poorer Mexicans

at the bottom of a highly unequal social pyramid.

Demographic and Socioeconomic Factors

Mexico will have great difficulty creating new

jobs for the many people who will enter the labor

force in the years ahead. More than half of all

Mexicans are under the age of 20, reflecting high

birth rates in past years. The population is currently

increasing at about 2.3 percent per year, doubling

11 The pyramidal age distibu- every 30 years or so.

tion shown in figure 6-3 creates a high degree of

momentum for further growth: even if fertility

dropped to replacement levels, Mexico’s population

would continue to increase for several decades as

young people entered their reproductive years.

Unless unemployment and underemployment come

down, and wages rise, pressures to emigrate could

grow rather than diminish.12 After World War II and

10 fiCePt for ]987, tie JJ~@d s~te~ M ex~fied rno~ mamlfac~ed g~ds to MeficO ~it MS imported in every year sinrx 1983 (ch. 3). The

$22.9 billion in U.S. imports from Mexico during 1991 would probably have required more less-skilled labor to produce than the $31.1 billion in exports

in that year. Thus trade with Mexico, despite being in substantial surplus, could also have had negative effect on the relative earnings of less skilled U.S.

workers.

1 I /992 wp ~~ra ~~eef ~m~~ow ~: population Reference Bureau, 1992) In con~as~ the U.S. pop~ation is growing at only 0.8 percent per

year (including growth due to immigrants), for a doubling time of 90 years.

12 while relative wages in Mexico and the United States will b a major force k deteug future rates of immigration there is much more to

socioeconomic development—and to peoples’ propensity to migrate in seruch of a better life--than their money incomes, as discussed in box 3-A in

chapter 3.
122 ● U.S..-Mexico Trade

until about 1980, Mexico’s gross domestic product

(GDP) grew at about 6 1/2 percent annually, before

dropping during the 1980s. If GDP growth averages

3 percent over the period 1985-2000, Mexico can

expect some 10 million “excess’ workers by the

turn of the century; if GDP growth averages 5

percent, the predicted excess would still reach 6

million. 13 It seems highly unlikely that Mexico’s

economy could expand fast enough to absorb all new

labor force entrants: this would take an unprecedented growth rate of more than 10 percent annually.

Because Mexico’s future growth will depend

heavily on foreign investment, failure to reach a free

trade agreement would ensure more immigration to

the United States. On the other hand, socioeconomic

improvements in Mexico may initially result in an

increase in migration to the United States rather than

the decrease expected over the long term. The reason

is that expectations could well rise faster than

economic improvements in Mexico can be realized. 14

Migration Networks

Flows of immigrants from particular regions in

Mexico to particular regions in the United States

have become strongly established over several

generations. Mexicans crossed the border to work on

railroads at the turn of the century, then to work on

farms, still later to work in the growing Los Angeles

garment industry.

Currently, the two major migrant streams come

from the border region and from rural areas and

small towns in Mexico’s interior. Immigrants from

the border region typically shuttle between jobs in

U.S. cities and homes in Mexico. Aided by family

and fiends, they make repeat trips to the same U.S.

city and often the same job. Migrants from the

interior are more likely to be undocumented and

more likely to end up staying in the United States

because of the distance from their home. Having, on

average, less education, they generally start lower on

the job ladder, but show somewhat more upward

mobility than border migrants.

15 The longer migrants from either group stay in the United States,

the more likely they are to move into better jobs,

bring in family members, and become permanent

U.S. residents.

U.S. Immigration Policy

IRCA was intended to slow illegal immigration

by requiring employers, for the first time, to verify

the legal status of those they hired. But because

forged papers are cheap and easily available and

because employers have little incentive to closely

question those they hire, or to give their papers more

than a cursory look (they need not even keep copies

on fide), the law has been easy to circumvent.l6

Apprehensions of illegals (the only routinely available indicator of entry) dropped sharply after passage of IRCA in 1986, but rose again to 1.2 million

in 1990-the same as in 1983.17 Not only does it

seem impossible for the United States to appreciably

slow the flow of undocumented workers, but as

Mexico continues to industrialize, more workers

will develop skills in demand in the United States,

increasing their attractiveness to U.S. employers (for

some of whom, undocumented workers are not only

cheap, but easier to control, and less likely to

complain than legal immigrants or native-born

workers),

Pressures to migrate grow with rapid population

increases in many parts of the Third World. Even if

wealthy nations provided considerable development

assistance to their poorer neighbors, these pressures

seem bound to increase. It maybe time to rationalize

migration on an international level; as a first step, for

instance, the United States could initiate discussions

aimed at international agreement on the definitions

of such migrant categories as political refugees. It

would also seem desirable to establish an interna13 Saul Trejo Reyes, ‘*Mexican-American Employment Relations: The Mexican Context,’ U.S.-Mexico Relations: Labor Market Interdependence,

Jorge A. Bustamante, Clark W. Reynolds, and Rail A. Hinojosa Ojeda, eds. (Stanford, CA: Stanford University Press, 1992), table 6, p, 265. By Reyes’s

definition, Mexico has about 2 1/2 million excess workers today.

14 u~u;horized Migration: An Economic De}’elopmenr Response, Report of the Commission for the Study Of International Migration and

Cooperative Fxonomic Development (Washington, DC: U.S. Government Printing Office, July 1990).

15 ~ me ~~ tom of Texas ~d Cdifomia, immigranw from the interior fmd work in agriculture or sawmills, as craftsmen or service workers; in

urban areas, they tend to work in construction or service jobs. Richard Jones and William Murray, “Occupational and Spatial Mobility of lkmporary

Mexican Migrants to the U. S.: A Comparative Analysis, ’ International Migration Review, vol. 20, 1986, pp. 973-985.

lb Rokfi L. Bach ad Howard Brill, ‘‘Impact of IRCA on the U.S. Labor Market and Economy, ’ Final Report to the U.S. Department of Labor,

Institute for Research on Multiculturalism and IntemationaJ Labor, State University of New York at Binghamton, April 1991.

17 Borjas, ‘‘The Economic Consequences of Migration, ” op. cit., footnote 6.
—..

Chapter 6---The Border ● 123

tional migration policy body, perhaps under the

United Nations.

ENVIRONMENTAL ISSUES

Mexico’s most serious environmental problems

are in the Federal District (Mexico City and vicinity), Guadalajara, and Monterrey, but it is pollution

along the border that most affects air and water

quality in the United States.18 NAFTA opponents

have argued that an agreement would spur still more

rapid and uncontrolled development along the border, with U.S. firms exporting dirty factories to

Mexico. Supporters counter that Mexico can improve its environment only if economic growth

generates new revenues that can be put toward

cleanup and prevention of pollution.

The Scope of the Problem

Some of the driest land in North America is found

in the Border Area, although the region also includes

forest and irrigated farrnlands.19 Most of the Border

Area is sparsely populated. High salinity of both soil

and river water limits food production and human

settlements. The total population is about 9 1/2

million, three-quarters of whom live in 14 pairs of

sister cities located on each side of the international

boundary. Tijuana-San Diego, with nearly 2 million

people, and Ciudad Juarez-El Paso with 1 1/2

million, are the two largest city pairs. More people

cross the border each day than any other national

boundary in the world, with over 200 million entries

from Mexico into the United States recorded at 10

crossing stations in 1989 and again in 1990.

Much of the growth on the Mexican side of the

border has been recent, paralleling industrial expansion-especially the maquiladoras, which have

been growing at about 16 percent annually as

measured by number of plants and employees.

Nearly half of those employed in the Border Area in

Mexico work in maquiladoras, more than half of

which are located in just two cities—Tijuana and

Ciudad Juarez.20 Rapid growth without land use and

urban planning has resulted in severe strains on

services and infrastructure. Mexican border cities do

not have enough drinking water, sewage capacity,

housing, or transportation. While San Diego is one

of the wealthiest cities in the United States, 40

percent of households across the border in Tijuana

have no running water, and 28 percent no electricity.21

Environmental problems in the Border Area run

the gamut: soil erosion, unmanaged solid and

18 Ah ~o~ution ~ Mexico City is be]ieved to cause hundr~s of deaths each year. U.S.-Mexico Trade: [nfOrmatlOn on En~’ironmental Regulafi”ons

and Enforcement, GAO/NS1AD-91-227 (Washington, DC: U.S. General Accounting Office, May 199 1), p. 3. Mexico City’s air pollution comes mostly

from cars, trucks, and buses (80 percent), with industry contributing 15 percent. Fecal dust comprises most of the balance, because the city’s sewage

treatment capacity is too small by a factor of three. N. Gardels and M. B. Snell, ‘‘Asphyxiation by Progress, ’ Columbia Journal of World Business,

vol. XXIV, spring 1989, p. 43.

One set of estimates ranks the relative costs of four classes of environmental problems in Mexico in descending order as follows:

. diarrheal diseases arising from water and solid waste pollution, coupled with lack of sanitation and poisoning of foodstuffs;

s health effects of air pollution in Mexico City;

. groundwater depletiow and

● soil erosion

S. Margulis, Back-of-the-Envte/ope Estimates of En}’ironmenkzl Damage Costs in Mexico, Policy Research Working Paper No. 824 (Washington DC:

World Bank, January 1992).

Because OTA’s assessment focuses on the potential effects of increased trade with Mexico on U.S. jobs, the discussion of the environment is

necessarily limited. A detaited review of the relationships between international trade and environmental protection can be found in U.S. Congress,

Offke of Txhnology Assessment Trade and the Environrnenf: Conflicts and Opportunities, OTA-BP-HE-94 (Washington DC: U.S. Government

Printing Office, May 1992), part of the ongoing study, American Industry and the Environment: Implications for Trade and U.S. Competitiveness. That

assessment will examine international markets for environmental services and technology, including Mexico’s, and the impact of environmental

regulations on U.S. industry.

19 Fact~ i~o~tion on tie Border Area comes from Integrated Environmental Plan for the Mexican-U.S. Border (WaShiQgtOQ, ~: U.S.

Government Printing Office, 1992) and Re>iew of U.S. -Mexico En\’ironmenfafIssues, Interagency Task Forcc coordinated by the Ofllce of the U.S. Trade

Representative, Washington, DC, February 1992, unless otherwise noted.

The ‘Border Area’ was itself defined in the 1983 ‘ ‘Agreement between the United States of America and the United Mexican States on Cooperation

for the Protection and Improvement of the Environment in the Border Area, ’ usually called the U, S,-Mexico Border Environmental Agreement or

sometimes the La Paz Agreement, as the region extending 100 kilometers (62 miles) on each side of the boundary between the two countries. Covering

about 250,000 square miles, the Border Area is nearly ,as large as lkxas (267,000 square miles).

20 summv: Enb,ironmenfa[ plan for the &fe.~iCarr-u S, Border Area, First Stage (1992-1994) (Wmhington, DC: U.S. Environment ~t~tioQ

Agency, February 1992), p. 8.

21 C. Cooper, ‘ ‘Ecological Exchanges in a Bi-national Metropolis: San Diego and Tijuana, ’ paper prcscntcd at the Annual Meeting of the American

Association for the Advancement of Science, Chicago, Feb. 8, 1992.

331-019 0 - 92 - 5 : ~L 3
124 ● U.S.-Mexico Trade

Box 6-B-Conservation

Biodiversity in Mexico is exceptionally high. The country ranks fourth in the world in total number of species

(first in species diversity for reptiles, second for mammals, and fourth for amphibians).l More than half of Mexican

reptilian, amphibian, and plant species are found only in Mexico, as are almost half of its freshwater fishes and about

one-third of its mammals.

Economic development and population growth inevitably threaten wildlife habitats. Mexico cannot feed its

people, and will seek to expand its agricultural lands. If a NAFTA reduces U.S. barriers to imports of Mexican fruits

and vegetables, areas that are now marginal for farming could come under cultivation. Careful planning will be

needed if the highways, roads, and railway lines needed to transport a growing volume of trade are not to cut into

fragile wetlands and desert habitats. But perhaps most threatened are the Gulf of Mexico and its estuaries, major

commercial fishing areas and unique resources.

The Gulf of Mexico

Gulf wetlands provide habitat for at least three quarters of North American migrating waterfowl.2 Many

species of fish and shellfish breed in these same wetlands. The gulf and its estuaries have already been seriously

damaged by U.S. oil and gas production, the associated petrochemical industries, and agricultural runoff, together

with industrial wastes and sewage from Mexico. Oil spills and wastes associated with shipping also pose continuing

threats. Examples of the damage include:

. polluted estuaries, with adverse consequences for commercial fishing (including closure of millions of acres

to harvesting of shellfish because of human health concerns);

• the deaths of an estimated 2 million seabirds and 100,000 marine mammals each year in the United States

alone because of marine debris, often plastic, which entangles the animals or is mistaken as food; and

● the loss of marine vegetation from dredging, urbanization, toxic industrial wastes, and sewage.

1 ~~”COEnVirO~enta/PrO~eCt, Report No. 1OOO5-ME (Washingto~ DC: World B* 1992).

Threm.s to biodiversity go back at least to the European colonization of North America and the westward expansion of the United States.

The estimated 60 million biso~ which in 1700 roamed much of what is now Mexico as well as the central United States, had been reduced to

a few dozen by 1900. F. 0, Monasterio, “Confronting Environmental Degradation: A Problem Without Borders,” FAO Review, vol. 20,

Sept./Oct. 1987, pp. 35-37.

2SummV: Environ~nta/ P+lan for the Men”can-U.S. Border Area, First Stage (1992-1994) wiishhl@OIL w: U.S. Envtinmati

Protection Ageney, February 1992), p. 8.

hazardous waste, pesticides and other agricultural that Mexico is the source of much of the air

chemicals, pollution of air and water, and squander- pollution in the Border Area as a whole.

ing of natural resources (box 6-B). Damage occurs

both directly (e.g., cent

. Water quality. Border Area water comes from

amination of rivers and major river systems including the Colorado,

ground water with industrial solvents) and indirectly Tijuana, and Rio Bravo/Rio Grande, and from

(e.g., as a secondary consequence of unpaved roads ground water sources. Threats to the quality of

and poor housing). The current situation can be Border Area water supplies, and to the marine

summarized as follows: environment of the Pacific Ocean and the Gulf

. Air quality. The limited data available from of Mexico, come both from industrial pollution

monitoring stations on the U.S. side indicate and from inadequate sewage treatment. For

that most of the larger U.S. border communi- example, the common ground water aquifer

ties, including San Diego and El Paso, fail to serving Nogales, Mexico and Nogales, Arizona

meet one or more national air quality standards. has been contamin ated with industrial solvents

Air quality monitoring, often limited on the from maquila plants.22

U.S. side, has only recently begun on the Many Mexican border cities have no sewage

Mexican side of the border, but it seems clear treatment plants of any kind. Ciudad Juarez, for

22 MW E. Kelly, Dick Kmp, MiC~el Grego~, and Jan Ri@ ‘‘lJ.S.-MexiCo Free Trade Negotiations and the Environment: Explotig the Issues, ”

Columbia Journal of World Business, vol. XXVI, s urnrner 1991, pp. 43-58.
Chapter 6--The Border ● 125

Cooperation and Conflict

The United States and Mexico are signatories to both bilateral and multilateral wildlife conservation

agreements covering migratory birds, game mammals, and endangered species. The agreements provide for animal

surveys, information exchange, training of technicians, enforcement of prohibitions against trade in wildlife, and

preservation of wetlands and wintering sites.3 Bilateral agreements also provide for establishment of national parks,

firefighting, and management of forest resources.

While cooperative efforts go back many years, so do conflicts--aver water rights, and recently over tuna

fishing. With the 1972 Marine Mammal Protection Act, the United States set strict standards for the protection of

dolphins, which were frequently killed or injured during commercial fishing operations.4 Failure by Mexico to meet

these standards led the United States, in 1991, to ban imports of tuna from Mexico.5 Mexico protested to the General

Agreement on Tariffs and Trade (GATT), arguing that the U.S. ban was an unfair trade practice. Subsequently, a

GATT dispute resolution panel found the U.S. action to be in violation of GATT codes. The matter remained

unresolved as of mid-1992, the next step being consideration of the panel’s findings by the GATT Council.

Similar issues have surrounded the incidental death of sea turtles during Mexican shrimp fishing operations

in the Pacific and the Gulf of Mexico. Seven of the eight species of marine turtles lay their eggs on Mexico’s

beaches. 6 U.S. shrimping vessels use special devices to keep sea turtles out of their nets, practices that Mexican

officials state will be adopted within 3 years. Mexico has also promised to stop fishing for the olive ridley sea turtle,

an endangered species found on the Pacific Coast of southern Mexico.

3 Bilater~ agr~men~ include the 1936 Convention for the Protection of Migratory Birds ~d Game Mammals and the 1984 Agreement

for Cooperation in the Conservation of Wildlife. Multilateral agreements include, among others, the 1941 Convention on Nature Protection and

Wildlife Preservation in the Western Hemisphere, the 1988 U.S.-Mexico-Canada Tripartite Agreement on the Conservation of Wetlands, and

the Convention on International Trade in Endangered Species of Witd Fauna and Flora (CITBS), a treaty addressing illegal trade in wildlife that

Mexico recently signed. Review of U.S.-Mexico Environmental Issues, Interagency ‘Ihsk Force coordinated by the Office of the U.S. Trade

Representative, Washington, DC, February 1992, p. 49-50.

4 tired dolp~ often sw together, especially in the eastern tropical Paciilc, where a quarter of the world’s tuna are taken. Fishe~en

who saw herds of dolphins surfacing to breathe would set their nets for tunq entangling dolphins who then suffocated because they could not

reach the surface. With passage of the 1972 law, modflcations to nets and new fishing practices reduced estimated doIphin deaths from about

130,000 in 1986 to 25,000 in 1991.

5 Tr~e ~~ the Envlrownt: conflicts ~~ oppo~unitie~ (washin@oq DC: Office of ~chnology Assessmen~ my 1992), pp. 15-16,

18-19. Between 1986 and 1989, Mexican fishermen reduced the number of dolphins killed per net deployed by more than half. R. Howard,

“U.S.-Mexican Cooperation Goes Far Beyond Trade,” Business America, Apr. 8, 1991, p. 9.

6 M~”co Environmental Project, op. cit., fOOb30te 1, p. 4.

example, produces 22 million gallons of raw

sewage daily. 23 With an estimated 8 to l0

million gallons of raw sewage pumped daily

into the Tijuana River, a 2.5-mile section of San

Diego beach has been closed since 1980, with

the quarantine temporarily extended to 6 miles

in 1983 and again in 1985 because of shifts in

ocean currents.24 Besides the major river systems, Border Area fresh water comes from

renewable and nonrenewable ground waters.

The quality of recharging water will affect the

quality of water later pumped from underground aquifers. Inadequate or nonexistent

sewage treatment has contamin ated wells with

coliform bacteria and viruses, leading to concern over sewage-associated diseases including

typhoid and hepatitis, which are more common

on the Mexican side of the border.25

23 D. Solis and S. L. Nazario, ‘‘(J. S., Mexico Take on Border Pollutiou” Wall Sfree[ Journul, Feb. 25, 1992, p. B 1.

2A J. bclou, “Dead]y Migration: Hazardous Industries’ Flight to the Third World, ’ Technology Review, July 1991, p. 50; Summary: Environmental

Pfan~or the A4exican-U.,Y Border, First Stage (1992-1994), op. cit., footnote 20, p. 12. San Diego, which has treated some of Tijuana’s waste water

since the 1960s, now plans to build a new sewage plant for Tiju.ana’s sole USC,

An estimaied 20 million gallons of raw sewage enters the Rio Grandc each day; the New River receives 17 million gallons. “A Permanent

US-Mexico Border Environmental Health Commission, ” .lourtwl of the American Medical As.rociurion, vol. 263, June 27, 1990, p. 3320.

25 me pan Americm Hea]th oq+iniz~tion places the incidence of typhoid at 100 times higher on the Mexican side. Solis md N@o, ‘ ‘U. S., Mexico

Take On Border Pollution, op. cit., footnote 23. Hepatitis in San Elimrio, TX, which affects 35 percent of children by the age of 8 and 90 percent of

residents by the age of 35, has been attributed to a sewage-polluted aquifer shared across the border. ‘‘Environmental Impact of N~A Investment

Provisions: Problems and Solutions, Memo to Ambassador Carla Hills, U.S. Trade Representative, from J D. Hair, President, National Wildlife

Federation, ” Nov. 20, 1991, p. 2.
126 ● U.S.-Mexico Trade

●

●

●

Municipal solid waste. Mexican border cities

generate about 3,500 tons of garbage each day;

only half is collected, two-thirds of which goes

to open air dumps.

Hazardous waste. Maquiladoras generate unknown but evidently large amounts of hazardous waste. Mexico’s environmental regulations

require that hazardous waste generated in

rnaquila plants from raw materials imported

from the United States either be returned or

“nationalized’ (e.g., recycled and retained in

Mexico). Compliance appears to be low: records collected by the U.S. Environmental

Protection Agency (EPA) show only 9 shipments (totaling 190 tons) of hazardous waste

from maquila plants through U.S. Customs

ports in Texas in 1987, and 356 shipments

(2,390 tons) in 1990. Mexico’s environmental

agency, SEDUE, has put the compliance of

maquiladoras with requirements for hazardous

waste return at about 30 percent in 1991, twice

as high as the previous year.26

Soil erosion. An estimated two-thirds of Mexican land suffers from moderate erosion (losses

of up to 4 tons of soil per acre per year), and 13

percent from severe erosion (losses of 4 to 6

tons annually) .27 For the farmer, erosion reduces land productivity and raises costs if more

fertilizer is used to replenish nutrients. Erosion

also leads to increased runoff, slowing the

recharge of aquifers, and causes silting of dams

and waterways.

Environmental Protection in Mexico

Mexico passed its first environmental law in

1971, establishing a Subsecretariat of Environmental Improvement under the Secretariat of Health,

but the agency got little money and did not

accomplish much.28 Under President de la Madrid,

who took office in 1982 after making the environment a campaign theme, Mexico created SEDUE,

with responsibilities similar to those of the U.S.

EPA. SEDUE’s budget remained small, if only

because of Mexico’s debt crisis, but the 1980s

brought acknowledgement that Mexico City’s air

pollution was becoming intolerable and saw the

beginnings of a grassroots environmental movement. So far, environmental groups have been small,

scattered, and concerned with local issues, most of

them in Mexico City, although citizen involvement

is also growing in the Border Area.

The comprehensive Federal Law of Ecological

Equilibrium and Environmental Protection followed

in 1988, covering both environmental protection

(water, air, pesticides, hazardous wastes) and conservation of natural resources.29 SEDUE was given

considerable powers to, for example, shut down

plants-powers not unusual in Mexico (box 6-C).

But Mexico’s government announced in April 1992

that SEDUE itself would be absorbed into a new

Secretariat for Social Development (SEDESOL),

along with the huge social welfare agency known as

PRONASOL. SEDESOL will be a large and powerful agency, thanks to the former PRONASOL; it also

becomes heir to a long-established tradition of

patronage and porkbarreling. In the U.S. context,

merging SEDUE into PRONASOL could be compared to merging EPA into the Department of Health

and Human Services. In the Mexican context, on the

other hand, the shift might be taken as a signal of a

higher priority for the environment. If nothing else,

a wait-and-see attitude seems called for. Much the

same holds for Mexico’s announced plans to give

more responsibility for environmental enforcement

and clean-up to state governments.

Mexican environmental laws state general objectives rather than specific criteria that must be met.

These broad objectives must be codified in regulatory language and technical standards, a process that

is underway but not complete. Regulations and

technical norms issued so far cover aspects of

environmental impact assessment, air pollution,

hazardous waste disposal, vehicle emissions in

26p. CMfioS, secret~ of Urban Development and Ecology, “Mexican Integrated Environmental Border Pl~” speech Ciudad Juarez, Oct. 23,

1991.

SEDUE (Secreturfa de Desarollo Urbario y Ecologia, the Secretariat for Urban Development and Ecology) has recently merged with another agency,

as discussed later in the chapter. For convenience, the chapter refers to SEDUE throughout.

zTBack.o~.rhe-Enve/ope E~fi~fes o~Environmenta/ Damage Costs in Mexico, op. cit., foomote 18, pp. 7-8.

28 ~ls SW- of even~ before passage of Mexico’s comprehensive environmental law h 1988 is btied on S.P. Mumme, “Clearing the Air:

Environmental Reform in Mexico,” Environment, vol. 33, December 1991, pp. 9-10.

29 me text was dr~ted by me then head of SED~, a close associate of Mexico’s current President Salinas. Seventeen separate U.S. statutes deal

with the comparable range of issues. See Review of U.S.-Mexico Environmental Issues, op. cit., footnote 19, pp. 17-23.

As in the United States, the laws and regulations of the 31 Mexican states must be at least as stringent w federal law.
Chapter 6--The Border . 127

Box 6-C—Enforcementl

In the United States, legal maneuvers and litigation can substantially slow regulatory enforcement. By the same

token, environmental groups have been able to use the U.S. legal system to force reluctant firms and government

agencies to follow the law. Neither polluters nor citizen groups have as much recourse in Mexico, where government

agencies have substantially more independence of action and freedom from oversight.2 Enforcement takes place

primarily through administrative proceedings, rather than litigation.

Like the United States, Mexico relies on a system of permits (now requiring environmental impact assessments

for new facilities and expansions, and, if there are possible hazards, a risk assessment) and inspections to ensure

compliance with laws and regulations. SEDUE can levy fines, close plants (partially, temporarily, permanently, or

in combination), and order administrative detention of corporate officers for up to 36 hours (usually served in

periods of several hours per day until an agreement on compliance is reached). SEDUE not infrequently shuts plants

before negotiations to force a quick settlement.3 Crimin al prosecutions have been rare.

Despite SEDUE’s theoretical powers, enforcement of Mexico’s environmental regulations has been lax. The

agency’s budget was only $39 million in 1991 (compared with a U.S. EPA budget of about $5 billion), and at that

had increased by more than six times from a 1989 total of $6 million.4 Mexico had only 19 inspectors to monitor

some 120,000 industrial facilities until 1991, when the authorized level went to 100.5

1 For tier&@ see Rtw@v of U.S. -M~”co Environmentullssues, Interagency lhsk Force coordimited by tie Office of tie U.S. Trade

Representative, Washington, DC, February 1992, pp. 38-42.

2 Mexico’s Civfl law ~adition gives the executive considerable power to take unilateral action and to itself resolve disputes; tie public

at large has little standing or influence. S.S. Jarvis, “Preparing Employees to Work South of the Border,” Personnel, June 1990, p. 60.

3 p~t ~lo~@s @ sEDuE ~ tie titer of 1990-91 sp~~ mu]~tio~s opemting ~ Mexico to begin enviromnenti audits in

preparation for negotiations with S!ZDUE inspectors, so as to avert the possibility of costly shutdowns. R.S, Jones, “Learmn“ gfrom Experience,”

Business Mexico, October 1991, p. 26.

Reportedly, more than 1,000 plants have been closed since 1989-82 permanently, including a state-owned refinery in Mexico City that

employed 5,000 people. A.R. Dowd, “Viva Free Trade with Mexico!” Fortune, June 17, 1991, p. 100.

4 (’Meficm ~v~omn~ ~ws, ReW~tions ~d sti~ds: Pre_ Report of EPA Findings,” U.S. ~v~o~en~ protection

Agency, Offke of Enforcement Oftlce of the General Counsel, May 3, 1991, revised June 19, 1991, p. 2.

The World Bank is currently evaluating Mexico’s application for a $90 million loan for SEDUE. T Atkesou Assistant Administrator,

0ft7ceof International Activities, Environmental Protection Agency, Hearings on the North American Free Trade Agreement, Serial No. 102-15,

House Committee on Energy and Commerce, Subcommittee on Commeree, Consumer Proteetioq and Competitiveness, Mar. 20, May 8 and

15, 1991, p. 104.

5 S. ~etcher ~d M. Ticm~ “Environment ad Trade, ” Issue Brief IB92006, Congressional Research Service, updated Mar. 4, 1992.

Fifty of the new inspectors are intended for the Border Area.

Mexico City, and contamination of the sea. Environ- waste; leaking underground storage tanks; and

mental impact and risk assessments are not required cleanup of abandoned hazardous wastesites.31

for existing industrial facilities, but plants must

register with SEDUE and apply for air, water, and

hazardous waste permits, as appropriate.30 Three Environment and the NAFTA

areas regulated in the United States but not yet Mexico and the United States have negotiated

covered in Mexico are: land disposal of hazardous over issues at least tangentially related to the

30 me ~rmntage of ~quiladora pI~tS m=ting the requirements for licensing under the 1988 federat law reportedly rose from 6 Prcent in 1989

to 55 percent in the fall of 1991. Chirinos, “Mexican Integrated Environmental Border Plan,” op. cit., footnote 26.

U.S. labor and environmental groups have argued, with some justification, that lax environmental enforcement in Mexico attracts U.S. plants that

might otherwise stay at home. Most of the documented cases involve inherently dirty industrial processes, where U.S. regulations have become

increasingly stringent. For example, three-quarters of furniture companies that relocated from I-m Angeles to Mexico during 1989 cited tough California

standards for emissions associated with paint and solvents, although labor costs appeared to beat least as important as a reason for moving. U.S. Generat

Accounting OffIce, letter to the Honorable John Dingcll, Hearings on the North American Free Trade Agreement, Serial No. 102-1-5, Iiouse Committee

on Energy and Commerce, Subcommittee on Commerce, Consumer Protection and Competitiveness, March 20, May 8 and 15, 1991, p. 237.

A study by the U.S. International Trade Commission found that labor costs ranked first and environmental controls last in a list of 21 factors

influencing locational decisions. T. Atkeson, Assistant Administrator, Office of International Activities, Environmental Protedon Agency, Hearings

on the North American Free Trade Agreement (above), p, 87.

31 u.s, -&fexiCo Trade: Information on Environmental Regulations and Enforcement, op. Cit., footnote 18, p. 6.
128 ● U.S.-Mexico Trade

Box 6-D—Major U.S.-Mexico Agreements Related to the Environment

1889- International Boundary Commission (IBC)

Created to settle boundary disputes.

1906- Convention Providing for the Equitable Distribution of the Waters of the Rio Grande for Irrigation

Purposes

Governed allocation of water from the upper 90 miles of the Rio Bravo/Rio Grande.

1944- Treaty on the Utilization of Waters of the Colorado and Tijuana Rivers and of the Rio Grande (Water

Treaty of 1944)

Replaced the IBC with the International Boundary and Water Commission (IBWC) and modified the 1906

convention. In cooperation with SEDUE and EPA, the IBWC identifies and seeks to correct cross-border water

pollution problems. Currently, the IBWC is overseeing construction or expansion of waste water treatment facilities

in five pairs of Border Area cities.

1983- U.S. Mexico Border Environmental Agreement (La Paz Agreement)

First formal agreement to improve the environment in the Border Area. Provides a “basis for cooperation

for the protection, improvement, and conservation of the environment and the problems that affect it . . . and a

framework for development of a system of notification for emergency situations.” Defines responsibilities for

governmental bodies including EPA, SEDUE, and the IBWC. Provides for study of air pollution along the border.

1989- Mexico City Agreement on Pollution

Commits both countries to solving air and water pollution, hazardous waste, and environmental health

problems in Mexico City.

Integrated Environmental Plan for the Mexican-U.S. Border Area (First Stage, 1992-1994)

The Plan, as it is referred to in this chapter, was released in February 1992. It is discussed in the text of the

chapter.

lu.s.-~~ico Tra&:lrlfOr~tiOn on Environmental Regulations andEnforcement, GAOAWUA.D-91-227 (wil.$h@OtL w: U.S. ~nti

Accounting Oillce, May 1991); Integrated Environmental P&n for the Mexican-U.S. Border Area (First Stage, 1992-1994) (Washington, DC:

U.S. Government Printing Oftlce, 1992).

environment-notably use of water from the Rio master plan for dealing with border environmental

Grande--for more than a century. During the 1980s,

the agenda expanded to include the full panoply of

environmental issues (box 6-D).

In May 1991, when Congress granted the administration ‘‘fast track’ negotiating authority, it called

for the administration to address the environmental

consequences of a NAFTA (on both sides of the

border) on a parallel track.32 In response, Presidents

Bush and Salinas charged EPA and SEDUE to

jointly prepare the Integrated Environmental Plan

for the Mexican-US. Border Area, Intended as a

problems, the Plan was released at the same time as

a parallel Review of U.S.-Mexico Environmental

Issues (the ‘‘Review’ ‘), prepared by the Office of the

U.S. Trade Representative. Neither the Plan nor the

Review is an environmental impact statement; such

a document could not be prepared without a NAFTA

text in hand.

Both reports, and especially the more important

Plan, have come under intense criticism for lacking

specific goals for environmental improvements and

32 III a letter to President BUSIL Senator Lloyd Bentsen, W- of the Committee on Finance, and Representative Dan Rostenkowski, Chairman

of the Committee on Ways and Means, also requested the president to indicate how differences in health and safety standards and the rights of workers

in the two countries would be addressed. See Exchange of Letters on Issues Concerning the Negotian”on of a North Amen”can Free Trade Agreement,

Cornrnittee on Ways and Means, U.S. House of Representatives, May 1, 1991.
Chapter 6--The Border ● 129

cost estimates for achieving them.33 EPA and

SEDUE conducted 17 public hearings in September

1991, following release of a draft of the Plan the

preceding month. Seven of the hearings took place

in Mexico, where they attracted great attention as

unique events in a country lacking a tradition of

citizen involvement on environmental matters.34

The final version of the Plan addressed some (but

not all) of the issues raised at the hearings. It does

not, for example, call for maquiladoras to submit

plans and timetables for meeting environmental

standards, or require SEDUE to disclose information

on environmental and health hazards, a matter of

great concern to many of those who participated in

hearings on the Mexican side of the border.35

Congressional concern has continued to mount. In

House Resolution 146, Congress reserved the right

to rescind fast-track authority if the administration

failed to act decisively on border environmental

problems, and in at least four other resolutions (H.

Res. 149, H. Res. 151, H. Res. 227, and H. Res. 246),

Congress requested the administration to include

environmental provisions within the NAFTA itself. 36 In response to mounting criticism and this

spate of resolutions, the administration began to

negotiate for ‘‘green language’ in a NAFTA. U.S.

Trade Representative Carla Hills, in a June 1992

letter to Senator Max Baucus, listed the following

environmental goals for NAFTA:37

1.

2.

3.

4.

To ensure that U.S. environmental laws and

regulations, if applied in a nondiscriminatory

manner, can be defended against unfair trade

challenges.

To provide that the NAFTA not interfere with

U.S. measures taken to comply with international environmental agreements.

To make clear that there is to be no ‘‘downward harmonization’ of U.S. environmental

and health and safety standards, and to explicitly recognize, in the text of the NAFTA, the

right of States and other subnational governmental bodies to set their own environmental

and health protection standards.

To place the burden of proof on the party

challenging any environmental measure as

constituting an unfair trade measure.

33 In~~~ponse t. ~ltique~ of ~ draft of tie Re\,ien,, ~cl~scd in October 1991, tie final version included further discussion of public health and maritime

issues, among other additions. The additions can best be characterized as background information. See, for example, ‘‘Comments on the Draft Review

of U.S.-Mexico Environmental Issues, ’ Natural Resources Defense Council, Instituto Authnomo De In)’estigaciones Ecolbgzca.r, AC,, and Grupo de

/os Cien, December 1991. The authors took issue with the draft Review because it concentmted on the Border Area, assumed that environmental

improvement would automatically follow from economic development, and did not consider alternatives to a NAFTA versus no-NAFTA

choice.

34 For discussion of the Cfitlclsms of tie 199 I &aft P/an based on testimony at eight of the hearings, interviews with environment] SpeCkifiSIS in

the Border Area, and other sources, along with briefer comments on the final Plan, see J.G. Rich, Planning the Border’s Future: The A4crican-U.S.

InregratedBorder Environmental Plan, U, S.-Mexican Occasional Paper No. 1 of the U.S.-Mexican Policy Studies Program, LBJ School of Public Affairs

(AustirL TX: University of Texas at Austin, March 1992). This report summarizes criticisms of the draft Plan in 17 areas, ranging from inadequacies

in the planning process itself (border communities complained of exclusion from the process, including inadequate notice of hearings) to vagueness on

measures for improvement in all areas of environmental protection. Lack of funding drew the most criticism.

35 ~c~ P/annlng the Border’s Fumre, ibid.

In a another analysis of the Plan, the Texas Center for Policy Studies stated that it ‘‘still falls far short of the needs of the border area today. After

examining 87 action Items for 1992 in the P/an—none constrained by financing—the Center concluded that:

● more than hatf (53 percent) consisted of information exchange during meetings, training programs, and plant visits;

. 10 percent of the remainder <

‘amounted to a promise to enforce existing laws’ and

. 17 percent called for a study or for further planning. See “A Response to the EPA/SEDUE Integrated Border Environment Plan+” Texas Center

for Policy Studies, Austin, Mar. I, 1992.

Another critic in Texas, the Governor’s environmental policy advisor, included in the Plan’s deficiencies that it is: short on funding; lacks deadlines;

is vague on enforcement and on mechanisms for coordination between State agencies and EPA; and calls for unnecessary needs assessments. She also

criticized the U.S. funding commitment compared to that of Mexico. See International Trade Reporter, Mar. 4, 1982, p. 401.

Further criticism of the Plan and/or the Revieu has come from the Community Nutrition Institute, the National WiJdlife Federation the Fair Trade

Campaign, and the Environrncntal Defense Fund. See, for summaries, “NAFTA: Flaws in Free Trade, Border Plans Seen Drawing Environmentalists’

Opposition” International Trade Reporter, Mar. 11, 1992, p, 452; and “Environrncntal Community Cites Flaws in Border Pl,an, Environmental Review,” International Environmental Reporter, Mar. 11, 1992, pp. 136-137.

M Con@ess also raised ~c~c issues in hearing~,g,, I.r.vues Relating to a Bllutcrul Free Trade Agreement with Muico, hcarin.gs, Subcommittee

on Western Hemisphere and Pcacc Corps Affairs, Commiltcc on Foreign Relations, U.S. Scmtc, Mar. 14, 22 and Apr. 11, 1991, and North American

Free Trade Agreement, hc.arings, Subcommittcc on Commcrcc, Consurncr Protcctlon, :md Competitiveness, Committee on Energy and Commerce, U.S.

House of Representatives, Mar, 20, May 8 and 15, 1991,

37 “Hills Lays Out Administration Plans on Environmental Initiatives in NAFTA,” [rrslde U..Y. Trade, June 19, 1992, pp. S-1 - S-5.
130 ● U.S.-Mexico Trade

5. To include technical and scientific experts in

dispute resolution concerning environmental

issues.

Though such a response might seem comprehensive,

it fell far short of what Senator Baucus sought. For

example, Senator Baucus had asked for an explicit

declaration that existing U.S. Federal and State

environmental laws and regulations be immune from

challenge under NAFTA. He also called for uniform

North American environmental protection standards, which all new manufacturing facilities would

have to meet; for financial commitments within the

NAFTA text; and suggested that a permanent

advisory body be created to monitor environmental

conditions in the years following implementation of

a NAFTA.

Cleaning up the Border Area will take a great deal

of money. Keeping it clean will require serious

commitment to regulatory enforcement, particularly

in Mexico. Estimates of the sums needed run well

into the billions of dollars.38 The final version of the

Plan provides relatively little reassurance on the

central issue of long-term funding by the two

governments (or other means of financing clean-up

such as taxes on polluters). The United States has

agreed to pay $379 million during fiscal years 1992

and 1993, and Mexico $466 million over the 3 years

1992 to 1994. These are modest sums. They may not

be enough even to begin arresting the deterioration

of the Border Area environment, much less to begin

improving conditions there. Since the Border Area

is still industrializing rapidly on the Mexican side,

greater expenditures in all likelihood will be needed

in the years ahead just to keep up with growth.

Mexico’s budgetary commitment is commendable, but it is hard to be sanguine about the

government’s decision to eliminate SEDUE as an

independent agency, and to merge it into a Secretariat for Social Development. Moreover, should a

NAFTA be implemented, some of the pressure

would be off the Mexican Government, because

environmental groups are not strong enough, as yet,

to have much influence. Ensuring border cleanup

requires financing methods in both countries that do

not depend on government appropriations. As discussed in chapter 2, a binational commission could

be created to finance environmental improvement

and infrastructure projects (e.g., sewage treatment

plants) along the border.39 The commission might

issue bonds, backed by both governments, to be

repaid, for example, by the proceeds from user fees

or “green taxes. ” These fees could be levied on

business profits in the Border Area or on exports

from maquiladoras.

CONCLUDING REMARKS

Signs of the growing momentum behind environmental protection in Mexico include the comprehensive federal law passed in 1988, a growing number

of environmental inspectors, stronger ties between

the environmental protection agencies in Mexico

and the United States, spending promised by Mexico

for implementation of the Integrated Plan for the

Mexican-U.S. Border Area, and growing citizen

awareness. But the problems are massive, and the

Plan has been widely criticized as inadequate,

particularly in its lack of timetables and guaranteed

long-term funding sources. Despite its own limited

success in setting priorities, the United States has far

more experience than Mexico in environmental

cleanup and control, and could, with Mexico’s

agreement, take a more prominent role in improving

environmental conditions in the Border Area, where

pollution affects people in both countries.

In contrast, the United States has relatively little

ability to control the flow of Mexican immigrants

seeking to cross the border. Draconian policies

would be necessary to slow undocumented immigration appreciably; only with improvements in wages

and income distribution in Mexico will the pressures

that drive migration moderate. There is little reason

to expect a NAFTA, by itself, to slow migration to

the United States.

38 h EPA Offlcid remnt]y estimated that meeting current needs simply for sewage treatment and ~“ g water in the Border Areawould cost $3.5

billion. “U.S. Working With Mexico to Develop Way to Track Maquiladora’s Hazardous Wastes, ” International Environment Reporter, July 1, 1992,

p.431. Also see “Down Mexico Way,’ The Economist, Apr. 18, 1992, p. 24; “The Environmental Impact of N- Investment Provisions, ’ op. cit.,

foomote 25, p. 5.

39 Rep~sentatives Bill Mc~dson and Ron Wyden have introduced a resolution (H. Con. Res. 325) calling for a U.S.-Mexico envkOnmentid

commission with 13 members from each country having such responsibilities. Such a commission could also determine needs and priorities. This

approach has the advantage that funds would be independent of federal budget processes in both countries. See Congressionuf Record, May 27, 1992,

p. H 3834.
Chapter 7

Autos and Parts
Contents

SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

MEXICO’S AUTO INDUSTRY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Assembly . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The Mexican Parts Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

THE U.S. INDUSTRY: ASSEMBLERS AND SUPPLIERS . . . . . . . . . . . . . . . . . . . . . . . . .

Industry in Trouble . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

costs . . . . . . . . . . . . ,4..... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Suppliers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

State and Local Government Incentives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The Labor Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

MEXICAN AUTO PRODUCTION TODAY AND TOMORROW . . . . . . . . . . . . . . . . . . .

Mexico as a Location for Production . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

NAFTA Impacts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

NAFTA and U.S. Jobs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

CONCLUDING REMARKS . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . .

Page

133

134

134

137

138

138

140

142

143

144

144

144

147

149

150

Boxes

Box Page

7-A. North American Auto Production: An Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134

7-B. Mexico’s Auto Decrees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136

Figures

Figure Page

7-1. U.S. Production and Sales of Passenger Cars and Trucks.. . . . . . . . . . . . . . . . . . . . . . 135

7-2. U.S. Imports of Auto Parts by Source . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142

7-3. U.S.-Mexico Auto Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147

7-4. Projected U.S. Auto Industry Employment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150

Tables

Table Page

7-1. Mexican Car and Truck Production, 1981-1991 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

7-2. Assembly Plants in Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

7-3. Mexico’s Auto Parts Market, 1990 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

7-4. Mexico’s Major Auto Parts Manufacturers and Their Strategic Alliances . . . . . . . . .

7-5. Retail Incentives in the U.S. Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

7-6. U.S. Passenger Car Sales by Nameplate and Location of Production, 1991 . . . . . . .

7-7. North American Passenger Car Assembly Plants, 1992 . . . . . . . . . . . . . . . . . . . . . . . . .

7-8. Comparative Wage and Benefit Levels, 1986 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

7-9. Pension and Health Insurance Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

7-10. U.S. Content . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

7-11. U.S. Auto Industry Employment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

7-12. Cost Structure for Auto Assembly in the United States and Mexico . . . . . . . . . . . . .

7-13.illustration of the Effect of Design-for-Assembly on Costs . . . . . . . . . . . . . . . . . . . .

7-14. New Assembly Plant Investments by Big Three Automakers. . . . . . . . . . . . . . . . . . .

7-15. Cost of Typical Wiring Harness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

136

137

138

139

139

140

141

142

142

143

144

145

145

146

147
Chapter 7

Autos and Parts

SUMMARY

Mexico has an automobile industry today as a

direct result of government policies that forced

companies to produce in Mexico in order to sell

there. General Motors (GM), Ford, Chrysler, Nissan,

and Volkswagen (VW), the major firms in the

Mexican industry, viewed their original investments

as the price of admission to Mexico’s market.

Because sales were too low to support efficient

plants, the companies would have preferred to

supply Mexico through imports. But today all five

operate engine and assembly plants oriented to both

the domestic and export markets.

Most of the companies have assembly plants near

Mexico City that primarily serve the domestic

market. Historically, these have been profitable only

because of trade barriers; if a North American Free

Trade Agreement (NAFTA) sharply lowered those

barriers, these plants would have to reduce their

costs and improve their productivity to remain

viable. Newer export-oriented plants have good to

excellent performance records. The automakers now

view them as part of their continental production

base. In contrast to engine and assembly plants, most

maquiladora investments for assembling wiring

harness, electrical and electronic parts, and seats

would have been made regardless of the Mexican

Government’s auto decrees.

In the highly integrated U.S.-Canadian industry,

trade friction and the threat of protection by the

United States accelerated investments by Japanese

automakers in U.S. ‘ ‘transplants. ” These, along

with imports, have permanently altered the dynamics of the industry, for GM, Ford, and Chrysler-the

Big Three-and for the independent firms that

supply them with parts (box 7-A).

Transplant assemblers, and the transplant suppliers that sell to them, have significant cost advantages

over their U.S.-based rivals; even if they pay similar

wages, their benefit costs are much lower. Independent U.S. suppliers will come under severe pressure

in the next few years. Some may see their hope for

survival in moving to Mexico.

A NAFTA that forced Mexico’s Government to

abandon its protectionist policies would leave auto-

. ,.,.

makers free to locate plants in Mexico based on the

same criteria they use in the United States and

Canada. But Mexico offers limited strategic options

for the Big Three: while direct production costs are

sometimes lower in Mexico, shipping can eat up the

savings and then some. Only for engines and

labor-intensive maquila parts production do low

labor costs consistently outweigh the additional

costs of operating in Mexico. Thus, OTA finds little

reason to believe that existing efficient capacity with

a high utilization rate in the United States or Canada

would be closed and replaced by production in

Mexico. But plants with old equipment, poor productivity/qualiy records, or low utilization (e.g.,

because they make vehicles whose sales have

declined) will be at risk regardless of a NAFTA.

Companies that need new capacity in North

America will find Mexico more attractive as they

continue to gain experience there, as the Mexican

market grows, and as local suppliers become more

numerous and capable, So far, a weak Mexican

supplier base has made it difficult for automakers to

meet existing local content requirements. Mexicanowned and operated parts firms can rarely match

their U.S. and Canadian counterparts in terms of cost

or quality, much less engineering capability; small

size, low productivity, and poor management offset

their low labor costs.

In the short term, then, neither the Big Three nor

transplant assemblers can expect to substantially

improve their competitive positions by moving

production to Mexico, Some parts suppliers can do

so, particularly if they have labor-intensive production processes. Parts firms are putting more sophisticated production into Mexico, and Mexican suppliers are entering strategic alliances with U.S. and

European firms to improve their own capabilities.

Even so, the overall risks to U.S. jobs and job

opportunities in this industry stem more from

contraction and restructuring by the Big Three and

their independent suppliers, who have not only lost

sales to transplants and imports but must improve

productivity to achieve and maintain profitability.

As these companies become leaner, they need fewer

workers. Meanwhile, most of the transplants have

located in different parts of the country than the

–133 –
134 ● U.S.-Mexico Trade

Box 7-A—North American Auto Production: An Overview

A car or truck has thousands of parts made by many different companies. The industry can be viewed as a

pyramid consisting of assemblers, their internal or captive suppliers, and independent suppliers in several tiers. The

assemblers sit at the apex, designing, developing, assembling, marketing, and distributing vehicles—which today

include a wide variety of light trucks (e.g., vans and jeep-like utility vehicles), as well as passenger cars (1991 U.S.

sales included 5 million light trucks, along with 9.5 million cars), typically, the assemblers make most major

components themselves--engines, transmissions, and large stampings (fenders, hoods, body structure). But they

buy other parts, components, and subsystems, ranging from brakes and engine electronics to seats and window glass.

The 1965 auto pact with Canada led to the integration of the U.S. and Canadian industries and a single market

for vehicles and parts. In addition, GM and Ford have extensive overseas operations, especially in Europe, while

each of the Big Three has equity links and/or strategic alliances with automakers in the Far East. GM was and is

highly integrated vertically, making many more of its own parts than Ford and Chrysler.

As Japanese automakers increased their sales in the United States, helped by superior manufacturing and

organizational know-how (lately labeled “lean production”) that enabled them to keep their prices low and their

quality high, the Big Three lost market share and in some years lost money. Sales dropped (figure 7-l), they found

themselves with more engine, assembly, and parts plants than needed, and began to close some. Continuing trade

friction, exemplified by the long-running “voluntary” restraint agreements on imports from Japan, spurred

investments in U.S. plants by Japanese automakers. As they began to assemble vehicles in the United States and

Canada, many of their parts suppliers, often members of the same keiretsu, followed. At the same time, despite the

intense rivalries among the major automakers, they have formed a growing number of joint ventures and cooperative

marketing agreements.

Today, the U.S. industry employs about a million people. Some 600,000 work for assembly firms, about half

in their parts operations, and 400,000 for independent suppliers. Roughly 100 first-tier suppliers-many of them

large companies with such familiar names as United Technologies and TRW-sell to the automakers, sometimes

in competition with captive suppliers like GM’s Delco division. Thousands of lower tier suppliers and

subcontractors sell to first-tier suppliers, to the automakers themselves, and in the aftermarket.

Over the last decade, Ford and Chrysler have cut back their internal parts production, seeking to reduce costs

and increase flexibility by buying more on the outside, and relying more heavily on suppliers for technology. At

the same time, they have streamlined their purchasing, reducing the number of suppliers they deal with directly.

Transplant assemblers import many parts from Japan or purchase from transplant suppliers here, which has

increased the overcapacity in the traditional supplier base.

plants being closed by U.S. firms, aggravating Assemblv

displacement problems.

.

MEXICO’S AUTO INDUSTRY

Policy decrees issued by Mexico’s government

have shaped its automobile industry since 1925 (box

7-B). Over time, the objectives shifted from import

substitution through assembly of knock-down kits

to, most recently, investments by multinational auto

firms in world-class assembly and engine plants that

would export to the United States and elsewhere.

Today, Mexico produces almost as many cars for

export—mostly to the United States—as for domestic sale (table 7-l).

Because of the policies summarized in box 7-B,

automakers operate two types of assembly plants in

Mexico-those supplying the domestic market, and

those producing for export, primarily to the United

States. With Mexico’s economic upturn, domestic

sales more than doubled from 274,000 passenger

cars and trucks in 1989 to 643,000 in 1991. OTA’s

interviews suggest that sales could reach a million

units by 1995. Because trade barriers remain in

force, imports take less than 2 percent of the market.

For many years, sales in Mexico were relatively

low. Plants were small, built mostly in and around

Mexico City. Today these plants are old and difficult

to expand because they are in locations that have
Chapter 7--Autos and Parts ● 135

12

10

(n

$8

-c

a

<6

u-l c

‘ 4

.-

=.—

z

2

0

1985 1986 1987 1988 1989 1990 1991

Figure 7-1 (a)—Production

I I

1985 1986 1987 1988 1989 1990 1991

Figure 7-1 (b)-Imports

U115

a

-g

c

a) 1 >

%

: 05

.—0

so

1985 1986 1987 1988 1989 1990 1991

Figure 7-1 (c)—Exports

SOURCE: U.S. Department of Commerce, Office of Automotive Industry Affairs.

E

❑ Big Three

❑ Transplants

Figure 7-I —U.S. Production and Sales of Passenger Cars and Trucks

❑ Japan

■ Mexico

❑ Canada

❑ Other

❑ Japan

■ Mexico

❑ Canada

❑ Other
136 ● U.S.-Mexico Trade

Box 7-B—Mexico’s Auto Decreesl

Mexico’s first auto decree remained in force, largely unchanged, from 1925 until 1%2. This period featured

the screwdriver assembly of knockdown kits behind a tariff wall. No more than 20 percent of parts content came

from Mexican suppliers. Assembly plants proliferated, numbering 12 by 1%0, although the industry’s annual

output never exceeded about 60,000 cars. Most were built and sold by U.S. firms.

The 1962 decree called for 60 percent domestic content, requiring that powertrains (engines, transmissions)

be made in Mexico. Foreign firms could continue to own assembly and engine plants but were limited to minority

shares in parts producers. The government also prohibited all imports of finished vehicles. While a supplier base

began to develop, the Mexican market was much too small for economic production of either vehicles or

components. Output reached 188,000 units in 1970, well below the capacity of a single efficient assembly plant.

Costs and prices were high. Mexico continued to import many parts, and ran a trade deficit in the motor vehicle

sector.

Further decrees in 1969, 1972, and 1977 addressed the trade deficit by requiring assemblers to export in

proportion to their production for sale within Mexico. Despite rising exports of engines, the trade deficit worsened.

But by the end of the decade, U.S. automakers, under pressure from Japanese imports, began looking at Mexico as

a possible site for low-cost production capacity.

In 1982, Mexican demand plummeted as a result of the economic crisis. A new auto decree followed in 1983.

Given strong U.S. demand, the automakers, led by Ford, built a number of new export-oriented engine and assembly

plants that proved to be competitive in cost and quality with those elsewhere in North America. Production in

maquiladora parts plants also rose. At the end of the decade, Mexican sales resumed their upward climb (table 7-l).

The latest auto decree, issued in 1989 and still in effect, includes the following provisions:

Foreign-owned assemblers are permitted 100-percent ownership of parts plants producing for export, but

only 40-percent ownership in suppliers serving the Mexican market.

Local content rules require that Mexican firms (defined as 60 percent Mexican-owned) provide 36 percent

of the value of the components used in vehicles sold within Mexico.

Assemblers must maintain a positive balance of trade.

Beginning in 1991, finished cars and light trucks could be imported into Mexico, limited to a 15 percent

market share in the first two years, rising to 20 percent in 1993. A further provision requires that exports

counterbalance these imports in 2.5:1 ratio (1991), declining to 2:1 in 1992-93 and 1.75:1 in 1994. Tariffs

on imported vehicles were set at 15 percent, with a 13.2 percent duty on parts. Imports of used cars and trucks

continue to be barred.

Maquila plants may sell some of their output within Mexico.

IFor de~ls, WE Douglas C. Benne~ and Kenneth E. Sharpe, Tronsnational Corporations Versus the State: The Political Economy of the

Mexican Auto Industry (Princetom NJ: Princeton University Press, 1985); Wilson Perez Nufiez, Foreign Direct Investment And Industrial

Development In Mexico (Paris: Orgardzationfor Economic Cooperation and Development 1990), pp. 109-135; James P. Womac% “A Positive

Sum Solution: Free Trade in the North American Motor Vehicle Sector,’ Strategic Sectors in M-”can-U.S. Free Trade, M. D&4 Baer and Guy

F. Erb, eds. (Washington DC: Center for Strategic and International Studies, 1991), pp. 31-65. The decrees also covered heavy trucks and buses,

subjects outside the scope of this chapter.

Table 7-l—Mexican Car and Truck Production, 1981-1991

1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991

(thousands of units)

Production for sale In Mexico

Passenger cars. . . . . . . . . . . 340 287 192 218 242 167 154 211 275 354 379

Trucks and buses. . . . . . . . . 231 180 81 113 149 98 94 132 171 196 245

Production for export. . . . . . . 14 16 22 34 58 72 163 173 196 279 366

Total.. . . . . . . . . . . . . . . . . . . 585 483 295 355 449 337 411 406 642 829 990

SOURCE: WoddMotor Vehic/e Data, 1991 Edition (Detroit, Ml: MotorVehlcle Manufacturers Association, 1991 ); Automotive Alews 1992 Market

Data Book (Detroit, Ml: Crain Communications, May 27, 1992).
Chapter 7--Autos and Parts ● 1 3 7

Table 7-2—Assembly Plants in Mexico

Annual

Location capacityaTarget markets

Ford. . . . . . . . . . . . . Cuautitlan

cars

trucks

Hermosillo (cars)

General Motors. . . . Ramos Arizpe (cars)

Mexico City (trucks)

Chrysler. . . . . . . . . . Toluca (cars)

Mexico City (trucks, some cars)

Nissan. . . . . . . . . . . Cuernevaca

cars

trucks

Volkswagen. . . . . . . Puebla

cars

trucks

60,000

50,000

160,000

100,000

60,000

120,000

75,000

80,000

50,000

200,000

15,000

Mexico

Mexico

U.S. and Canada

U.S. and Canada, Mexico

Mexico

Mexico, U. S., and Canada

Mexico, U. S., and Canada

Mexico, Spain, Latin America

Mexico, Spain, Latin America

Mexico, U. S., and Canada

Mexico, U. S., and Canada

aBas~ on r~ent production levels and industry interviews.

SOURCE: Office of Technology Assessment, 1992.

become congested and are subject to stiffening

environmental controls (table 7-2). With some

exceptions, including a number of foundries and

glass plants, neither assembly nor supplier facilities

oriented towards the Mexican market could survive

an immediate and complete elimination of protective barriers. The companies that built these plants to

gain a place in the Mexican industry sought a

lengthy post-NAFTA adjustment period to preserve

their positions while they install more modern

equipment and reorganize production to meet world

standards of cost and quality. Both GM and Chrysler

have announced plans to close assembly plants in

Mexico City. Replacement capacity, when added,

will probably be nearer the U.S. border or close to

ports suited for shipping to the rest of Latin America,

Export-oriented plants are newer and larger. Until

these plants came on stream, few industry executives

were sanguine about Mexico as a potential site for

any but simple operations. Modern assembly and

engine plants with state-of-the art production equipment were viewed as risky investments that had to be

made to satisfy the government and tap a growing

market. The concern was that low productivity and

quality would offset low wages. This view has

changed with the success of modern, export-oriented

Mexican plants. ’ Even so, of the five assemblers

with operations in Mexico, only VW and Nissan are

adding significant capacity. Both are doing so to

increase their exports to other countries in the

Americas as well as to the United States.

The Mexican Parts Industry

The supplier industry can also be divided into

plants that produce solely or primarily for the

Mexican market and maquiladora operations that

export products such as wiring harnesses to U.S. and

Canadian assembly plants. Few Mexican-owned

parts suppliers have achieved levels of cost and

quality necessary to sell into the United States and

Canada, largely because they have been unwilling to

invest sufficiently in plant, equipment, and technology. Most would not be viable without protection.

As table 7-3 shows, maquiladora plants buy only

about one-quarter of their parts content from Mexican suppliers, even though the maquilas rarely

engage in technologically demanding production.

Assemblers in Mexico report continuing difficulty in meeting local content requirements because

they cannot get what they need from Mexican fins;

some have made their own investments in Mexican

I ‘ ‘The Auto and Electronics Sectors in US-Mexico Trade and Investment, ” report prepared for OTA under contract No. 13-1815 by Harley Shaiken+

May 1992.
138 ● U.S.-Mexico Trade

Table 7-3—Mexico’s Auto Parts Market, 1990

Value Share of total

(billions of dollars) (percent)

Consumption by assemblers

Purchases from Mexican suppliers. . . . . . . . . . . . . . $3,2 27%

Imported parts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.9 24

Captive (self-supplied).. . . . . . . . . . . . . . . . . . . . . . . . 0.6 5

Consumption by maqulladora component plants

Purchases from Mexican suppliers. . . . . . . . . . . . . . 0.4 3

Imported parts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.0 8

Aftermarket sales

Produced by Mexican suppliers 2,5 21

imported parts, . . . . . . . . . . . . . . . . . . . . . . . . ... , . . 1.0 8

Direct export sales by Mexican suppliers. . . . . . . . . 0.5 4

Total. ... , . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $11.9 100%

NOTE: Total does not add because of rounding.

SOURCE: Norman stoner, “The Mexican Automotive Parts Industry: Challenge and Need of Capital Expansion,” paper

presented at the 46th Annual Plenary Meeting of the Mexico-U.S. Business Committee, San Diego, CA,

Nov. 22, 1991, figure 10, p. 20. - -

parts plants to earn required export credits.2 Some

Mexican firms have entered strategic alliances with

U.S. or European firms to bring in new technology

and management know-how (table 7-4). This trend

suggests that, given a suitable transition period, a

growing Mexican market, and outside investments,

post-NAFTA restructuring could be relatively rapid.

THE U.S. INDUSTRY:

ASSEMBLERS AND SUPPLIERS

Industry in Trouble

At the end of World War II, the U.S. automobile

industry was an oligopoly dominated by a single

firm, General Motors. By 1964, imports (excluding

those from Canada) exceeded half a million vehicles—

a market share of 6 percent. By 1991, the Big Three’s

passenger car market share had fallen to 64 percent.

Japanese firms had nearly 30 percent of the market

under their own names, plus another 5 percent

through cars sold under Big Three nameplates (and

included in the Big Three’s 64 percent) that were

built in Japan or by transplants.3

Japanese automakers broke into the U.S. market

by designing and developing vehicles that appealed

to U.S. consumers through styling, functional performance, and long-term reliability as well as initial

quality. 4 They differentiated their products, developed highly efficient manufacturing systems and

extensive dealer networks, and now command levels

of brand loyalty that often exceed those of the Big

Three, especially among younger consumers-in

large measure because of perceived advantages in

quality.5

2 Managers in one fm visited by OTA reported that they had recently begun to purchase steel tubing locally. The Mexican supplier had achieved

competitive quality. Prices were 15 percent higher than in the United States, a difference less than the tariff and transportation costs for bringing in tubing

from the United States.

Ford buys from about 250 suppliem in Mexico, GM from about 150, and Chrysler from 120. Nissan and VW buy from fewer than 100 each. The

ELM Guide to Mexican Auto Sourcing (East Lansing, MI: ELM Lntemational, 1992), pp. C1-C14.

3 U.S. fiisre~ mom b80 percent of the light truck market. VW, which opened the fmt transplant, ceased U.S. manufacture iII 1988, ~d now

supplies low-end vehicles from Mexico. European firms accounted for 4.1 perced of 1991 U.S. passenger car sales. Automotive News 1992 MarketData

Book (Detroit, MI: Crain Communications, May 27, 1992), p. 17.

b U.S. Indusm”al Competitiveness: A Compan”son of Steel, Electronics, and Automobiles (Washington DC: Office of ‘lWmology Assessment July

1981).

While Japanese auto fms benefited from lower wages during the years in which they began exporting to the United States, today total compensation

(wages and benefits) in Japanese assembly plants is about % pereent of the U.S. level. Kevin Done, “Japanese Earn Highest Motor Industry Pay,”

Financial Times, Feb. 22, 1992, p. 4.

5 Fred Mannering and Clifford WiIIStOn, ‘‘Brand Imyalty and the Decline of the American Automobile Firms, ’ Brookings papers On Econo~”c

Activity: Macroeconomics, 1991, pp. 67-103.
—

Chapter 7--Autos and Parts ● 1 3 9

Table 7-4—Mexico’s Major Auto Parts Manufacturers and Their Strategic Alliances

1990 Sales

Firm (million of dollars) Principal products Partners

Spicer. . . . . . . . . . . . . . $48 0 Engine parts, clutches, Dana, Kelsey-Hayes

transmissions, axles, GKN, Perfect Circle,

universal joints, TRW, many others

gaskets, electrical

parts

Vitro Crinamex. . . . . . . 256 Auto glass

ICA Autopartes. . . . . . . 250 Manual transmissions, Clark, Budd, Borg

clutches, brakes Warner

Condumex. . . . . . . . . . . 170 Wiring harnesses, shock Sealed Power,

absorbers, pistons, Packard Electric,

piston rings Maremont

Proez/Metalsa. . . . . . . . 120 Stampings, chassis A.O. Smith,

parts Solvay Automotive

Grupo Rassini. . . . . . . . 100 Springs, NHK, Lear

seats and upholstery Seating

Grupo Tebo. . . . . . . . . . 80 Brake and steering Alfred Teves,

parts TRW

Cifunsa. , . . . . . . . . . . . . 80 Iron castings Teksid

Nemak. . . . . . . . . . . . . . 71 Aluminum castings Ford, Teksid

SOURCE: Norman Stoner, “The Mexican Automotive Parts Industry: Challenge and Need of Capital Expansion,” paper

presented at the 46th Annual Plenary Meeting of the Mexico-U.S. Business Committee, San Diego, CA,

Nov. 22, 1991, table 4, p. 22.

Perceived quality commands a substantial price

premium in the U.S. market. The pricing policies of

Japanese automakers reflect this: they rely less on

rebates and find it easier to raise prices. As table 7-5

shows, Big Three rebates averaged $380 more than

those for Japanese vehicles in 1991. Between 1985

and 1991, Japanese automakers were able to raise

their prices by an average of 43 percent, while the

Big Three could raise prices by only 25 percent.6

These differences have had huge impacts on profits

and losses.7 For the Japanese fins, premium pricing

in the United States has helped offset the losses

inherent in rapidly developing a large-scale North

American manufacturing base. In 1990, Japan’s

Table 7-5—Retail Incentives in the U.S. Market

1986 1987 1988 1989 1990 1991

Big Three average. . . . $300 $490 $485 $760 $990 $910

Japanese average. . . . — — — 355 370 530

SOURCE: “Statement of Ronald R. Boltz, Vice President, Product Strategy

and Regulatory Affairs, Chrysler Corporation, Before the Joint

Economic Committee,” Dec. 10, 1991, chart 7.

automakers earned an average of about $1,300 for

each car sold in their home market, while losing

about $1,100 per vehicle sold in the United States.*

Although their profitability at home has fallen since

1990, the major Japanese automakers have more

latitude for reducing prices in the United States than

the Big Three.

b ‘‘S@tement of Ronald R. Boltz, Vice President, Product Strategy and Regulatory Affairs, Wsler COrpOmtiOrL Before tie Joint Econo~c

Committee,” Dec. 10, 1991, chart 6.

7 k 1991, GM had a net IOSS of $4.5 billion and an operating loss in automotive products of $3.5 billion. &COrding to its armuid report, tie ~mpmy

lost $7.1 billion in the United States, made $600 million in Canada, $1.8 billion in Europe, and $460 million in Latin Americm while losing $150 million

in other parts of the world. North American losses came to $1,800 per cu sold; GM spent an average of $1,100 per car for dealer and retail incentives.

See Frank Swoboda and Warren Brown, “GM’s Wrenching Trek: Rcmaking Itself, ” Washington Post, Feb. 26, 1992, pp. G-1, G-2.

Ford lost about $2 billion in 1991, a year in which it paid out $6 billion in rebates. Ford’s chairman has stated that ‘as long as there is excess capacity

there will be rebates. ” Kathy Jackson, “Foreign Operations Put Ford Deep in the Red, ” Automotive News, Oct. 28, 1991, pp. 6, 41; Kathy Jacksor+

“Rebates Here for Long Term, But Ford May Spcrrd Less,’ Automotive News, Jan. 20, 1992, p. 19.

8 ‘‘Statement of Ronald R. Boltz, ” op. cit., footnote 6, chart 9. The leading Japanese automakers all experienced declines in profitability in 1991.

OTA’S interviews suggest that one result may bean extension of product life cycles from about 4 to 6 years. This would save the companies large sums

in engineering and startup costs.
140 ● U.S.-Mexico Trade

Table 7-6—U.S. Passenger Car Sales by Nameplate and Location of Production, 1991

Location of assembly plant

United States Canada Mexico Japan Other Total

Nameplate (thousands of units)

General Motors. . . . . . .

Ford. . . . . . . . . . . . . . . .

Chrysler. . . . . . . . . . . . .

Toyota. . . . . . . . . . . . . .

Honda. . . . . . . . . . . . . .

Nissan. . . . . . . . . . . . . .

Mazda. . . . . . . . . . . . . .

Mitsubishi. . . . . . . . . . . .

3,609

2,329

999

299

409

175

89

70

550

370

295

36

74—

—

—

ture:

1.

2.

3.

35

105

144—

—

—

91 35

— 63

70 —

676 —

321 —

409 —

255 .

121 —

4,320

2,867

1,508

1,010

803

584

344

191

NOTE: Totals may not add because of rounding.

SOURCE: AuforrrotWe News, Mar. 2, 1992, p. 3.

No longer do Japan’s automakers rely almost

entirely on manufacturing cost advantages and a

reputation for making small cars with high quality.

They have moved steadily up-market, established

new nameplates, and taken the lead in many aspects

of product engineering. One way or another, it seems

the United States will have to become comfortable

with a substantial Japanese presence in this industry

through transplants and strategic alliances, as well as

imports. Three factors underlie the emerging strucA growing number of market niches (minivans, new luxury nameplates).

Joint ventures, coproduction agreements, and

other forms of alliances, including sales of

vehicles produced in the Far East or by

transplants and marketed under U.S. brand

names (table 7-6) and U.S. sales by Japanese

firms of products made for them by the Big

Three.9

Rapidly rising imports of parts from the Far

East, primarily to supply transplant engine and

assembly facilities, along with investments in

the United States by Japanese parts firms to

supply the transplant assembly operations of

their traditional Japanese customers.

The transplants and joint venture operations that

began to open during the 1980s, largely in response

to U.S. policies aimed at limiting imports, significantly increased North American assembly capacity

(table 7-7). The new plants have high levels of

productivity and quality, placing growing pressures

on older U.S.-owned facilities.l0

costs

Automobile production facilities typically become profitable when operating at relatively high

fractions of capacity (e.g., 85 percent or more) .11 In

1991, the Big Three averaged 63 percent, while the

transplants operated at an estimated 67 percent of

Capacity.12 The transplants are projected to reach 76

percent in 1992, with the Big Three at only 66

percent. If these projections prove even roughly

accurate, U.S. automakers will continue losing

money on their North American operations while

Japanese fins, although also making losses, would

improve their relative positions.

As a result, Japanese automakers would continue

to have greater freedom of action. For example, they

9 s~gl~.f~mmsplmts ~ve b~nmore successful than joint ventures. In October 1991, Chrysler sold its share ti Diamond-SW Motors to i~ fo~er

pmtner, Mitsubishi. The Subaru-Isuzu transplant lost $31 million in 1991, while CAMI (GM-Suzuki) has been embroiled in a dispute over dutiable

content with the U.S. Treasury. Nonetheless, Ford purchased a half-share in Mazda’s Flat Rock facility, which already builds cam for both companies.

In cooperative agreements, illustrated by Mazda’s production of Ford Probes at Flat Rock, one company buitds similar vehicles for sale under both

nameplates. In another example, Nissan produces the Mercury Villager for Ford, while Ford builds the Nissan Pathfinder. Lindsay Chappell, “Joint

Ventures Falter, ” Au(mnorive News, Dec. 16, 1991, pp. 1, 45; Richard JohnsoL “Mazda to Have ‘American’ Cars, “ AutomotiveNews, Dec. 16, 1991,

pp. 1,43.

10 ToyotA Honda, ~~, ad Niss~ Me befiev~ to have automobiles that are on average significantly better designed for mantiactiabdity than

Ford, the best of the Big Three on this measure. But not all transplant factories have achieved productivity levels superior to the best plants opemted

by the Big Three. See James P. Womac~ Daniel T. Jones, and Daniel Roos, The Machine That Changed The World (New YorIq NY: Harper Perennial,

1991), pp. 84-87.

11 U.S. lndus~iuf Our/ook ’92 (Washington, DC: Department of Commerce, January 1991), P. 36-6.

12 “Statement of Romld R. Boltz,” op. cit., footnote 6, chart 12.
Chapter 7-Autos and Parts ● 1 4 1

Table 7-7—North American Passenger Car Assembly Plants, 1992

Location

United States Canada Mexico Total

(number)

Big Three

General Motors. . . . . . . . . . . . . 16 2 1 19

Ford. . . . . . . . . . . . . . . . . . . . . . . 7 2 2 11

Chrysler. . . . . . . . . . . . . . . . . . . 4 1 1 6

Wholly Owned Transplants

Honda. . . . . . . . . . . . . . . . . . . . . 2 1 — 3

Nissan. . . . . . . . . . . . . . . . . . . . . 1 — 1 2

Toyota. . . . . . . . . . . . . . . . . . . . 1 1 — 2

Hyundai. . . . . . . . . . . . . . . . . . . — 1 — 1

Mitsubishia. . . . . . . . . . . . . . . . . 1 — — 1

Volkswagen. . . . . . . . . . . . . . . . — — 1 1

Volvo . . . . . . . . . . . . . . . . . . . . . . — 1 — 1

Joint-Venture Transplants

CAMI (GM-Suzuki). . . . . . . . . . — 1 — 1

Mazda b. . . . . . . . . . . . . . . . . . . . 1 — — 1

NUMMI (GM-Toyota)c. . . . . . . . 1 — — 1

Subaru-lsuzu. . . . . . . . . . . . . . . 1 — — 1

Total. . . . . . . . . . . . . . . . . . . . . . 35 10 6 51

~OintV9ntUrQWithChrySler dissolved inoctober 1991.

bFord PurchaS~~permnt share in1992.

Wonsent decree with U.S. Department of Justice calls for dissolution in1996.

SOURCE: Automotive News 1992 Market Data Book (Detroit, Ml: Crain Communications, May 27, 1992), p. 13.

might be able to avoid or delay layoffs and

contraction in Japan, where profits have declined,

while continuing to invest in North America and

Europe. They could afford more aggressive pricing/

incentive policies that would serve to further drain

resources from the Big Three, undermining the

latter’s ability to overhaul their product lines and

continue moving to lean production. Or Japanese

firms could choose to continue rapidly introducing

new models.

The transplants may have manufacturing cost

advantages of up to $1,000 per car.13 Productivity is

only one of many reasons for this difference, and

indeed may account for less than $200 of the total.

Other factors include incentive packages provided

by State and local governments to attract transplants

and a new, young workforce with low pension and

health care costs.

As table 7-8 shows, transplant assemblers pay

about the same wages as the Big Three, but have

benefits costs that are lower by roughly $5 per hour,

corresponding to $400 per car. Transplant suppliers

pay lower wages than traditional U.S. suppliers,

while having lower benefits costs in addition; thus

they have an even larger labor cost advantage. Lower

benefits costs are a direct result of younger workers.

The transplants pay much less for funding pensions

because they have no retired employees to support;

their medical insurance costs average less than half

those for the Big Three because their younger

workforces are healthier (table 7-9).

Largely because of differences in national approaches to health care, medical insurance cost

differentials are at least as great when U.S. costs are

compared with those in Canada, Germany, or Japan.

Ford puts its 1990 health insurance expenses at $65

per vehicle produced in Canada, compared with

13 ‘Testimony by Cmdacc Howes before the Joint Economic Committee hearing on The Future Of U.S. Manufacturing: Auto Assemblers ~d

Suppliers,” Dec. 10, 1991, p. 12.

A recent report from the Economic Strategy Institute (ESI) argues that, with favorable exchange rates, parts produced in the United States cost

sigtilcantly less than parts shipped in from Japaw and that, largely for this reason, Ford has the lowest delivered costs per vehicle in the U.S. market

(and, indeed, lower production costs than Japanese automakers in Japan). But when differences in capacity utilimtion, benefits, and capital costs are taken

into account, the average U.S. automaker still has costs about $1,000 greater than the average Japanese automaker. ESI also acknowledges that Ford

needs significantly more labor hours for assembly than Toyota Honda, Nissan, or Mazda, and that GM and Chrysler take substantirdly more hours than

Ford, The F’ufure Of The AutcJ lndu.wr-): 1( CurI L’ompete, can Zt Survive? (Washington DC: Economic Strategy Institute, 1992).
142 ● U.S.-Mexico Trade

Table 7-8-Comparative Wage and Benefit Levels, 1986a

Average Total compensation

hourly wage Index (including benefits) Index

Big Three assembly and in-house parts. . . . . . . $15.00 100 $22.50 100

Transplant assembly. . . . . . . . . . . . . . . . . . . . . . 15.00 100 17.50 77

Parts

Independent U.S. suppliers. . . . . . . . . . . . . . . 10.40 69 13.00 58

Transplant suppliers. ... , . . . . . . . . . . . . . . . . 8.00 53 10.00 44

aNo~rnprehensive data are available for later years; although wages and benefits have increased Considerably since

1986, with Big Three wages and benefits currently exceeding $35 an hour, OTA’s interviews indicate that the ratios

in the index columns remain about the same.

SOURCE: Candace Howes, “The Benefits of Youth: The Role of Japanese Fringe Benefit Policies in the Restructuring

of the US Motor VehicJe Industry,” /nternationa/ Contributions to Labour Studies, vol. 1, 1991, table 4, p. 125.

Table 7-9—Pension and Health Insurance Costs

Big Three Transplants

(dollars per hour)

Pension contributions. . . . . . . . . . $2.75 $0.75

Health insurance. . . . . . . . . . . . . . 5.29 2,10

Total. . . . . . . . . . . . . . . . . . . . . . $8.04 $2.85

SOURCE: “Statement of Ronald R. Bolfz, Vice President, Product Strategy

and Regulatory Affairs, Chrysler Corporation, Before the Joint

Economic Committee,” Dec. 10, 1991, chart 15.

$300 in its U.S. plants. 14 Health care costs for auto

firms are lower by half in Germany, and by three

times in Japan.15 Countries with national health

plans and different approaches to pensions thus gain

signtificant cost advantages, The problem is much

greater for the Big Three than the transplants

because Ford, GM, and Chrysler must pay the full

costs of health and benefits packages for an older and

still aging workforce.

Suppliers

U.S. parts suppliers are in as much trouble as the

assemblers. Imports of parts from Japan have been

increasing rapidly (figure 7-2). The majority of these

parts go to transplant assemblers, which import an

estimated 52 percent by value of the components in

their vehicles (table 7-10). Transplants source the

other 48 percent internally, from transplant suppliers, and from independent U.S. parts suppliers.

Figure 7-2—U.S. Imports of Auto Parts by Source

35

30

5

0

m Other

IZZl Japan

- “EEX(” “Mexico

. . . . . . . . . . .

_ Canada

! . . . . . . . . . . . . . . .

. . . . . . . . .

rl

. .

. .

. .

. .

. .

—

. . . . . .

. . .

. . .

. . .

. . .

. . .

. . .

—

1984 1985 1986 1987 1988 1989 1990

SOURCE: Stephen A. Herzenberg, “The North American Auto Industry At

the Onset of Continental Free Trade Negotiations,” Economic

Discussion Paper 38, U.S. Department of Labor, Washington,

DC, July 1991, table 13.

Japanese-owned parts firms followed their customers to the United States, operating about 300 plants

here and in Canada by 1992. Transplants buy mostly

simple, low-value-added parts from independent

U.S. suppliers-gaskets and hoses, not gears and

bearings. l6

Because transplant suppliers pay less than traditional U.S. suppliers, a transplant assembler can save

14 kwiam C. Symonds, “It’s Not Perfec~ But It Sure Works,” Business Week, Mar. 9, 1992, p. 54.

IS 4 ‘Auto Firms Need Both Trade Help, Domestic Reforms, Industry Experts Say, “ International Trade Reponer, Dec. 11, 1991, p. 1,803.

lb A recent (~d con~oversi~) s~dy es~t~ that Honda’s Marysville plant-often thought to pLUChaSe more from the traditional U.S. supplkbase

than other transplant-sources only 53 percent (by value) of its parts content in the United States, not far above the average of 48 percent given in table

7-10. Of this 53 percent (the rest comes from Japan), Honda buys 20 percent from traditional U.S. suppliers. The other 33 percent comes from transplant

suppliers and internal Honda production in North America. Sean P. McAlinde~ David J. Andre% Michael S. FlynrL and Brett C. Smith, The U.S. Japan

Automotive BiIateral 1994 Trade Dejicit, Report Number UMTRI 91-20 (Ann Arbor, MI: University of Michigaq Transportation Research Institute,

May 1991). Also see, “Honda: Is It An American Car?” Business Week, Nov. 18, 1991, pp. 105-112.
—.

Chapter 7---Autos and Parts . 143

Table 7-10—U.S. Content

Estimated percentage

value of U.S. partsa

Vehicles imported from Japan. . . . . . . . . 1%

Transplant production. . . . . . . . . . . . . . . 48

Big Three U.S. production. . . . . . . . . . . . 88

aTodetermine whether a given model qualifies as “domestic” or “imported”

for purposes of fuel economy standards, the U.S. Environmental Protection Agency (EPA) uses a formula for determining North American content

that gives substantially different results. EPA content figures bear little

relationship to the dollar values of U.S. and foreign parts.

SOURCE: “Statement of Ronald R. Boltz, Vice President, Product Strategy

and Regulatory Affairs, Chrysler Corporation, Before the Joint

Economic Committee,” Dec. 10, 1991, chart 13.

a substantial sum on its total component costs

simply by purchasing from low-wage transplant

suppliers.

17 But even if Japanese automakers could

buy equivalent parts more cheaply from a U.S. firm,

they might gain by sourcing within their kieretsu.

Supplier profitability, and with it the ability to

contribute engineering support, depends on capacity

utilization. The Japanese assemblers have no wish to

weaken their traditional suppliers, while weakening

their rivals’ supplier base could help them.

Mounting pressure on the traditional supplier base

has led companies to close unionized plants, add

capacity in low-wage southern states, and in some

cases relocate to Mexico. The principal countervailing force has been demand by assemblers for nearby

parts plants to meet “just-in-time” (JIT) delivery

requirements. Still, lean production does not automatically require that critical components and subassemblies come from tightly grouped plants. The

need is for low inventories so that potential bottlenecks—for instance, a batch of bad parts-surface

before they disrupt downstream production. Automakers continue to weigh transportation costs,

economies of scale, currency exchange risks, political factors, labor costs and workforce capabilities,

and regulatory requirements in deciding where to

locate assembly and captive parts plants.

Transportation and inventory costs make it unlikely that imports to North America will incorporate significant content purchased from independent

U.S. suppliers. Suppliers would have to offer exceptional advantages in cost, functional performance, or

quality to win such business.18 Critical components

for transplants will likely continue to be made by the

assembler (in Japan or in North America) or by the

transplants’ traditional suppliers, either in their

Asian plants or here. The high proportion of

components and subassemblies currently being imported or made in transplant supplier facilities,

suggests that, even if all the vehicles now being

imported from Japan were to be replaced by North

American transplant production, many independent

U.S. suppliers would continue to find it difficult to

win the business of transplant assemblers.

State and Local Government Incentives

State and local governments have bid aggressively for transplant assembly and parts facilities,

offering tax deferrals and abatements, new highways

and industrial parks, training grants, and low-cost

financing for plant and equipment. Subsidies provided by State governments to assembly transplants

alone have been placed at $50 to $75 per vehicle.19

State and local government pay for these incentives from tax revenues that come in part from

existing plants, which are thus supporting the

creation of new competitors. Once fully established,

the new competitors can expect to be more efficient,

if only because they will have new equipment and

factories laid out in accord with the latest practices.

They may have better prepared workers, particularly

if incentives include trainin g grants, By reducing

capital outlays and startup costs, incentives shorten

the time it takes a new entrant to become profitable

and challenge existing firms.

IT Candace Howes, “The Benefits of Youth: The Role of Japanese Fringe Benefit Policies in the Restructuring of the US Motor Vehicle Industry,”

International Conm”butions to Lubour Studies, vol. 1, 1991, pp. 113-132.

IS Toyota claims that, in 1990, the ‘ ‘defect ratio for parts imported from 75 North American and European companies was 100 times seater ~

the ratio for parts supplied by 147 Japanese makem-1,000 defects per million imported parts versus 10 for locally produced parts. ” Richard Johnsom

“Quality Still the Key, Toyota Tells Parts Makers, ” Automotive News, Nov. 11, 1991, p. 42.

19 ‘‘Tes~ony by Candace Howes, ’ op. cit., fOOtnOte 13, p. 9.

For a summary of incentive packages provided transplants, see After the Cold War: Living with Lower Defense Spending (Washington, DC: Office

of Technology Assessment, February 1992), table 6-11, p. 181. Some U.S.-owned manufacturers also benefit from incentives. Thomas J. LeuclG

“Business Incentives: A High-Priced btdown, ” New York Times, Mar. 8, 1992, sec. 4, p. 16.
144 ● U.S. Mexico Trade

Table 7-11—U.S. Auto Industry Employment

1978 1987 1991

(thousands)

Total employment. . . . . . . . . . 1,311 1,131 1,036

Total production workers. . . . . 1,032 889 799

Big Three. . . . . . . . . . . . . . . 693 536 436

Assembly. . . . . . . . . . . . . 263 242 191

Parts. . . . . . . . . . . . . . . . . 428 293 245

Transplants . . . . . . . . . . . . . . — 13 26

Union . . . . . . . . . . . . . . . . — 4 11

Nonunion . . . . . . . . . . . . . — 9 16

Independent parts. . . . . . . . 296 320 325

Union . . . . . . . . . . . . . . . . 155 84 81

Nonunion . . . . . . . . . . . . . 141 236 244

NOTE: Totals may not add becauseof rounding.

SOURCE: Office ofTechnology Assessmen41992.

The Labor Market

Employment

In 1991, a little over a million people held jobs in

the U.S. auto industry (table 7-1 1). Seventy-seven

percent worked in direct production—30 percent in

assembly (including transplants and truck assembly)

and the rest in parts production. The Big Three,

including their parts divisions, employed 55 percent

of all production workers, independent parts suppliers a little over 40 percent, and transplants 3 percent.

As the table shows, since 1978, employment has

declined more than 20 percent, with Big Three

employment dropping by 37 percent overall and

fully 42 percent in captive parts divisions; as Big

Three firms bought more parts from independent

U.S. suppliers—and from Mexican maquiladoras—

they shed 180,000 jobs in parts production. Nonunion U.S. parts suppliers, including transplants, have

added roughly 100,000 production jobs since 1978,

while employment in unionized independent parts

suppliers has declined by an estimated 74,000 jobs.

As a result, union coverage in independent U.S. parts

plants has fallen from something over half to

between one-sixth and one-third.20

Wage Setting and Wage Trends

From the late 1940s to the late 1970s, real hourly

wages rose steadily as a result of United Auto

Workers (UAW contracts that stipulated annual

increases of roughly 3-percent plus inflation. A

pattern-setting agreement negotiated between the

UAW and one or the other of the Big Three became

the basis for subsequent negotiations at the other

U.S. assemblers and major unionized suppliers. By

1982, competitive pressures ended the tradition of

annual real wage increases; average hourly wages

for assembly workers fell in real terms by 3 percent

from 1985 to 1991. In exchange for wage moderation and acceptance of the automakers’ demands for

more flexible work rules on the shop floor, the UAW

has gained guarantees for most workers of almost

fill-time pay even if laid off during the 3-year

contract period.

Transplant assemblers, union and nonunion, have

typically matched or almost matched Big Three

wages, but real wages in the independent parts

industry have declined steeply because of falling

union coverage and the breakdown of pattern

bargaining in parts companies that remain unionized. Since the mid-1980s, Big Three contracts have

had little influence on bargaining at unionized

independents. Contract outcomes depend on local

labor market conditions, wage levels at competing

companies, including nonunion and foreign producers, and the employer’s financial position. By 1989,

wages at unionized independents were only twothirds those in assembly companies, and were nearly

identical to the average in all U.S. manufacturing. At

nonunion parts suppliers, wages had fallen to 77

percent of the U.S. manufacturing average.

MEXICAN AUTO PRODUCTION

TODAY AND TOMORROW

Mexico as a Location for Production

Assembly

To build and equip a modern new assembly plant

in Mexico, capable of producing 250,000 cars per

year for the U.S. and Canadian markets, would cost

at least $500 million-more if a stamping facility

were included. Construction and plant startup would

take at least 3 years. As table 7-12 shows, shipping

in components would impose a substantial cost

penalty over a U.S. plant. In OTA interviews, one

Zo mere me n. U.S. Government ,statiStiCs on employment in independent parts firms, which has been estimated as tottd indusm employment tinus

assembler employment. Union members in independent parts plants are estimated as auto industry union members minus assembly company union

members, using figures on union membership collected in the Current Population Survey. Alternative estimates of union coverage over time based on

membership figures from the United Auto Workers and on the Industry Wage Surveys of the Bureau of Labor Statistics give comparable totals.
Chapter 7--Autos and Parts ● 1 4 5

Table 7-12—Cost Structure for Auto Assembly in the

United States and Mexicoa

United States Mexico

Laborb. . . . . . . . . . . . . . . . . . . . . . . . . . $700 $140

Parts, components, subassemblies. . 7,750 8,000

Component shipping costs. . . . . . . . . 75 600’

Finished vehicle shipping. . . . . . . . . . 225 400

Inventory costsd. . . . . . . . . . . . . . . . . . 20 40

$8,770 $9,180

alllustrative only.

bAss ume s 20 hours of assembly labor per vehicle in the United States, 30

hours in Mexico, representative of good but not best current practice.

clncl~= shipment of stampings from the United States; component

shipping costs would come to about $400 for a plant that did its own

stamping.

dAssumes 10 percent cost of funds.

SOURCE: Office of Technology Assessment, 1992, based on industry

interviews.

Big Three firm put these costs at $500 to $700 per

vehicle, roughly 10 percent of the cost of the

components. Shipping costs could be reduced by

about one-third if the Mexican plant did its own

stamping (sheetmetal parts are hard to handle and

easily damaged in transit). But an integral stamping

plant would raise the initial investment by about

$250 million. Shipping completed vehicles would

also incur a cost penalty in major U.S. markets that

are distant from Mexico.

Table 7-12 indicates that cheap labor currently

provides little or no incentive to build a new

assembly plant in Mexico, unless a substantial

proportion of the output were to be sold there or in

Central and South America. Predictable future

developments would work both for and against

Mexico. A stronger Mexican supplier base, able to

produce many of the components that must now be

imported, would reduce the transportation cost

penalty somewhat. OTA’s industry interviews indicate that it would probably take 10 to 15 years to

broaden and deepen the supplier base sufficiently.

Photo credit: Ford Motor Co.

Assembly line at Ford’s Hermosillo, Mexico plant.

Over this period, the automakers will redesign most

of their vehicles twice, in the process reducing labor

content through improved design-for-manufacturebility and design-for-assembly. By the time Mexico’s supplier base develops—and its transportation

system improves, so that shipping costs decline—

lower labor content will reduce the advantages

Mexico can expect from low wages.

Table 7-13 illustrates, comparing three vehicles

that differ in assembly labor requirements. In the

first case (’ ‘Future”), assembly labor in the United

States has fallen to 13 hours, about the best achieved

anywhere in the world today. The second case

(“Current”) requires 20 hours-not far from the

best achieved by the Big Three at present, and the

same as assumed in table 7-12. The third case

requires 30 hours, not uncommon today and representative of many cars still built in Mexico. In all

three cases, stampings come from an integral plant,

Table 7-13—illustration of the Effect of Design-for-Assembly on Costsa

Mexican assembly plant

U.S. assembly plant Current productivityb Equal productivity

Vehicle Assembly Costs (dollars) Assembly Costs (dollars) Assembly Costs (dollars)

design case hours Labor Shipping Total hours Labor Shipping Total hours Labor Shipping Total

Future. . . . . . . . . 13 $455 $30 0 $755 19.5 $91 $750 $841 13 $61 $600 $661

Current. . . . . . . . 20 700 300 1,00 0 30 140 750 890 20 93 600 693

Older designs. . 30 1,050 300 1,35 0 45 210 750 960 30 140 600 740

aASsumeS: integral stamping (no shipping costs for stamping); equal component and inventory costs; wagebenefit costs at $4.67 per hour in Mexico and

$35 per hour in the United States; finished vehicles shipped to U.S. markets.

bLa~r hours assumed 50 percent higher in Mexico.

SOURCE: Office of Technology Assessment, 1992.
146 ● U.S.-Mexico Trade

avoiding the cost penalties of shipment from the

United States to Mexico, while about 40 percent of

the vehicles’ components continue to be imported.

The table includes two scenarios for Mexico. In the

first, or current scenario, productivity is lower than

in the United States, requiring 50 percent more

assembly hours for vehicles of the same design—

about the norm today. In the second scenario,

Mexican productivity equals that in the United

States; in addition, shipping costs decline from $750

to $600 as a result of improvements in Mexico’s

transportation system.

Table 7-13 indicates that Mexican assembly

plants will have significant cost advantages in the

future only if they incorporate integral stamping

facilities and their productivity increases. If vehicle

designs improve, reducing labor content, shipping

costs will continue to offset much of the labor cost

differential. If the Mexican supplier industry improves, assembly in Mexico will become more

attractive. It is no surprise, then, that none of the Big

Three’s announced new capacity is planned for

Mexico, with the exception of replacements for

existing plants in Mexico City (table 7-14).

Engines

All five automakers active in Mexico elected to

export engines to satisfy the government’s trade

balancing requirements. Engines are easy to ship;

after transportation costs and tariffs, Mexican engine

plants have proven able to deliver into the United

States at costs perhaps 7 percent below those of U.S.

plants.

21 The complex equipment required in engine

plants means that workers must have good skills;

while training is time consuming, it has not proved

a major hurdle.22 Engine production is high in

value-added but not in labor intensity. A highvolume plant employs about a thousand people,

about a third as many as a typical vehicle assembly

plant. Companies can afford to pay a wage premium

to reduce turnover and retain workers they have

trained. They can also afford to bring in components

from outside Mexico because parts like pistons and

valves have low shipping costs relative to their

value. Mexico has several foundries capable of

producing complex castings at competitive cost and

quality levels.

Table 7-14—New Assembly Plant Investments

by Big Three Automakersa

Investment Planned

Location (millions of dollars) startup

Ford. . . . . . . . . . Avon Lake, OH $900 1992

Ford. . . . . . . . . . Oakville, Ontario 900 1993

Ford. . . . . . . . . . Louisville, KY 650 1995

Chrysler. . . . . . . Detroit, Ml 1,000 1992

Chrysler. . . . . . . Bramalea, Ontario 600 1992

Chrysler. . . . . . . Mexicoa To be determined

General Motors. Silao, Mexicoa

400 1994

aReplacement for existing Plant.

SOURCE: Office of Technology Assessment, 1992, based on industry

interviews.

Would companies put engine plants in Mexico in

the absence of the government’s trade-balancing

requirements? Today, a new world-class plant with

an annual capacity of 400,000 to 450,000 engines

would cost around $700 million to build, about the

same as anew assembly plant.23 Such a factory, built

in Mexico, could supply engines to the United States

at unit cost savings (after transportation) of perhaps

$50 to $70. In the United States, it would take about

2 years to build and equip the plant. It would be a

further 2 years before it was running at full capacity.

Construction would take longer in Mexico. It would

also take an additional 1 to 2 years to reach full

production because of the need to train the entire

workforce, and because start-up would be slowed by

lack of experience even given a well-trained

workforce.

A firm that contemplated replacing an existing

(high-wage, efficient) U.S. engine plant with a new

factory in Mexico would calculate financial breakeven at more than 30 years after construction began.

The picture would look better if the existing U.S.

plant was old and inefficient, or suffered from poor

labor relations. The performance records of existing

Mexican engine plants mean that when automakers

consider location decisions in the future, Mexico

will be viewed on its merits rather than in terms of

meeting the requirements of the Mexican Government.

Parts

Powertrain assemblies have high value and are

critical for customer satisfaction. Automakers make

these themselves, with some exceptions for engines

21 OTA interviews.

22 ~~~c Auto ~d Elec&o~c- se~tor~ ~ US-Me=~o Trade ad ~ve=~ent,~~ ~p, ~it., foo~ote 1.

23 OTA interviews.
Chapter 7-Autos and Parts . 147

Table 7-15-Cost of Typical Wiring Harness Figure 7-3-U.S.-Mexico Auto Trade

Selling or transfer price . . . . . . . . . . . . . . . . . . . . . . . . . . $250

Expected profit. . . . . . . . . . . . . . . . . . . . . . ... ... ... .. $10-20

Assembly cost (40 minutes)

Mexico. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1-2

United States

Big Three internal supplier (@$35 per hour).... 23

Independent unionized supplier (@ $26 per hour). 17

Independent nonunion supplier (@ $18 per hour). 12

Added shipping costs for Mexican assembly. . . . . . . . . $7

Extra inventory costs for Mexican production. . . . . . . . $0.50

SOURCES: Industry interviews; Candace Howes, “The Benefits of Youth:

The Role of Japanese Fringe Benefit Policies in the Restructuring of the US Motor Vehicle Industry,” International Contributions to Labour .Wcfies, vol. 1, 1991, table 4, p. 135.

and more frequent exceptions for transmissions.

Finish parts such as exterior sheetmetal or dashboard

assemblies are easily damaged in shipping and

critical for customer perceptions of quality. Automakers also control this production, either through

internal production or subcontracting to trusted

suppliers, and seek to keep it close to the point of

final assembly. Specialists, either internal parts

divisions or first-tier suppliers, design, develop, and

manufacture many other vehicle subsystems—

brakes, sunroofs, catalytic converters. Economies of

scale are important, proprietary technology significant, and transportation costs typically low relative

to value. Today, Mexican suppliers have little hope

of competing for this business without a partner that

has an established track record.

The situation is quite different for the laborintensive maquiladora plants. Table 7-15 shows that

Mexico has far lower costs for wiring harness

assembly. Much the same is true for airbags and

cut-and-sew operations on seats. Difficult to automate, this sort of work can be performed by

low-skilled labor with little or no training. Production went to Mexico because of labor costs, not

because of the government’s trade balancing requirements. JIT means a potential distance handicap

that maquiladora plants must overcome, but supply

pipelines from Mexico are much shorter than those

from the Far East. In combination with the other

forces at play in this industry, a NAFTA would

encourage further transfers of production.

8

6

4

09

.—50

=.—m

-2

-4

-6

0 Imports - parts nm

I

- Imports - vehicles I--l Juul

I

I ~

1111111111 11111111

m Exports - vehicles w :j~:

u

,.,.,., ,,,,

II

,.,. ,., ,,,

~ Exports - parts

::,::.::.::: .: ::: ::::.:: . . . . ,,.,,,.,.,.

,.,.,.,., .,.

,.,,.,, ,..

,., ,., ,

NOTE:

1984 1985 1986 1987 1988 1989 1990

Engines inciuded under parts.

SOURCE: Stephen A. Herzenberg, “The North American Auto Industry At

the Onset of Continental Free Trade Negotiations,” Ecmomic

Discussion Paper 38, U.S. Department of Labor, Washington,

DC, July 1991, table 2.

Employment in maquiladora parts production,

less than 10,000 in 1980, reached 100,000 in 1990

and 130,000 by the end of 1991. Already, GM is

Mexico’s largest employer, with, for example,

27,000 workers assembling wiring harnesses in

maquiladoras operated by the company’s Packard

Electric Division.

24 Of 64 Big Three-owned plants

in Mexico, 40 are near the border; 26 of the border

plants assemble wiring harnesses and 6 export

upholstery and soft trim parts to the United States .25

NAFTA Impacts

Assembly

Figure 7-3 illustrates the speed with which U.S.

imports of vehicles and parts from Mexico have

increased. This is largely a result of Mexico’s

trade-balancing policies. Almost all of the vehicle

imports are passenger cars, because light trucks face

tariffs of 25 percent when imported into the United

States, while tariffs on passenger cars are only 2.5

percent.

~ OTA interviews and GM annual reports.

25 The ELM Guide t. ~e~”can Auto Sourcing, op. cit., foo~ote 2, pp. C1-C20. Ma,IIy of tie otier border plants assemble electrical components ~ch

as relays and motors.
148 ● U.S.-Mexico Trade

If a NAFTA led to the removal of Mexico’s

export-balancing requirements, U.S. imports of passenger cars from Mexico would probably stabilize,

unless the relative cost picture changed a good deal.

As discussed above, this seems unlikely; there is

little or no advantage in locating assembly plants in

Mexico today, and newer vehicles will require less

assembly labor. Investments in new assembly capacity in Mexico will be driven primarily by Mexican

demand. A NAFTA that removed the tariff on light

trucks could encourage new Japanese investment in

Mexico.

There is one further consideration. Mexican

plants, because they use less automation, can be very

flexible. This makes them attractive for assembling

older designs with high labor content, low-volume

niche vehicles such as convertibles (which likewise

have high labor content), or as a means of increasing

production when capacity limits have been reached

in the United States and Canada. Thus, in some cases

it might be profitable to close an older U.S. plant

making such vehicles and transfer production to

Mexico. Furthermore, if automakers continue to

pursue niche marketing strategies, assembly in

Mexico could become more attractive. However, the

proliferation of new models during the 1980s

strained the financial resources of a number of

companies, and this trend has at least temporarily

Peaked. 26

Engines

Mexico has demonstrated cost advantages in

engine production. Nonetheless, while all five automakers active in Mexico have been adding engine

capacity, their favorable experiences with exportoriented Mexican plants have not led them to put

new capacity there. Ford, for instance, will have

built or renovated three engine plants in the United

States, one in Canada, and one in Mexico over the

period 1990 to 1995. The existing Mexican plant, in

Chihuahua, was closed for 2 years to be retooled for

Ford’s new Zeta engine. This is the only new or

renovated Big Three engine plant that will come on

stream in Mexico during these years. Nor have any

of the Big Three announced major new investments

in transmissions or other powertrain components in

Mexico, although the economics for such plants are

similar to those for engines.

A NAFTA that eliminated the current 2.5 percent

tariff would reduce the costs of a typical engine

delivered into the United States by $15 to $20. This

would increase the cost advantage compared with

U.S. production by as much as one-third, a significant amount. Automakers would be more likely to

put new engine plants into Mexico after a NAFTA

than they would new assembly plants. Nevertheless,

the financial penalty of slower startup would likely

outweigh the advantage of lower labor costs.

Parts

Relaxation of Mexico’s investment requirements

could attract more first-tier suppliers to Mexico,

along with lower tier firms that have not considered

Mexico in the past because their manufacturing

processes are not especially labor intensive. Although Mexico could not become a design and

development center within the next two decades

(Canada has not managed that, after all), the growing

role of suppliers in development suggests that some

Mexican component firms would begin to take on

more engineering-intensive work.

For labor-intensive parts production, a NAFTA,

by itself, would do little to either encourage or

discourage relocation. Mexico has sought to attract

maquiladora parts plants for years. A good deal of

the work suited to these plants has already moved,

but more could be relocated in the years ahead,

particularly if small U.S. parts manufacturers, many

of whom are losing business, believe they can

remain viable with lower wages. If more of these

companies do flee to Mexico it will not be because

of NAFTA provisions themselves, which should not

change the economics of producing in Mexico

significantly. An agreement might have its greatest

impacts simply by publicizing the opportunities, so

that smaller companies that might otherwise not

think of moving begin to consider Mexico.

The Mexican Market

Given very substantial excess capacity in both the

assembly and parts sectors in North America,

immediate ‘‘Ikee trade” would decimate Mexican

suppliers. An end to local content requirements and

import restrictions would also render much of

Mexico’s assembly capacity uncompetitive. If assemblers were permitted to supply Mexico by

26 me nu~ of mode~ av~able in the U.S. market grew horn about 400 iII 1980 to a high of 614 h 1987, Wd now StidS at 555. ‘‘Numb of

Car Models Drops For ’92: U.S. Builts Pass Imports,” AutoWeek, May 18, 1992, p. 11.
Chapter 7--Autos and Parts ● 1 4 9

importing vehicles, they would close some of these

plants because they could thereby increase their

capacity utilization and profitability in the United

States and Canada. Nissan could supply Mexico

from both the United States and Japan. Only VW

needs its Mexican plants to continue servicing the

rest of North America.

In the absence of trade restrictions, other Japanese

and Korean automakers would quickly begin exporting to Mexico as well, reducing the market shares of

the five firms that now sell there and cutting into

their profits. If all but VW closed their assembly

plants, the Mexican auto industry would be left with

little beyond export-oriented engine plants, several

modem assembly plants, and maquiladoras. Such an

outcome would be unacceptable to the Mexican

government-thus the negotiated NAFTA transition

period, with rules of origin that vehicles or components would have to meet to qualify for favorable

tariff treatment. Given a North American rule-oforigin of 62.5 percent, two-way trade in finished

vehicles should increase during and following the

transition period. Modernized Mexican assembly

plants would produce fewer models in higher

volumes to achieve economies of scale, and Mexico

would import other models.

Sales in Mexico could approach those in Canada

after 10 years or so, provided wages and living

standards rise, enabling more Mexicans to buy cars.

New capacity would probably go into Mexico in step

with increases in sales. If infrastructure improvements continue at the pace currently planned,

per-mile transportation costs would converge with

those in the United State. Even so, if wages

increased, shipping cost penalties would probably

continue to make it unprofitable to assemble vehicles in Mexico for export unless the country’s

supplier base became much stronger. On balance, a

NAFTA, if accompanied by growth in the Mexican

market, should provide additional sales and profits

for the Big Three firms and their suppliers as excess

capacity in the United States and Canada came on

line to replace higher cost assembly plants in

Mexico.

NAFTA and U.S. Jobs

If a NAFTA benefits U.S. automakers by opening

up the Mexican market, it is not likely to do much for

U.S. auto workers. In the 1970s, the UAW represented the vast majority of workers in the industry,

and wages had been largely taken out of competition. Today, the industry is evolving toward a core

of assembly companies, mostly unionized and paying high wages, surrounded by first-tier suppliers,

some unionized, that pay somewhat lower wages,

and by lower tier suppliers that are mostly nonunion

and pay much lower wages.

Restructuring along these lines will continue. The

high-wage core will shrink as the assemblers become more efficient and buy more of their components from independent suppliers. The rate at which

the core shrinks will depend on the fortunes of the

Big Three relative to the transplants. It depends

particularly on the fate of GM, which remains much

more vertically integrated than its competitors,

employing about 150,000 production workers in its

parts plants.

In this context, a NAFTA would affect U.S. jobs

and job opportunities in two primary ways:

1.

2.

To the extent that Mexico relaxes its trade

balancing and local content rules, U.S. companies would be able to increase their exports of

vehicles and parts to Mexico. This would save

a modest number of U.S. jobs, and a greater

number if the Mexican market expands as a

result of NAFTA.

A NAFTA would also influence business

strategy and wage setting in the independent

parts sector. By locking in more liberal policies in Mexico, a NAFTA could lead to

increased investments in Mexico by first-tier

U.S. and Asian suppliers and to plant relocations by lower tier U.S. suppliers pursuing

low-wage strategies. A larger, more competent

Mexican supplier base would in turn mean

increased competition for suppliers that remained in the United States, putting downward

pressure on U.S. wages.

Figure 7-4 shows one set of projections, based on

output growth at 1.5 percent per year coupled with

productivity improvements of 3 percent per year.

Over a 15-year period, industry employment falls by

20 percent, from its current level of about 1 million

workers to 800,000. If, over this same period,

Mexican plants producing for the U.S. market added

another 130,000 jobs—about the number working in

maquiladora parts production at the beginning of

1992—and these jobs represented a one-for-one

replacement of U.S. jobs—the U.S. total would fall

to 650,00.
150 ● U.S.-Mexico Trade

Figure 7-4-Projected U.S. Auto industry

Employment”

1992 1997 2002 2007

aAllwO~erS; ~urnes output increases at 1.5 percent per year, productivity inffeases at 3 percent per year.

SOURCE: Office of Technology Assessment, 1992.

Contraction and competition will probably mean

continued real wage losses even for workers who

keep their jobs. And few of those who lose semiskilled jobs in the auto industry can expect to find

comparable employment. Long-tenure, high-wage

auto workers suffer longer unemployment spells and

greater earnings losses than other displaced workers

(see ch. 4, table 4-3). In a sample including

engineers, managers, and skilled workers, as well as

direct production employees, 40 percent of those

displaced from auto industry jobs over the period

1979-89 were unemployed for more than 6 months.

Of those who found new work, 55 percent suffered

earnings loses of 25 percent or more. Restructuring

in this industry will continue to place a heavy burden

on the individuals who lose their jobs and the

communities in which they live. And the reliance by

independent parts suppliers on low-wage, low-skill

strategies increases the likelihood that they will

relocate to Mexico.

Even so, a NAFTA is unlikely to have the

devastating effects on U.S. workers that the UAW

has charged. To some extent, NAFTA has become a

lightning rod for fears over the future of jobs in a

Shrinking industry with declining real wages. These

trends have their origins in the globalization of the

auto industry, a development in which Mexico has,

as yet, played only a small part. But if NAFTA is not

the root of U.S. auto workers’ problems, it could

aggravate them or contribute to their solution. To

contribute to solutions, a NAFTA would have to

address four issues alongside liberalization of Mexico’s government polices:

1.

2.

3.

4.

measures for limiting net imports into the

North American market, so that some production now taking place in Asia would move to

the United States, Canada, and Mexico;

to the extent that vehicles and components

continue to enter from outside North America,

measures for improving competitiveness here

to achieve a rough trade balance with the rest

of the world;

help for U.S. plants, particularly suppliers, in

pursuing high-productivity strategies; and

measures for dampening downward pressure

on wages in the United States and Canada,

particularly in independent parts firms.

Chapter 2 includes a number of policy options that

address these issues.

CONCLUDING REMARKS

Over the past three decades, U.S.-based automakers have seen their share of domestic sales

decline from 95 percent to about 65 percent. They

first lost market share to imports, later to Japaneseowned transplants. Transplant production provides

some jobs for U.S. workers that would otherwise

have been lost to imports. But transplant suppliers

pay lower wages than traditional U.S. suppliers, and

independent U.S. suppliers face a difficult future

unless transplant assemblers begin buying from

them in greater volume.

Mexico’s auto decrees have sheltered the five

participating assemblers, providing higher profits

than they could otherwise expect. These profits

came at a cost—the requirement for a positive trade

balance, even at the expense of operating inefficient

assembly plants and buying parts from inefficient

Mexican suppliers. A NAFTA that reduced Mexico’s local content and trade balancing requirements

and included a reasonable transition period before

new entrants could freely sell in Mexico should

provide some additional sales, profits, and jobs in

the United States. But this will be a very small effect

superimposed on long-term employment decline.

Despite widespread plant closings and layoffs, the

Big Three as a group have yet to complete the

transition to lean production. Auto industry employment will continue to fall as productivity improves.
Chapter 8

Electronics
Contents

Page

SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .153

MEXICO’S ELECTRONICS INDUSTRY: DEVELOPMENT AND

CAPABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153

Government Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .154

The Mexican Industry Today . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155

Maquiladora Electronics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158

THE U.S. ELECTRONICS INDUSTRY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159

Competitive Status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .160

The Labor Market in Electronics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 162

U.S.-MEXICO LINKAGES IN ELECTRONICS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165

Location Decisions in Electronics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165

NAFTA Impacts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169

Longer Term Impacts: Paced by Skills Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171

CONCLUDING REMARKS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172

Boxes

Box Page

8-A. Mexico’s Computer Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 156

8-B. Upgrading Telecommunications in Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159

8-C. Workers in Electronics Maquiladoras . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160

8-D. Making Telephones in Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 167

8-E. Technology Transfer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172

Figures

Figure Page

8-1. Production and Trade in Mexico’s Consumer Electronics Sector . . . . . . . . . . . . . . . . . 157

8-2. Production and Trade in Mexico’s Computer Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157

8-3. Production and Trade in Mexico’s Telecommunications Equipment Sector. . . . . . . 158

Tables

Table Page

8-1. Government Policies Affecting Electronics production in Mexico . . . . . . . . . . . . . . . 154

8-2. Value-Added by Country for Personal Computer Production in Mexico . . . . . . . . . . 157

8-3. U.S. Imports of Computer Peripherals and Subassemblies by Country, 1991 . . . . . 158

8-4. Maquiladora Electronics Production . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159

8-5. U.S. Electronics Trade, 1991 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161

8-6. U.S. Trade in Computers and Telecommunications Equipment, 1991 . . . . . . . . . . . . 161

8-7. Employment in the U.S. Electronics Industry, 1991 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 162

8-8. Employment Trends in U.S. Electronics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163

8-9. Hourly Wages in the U.S. Electronics Industry and in Mexican Maquiladoras . . . . 164

8-10. TV Assembly Costs in Mexico and the United States . . . . . . . . . . . . . . . . . . . . . . . . . . 166

8-11. Cost Breakdown for a Typical Personal Computer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163

8-12. Personal Computer Production Costs in the United States and Mexico . . . . . . . . . . 167

8-13. Distribution of Expenses in the Computer and Television Industries . . . . . . . . . . . . 168

8-14. Advantages and Disadvantages of Electronics Production in Mexico

Compared to the United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169

8-15. Likely Effects of a NAFTA on Investment inMexico’Selectronics Industry . . . . 171
.— . . .—

Chapter 8

Electronics

.

SUMMARY

As in the auto industry, government policies have

shaped growth, development, and foreign investment in Mexican electronics. By controlling access

to its domestic market, Mexico has attracted foreignowned multinationals who have set up local manufacturing plants. Low-wage labor and preferential

tariff treatment have also helped Mexico attract

many maquiladora plants producing electrical equipment and electronic products such as TVs and

telephones. In 1990, maquiladora factories sent 4.4

million color television sets to the United States—

more than any other producing nation and half of all

U.S. imports of color TVs. Growth in Mexican TV

production has gone hand in hand with a continuing

shift of production out of the United States in search

of lower labor costs. In 1991, Zenith, the only

remaining U.S.-owned TV maker, began moving its

remaining U.S. assembly operations to Mexico.

Limitations in technology, worker skills, and

infrastructure will, however, limit development of a

more robust electronics industry in Mexico. Electronics fins, particularly those producing computers, telecommunications equipment, and process

control systems for business and industry, compete

on technological excellence, as do producers of

some advanced consumer products like videocassette recorders (VCRs) and projection TVS.

These businesses depend on skilled labor, along

with design, development, and marketing.

Responsiveness to rapidly changing market demand is also essential in electronics. Production

facilities belong near design and marketing teams so

that new ideas can be quickly incorporated into

products that are often specialized or customized.

Mexico’s proximity to the United States gives it

some advantages over Asian competitors in this

respect, but limited skills and research capacity

detract from that advantage.

Better technical and managerial capabilities would

enable Mexico to move up the development ladder

over time. The Mexican university and technical

training systems are producing large numbers of

graduates, but relatively few can find jobs that

provide the kind of experience needed for Mexico to

improve its industrial competence. Furthermore, the

Mexican Government has all but eliminated incentives for multinationals to produce sophisticated

electronics products locally, which promises to slow

the pace of development.

In the near term, Mexico will continue to attract

mostly labor-intensive electronics production, such

as TVs and other standardized consumer electronics

products, telephones, and answering machines. There

are still many of these kinds of jobs in the United

States. U.S. plants employ about 230,000 electrical

and electronics assemblers and over 150,000 precision assemblers. The Bureau of Labor Statistics

(BLS) estimates that more than 40 percent of these

jobs could disappear by the turn of the century. The

jobs are at risk from automation and other forms of

productivity improvement, including redesigned

products that require less labor, as well as transfers

of production to low-wage offshore plants. Production of many more-or-less standardized products has

already moved out of the United States to the Pacific

Rim, Mexico, and the Caribbean. A North American

Free Trade Agreement (NAFTA) might accelerate

movement of jobs to Mexico somewhat, but Mexico

has been pursuing policies to attract labor-intensive

production for years; a NAFTA would have only a

limited effect on the dynamics in this sector.

MEXICO’S ELECTRONICS

INDUSTRY: DEVELOPMENT AND

CAPABILITIES

The electronics industries in the United States and

Mexico are becoming increasingly interrelated

through trade and investment. U.S. electronics firms

have invested in Mexico to take advantage of cheap

1 This section draws in many places on “NAFTA and the Electronics Industry in Mexico, ” report prepared for OTA under contract No. H3-7200

by Patricia WilsoL February 1992. The Wilson report is based on surveys of muquiladoras and interviews covering the period 1988 until late 1991, and

recent interviews at non-maquila electronics plants. This section also draws on “Japanese-Owned Maquiladoras in Mexico, ” report prepared for OTA

under contract No. H3-7145 by Martin Kenney and Richard Florid% April 1992, which reports on site visits and interviews with Japanese-owned

electronics firms in Mexico, both end-product manufacturers and component suppliers, and on interviews in Japan with high-level executives of

electronics fm.

–153–
154 ● U.S.-Mexico Trade

Table 8-l-Government Policies Affecting Electronics Production in Mexico

Sector Policy tools outcome

Consumer Electronics. . . . . . ●

●

Computers. . . . . . . . . . . . . . . ●

Telecommunications. . . . . . . ●

●

Electrical Equipment. . . . . . . ●

Suppliers. . . . . . . . . . . . . . . . .

Import substitution through trade

barriers, later liberalized.

Maquiladoras.

Targeting through informal computer decrees in 1981 and 1987,

which created a protected market for MNCs willing to invest in

local manufacture.

State ownership of TelMex, the

national t telecommunications company, accompanied by “buy

national” policies.

Market protection through tariff

and non-tariff barriers,

Maquildadoras.

Local content provisions in computer decrees.

Export-oriented assembly industry dominated by foreign-owned

multinational corporations (MNCs).

Limited use of local suppliers.

Limited domestic sales.

Production within Mexico by companies including IBM and HewlettPackard. Limited integration of

local component suppliers. Export of production in excess of

Mexican demand, coupled with

imports of products not locally

produced.

Local production by two foreignowned MNCs, Ericsson and lndetel, with limited imports and exports of finished products.

Export-oriented firms supplying

U.S.-based manufacturers.

Extremely limited supplier network.

SOURCE: Office of Technology Assessment, 1992.

labor and gain access to a market that was heavily

protected until recently. In 1989, the United States

was Mexico’s leading trading partner in electronics

products; Mexico was the sixth largest trading

partner of the United States, behind Japan and a

number of other Asian countries, but ahead of

Canada. 2 In 1991, the sum of U.S. electronics

imports from Mexico and U.S. electronics exports to

Mexico totaled $12.5 billion, with the United States

posting a $1.0 billion deficit.

Electronics generates about 3 percent of Mexico’s

gross domestic product. There has been a good deal

of foreign direct investment (FDI), especially in

telecommunications, computers, consumer electronics, and electrical equipment. Factory shipments

totaled $6.5 billion in 1989, and employment topped

250,000 workers.3 But the Mexican industry is

dwarfed by that of the United States, which had

domestic shipments of over $190 billion in 1989 and

employed more than 2 million workers. While

employment in U.S. electronics is 8 times that in

Mexico, U.S. output is almost 30 times greater,

indicating much higher productivity, for reasons that

range from higher levels of automation to differences in the types of products manufactured in the

two countries.

Government Policies

The Mexican Government has long considered

electronics a key industry for the nation’s overall

economic development and created programs to

attract investment. Unlike the auto industry (ch. 7),

there was no single comprehensive policy. Instead,

the government implemented a shifting mix of

policies tailored to different segments of the industry

and ranging from strict import substitution to the

promotion of exports (table 8-l).

Government efforts to build a domestic industry

by simple import substitution were generally ineffective. In consumer electronics, for instance, Mexico found itself with 10 small companies competing

to sell components to domestically-oriented TV

manufacturers. Total demand could have been

supplied by a single producer. With the removal of

2 The Likely Impact on the United States of a Free Trade Agreement with hle~”co, USITC Publication 2353 (Washington, DC: U.S. International

Trade Comrnissiou February 1991), p. 4-27.

3 Ibid., p. 4-26.
Chapter 8--Electronics ● 155

trade barriers in 1987, imported components flooded

in. The percentage of locally manufactured components used by domestically-oriented TV manufacturers dropped from almost 90 percent during the

mid-1980s to 10 percent in 1988.4

More effective were Mexico’s computer programs which used restrictions on local sales in

combination with import barriers to attract foreign

investment (box 8-A). A number of U.S. companies

established facilities in Mexico to gain access to the

growing Mexican market-which would otherwise

have been denied them-and to other Latin American countries with which Mexico had favorable

trade agreements. Major U.S. computer manufacturers, including IBM, Hewlett-Packard, Digital Equipment Corp., and Tandem, established plants in

Mexico.

In telecommunications, the government pursued

its ends through state ownership, until 1990, of

TelMex, the sole provider of telephone service.

TelMex limited its purchases of switching and

terminal equipment to domestic producers. Together

with high trade barriers, this policy attracted investments by Ericsson and Indetel, the first based in

Sweden, the second owned by the French company

Alcatel.

In keeping with Mexico’s overall transition away

from an import substitution strategy, trade barriers in

electronics have been reduced significantly in recent

years. The market for computers has been opened to

imports, TelMex has been privatized, tariffs have

been lowered to a maximum of 20 percent, and

import licensing requirements have been eliminated

on many goods, These changes promise to enhance

U.S. access to Mexico’s markets for electronic

products.

Mexico’s export-oriented policies-notably the

special treatment afforded maquiladoras—also attracted FDI in electronics. Many U.S. companies, in

particular, invested in maquila operations to assemble standardized, labor-intensive products including

TVs, transformers, and power supplies. Japanese TV

manufacturers have done the same. Because the

maquiladora program did not include provisions on

local content, the sector developed in almost total

isolation from Mexican suppliers.

The Mexican Industry Today

Largely as a result of these policies, Mexico’s

electronics industry consists of two groups of firms

with quite different business objectives and capabilities. Both groups are dominated by foreign capital

and technology. One produces goods such as computers and telecommunications equipment primarily

for the Mexican market (although some computers

are exported to meet trade-balancing requirements).

The other group produces in maquiladora plants

almost exclusively for export to the United States.

Non-maquiladora electronics producers pose relatively little threat to U.S. jobs because they are

inefficient, limited in skills, and/or focused on the

Mexican market. They produce goods that might,

but for the past policies of Mexico’s government, be

shipped in from the United States. Mexico’s domestically oriented consumer electronics industry illustrates this point. As figure 8-1 shows, it is very small,

with insignificant exports and considerable imports.5

Mexico’s production and exports of computers

have grown rapidly since 1985, but from a tiny base,

so that the industry remains small and many

products must still be imported (figure 8-2). Most of

the multinational corporations (MNCs) operating in

Mexico produce state-of-the-art products (the IBM

PS/2, for example), but Mexican manufacturing

tends to be limited to routine assembly of final

products with components brought in from the

United States and the Far East. While Mexico’s

computer decrees required foreign firms to transfer

technology to Mexican suppliers, local content rules

were necessarily loose enough to permit imports of

critical components. Mexican suppliers provide

simple, low-technology parts-housings, printed

circuit boards, metal and plastic mechanical parts,

cable harnesses, some power supplies, and some

discrete electronic components.

The Mexican components industry is small-only

about 50 firms, employing some 7,000 people. Local

manufacture of semiconductors is limited to discrete

4 Wilson Perez Nuiiez, Foreign Direct Investment and Industrial De\’elopmcnt in Mexico (Paris: Organization for Economic Cooperation and

Development, 1990), pp. 92-93.

5 Tariffs on ~pon~ ~onsumer elecfiofic goods were reduced dr~atically ~ 1987. By tie middle of 1988, Mexico bd stopped producing CM

radios, audio turntables, and tape decks; speaker production had declined 92 percent. Gray Newman, “Industries vs. Imports: The Gloves are Off, ”

Business Mexico, March 1989, pp. 14-19.

331-019 0 - 92 - 6 : QL 3
156 ● U.S.-Mexico Trade

Box 8-A—Mexico’s Computer Programs

In 1981, following a near doubling of computer imports between 1979 and 1980, Mexico’s government issued

a set of unofficial guidelines intended to draw in foreign investments to the computer industry. Modified in 1987,

these “computer decrees” helped Mexico attract foreign manufacturers of computers and peripherals.1 The goals

included:

. domestic production of computers sufficient to meet 70 percent of demand within 5 years;

● a greater number of domestically-owned component suppliers;

. promotion of exports to achieve economies of scale and generate foreign exchange; and

● increased spending on R&D.

Firms wishing to participate in the Mexican market were required to begin manufacturing in Mexico, meeting

specified targets for employment, local content, and trade balancing, and to establish job training programs. Prices

were limited to 15 percent above those charged in the firm’s home country to prevent manufacturers from taking

advantage of the protected market.2 Microcomputer manufacturers could enter only through minority ownership in

joint ventures with Mexican firms. (Apple refused to participate for fear of losing control over its proprietary

Macintosh technology in a country with weak intellectual property protection.) The government permitted full

foreign ownership of minicomputer operations so long as export requirements were met. Companies could import

large computers provided they maintained local production of smaller machines. In return for their investments,

companies were protected from import competition through tariffs and import licensing requirements. They also

benefited from investment tax credits, low-interest loans, and subsidized utility rates.

Partly in response to pressure by IBM, the government relaxed some of its rules in 1985, codifying the changes

in the 1987 decree. Foreign firms were permitted to establish wholly owned affiliates in Mexico for producing

microcomputers, provided they complied with foreign exchange, export performance, training, and local content

requirements. Import licensing requirements on some components and subassemblies were eased. Later changes

eliminated many incentives, while permitting firms operating outside the plan to bring in larger numbers of

assembly kits.

In April 1990, the Mexican Government effectively dismantled its previous computer decrees, replacing them

with a “program for the Modernization of the Computer Industry’ scheduled to run through March 1993. Under

the new program, Mexico will move in stages toward an open market. Import licensing requirements will be further

eased, tariffs reduced to 20 percent on assembled computers and 5 to 10 percent on parts, and trade balancing

requirements removed Manufacturers with plants in Mexico will be allowed to import computers and components

duty free up to a limit determined by the level of local content in their Mexican production and their level of

investment in fixed assets and R&D.3 Companies must maintain at least 30 percent local content by value and

perform some R&D in Mexico.

1*~~ ~opm for ~mo~ tie M,anu.facturing of Electronic Computer Systems, Their * Modules ~d ~ir periph~

Equipment” was never formally adopted by the Mexican government but administrative authorities followed its guidelines, often modifying

thereon acase-byase basis. See Econonu”candSocial Progress in Latin America: 1988 Report (WashingtorL DC: Inter-American Development

B- 1988), p. 166. Also, Susan Walsh Sanderson and Ricardo Zermefb%mzales, “Trade Liberalization in Mexico’s Electronics Industry,”

Strategic Sectors in Ma”can-U.S. Free Trade, M. Delal Baer and Guy F. Erb, eds. (WAdngtom DC: Center for Strategic and International

Studies, 1991), p. 72.

2h OTA ~~miews, so- f~s stated that they can produce computers at somewhat lower cost in Mexico than in the United S@tes. For

others, however, higher prices for locally purchased components lead to increased manufacturing costs. See Wilson Perez Nuflez, Foreign Direct

Investment and Indusm”a[ Development in Mem”co (Paris: Organization for Economic Cooperation and Development 1990), pp. 92-93.

3For ~~ce, comp~= wi~ I- manufacturing facilities established under the old decrees can now import computer equipment rmd

components duty-free up to 80 penxnt of the level of value added in their Mexican plants. Review of Traa% and Investment Liberalization

Measures by Mm-co and Prospects for Future United States-Mem”can Relations, USITC Publication 2275 (Washington, DC: U.S. International

Trade Commis sion, April 1990), p. 4-8.

components such as transistors and diodes (not TVs, and other consumer goods, they generally

integrated circuits) and occurs in maquiladoras for cannot meet requirements for close tolerances and

export back to the United States. While Mexican- high stability laid down by MNCs for industrial

owned firms make parts for locally produced radios, applications. Lack of experienced engineers and
Chapter 8--Electronics ● 157

Figure 8-l—Production and Trade in Mexico’s

450

400

350

~ 300

5

~ 250

% 200

m

.5 150

g ,0 0

50

0

-50

Consumer Electronics Sectora

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

,. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . .

,.

1987 1988 b 1991C

m Domestic production ~ Exports A

m Imports * Mexican consumption”

a~~uding maquihdoras. bEstimated.

cProjected.

dproduction plus imports minus exports.

SOURCE: Edith Houston, “Mexico: Electronic Consumer Goods Market

Assessment,” U.S. Department of Commerce, International

Trade Administration, 1988.

technicians will limit expansion into more sophisticated components, and indeed into more sophisticated electronics products of all types. Mexican

suppliers currently provide one-third to one-half of

the quantity of computer parts, but this corresponds

to only about one-quarter by value (table 8-2).6

Color monitors, disk drives, and most power supplies are imported from Asia. Integrated circuits

come from the United States or Asia.

Few Mexican-owned firms have established themselves in the computer industry. U.S.-based companies, for example, account for about 80 percent of the

personal computers (PCs) made in Mexico. While a

few Mexican companies (Printaforma, for one) have

designed PCs around components available on the

open market, they are not exported. Companies

producing peripherals have been somewhat more

successful, but they typically produce simple assemblies such as keyboards, power supplies, and displays; in 1991, these three items comprised nearly all

of Mexico’s total exports of peripherals to the

United States, with keyboards alone totaling 82

Figure 8-2—Production and Trade in Mexico’s

1200

1000

800

* 60 0

%

~ 400

-o

5 200 (nc

.—o 0 =

z .200

-400

-600

-800

Computer Sectora

-

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . .

1985 1987 1989 1992b

n Domestic production ~ Exports

m Imports * Mexican consumption

a

lncluding peripherals,

bProjected.

Cpr~uction plUS imports minus expo~s.

SOURCE: “Trade and Event Research: Mexicc+Computers, Peripherals,

Software, and Services,” U.S. Department of Commerce,

International Trade Administration, August 1990.

percent (table 8-3). U.S. imports from Japan and

newly industrializing countries (NICs) in Asia, in

contrast, center on more sophisticated peripherals

such as disk drives and laser printers.

Computer production in Mexico poses little threat

to U.S. jobs. If Mexico’s economy grows, domestic

production will be needed to serve the growing local

Table 8-2—Value-Added by Country for Personal

Computer Production in Mexico

Value

(percent)

Components:

From Mexico. . . . . . . . . . . . . . . . . . . . . . . . . . . 30%a

From the United Statesb. . . . . . . . . . . . . . . . . 30

From Asia. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

In-plant value added (Mexico). . . . . . . . . . . . . . 10

%verstated because many subassemblies purchased in Mexico indude

parts imported from the United States and Asia.

bln~udes all internal production of components by the computer manufacturer in countries other than Mexico,

SOURCE: Harley Shaiken, Mexico in the Global Economy: High Twhnology and Work Organization in Export Industries (La Jolla, CA:

University of California, San Diego, Center for U.S.-Mexican

Studies, 1990), p. 112.

b Wilson, ‘‘NAFTA and the Electronics Industry in Mexico, ’ op. cit., foomote 1, p, 7; Susan Walsh Sanderson and Ricardo Zerrnefh-Gonztdes,

“Trade Liberalization in Mexico’s Electronics Industry, ” Strategic Sectors in Mexican-U.S. Free Trade, M. Delal Baer and Guy F. Erb, eds.

(Washington DC: Center for Strategic and international Studies, 1991), p. 79.
158 ● U.S.-Mexico Trade

Table 8-3—U.S. Imports of Computer Peripherals

and Subassemblies by Country, 1991

Figure 8-3-Production and Trade in Mexico’s

Telecommunications Equipment Sector

Mexico Taiwan Singapore Japan

(thousands of units)

Hard disk drives. . . 4 90 7,460 4,080

Floppy disk drives. . 1 410 210 12,960

Printers. . . . . . . . . . . 8 10 290 6,140

Displays. . . . . . . . . . 146 4,550 300 3,000

Power supplies. . . . 370 1,870 670 450

Keyboards, . . . . . . . 2,450 3,630 510 1,280

SOURCE: Office of Technology Assessment, 1992, based on official

statistics of the U.S. Department of Commerce.

market. Imports from the United States and Asia will

supply demand for products not locally produced.

U.S. computer manufacturers have little incentive to

establish additional manufacturing facilities in Mexico; they have already established production facilities primarily to serve the Mexican market. A

NAFTA would not change this pattern.

In telecommunications, Mexico is nearly selfsufficient, due to local production by two large

European-owned manufacturers, Ericsson and Indetel (figure 8-3). Other multinationals, including

Siemens, Philips, and NEC sell some products

including transmission equipment (e.g., cables) to

TelMex. With Mexico investing heavily in its

telephone network, imports have increased because

local producers cannot expand rapidly enough. Little

telecommunications hardware has been exported,

with the exception of terminal equipment made in

maquiladoras, in part because Mexican production

has not offered economies of scale.

Telecommunications manufacturers in Mexico

buy about one-third of their inputs locally, typically

housings, low-end passive components, transformers, circuit boards, connectors, and relays for customer premises equipment. In recent years, both

Ericsson and Indetel have established joint ventures

with Mexican firms to produce printed circuit

boards, connectors, and power equipment. One of

Indetel’s joint ventures makes advanced circuit

boards using surface-mount technology. While Mexican firms export some of these components, volumes are small and sales have been mostly in Latin

America.

Mexican telecommunications producers will probably continue to concentrate on domestic demand,

which is expected to grow rapidly during the next

decade. Mexico now has only about 6.3 telephone

800 I I

700

600

100

0

-100 I J

1985 1986 1987 1988

0 Domestic production ~ Exports

m Imports

a

* Mexican consumption

aproduction plus imports minus exports.

SOURCE: “Market Research Summary: The Mexican Market for Telecommunications Equipment,” U.S. Department of Commerce, international Trade Administration, 1990.

lines per 100 inhabitants, compared with 50 to 60

lines per 100 in the United States. Over the next 5

years, TelMex expects to spend $10 billion to $14

billion to expand its telephone network (box 8-B), a

task that will absorb most local production and also

require increased imports.

Maquiladora Electronics

Electronics represents the largest sector of the

maquiladora industry. In 1990, over 500 electronics

maquiladoras produced goods valued at $6.1 billion, accounting for 44 percent of maquiladora

output and 37 percent of employment (table 8-4).

This is the segment of Mexico’s electronics industry

that presents the greatest threat to U.S. jobs,

particularly in the manufacture of standardized,

labor-intensive goods.

Unlike investments in Mexico’s domesticoriented electronics industry that were dictated by

restrictions on market access, expansion in the

maquila sector has been driven by cost considerations. U.S. companies have sought to reduce production costs and fend off competition from overseas

rivals, particularly those in the Far East, by investing

in Mexico or contracting with existing maquilas.

Hourly wages in electronics maquiladoras averaged

about $1.10 for direct laborers in 1991, approxi-
Chapter 8--Electronics . 159

Box 8-B—Upgrading Telecommunications

in Mexico

As part of the privatization agreement, the new

owners of TelMex must expand and improve the

Mexican telecommunications system. For example,

by 1994, TelMex must:

. provide long distance service to all towns with

over 500 inhabitants, 10,000 of which have no

service at present;

● improve reliability and provide faster repairs;

and

. answer all operator-assisted calls within 10

seconds (only 70 percent meet that mark at

present).

TelMex is committed to increase network line

density to 10 lines per 100 people by 1994, and 20

per 100 by 2000. This will require installation of

about 800,000 new lines per year through 1994,

rising to 1.6 million lines per year afterwards, New

telephones (as opposed to lines) wilI go in at a rate

of 3.3 million per year, to reach a level of 25 million

installed phones by 1994. Much of the expansion

will consist of digital systems.

mately one-seventh to one-tenth their level in the

United States and half the typical level in the Asian

NICS.

7 Over 99 percent of the components used in

these maquiladoras are imported from abroad.

Electronics maquiladoras rely heavily on lowskilled workers (box 8-C), which limits production

to two types of assembly: finished products with

high labor content and low profit margins, and labor

intensive components or subassemblies to be

shipped to the United States for incorporation into

final products. The first category includes consumer

goods such as telephones and small- to mediumsized TVs, along with electrical equipment such as

transformers and power supplies; the second includes circuit boards and other subassemblies for

large-screen TVs and for telecommunications switches.

Such products can be assembled by unskilled or

semiskilled workers with little or no sacrifice in

product quality.

Thus, maquiiadora electronics firms can be

viewed as competing directly with both U.S. and

Asian workers. They are more representative of the

Table 8-4--Maquiladora Electronics Production

1982 1984 1986 1988 1990

Number of plants. . . . . . . . . 223 244 302 411 519

Employment (thousands). . . 74 109 113 153 170

Output (billions of

dollars). . . . . . . . . . . . . . . $1.7 $2.6 $2.6 $4.6 $6.1

Value added (billions of

dollars). . . . . . . . . . . . . . . . $0.44 $0.57 $0.58 $0.97 $1.36

Share of electronics in all

rnaquila production

(by value). . . . . . . . . . . . . 620/. 53% 47% 45%. 440/o

SOURCE: Maquiladora Industry Analysis, CIEMEX-WEFA Mexiean Service, September 1991, pp. 68-73.

cost-driven investments likely to be seen in Mexico

in the wake of a NAFTA than the investments that

have taken place in computers or telecommunications.

THE U.S. ELECTRONICS

INDUSTRY

While the United States still has the largest

electronics industry in the world in terms of output

and employment, growth has been slower than in

Japan and a number of Asian NICs. Competition has

increased in all segments of the industry, but it is in

commodity goods that the United States has fallen

behind.

In the analysis that follows, OTA divides U.S.

electronics into seven sectors:

1.

2.

3.

4.

5.

6.

consumer electronics, including household

audio and TV equipment (Standard Industrial

Classification (SIC) code 365 1);

computers and peripherals (SIC 357);

semiconductors (SIC 3674);

electronic components other than semiconductors, including capacitors, resistors, and connectors (SICs 3671, 3672, 3675, 3676, 3677,

3678, and 3679);

telephone and telegraph equipment, including

central office (CO) switches, private branch

exchange (PBX) equipment, and customer

premises equipment such as telephone sets and

answering machines (SIC 3661);

radio communication and navigation equipment, including radio and television broadcasting and cellular telephone equipment (SICs

3663, 3669, and 3812); and

I &faqulladora Industry Analysis, CIEMEX-WEFA Mexican Service, September 1991, pp. 75-78. In South Kore% Taiwan, and Singapore,

production workers in electronics averaged $3-$3.25 per hour (including benefits).
160 ● U.S.-Mexico Trade

Box 8-C—Workers in Electronics Maquiladorasl

Because of the high labor turnover rate in border area maquilas, itself a consequence of low wages and

generally poor working conditions, managers are continuously hiring new workers and putting them on the

production line. In Ciudad Juarez, a city with a high concentration of electronics production, maquiladoras report

monthly turnover rates of 7 to 8 percent. Managers report that workers will leave a job for as little as 20 more pesos

a week (there are about 3,000 pesos to a dollar). Workers object to the pace of assembly and to the continual pressure

to increase output; managers claim that workers lack the discipline needed for industrial production. In the densely

packed maquiladora parks in Juarez, plants actively solicit new employees. Many have large banners outside

advertising that they are hiring. Others send sound trucks to rival maquiladoras during breaks to solicit workers,

although in some parks managers have agreed to halt such practices.

Today, the typical maquila worker has little or no industrial experience beyond jobs in other maquiladora

plants. Education levels are low (ch. 5), in part because maquiladoras in electronics tend to hire a large percentage

of women, most of whom have little formal education. Direct production labor accounts for nearly 80 percent of

employment, a figure that has declined only slightly in recent years. This is a much higher fraction than is typical

in the United States, where production workers account for only 38 percent of employment in computers and

peripherals and 68 percent in consumer electronics.2

Given low skills and high turnover, companies sometimes de-automate or otherwise modify tasks for Mexican

workers, reducing productivity, often harming quality, and slowing production changeovers. Others have looked

to automation as a means of coping with turnover, paying higher wages to retain a core of skilled workers able to

keep the machines running while accepting high turnover in the rest of their workforce. In this way, one TV plant

in Juarez reduced its workforce from 6,000 in 1974 to 3,800 in 1991.

Even in plants with automated equipment, most new workers get only a day or two of training. In OTA

interviews, a manager in a maquila making transformers stated that production methods had been simplified

compared to U.S. operations to accommodate workers lacking basic skills so that half the workforce needed only

manual dexterity and good hand-eye coordination to do their jobs. Other workers did need skills such as soldering

or tracking production statistics. The plant manager noted that it had taken 3 years to get the plant operating properly.

So far, these patterns have kept maquiladoras from moving into more complex forms of production. But with

time and experience, the capabilities of the maquiladora labor force will improve. According to the manager of a

TV plant, production skills and industrial discipline are now beginning to be passed down through families, so that

young people entering the labor force have abetter idea of what to expect. Willingness to pay higher wages would

enable maquilas to reduce turnover and upgrade their workforces more rapidly. If they did so, they might begin

attracting more demanding production, thereby putting Mexican workers in head-to-head competition with a larger

number of U.S. electronics workers.

IBm~ on ow ~t=iews~ “me AUtO and Electronics Sectors in U.S.-Mexico Trade andhuxtment,” report pmp~dfor OTAunder

contract 13-1815 by Harley shaikerL May 1992.

2u.s. l~Wm”a/ Outlook ’92 (Washington, DC: Department of Commerce, January 1991), pp. Z%l. ST-14.

7. electrical equipment such as transformers, billion, with consumer electronics leading the way

electric lighting equipment, motors, and gener- (table 8-5). Only two segments of the industry

ators (SICs 361, 362, and 364). recorded a surplus in 1991-components, which

sends most if its exports to Mexico, Canada, and

Competitive Status Asia to support offshore assembly operations, and

radio communication and navigation equipment,

Import Pressure much of which is defense-related.

Since 1981, U.S. imports of electronic goods have Import penetration has been particularly high in

increased from about $20 billion to $80 billion. U.S. standardized, labor-intensive products. As shown in

exports, while increasing, have not kept pace, and table 8-6, the U.S. computer industry posted a trade

since 1983, the United States has run a trade deficit deficit only in peripherals, for which direct labor

in electronics.8 In 1991, the deficit totaled over $11 constitutes up to 50 percent of production costs; the

8

1991 Electronic Marker Data Book (Washington DC: Electronic Industries Association 1991), p. 104.
Chapter 8-Electronics . 161

Table 8-5-U.S. Electronics Trade, 1991

Shipments Imports Exports Balance*

Sector (billions of dollars)

Computers. . . . . . . . . . . . . . . . . . . . . . $58.5 $25.6 $24.0 ($ 1.6)

Radio communication and navigation 57,5 3.8 6.5 2.7

equipment b. . . . . . . . . . . . . . . . . . .

Electronic components. . . . . . . . . . . . 34.5 5.9 6.0

Semiconductors. . . . . . . . . . . . . . . . . 27.9 12.3 11.8 (0.6)

Electrical equipmentc

. . . . . . . . . . . . . . 22.3 3.9 3.5 (0.5)

Telephone and telegraph. . . . . . . . . . 15.2 4.3 2.5 (1 .9)

Consumer electronics. . . . . . . . . . . . . 7.7 12.3 2.1 (10.1)

Total. . . . . . . . . . . . . . . . . . . . . . . . $223.6 $68.1 $56.3 ($11.9)

aparentheses denote negative balance (imports greater than expotis).

blndustry shipment data estimated from product shipment data for 1991.

~rade figures estimated from 1990 data.

NOTE: Totals may not add because of rounding.

SOURCE: Office of Technology Assessment, 1992, based on official statistics of the U.S. Department of Commerce.

Table 8-6--U.S. Trade in Computers and

Telecommunications Equipment, 1991

Imports Exports Balancea

(billions of dollars)

Computer equipment

Computers. . ... , . . . . . . . . . . . . . $4.0

Peripherals. . . . . . . . . . . . . . . . . . 13.6

Parts and accessories, . . . . . . . . 8.0

$25.6

Telephone and telegraph

Network and transmission. . . . . . $0.5

Customer premises equipment. . 3.5

Parts. . . . . . . . . . . . ... , . . . . . . . 0.5

$2.1

$7.6

6.7

9.7

$24.0

1.9

0.8

0.7

$1.4

$3.6

(6.9)

($1.6)

aparentheses denotes negative balance (imports greater than expofls).

NOTE: Totals may not add because of rounding.

SOURCE: Office of Technology Assessment, 1992, based on official

statistics of the U.S. Department of Commerce.

computers and parts segments posted surpluses in

1991. Similarly, the deficit in telecommunications

resulted from imports of customer premises equipment (telephones, FAX machines, and the like), of

which little production exists in the United States,

and for which direct labor is approximately 30

percent of production costs. For these products,

competition hinges on costs, and low-wage Mexican

labor can help improve the competitiveness of U.S.

manufacturers. In capital goods such as large computers or CO switches, technological capability

counts for more than manufacturing costs. Successful firms must continually develop new hardware

and software. Because of its underdeveloped R&D

base, Mexico offers little to U.S. manufacturers of

capital goods and will compete only marginally with

U.S. workers in these sectors.

Competition from low-wage nations has hurt U.S.

manufacturers of standardized electronics products.

For example, of 27 U.S.-owned companies that

made TVs in 1960, only Zenith survives. The others

have vanished or been purchased by Japanese and

other foreign fins. Zenith has 16 percent of the U.S.

television market, but, unlike its primary competitors, does not compete on a world scale. As of 1990,

nine Japanese corporations assembled color TVs in

the United States; four of these companies produced

picture tubes here as well. Most of the TV manufacturers that sell in the United States assemble some of

their sets in Mexico, and bring in circuit boards and

other subassemblies from maquiladoras for those

assembled in the United States.

In the computer industry, U.S. firms have managed to maintain their primacy, but competition has

intensified as the industry has fragmented into

submarkets for machines ranging from notebooks

and laptops to workstations to supercomputers. Price

competition for PCs has become almost as intense as

for home entertainment products, with Asian and

some U.S. firms seeking to undercut U.S.-based

product leaders by offering competitive, but less

sophisticated, machines. Low-cost clones have further segmented the PC market into a lower end, that

can be satisfied with readily available technology

and is thus less responsive to brand names, and an

upper end that demands sophisticated technologies,

such as active matrix liquid crystal displays, where

brand names still help differentiate products.

Competitive pressures in end-product markets

have been transferred to U.S.-based suppliers of

electronic components and electrical equipment,
162 ● U.S.-Mexico Trade

driving down prices and profit margins. Faced with

rising capital investments required to keep up in new

technologies, many manufacturers sought merger

partners or simply exited. In the recession year of

1991, more than two dozen manufacturers of circuit

boards left the industry or went bankrupt, while

Japanese firms bought out three large component

producers. Nearly all component imports once

originated in the offshore plants of U.S. fins, but

now more than half come from foreign-owned

companies.

U.S. Government Policies

U.S. electronics markets are considerably more

open than foreign markets, including the European

Community and Japan. The United States has led the

world in deregulating telecommunications, for example. Other countries have been slow to follow,

with governments reluctant to stop sheltering their

manufacturers and service providers.9 Foreign firms

have captured over half the U.S. market for CO

switches (in essence huge special-purpose computers, many of which sell for tens of millions of

dollars) and PBXs, while U.S. telecommunications

manufacturers have not done nearly as well abroad.

Deregulation and divestiture have had equally

profound effects on household telephone equipment.

As a monopoly, AT&T leased telephones to its

customers. But, once customers could buy their own

telephones, answering machines, and so on, many

chose cheaper products from abroad. AT&T produced 14 million phones in 1982, less than 2 million

in 1984. All telephones for home use, cordless

phones, and answering machines sold in the United

States—and almost all FAX machines (some are

made here by foreign-owned “transplants’ ’)--are

now imported, most from Asia and some from

Mexico. Some office telephones are still made in the

United States.

U.S. trade policies have preserved some domestic

jobs in television production. After a long series of

complaints alleging dumping and other “unfair”

trade practices, U.S. officials negotiated Orderly

Marketing Agreements (OMAs) in the late 1970s to

limit imports. Japanese firms responded by investing

in U.S. plants for assembling TVs, preserving some

Table 8-7—Employment in the U.S.

Electronics Industry, 1991

Total Production workers employment

(thousands) (thousands) (percent)

Electrical equipment. . . . . . 430

Electronic components. . . . 320

Consumer electronics. . . . 60

Telephone and telegraph. . 120

Semiconductors. . . . . . . . . 230

Radio communication

and navigation. . . . . . . . 390

Computers. . . . . . . . . . . . . 420

Total. . . . . . . . . . . . . . . . 1,970

300

220

40

70

90

140

130

1,000

70%

69

65

54

40

37

32

51%

NOTE: Totals and percentages may not compute beeause of rounding.

SOURCE: Office of Technology Assessment, 1992, based orI figures from

Employment and Earnings, March 1992.

U.S. jobs in an otherwise declining industry.10 The

structure of U.S. import duties also encourages

domestic production of the picture tubes. Completed

TVs are subject to a 5 percent tariff; picture tubes are

subject to a 15 percent tariff. But picture tubes—the

most costly component in a TV, representing some

40 percent of component costs-can be produced in

the United States, shipped to a Mexican maquiladora, and then re-enter as part of an assembled TV

with only a 5-percent tariff on the value added in

Mexico, thus helping U.S. picture tube plants

compete with Asian plants.

The Labor Market in Electronics

Jobs, Wages, and Displacement

The U.S. electronics industry employed nearly 2

million people in 1991, about 1 million of them

classified as production workers (table 8-7). In

computers, semiconductors, and radio communications and navigation equipment, production workers

make up less than 40 percent of total employment.

In electrical equipment, components, and consumer

electronics, production workers represent 65 to 70

percent of employment.

Generally speaking, parts of the industry producing high-technology equipment in low to moderate

volumes have the smallest percentages of production workers. Examples include military electronics

and mainframe computers, where large numbers of

engineers, software specialists, and skilled techni9 Aftm the AT&T bre~p, the I_Jnit~ Smtes open~ its equipment market mom-or-less udaterally to fOrei~ manufacturers, losing leverage that

might have helped U.S. firms gain access to foreign markets. See International Competition in Services (Washingto~ DC: Office of lkchnology

Assessment, July 1987), ch. 9.

IO Intermhona/ competitiveness in Electronics (Washington, DC: Office of RchnoIogy Assessment, November 1983), pp. 44647.
Chapter 8--Electronics ● 163

cians are needed to design and develop new products. Companies in these businesses sometimes

move labor-intensive operations offshore, as do

mass producers of semiconductor chips.11 The

sectors with high percentages of production workers

tend to have lower rates of technological change and

manufacture mature consumer products in large

volumes or engage in customized assembly of

standardized components (e.g., small-volume production of specialized power supplies). Highvolume assembly is more footloose because so much

production is controlled by MNCs that operate

globally. Smaller U.S. companies producing specialized electronic equipment often depend on a core

of experienced employees, from production workers

and technicians to engineers and salespersons,

working under one roof. Proximity to one another

and to customers is important in this part of the

industry.

U.S. electronics employment peaked in 1984.

Since then, jobs have been disappearing more or less

uniformly across the industry. In the five segments

for which continuous data are available from the

Labor Department, employment declined 16 to 19

percent over the period 1984 to 1991, for a total of

307,000 jobs (table 8-8). Production workers have

suffered a disproportionate share of the decline.

Employment in all of U.S. electronics was nearly the

same in 1991 as in 1978, having risen before falling.

But, with the exception of the highly diversified

components industry, the labor-intensive segments

of the industry have been shrinkingsince the late

1970s. Between 1978 and 1991, 194,000 production

worker jobs were lost, 145,000 of these in consumer

electronics and electrical equipment alone.

At the same time, employment in service industries related to electronics-notably computer and

data processing services (SIC 737)—has been on the

Table 8-8—Employment Trends in U.S. Electronics

Number of employees (in thousands)

Sector and percentage of production workers

1978 1984 1991

Electrical equipment. . . . 570 73% 520 71% 430 700/o

Electronic components. . 280 73 380 72 320 69

Consumer electronics. . . 90 73 70 69 60 65

Semiconductors. . . . . . . . 170 47 270 43 230 40

Computers. . . . . . . . . . . . 340 45 520 40 420 32

Total. . . . . . . . . . . . .. 1,450 64% 1,770 58% 1,460 54%

NOTE: Totals may not add because of rounding.

SOURCE: Office of Technology Assessment, 1992, based on data fmm

Employment and Earnings, March 1992; and Employment,

Hours, and Earnings, United States, 1909-1990, vol. 1, BLS

Bulletin 2370, (Washington, DC: Department of Labor,

Bureau of Labor Statistics, March 1991).

rise. BLS forecasts that employment in computer

and data processing services will grow faster than in

any other major industry, reaching 1.2 million jobs

by the year 2000 compared with 224,000 in 1978.12

Growth in software and computer services firms

could create more jobs than are lost in electronics

manufacturing over the next decade, but few people

who lose production jobs in electronics are likely to

find new work in computer services without considerable retraining.

Real wages have been relatively stable in electronics as a whole over the past 15 years (table 8-9).

But in consumer electronics and electrical equipment, the two sectors with the longest history of job

losses, wages have fallen by 7 to 10 percent since the

mid-1980s. For most of the post-World War II

period, unions represented workers at many large

companies in these labor-intensive parts of the

industry. Over time, the movement of production

offshore and to nonunion plants in the United States

diminished union influence on wages. To keep some

jobs in the United States, unions have been willing

1 I Semiconductor firms employ many engineers in the design of new products, and more complex manufacturing during front-end wafer fabrication

has increased the need for technicians. Much of the labor-intensive assembly required to package “commodity’ semiconductors such as memory chips

moved offshore beginning in the late 1960s. Unlike consumer electronics fiis, which went to Asia and Mexico in efforts to match the costs of fore@n

fmns, U.S. semiconductor firms shifted assembly operations to Asia at a time when they had little meaningful competition. Competitive forces within

the U.S. industry drove these transfers of production+ as fms sought to cut their costs in order to gain market share and move down learning curves

ahead of their domestic rivals. Znternutionul Competitiveness in Electronics, ibid., pp. 192-193. Design and production of application-specific integrated

circuits (ASICS) has remained in the United States because these products must be tailored more closely to the needs of individual customers.

12 -y more sofmme specl~isw work in o~er parts of the economy, including the computer manufacturing sector ad other d~able gods

industries. BLS expects employment of software professionals to increase by over 400,000, to 1.4 million by the end of the decade. George Silvestri

and John Lukasiewicz, “Projects of Occupational Employment, 1988 -2000,” Monthly Labor Review, November 1989, pp. 42-65.
164 ● U.S.-Mexico Trade

Table 8-9--Hourly Wages in the U.S. Electronics industry and in

Mexican Maquiladoras

1978 1984 1988 1990 1991

(1991 dollars)

Electrical equipmenta. . . . . . . . . . . . . . . . . $11.54

Electronic components. . . . . . . . . . . . . . . . 9.42

Consumer electronics. . . . . . . . . . . . . . . . . 10.95

Telephone and telegraph. . . . . . . . . . . . . . NA

Semiconductors. . . . . . . . . . . . . . . . . . . . . 10.93

Radio communications and navigation. . . NA

Computers. . . . . . . . . . . . . . . . . . . . . . . . . . 11.29

Average, U.S. manufacturing. . . . . . . . . . . $12.39

Average, electronics maquiladoras c. . . . . . NA

$11.55

9.72

12.16

NA

12,21

NA

11.90

$12.24

$1.06

$11.03

9.68

11.35

13.25

12.74

13.82

12.19

$11.67

$0.87

$10.51

9.51

10.58

12.09

12.74

13.53

11.97

$11.26

$0.92

$10.39

9.51

10.97

12.20

12.78

13.38

12.16

$11.18

$1.09

NA D Not availabfe.

aHoudy wage data for electrical machinery (SIC 362) are not reported for 1978-1987. Wage eStimates for this sector

are therefore based upon wages in SIC 3621, motors and generators, which comprises 50-60 percent of production

worker employment in SIC 362.

bDue tochanggs in SIC ~tegories, wage data for telephone and telegraph and radio communications and navigation

prior to 1987 Is not comparable with that after 1987, and thus are not included in this table.

cData not av~lable for 1978. Data for 1991 foree=t by CIEMEX-WEFA.

SOURCE: Employment and Earnings, March 1992; Employment, Hours, and Earnings, United States, 1909-%1, vol.

1, BLS Bulletin 2370 (Washington, DC: Department of Labor, Bureau of Labor Statistics, Marefi 1991 ). Base

wages in Mexican maquiladoras eetimatecf from data in Maqui/adora /ndustry ,4na/ysis, CIEMEX-WEFA

Mexican Service, September 1991, p. 75.

to accept wage reductions.13 Members of the International Brotherhood of Electrical Workers (IBEW)

at the Zenith plant in Springfield, Missouri, for

example, agreed to an 8-percent wage cut and a

5-year wage freeze in order to dissuade the company

from moving operations out of the United States.

Nonetheless, the Springfield plant’s production later

went to Mexico.

Rates and impacts of displacement due to plant

closings or other permanent layoffs reflect the

variations in sectoral labor and product markets. On

average, electronics workers lost jobs less often,

found new jobs faster, and experienced smaller and

less frequent wage losses between 1979 and 1989

than did workers in other durable goods industries.

Workers in the labor-intensive portion of electronics

(electrical equipment, consumer electronics, and

components) fared slightly better than those in other

durable goods industries, while workers in other

electronics sectors fared significantly better (see ch.

4, table 4-3). For example, in electronic machinery,

equipment, and supplies, an average of 3.7 percent

of workers were displaced each year over the 1979

to 1989 period, a rate about 10 percent below the

average for durable goods manufacturing. About 28

percent of these workers experienced periods of

unemployment greater than 6 months. Of those that

had found new jobs by the time of the displaced

worker survey, almost one-half earned their previous

wage or higher (in nominal terms).

Mexico and NAFTA

The IBEW estimates that 25,000 of its members

lost their jobs between 1985 and 1989 because of

transfers of production to Mexico.14 Electronics

maquiladoras now employ more than 160,000

Mexican workers. But it is difficult to assess the true

impact of Mexican production on U.S. electronics

employment. In many cases, the only alternatives for

electronics firms that moved manufacturing to

Mexico were to shut down or move production to

Asia. Moving production to Mexico has less impact

13 OTA inte~iews. Rwent wage declines in the eketrical C@pmmt COnSUmer electronics, and telephone and telegraph sectors have beem

accompanied by the growth of a low-wage, Small-fm sector making specialized products in small volumes Clusters of these fms exist in several parts

of the country, including Southern California, whe~ they rely heavily on Hispanic workers and have been cited for violations of wage and hour

regulations almost as frequently as garment factories. Maria Patricia Femandez Kelly, “Labor Force Recomposifion and Industrial Restructuring in

Electronics: Implications for Free Trade, ’ draft report prepared for the U.S. Department of Labor, Bureau of International Labor Affairs, Wsshi.ngtoL

DC, July 1992.

14 I ~Ro~ Wod Dir~tor, Rese~h and fionomics lkp~en~ International Brotherhood of Electrical WOrkerS, &fOre tie MW of tie U.S.

,

Trade Representative, Covering the Desirahilitv. the Scope, and the Economic Effects of a North American Free Trade Agreement,” Sept. 3, 1991, p.

18.
Chapter 8-Electronics . 165

on U.S. employment than these alternatives. By

staying in business, firms can retain U.S. jobs in

engineering, marketing, and ‘‘headquarters’ operations that would otherwise disappear as well. A

move to Mexico rather than Asia, may not disrupt

supplier networks. Electronics maquilas import

some 99 percent of their components, many from the

United States; factories in Asia buy mostly from

Asian suppliers.

Until the mid-1980s, growing sales, defense

production, a regulated telecommunications industry, and union influence combined to cushion U.S.

electronics workers from the layoffs and wage losses

that affected other blue-collar workers. Now, many

of these cushions are gone. A NAFTA would find

production workers in electronics increasingly vulnerable to competition from imports and the threat of

offshore production. Regardless of NAFTA, however, employment in high-volume, standardized

electronics manufacturing will continue to shrink in

the years ahead due to automation. At the same time,

cost pressures in a highly competitive industry

dominated by Asian companies with worldwide

marketing strategies and correspondingly large economies of scale will drive smaller U.S. companies to

seek lower costs through low-wage offshore labor.

Labor-intensive work will continue to migrate to

Mexico, Asia, and the Caribbean. Even when

production does not move, the option of producing

in Mexico will restrain U.S. wage increases.

There is an alternative: production of differentiated, high-quality goods with varied product attributes and features. With flexible organizational

forms, high levels of worker skill and training, and

corresponding commitment to the job, firms could

pay high wages in U.S. plants to supply such

markets. Small, high-technology firms have used

these methods for years, especially in defense

electronics. Sony expects that such an approach will

just@ locating its new TV assembly (and picture

tube) plant near Pittsburgh, bucking the pattern of

movement of assembly to Mexico. The company

plans to take over a former Volkswagen plant,

receiving a substantial incentive package from State

and local governments. To take advantage of the

skilled and experienced labor pool in the area, Sony

will replace traditional assembly lines with selfdirected work teams responsible for tasks such as

cabinet-making and installation of picture tubes. The

groups will be responsible not only for assembly and

quality assurance, but for scheduling and inventory

control and for maintaining their equipment. Workers will be trained in multiple skills and share

responsibility for the group’s work. Because the

groups will be self-directed, Sony plans to dispense

with first-level supervisors.

U.S.-MEXICO LINKAGES IN

ELECTRONICS

Mexico has attracted foreign investment in electronics because of its low wages and because of

government policies that controlled access to its

markets. Mexico may continue to have cheap labor

for many years, but market access has already been

liberalized. Investment decisions will then depend

more on Mexico’s suitability as a location for

manufacturing relative to alternatives. Production

costs, skill levels, and the rate of growth of Mexico’s

domestic market will be primary considerations.

Location Decisions in Electronics

Mexico’s advantages are most visible in laborintensive consumer electronics production. Nearly

all the major TV manufacturers that sell in the

United States have assembly facilities in MexicoZenith, Thomson-RCA, Philips, Sony, Matsushita,

and Hitachi. Zenith is consolidating its TV assembly

in Mexico; Philips has half its North American

production in Mexico. Production of smaller TVs

went to Mexico first; now many companies assemble at least some of their large-screen TVs there as

well.

Production Costs

In the low-margin consumer electronics business,

a few dollars saved in production can make the

difference between profit and loss. Compared with

manufacturing in the United States, reduced labor

and overhead costs from Mexican production can

save as much as $80 per set (table 8-10). Some

maquiladora TV plants have now invested in

considerable automation, seeking to drive costs

down still further.

Cost savings of the magnitude summarized in

table 8-10 are compelling: anew TV assembly plant

can be built for about $100 million; with production

of 1 million sets per year, this initial investment

could be paid back from the savings in production

costs in about a year. Zenith, which posted a $52

million loss in 1990, claims that its Mexican
166 ● U.S.-Mexico Trade

Table 8-10-TV Assembly Costs in Mexico and the

United States

Cost per TV (dollars)

Mexico United States

Labor. . . . . . . . . . . . . . . . . . . . . . . . $15 $90

Overhead . . . . . . . . . . . . . . . . . . . . 60 70

Components. . . . . . . . . . . . . . . . . 225 225

Additional duty. . . . . . . . . . . . . . . . 3.75 NA

Additional inventory Costa. . . . . . . 0.60 NA

Additional transportation. . . . . . . 1.50 NA

$305.85 $385.00

aAssumes 10 percent cd Of funds.

NA = Not applicable.

SOURCE: Office of Technology Assessment, 1992, based on industry

interviews.

operations will save $400 million a year once its

remaining U.S. production has been relocated.15

But such savings are not possible in other parts of

the electronics industry. Much of the cost of

electronics equipment is in fact the result of mechanical, rather than electronic components. The disk

drives in computers, for example, are complex

electro-mechanical assemblies. Good design practices can reduce labor content, and, particularly if

automation becomes feasible, make it cost-effective

to produce in the United States. Design for manufacturability and design for assembly-e. g., reducing

the number of parts and designing each for ease of

handling, either manually or with automated equipment-can dramatically simplify production processes. For example, fasteners such as screws, may

account for 5 percent of parts cost but 75 percent of

assembly cost if they must be inserted by hand.

Reducing the number of fasteners or replacing them

with snap-fit assemblies or adhesive bonding eliminates much of this labor. Better yet, two or three

pieces can be replaced by one. In redesigning its

ProPrinter, for example, IBM reduced the number of

parts by two-thirds, cutting assembly time by 90

percent and improving the reliability of the finished

product.

Miniaturization--especially in semiconductors—

also contributes to reductions in labor content by

putting greater functional capability on each chip, so

that fewer chips are needed in each system. With

reductions in the total number of components and

interconnections, assembly becomes less important,

Table 8-1 l-Cost Breakdown for a Typical

Personal Computer

Direct labor. . . . . . . . . . . . . . . . . . . . . . . . . less than 5%

Overhead. . . . . . . . . . . . . . . . . . . . . . . . . . . 10%

Mechanical parts. . . . . . . . . . . . . . . . . . . . . 5%

Tooling, etc.. . . . . . . . . . . . . . . . . . . . . . . . . 2%

Electronic parts and components. . . . . . . . 30-607.

Disk drives. . . . . . . . . . . . . . . . . . . . . . . . . . 15-30’YO

Monitor. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5-lo%

Keyboard. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-5%.

SOURCE: Benjamin Gomes-Cassares, “International Trade, Competition,

and Alliances in the Computer Industry, ’’paper presented at the

Mkwld Trade and Global Competition Colloquium, Harvard

Business School, Boston, MA, Demmber 1991 (based on

company estimates).

component manufacturing more important. As a

result, electronic devices for which assembly labor

represented 40 percent of manufacturing costs a few

years ago, such as computers, now have direct labor

content of 5 percent or less (table 8-1 1). A PC that

costs $1,000 to manufacture in the United States

might cost $950 in Mexico. It would take many years

to recover the costs of a new plant in Mexico.

Moreover, import duties on computers produced in

Mexico would negate most of the potential savings.

Under a NAFTA that eliminated these duties,

computer assembly in Mexico could become more

attractive. But other costs of manufacturing in

Mexico--e. g., the more complicated logistics of

production management-might nonetheless outweigh the savings in direct labor.

Suppliers and Just-In-Time (JIT) Production

As a low-wage production site, Mexico competes

directly with Asia. Mexico has the advantage of

being near the United States, which simplifies the

coordination of design and production for U.S. firms

(box 8-D). Products shipped from Mexico can reach

retail outlets in about a week, compared to 8 weeks

if shipped from Asia. Reductions in inventories of

goods in transit contribute to cost savings. On the

other hand, for companies that currently manufacture in the United States, shifting production to

Mexico can add considerably to inventory costs.

Where product cycles are short and companies

must react quickly to changes in consumer demand,

as in the PC industry, offshore production, even in

Mexico, can penalize responsiveness and disrupt JIT

production systems. Many firms in such markets,

Dell Computer for one, carry very small inventories

15 ~~~ recendy ~oun~d ~1 it wiu close i~ Springfield, M() plant. In total, 1,200 jobs will be 1ost-600 in assembly ad 600 in a cabinet

finishing plant. John Burgess, “TV-Maker Zenith Will Move Assembly Operations to Mexico, ” Washington Post, Oct. 30, 1991, p. F3.
Chapter 8--Electronics ● 167

Box 8-D—Making Telephones in Mexicol

Direct labor represents 30 percent of manufacturing costs for standard telephones. Assembly requires just a few steps—manual insertion of the

circuit pack, assembly into the housing, and testing

to make sure the phone rings, followed by packaging for shipment. These tasks can be easily conducted with unskilled labor in Mexico or elsewhere.

With deregulation and the opening of the U.S.

market, AT&T shifted production of telephones to

Asia. Inventory costs for parts and finished goods

erased much of the savings the company hoped to

achieve, keeping prices high and costing the

company market share. Phones sometimes had to be

shipped back to Asia for repair. By moving

production and repair operations to Mexico, AT&T

reduced its inventory and shipping costs, lowered

prices, and regained lost market share. The company now makes about 9 million phones each year

in Mexico, up from 2 million before the move.

Success with phones led AT&T to make answering

machines to Guadalajara, after unsatisfactory experiences with contract production in Asia. The

company claims it would have been unable to stay

in the answering machine market without its

manufacturing operations in Mexico, which it

expects will produce several million answering

machines in 1993.

l~s ~x is bawd on industry interviews.

of finished goods (as little as a single day’s worth).

While these firms may hold larger quantities of parts

inventories, to allow rapid assembly of final products and to take advantage of dips in component

prices, production in Mexico would require larger

stocks of completed products, which, if they must be

marked down because of rapid shifts in consumer

demand, could erase at least some of the savings

achieved through production in Mexico (table 8-12).

In mature, high-volume industries, where demand is

more stable and predictable, the chances of being left

with unsold inventories are greatly reduced.

The cost differential shown in table 8-12 would

probably not justify production in Mexico. ADDS

Corp., for example, recently decided to move

production of computer displays from Taiwan to the

United States. The company estimates that production costs will rise from $300 to $320, but will be

offset by reductions in overhead costs for managing

Table 8-12—Personal Computer Production Costs in

the United States and Mexico

Cost per computer (dollars)

United States Mexico

Direct labor. . . . . . . . . . . . . . . . . . $35

Overhead. . . . . . . . . . . . . . . . . . . . 100

Mechanical parts. . . . . . . . . . . . . . 50

Tooling. . . . . . . . . . . . . . . . . . . . . . 20

Components. . . . . . . . . . . . . . . . . 795

Total manufacturing. . . . . . . . . . $1,000

Additional transportation. . . . . . . NA

Inventory in transita. . . . . . . . . . . . NA

Losses on inventory. . . . . . . . . . . NA

Total cost. . . . . . . . . . . . . . . . . . $1,000

$ 5

80

50

20

795

$950

6

3

15

$974

aA~~umes 10 percent @st ‘f ‘Unds.

bAssumes one week’s production per year of finished goods so~ at cost.

NA - Not applicable.

SOURCE: Office of Technology Assessment, 1992.

production-costs omitted from table 8-12 for

simplicity, but not necessarily insignificant even for

Mexican production.

Deficiencies in the Mexican supplier base will

also limit investments by firms working towards JIT

production. Electronic components produced by

Mexican firms are high in price and low in quality

compared with those available on the world market.

MNCs operating in Mexico also note that delivery is

unreliable. The local supplier base will probably be

slow to develop. Most circuit boards for TVs are

already stuffed in Mexico, with components imported from Asia. (Only Philips currently assembles

circuit boards for TVs in the United State s.) Because

most of these components are standardized, made in

high volumes in low-cost Asian plants, and inexpensive to ship, there is little incentive for producing

them in Mexico. Development of a supplier base for

more complex products will be paced by the overall

development of the Mexican electronics industry.

Intrafirm Linkages and Investment Costs

Despite the global dispersion of manufacturing in

recent years, many MNCs try to maintain close

linkages among manufacturing, marketing, and R&D

departments. This is true especially for development

of goods made in low volume with customized

features-as for large computers and telecommunications equipment—and also for high-volume, hightechnology products such as laptop computers.

Linkages between marketing and manufacturing

become especially crucial when products must be

customized for each user.
168 ● U.S.-Mexico Trade

Table 8-13-Distribution of Expenses in the Computer and Television Industries

Computer

Mainframe Minicomputer Personal Television

(percentage of total expenses)

Production. . . . . . . . . . . 49% 51% 58% 89%.

R&D. . . . . . . . . . . . . . . . 11 11 6 4

Marketing . . . . . . . . . . . . 32 31 25 7

Other . . . . . . . . . . . . . . . 5 5 4 —

Profit . . . . . . . . . . . . . . . 4 2 7 —

SOURCE: Benjamin Gomes-Cassares, “international Trade, Competition, and Alliances in the Computer Industry,”

paper presented at the WoddTradeand Global Competition Colloquium, Harvard Business School, Boston,

MA, December 1991; and corporate annual reports.

The differences between products like computers

and televisions are reflected in corporate expenditures (table 8-13). For minicomputer and mainframe

manufacturers, R&D and marketing costs top 40

percent of annual revenues; even for PCs, they can

exceed 30 percent. In contrast, TV manufacturers

spend only 11 percent of total revenues on R&D and

marketing; almost all their revenues go to cover

manufacturing costs.

Compaq Computer, for example, recently announced two new portable computers priced for the

low-end market. Compaq decided to produce these

computers in its Houston plant rather than offshore

so that the design engineering staff could work

closely with production engineers. These products

incorporate new technologies that may need refinement over the first few months as they are tested in

the market.l6 In some segments of TV manufacturing, too, market considerations can make it advantageous to keep design and production teams near each

other. Several TV firms state they will keep production of projection and large screen TVs in the United

States at least until these markets stabilize. U.S.

sales of projection TVs are only 200,000 per year,

while product features have been in constant flux as

companies strive to push costs down and improve

performance.

Investment Costs, Worker Skills, and

Technological Infrastructure

For many sophisticated products, including telecommunications switches and semiconductors, the

capital costs of manufacturing plants continue to

increase. State-of-the-art semiconductor fabrication

facilities cost between $500 million and $1 billion to

construct; for telecommunications switches, investment costs run to hundreds of millions of dollars. At

these levels, companies build no more plants than

necessary, and examine location decisions very

carefully. There is no reason to close existing plants

and move them, even if the technologies are not

demanding, unless costs can be recovered quickly—

which is not the case when front-end capital costs are

high.

Mexico is an unlikely choice for new capitalintensive manufacturing because of its relatively

poor technological infrastructure. Whereas the production of TVs and electrical equipment is largely a

matter of assembling components, the manufacture

of products such as semiconductors and picture

tubes requires workers and organizations able to

cope with complex production equipment that may

need constant ‘‘tuning’ to keep productivity and

quality high. For products such as mainframe

computers and telephone switching systems, each

unit may be built to somewhat different specifications, requiring highly skilled workers. Mexico has

little capability in these areas today. For reasons

discussed in chapter 5, it would probably be several

decades before Mexico could catch up even with

NICs like Korea, where production of complex

semiconductors began during the 1980s.

With declining direct labor content in many

electronics products, the relative importance of

indirect labor-engineers, equipment repair techniIS Joe T~ker, cornp~ cornputm Corp., personal communication, February 1992. Hyundai, too, rmently aMOmCed ptitO shift i~ PC o~ations

from Korea to the United States. Despite the potential cost savings of a Mexican plantj Hyundai opted to build in the United States in order to be nearer

new technical developments. Managers noted that assembly would be moved, along with desi~ developmen~ and marketing, to help the company

respond morequicldy to shifting market demand, Hyundai has promised the new U.S.-based division substantial autonomy for worldwide PC operations.

Jim Carlto~ ‘‘Hyundai Plants to Move Its Division for Personal Computers to the U.S.,’ Wal/StreetJourna/, Apr. 20,1992, p. A2. Reportedly, Goldstar

and SamSung are considering exiting the PC market because they have been having so much trouble keeping up, yet do not wish to follow Hyundai to

the United States.
Chapter 8-Electronics ● 169

Table 8-14-Advantages and Disadvantages of Electronics Production in Mexico Compared

to the United States

Labor Suppliers/ Interfirm Market Investment Workforce

costs JIT linkages size costs skills

Television

Assembly. . . . . . . . . . . . . . . . . . . . . + o 0 0 0 0

Picture tubes. . . . . . . . . . . . . . . . . . 0 0 0

Computers. . . . . . . . . . . . . . . . . . . . . . 0 0

Peripherals. . . . . . . . . . . . . . . . . . . . . . 0 0 0

Semiconductors. . . . . . . . . . . . . . . . . ; o 0

Telecommunications

Switches . . . . . . . . . . . . . . . . . . . . . . O 0

Customer premises equipment. . . + o 0 0 0 0

Electrical equipment. . . . . . . . . . . . . . + o 0 0 0 0

Key: + - Mexico at an advantage.

O = Little or no difference, or not a significant factor.

-- Mexico at a disadvantage.

SOURCE: Office of Technology Assessment, 1992.

cians, managers, and administrative personnel-has

increased. These are precisely the kinds of workers

that are in shortest supply in Mexico. As a result,

wages for skilled technicians, engineers, and managers are rising. Whereas wages for production workers are perhaps one-tenth those in the United States,

pay for skilled technicians and engineers may be

one-fifth to one-third of U.S. levels. Some Mexican

managers earn as much or more as their U.S.

counterparts. Thus, the growing importance of

indirect labor reduces Mexico’s ability to attract

investment and jobs in electronics by requiring skills

in short supply in the Mexican labor force and

reducing the cost advantages of manufacturing in

Mexico.

NAFTA Impacts

By itself, a NAFTA is unlikely to radically alter

patterns of investment and development in the

Mexican electronics industry. Investment would

continue without an agreement in response to

Mexico’s unilateral policies for attracting FDI, the

dismantling of trade restrictions on computers, and

the opening of TelMex procurements following

privatization. NAFTA may, in some cases, speed the

flow of investment dollars to Mexico by reducing

uncertainty about the future. Specific NAFTA provisions, for example on rules of origin, will also affect

trade and investment patterns in both near and long

terms.

Table 8-14 summarizes Mexico’s capabilities in

electronics manufacturing compared to those of the

United States. As the table shows, the relative

advantages of each country vary greatly from sector

to sector. For products such as TVs, customer

premises telecommunications hardware, and electrical equipment, labor costs outweigh other factors, so

that Mexico can attract production away from the

United States.

While most of the movement in TV production

has already occurred, as Mexico’s infrastructure of

suppliers and its design/development capabilities

improve, Mexico will be able to attract more

technologically sophisticated production. For example, Hitachi announced in February 1992 that it

would move production of projection TVs from

Anaheim, California to Mexico; Sony already makes

projection TVs in Mexico.

Manufacture of picture tubes will probably remain in the United States, at least in the near term.

New picture tube plants cost $100 million to $200

million, while existing plants can be retooled for $10

million to $20 million. Because production is highly

automated, labor cost savings would not offset the

investment costs associated with a transfer to

Mexico, particularly given the narrow profit margins

in this business. Newer entrants, such as Korean

fins, are more likely to put tube plants in the United

States than in Mexico, where skilled workers would

have to be trained because no base of picture tube

manufacturers exists today. Dependable supplies of

water, a critical element in picture tube fabrication,

also are a problem in Mexico, particularly in the

border region. Perhaps most important, Mexican

suppliers cannot at present supply the glass funnels

and blanks needed for picture tubes. These would

have to be imported from the United States or the Far

East.
170 ● U.S.-Mexico Trade

In the absence of government policies forcing

them to do so, computer firms have little reason to

manufacture in Mexico. The potential cost savings

do not appear adequate to justify branch-plant forms

of production. Leaders in the industry such as IBM,

Apple, and Compaq differentiate their products

through technology rather than pricing. Besides,

most U.S. computer manufacturers are consolidating

manufacturing operations due to overcapacity. Generally speaking, the Mexican market, by itself, is too

small to just@ additional investments. However,

some new production capacity for PCs may go into

Mexico in the medium term to serve domestic and

export markets. Rapid growth rates, estimated at 20

percent by the U.S. Department of Commerce, could

see sales in Mexico doubling, to $2 billion from the

current level of $1 billion, within 4 years. Mexico

already has plants assembling micro and minicomputer systems, and companies might choose to

expand them or supplement them.

From TV production, moreover, Mexico could

probably move into computer displays. Zenith

already manufactures color displays in Mexico, and

has announced plans to move monochrome display

production from Taiwan to Mexico, Development of

skills for more advanced peripherals would require

significant investments by companies based in the

United States, or, more likely, Japan and Singapore,

which excel in such products. While some incentive

may exist for Japanese printer manufacturers to

locate in Mexico to reduce transportation costs, disk

drives are easy to ship, and manufacture in Mexico

offers no apparent advantage to current producers.

On the other hand, a major technological change in

mass storage devices could conceivably see Mexico

entering on the ground floor.

Mexico is not a contender for advanced semiconductor production. It would be very difficult to build

and operate a clean room facility in Mexico today.

Chip assembly operations that have not already been

automated have long since moved to the Far East.

Moreover, there are few fabrication facilities in the

United States that could ship parts to Mexico for

assembly, and few prospects for new wafer fabrication installations given current levels of overcapacity. Very high costs for building a state-of-the-art

semiconductor facility, the economies of scale

inherent in semiconductor production, and the very

high risks involved, ensure that new capacity will be

added in developed countries or in advanced developing countries like Korea.

Economies of scale will also prevent current U.S.

manufacturers of telecommunications switches from

shifting production to Mexico. In the United States,

both AT&T and Northern Telecom produce major

CO switches at only one location. The Mexican

market, although it is expected to grow rapidly, is

still only one-eighth the size of the U.S. market

(800,000 lines per year compared with about 6

million here). Mexico would probably need to call

on government inducements to attract switch production beyond what it has today. More likely, the

output of U.S. plants, which have excess capacity,

will be directed toward Mexico. If the Mexican

market grows at a faster pace, perhaps at 1 million

lines per year, OTA interviews indicate that it could

be profitable for a third competitor to manufacture

CO switches there-provided it could expect to

capture a third of sales. Such an operation would be

viable only if foreign manufacturers, with larger

economies of scale, were prevented from shipping

switches duty-free to Mexico. In effect, new investment in Mexico would only be attractive if competition were limited to existing Mexican manufacturers. Table 8-15 summarizes the results of the

preceding discussion, and identifies the primary

constraints on production in Mexico.

A NAFTA is likely to affect investment decisions

in electronics primarily through rules of origin.

These could have considerable impact on picture

tube production, for instance. Currently, Asian

picture tubes go into many sets assembled in Mexico

for sale in the United States. Tubes from the Far East

cost less than $65 ($61 to $62 in production costs

and less than $3 for shipment to Mexico), and can be

incorporated duty-free into sets assembled in maquiladoras.17 When shipped to the United States, tubes

face a 5-percent duty-the rate charged on value-

-added in Mexico for completed TVs (only one-third

the 15-percent tariff levied on picture tubes imported

separately). At the 5-percent level, Asian picture

tubes cost about $68 delivered into the United

States—substantially less than U.S.-made tubes,

which run $72 to $75. A good deal of new tube

capacity has been put in place or announced in

Southeast Asia, with much of this directed at the

North American market (since there is little new

assembly capacity going into Asia). A NAFTA

IT ~ese cost figures come from Duane Welch C’otig kc., J~WUY 192.
Chapter 8-Electronics . 171

Table 8-1 5-Likely Effects of a NAFTA on Investment in Mexico’s Electronics Industry

Product Effect of a NAFTA Comments

Consumer electronics

Computer peripherals

Personal

computers/minicomputers

Mainframes/supercomputers

Telecommunications switches

and PBXs

Semiconductors

Customer premises

telecommunications

equipment

Electrical equipment

Continued transfers of production to Mexico.

Some movement of low-end peripherals such as keyboards, power

supplies, and monitors from Asia

and the United States.

Little movement to Mexico. some

new capacity could be added in

the medium- to Iong-term to serve

the Mexican market.

No movement to Mexico.

No movement without government inducements and protection from third-country imports.

No movement to Mexico likely

except for simplest products.

Some movement of production

from Asia to Mexico to reduce

shipping times and costs.

Continued movement of highvolume production.

High-end products such as projection TVs may remain in the United

States until the market stabilizes.

Limited skills and suppliers for

higher-end disk drives in Mexico.

Limited Mexican supplier base;

additional inventory rests in a

rapidly changing market; overcapacity in existing U.S. facilities.

Lack of skills.

Relatively small market.

Limited worker and organizational

skills; economies of scale.

SOURCE: Office of Technology Assessment, 1992.

requiring a sufficiently high level of North American

content could keep most or all of these tubes out.

Rules of origin would also have implications for

computer manufacturers. U.S. producers currently

import many components and subassemblies. Requiring a high degree of local content, while helping

U.S. component manufacturers, could place U.S.

computer manufacturers at a disadvantage. Some

components such as active matrix displays for

portable computers are not yet available from U.S.

suppliers. Many other components are available

more cheaply overseas.

Longer Term impacts: Paced by Skills

Development

Longer term evolutionary patterns will depend to

a large extent on organizational and worker skills in

both countries. In the United States, manufacturers

must pursue high-wage production strategies to fend

off low-wage rivals. Mexico must develop managerial and technical skills to move upscale in electronics. For Mexico, this will require three mutually

supportive processes:

1.

2.

3.

state-led programs to provide basic educational skills and attract foreign investment;

investments in worker training and supplier

development programs by the government and

by companies currently operating in Mexico;

and

technology transfer from MNCs.

Mexico’s government is unlikely to go back to

full-blown protectionism and subsidization. But this

does not mean that Mexico will not offer incentives

to attract foreign multinationals through limited

forms of managed trade, investment controls, or tax

credits. Nations such as Taiwan, Korea, and Singapore have found these valuable in attracting

foreign investors, fostering strategic alliances with

domestic firms, and promoting local industries.

Mexico has no such policies at present in electronics.

Indeed, SECOFI, the Mexican Ministry of Commerce, has only $25 million available for facilitating

technology absorption, funding research centers in

Mexico’s states, and stimulating private sector

innovation. 18

1~ Intewiew witi Santiago Ixvy, SECOFI, May 20, 1992.
172 ● U.S.-Mexico Trade

Box 8-E—Technology Transferl

While many electronics companies operating in Mexico have failed to locate or develop local sources for key

inputs to their production, IBM in Guadalajara has recorded something of a success. IBM purchases planar boards

for its PCs from a local company, ADTEC, a joint venture between one of IBM’s U.S. suppliers and a Mexican firm.

ADTEC produces double-sided boards using surface mount technology on a state-of-the-art production line. Most

of the 300-plus components come from the United States. Production yields in Mexico exceed 80 percent, compared

to 65 percent in a comparable U.S. plant. ADTEC has now begun to sell to other computer manufacturers in

Guadalajara, including Hewlett-Packard.

ADTEC has succeeded in part because its engineers learned from the experience of the U.S. plant that installed

a surface-mount line in 1985,2 years before the Mexican plant opened. Trainingalso played an important role. The

first workers hired by ADTEC received a full 6 months of training--very unusual in the Mexican electronics

industry-although the company now finds it can get by with 3 weeks of training for new workers. Turnover is low:

1 percent a month compared with 7 or 8 percent in typical electronics maquiladoras.

IBM helped start ADTEC because it wanted a local source to aid in JIT production and because the Mexican

Government required heavy investments in technology transfer as a condition for a fully-owned affiliate in Mexico.

Still, while ADTEC produces quality products at high yields, the company hardly qualities as “high” technology:

tie-quarters of the workforce are in direct production jobs, and their tasks resemble those in many TV assembly

plants.

As part of its investment agreement with the Mexican Government, IBM also shares in the funding of a $22

million Semiconductor Technical Center for the custom design of semiconductor chips. In addition, the center began

offering masters degrees in engineering in February 1991 and hopes to add a doctoral program in the future.

Manufacture of chips designed at the center takes place in the United States, however.

IB~~ on ‘N~A ti & EkCbOrdCS hMhlS~ h mfiCO,” report prepared for OTA under contract No. H3-7200 by Patricia WiisoU

February 1992 md OTA interviews.

CONCLUDING REMARKS development programs or extensive workforce training (box 8-E).

Mexican-owned firms including contract maqui- Some upgrading of capabilities in electronics

ladoras will need to improve the skills of their maquiladoras has taken place in recent years.

.

workers if they hope to take on more complex

production tasks. Automation—increasingly necessary for meeting quality standards in electronics

production—raises skill requirements for workers

who maintain equipment and trouble-shoot manufacturing processes. As more customers demand that

their suppliers use statistical process control and JIT

production methods, training needs will grow.

Mexico will also have to develop an adequate

supplier base to attract assemblers that wish to

implement JIT systems.

Skills development—and concomitant increases

in industrial capability-will depend largely on

foreign investment. Multinationals control the technology that Mexico must learn to use. Government

initiatives to provide training in the electronics

industry have so far been weak. Only large corporations are likely to be willing to support supplier

Maquiladoras have been investing in automated

equipment--e.g., for assembling circuit boards,

injection molding plastic parts, winding transformer

coils, and testing final products—in part to meet the

quality standards of their customers in export

markets.

Expansion of the Mexican electronics industry

into more technologically sophisticated product

lines, such as at Hewlett-Packard (H-P), suggest

what the future may hold for Mexican electronics.

H-P has established an R&D facility in Guadalajara

that now designs memory boards for company-wide

applications. Guadalajara has also become the primary center for production of impact printers and

handles design changes. At present, however, this is

the only electronics R&D center in Mexico operated

by a multinational. Development of a modern

electronics industry will be a long-term undertaking

for Mexico.
Chapter 9

Apparel
.— —..

Contents

Page

SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . 175

THE U.S. AND MEXICAN INDUSTRIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 176

Apparel Products and Apparel Jobs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 176

Mexican Apparel Production . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .181

Trade Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 183

The Structure of U.S. Imports From Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185

IMPACTS OF NAFTA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .186

The Maquilas. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 187

Nonbasics Production in Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 188

Effects on U.S. Jobs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189

The Uruguay Round and the MFA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 192

CONCLUDING REMARKS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 193

Boxes

Box Page

9-A. Quick Response: Lean production in the Apparel Industry . . . . . . . . . . . . . . . . . . . . . 181

9-B. Quotas on Apparel From Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 184

9-C. Apparel Production in Guatemala . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191

Figures

Figure Page

9-1. Distribution of Apparel Employment, 1989 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180

9-2. U.S. Apparel Imports from Caribbean Basin Initiative (CBI) Countries . . . . . . . . . . 186

Tables

Table Page

9-1. U.S. Apparel Employment byproduct Category, 1991 . . . . . . . . . . . . . . . . . . . . . . . . . 177

9-2. import Penetration by Class of Apparel, 1990 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177

9-3. Growth of the Maquiladora Apparel Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 182

9-4. Costs for U.S. and offshore production of Men’s Shorts . . . . . . . . . . . . . . . . . . . . . . . 184

9-5. U.S. Apparel Imports by Country of origin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 186

9-6. U.S. Imports of Apparel From Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . 187

9-7. Workforce Characteristics in Maquiladoras, 1990 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 187

9-8. Employment, Wages, and productivity in Apparel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189
.———

Chapter 9

Apparel

SUMMARY1

U.S. imports of clothing, primarily from Asia,

have been rising for years, from $2.5 billion in 1974

to more than $26 billion in 1991—roughly 40

percent of U.S. spending on apparel. Meanwhile,

U.S. employment in the garment industry has

shrunk-from more than 1.3 million workers during

the 1970s to about 1 million currently. More than

150 low-wage countries ship apparel to the United

States. While some U.S. apparel jobs will move to

Mexico in the years ahead, Mexico has so far been

a minor supplier of garments to the United States and

will have difficulty dislodging established Asian

producers. The threat to U.S. apparel jobs is global,

not regional.

Apparel production is highly labor-intensive and,

as in other manufacturing sectors, it is assembly

(sewing) that has been most difficult to automate,

and hence most susceptible to low-wage competition. Equipment is inexpensive, easy to buy and to

use. The sewing machines found in many apparel

factories cost well under $1,000.

Two broad sectors characterize the U.S. industry.

Companies in one produce large quantities of basic,

standardized commodities such as blue jeans and

underwear. The other sector manufactures smaller

runs of fashion-sensitive goods, much of it women’s

wear. Both sectors have been under severe pressure

from imports. Women’s outerwear-the largest

fashion-sensitive category-accounts for about onethird of total U.S. apparel employment. Much of this

employment is concentrated in the garment centers

of New York and California, reflecting the continuing importance of design in this industry; production

takes place near both major retail markets and

styling centers.

The Mexican share of U.S. apparel imports has

risen from 2 to 6 percent since the early 1980s,

almost all of this from maquiladora plants that sew

clothing originally cut in the United States. Finished

garments shipped to the U.S. markets are charged

duty only on the value added in Mexico. Production

in the maquiladora sector is based on very long runs

of standard items; like mass production everywhere,

plant operations are designed to minimize skill

requirements and to accommodate a high-turnover

workforce. While the United States imports large

volumes of women’s wear, very little comes from

Mexico. Asia is the major source, with much of the

apparel air freighted to the United States in a global

version of ‘‘Quick Response.

Production workers account for a greater share of

U.S. employment in apparel than in other manufacturing industries-nearly 85 percent, compared to

68 percent for all of U.S. manufacturing. Moreover,

the apparel workforce is dominated by sewing

machine operators, About two-thirds of all workers

in the industry are classified as operators, and

another 6 percent are laborers or material handlers;

only about 10 percent of the workforce hold

technically oriented jobs such as mechanic or

precision production worker.

2 Although sewing

requires considerable skill, operators with little

formal education or training can become proficient

in a matter of weeks or months. Thus, U.S. apparel

producers have tended to locate in areas with huge

supplies of low-wage labor: in immigrant communities in the Northeast and California, and in the

Southeast.

In early 1992, sewing machine operators< in

Mexico’s maquiladora sector earned between $7

and $10 a day, compared to an average of $6.25 per

hour in the United States— a difference so large that

it may seem inconceivable that U.S. production

could survive direct, unprotected competition with

Mexico. To date, a complicated set of import quotas

has limited apparel imports into the United States

] This chapter is based on “The North American Free Trade Agreement and the U.S. Apparel Industry, ” report prepared for OTA under contract

No. 13-0615 by Thomas Bailey and Theo Eicher, May 1992. The Bailey and Eicher report is based on intewiews in Mexico and the United States, data

and information from the Mexican and U.S. Governments, and industry sources including unions and employer associations. It also draws on other studies

conducted by the authors over the last 3 years, including site visits to more than 40 U.S. apparel factories. For OTA, the fmt author visited companies

in Mexico City, Aguasca.lientes, and Tijuana. Some of these plants produce for the Mexican market, others are maquiludoras shipping to the United

States. He also interviewed representatives of the national and the Aguascalientes apparel chambers, the national textile chamber, and Mexican experts

on the textile and apparel industries.

2 These figures are based on the public use sample of the March 1988 Current Population Sumey.

–175–
176 ● U.S.-Mexico Trade

from Mexico, at least on paper. If a North American

Free Trade Agreement (NAFTA) ended these restrictions, it might appear that U.S. apparel jobs

would quickly melt away. To make matters worse,

many U.S. apparel workers have relatively little

education, and face limited opportunities in the labor

market-particularly those living in rural areas in

such States as Georgia and the Carolinas.

In practice, the quotas negotiated by the U.S. and

Mexican governments have been only a minor drag

on Mexico’s shipments of apparel to the United

States. Nevertheless, a NAFTA would further stimulate growth of maquila-like production. U.S. imports

of apparel from Mexico doubled between 1987 and

1991. With a NAFTA, the current maquila sector

would continue expanding, perhaps at a higher rate

(while coming to be identified by its export-oriented

character, rather than the special trade rules under

which it was established). Maquiladora apparel

plants currently employ in the neighborhood of

45,000 people, a figure that could grow to as much

as 130,000 by the end of the decade. Not all of these

jobs would replace U.S. jobs one-for-one. But if they

did, that would represent about 8 1/2 percent of

current employment in the U.S. industry. Even

without a NAFTA, the maquila sector would probably continue to expand. The simple fact is that

production of basic apparel costs much less in

Mexico than here. Because of Asian competition, on

the other hand, exports of fashion-oriented apparel

from Mexico to the United States, almost nonexistent today, seem unlikely to grow rapidly.

THE U.S. AND MEXICAN

INDUSTRIES

Apparel Products and Apparel Jobs

The apparel industry is extremely diverse, producing one-of-a-kind gowns that sell for thousands

of dollars as well as millions of identical copies of

plain white t-shirts worth only a few dollars. It is

possible to make a broad distinction between standardized commodities, sold year round and produced

in large runs, and more fashion-sensitive items. The

latter, produced in large numbers of styles that

change from season to season and year to year,

include much women’s wear and a good deal of

men’s and children’s clothing. Fashion-sensitive

clothes are not necessarily expensive: mass market

retailers like Walmart and J.C. Penney have been

leaders in popularizing marketing strategies based

on ever-changing styles of low-priced clothing.

Standardized, commodity-like items include work

clothes and white dress shirts.

Table 9-1 breaks down U.S. apparel employment—84 percent of which is in direct production—

into three groups: Group 1, women’s outerwear;

Group 2, men’s outerwear; and Group 3, underwear,

nightwear, and infant and children wear. Women’s

outerwear, the most fashion-sensitive group, accounts for nearly 44 percent of U.S. employment.

The most standardized goods are found in Group 3,

which accounts for less than 20 percent of U.S.

apparel jobs, with the men’s wear group falling in

the middle of the standardized to fashion-sensitive

range and accounting for nearly 40 percent of

employment.3

Imports in all three categories have been increasing for years, with women’s outerwear above the

average, primarily as a result of high import ratios

for sweaters and blouses. Group 3, dominated by

underwear and nightwear, shows the lowest import

penetration.

Table 9-2 shows that imports are highest in

fashion-sensitive categories-the categories in which,

according to table 9-1, U.S. employment remains

highest. 4 Two opposing forces are at work in

fashion-sensitive clothing. Because such items are

made in small lots with hand labor, offshore plants

in low-wage countries can undercut U.S. costs

substantially. But frequent design changes and the

importance of timely delivery to retailers help U.S.

plants overcome cost disadvantages through superior customer service. At the same time, wellmanaged foreign operations, especially in Asia, have

3 k terns of ~ket @e, bmic products sold year-round account for about 20 percent of U.S. apparel W% ‘‘seasonal’ products, with a 20-week

life, roughly 45 percent of saIes, and “fashion” products, with a l~week life, the remaining 35 percent. The U.S. Textile and Apparel Industry: A

Revolution in Progress (Washington DC: Office of lkchnology Assessment, April 1987), p. 16. Thus it appears that about two-fti of the industry,

whether measured by employment or sales, is quite sensitive to fashiou while about one-fifth is accounted for by basic, commodity garments.

4 me wewi~ tie categofie5 in mble g-z extends fkom a low of 11 percent for women’ss wimsuits to a high of 80 percent for women’s sweaters.

Import penetration for women’s blouses, the hugest single subcategory in terms of imports ($5.1 billion), stood at 59 percent in 1990. Apparel, Current

industrial Reports, MQ23AS1-90 (Washington, DC: Bureau of the Census, 1990), table 7.

Lmports grew particularly rapidly over the period 1980-1987, when the trade deficit in apparel increased from $5 billion to $20 billion.
Chapter 9--Apparel ● 177

Table 9-1—US. Apparel Employment by Product Category, 1991a

Number Percent

(thousands) of total

Group 1, women’s outerwear

WMJ blouses, shifts and dresses (2331, 2335)b. . . . . . . . . . . . . . . 102.6

WMJ suits, skirts, and coats (2337). . . . . . . . . . . . . . . . . . . . . . . . . 36.9

WMJ outerwear, NEC (2339). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 187.2

326.7 43.5%

Group 2, men’s outerwear

MB suits and coats, trousers (231, 2325) . . . . . . . . . . . . . . . . . . . . . 132.4

MB shirts (2321 ).... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63.8

MB work clothing (2326). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43.3

MB clothing, NEC (2329)... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49.5

289.0 38.5%

Group 3, underwear, nlghtwear and lnfant’s and

children’swear

WMCl undetwear and nightwear (2341). . . . . . . . . . . . . . . . . . . . . . 50.0

MB underwear and nightwear (2322)... . . . . . . . . . . . . . . . . . . . . 16.8

GCl outerwear, NEC(2369). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34.5

GCl dresses, blouses and shirts (2361). . . . . . . . . . . . . . . . . . . . . . 22.8

Foundation garments (2342). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.4

135.5 18.0%

Total for Groups l, 2, and 3.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 751.2 100%

GC1-girl’s, children’s, and infant’s

MB -men’sandboy’s

NEC-not elsewhere classified

WMC1-women’s, misses, children’s, and infant’s

WMJ-women’s, misses, andjunior’s

a~clu~S 203,000wofiersemploy~ inmiscellaneous fabricated textiles (SlC239, which includes homefurnishings

andavarietyofindustrial products), 43,400in miscellaneous apparel andaccessories(SIC 238),and 26,500inhats,

furgoods, and men’sneckvvear (SlCs2353,237, and 2323).

bNum&rs in parenth~es are Standard Industrial ClassifbatiOn (SIC) ~es.

SOURCE: Employment and Earnings, March 1992, except SIC codes 2322 and 2369, for which employment figures

have been estimated from 1989 figures reported in County Business Patterns based on ratios of 1991 to

1969 employment equal to that for SIC 23 as a whole.

Table 9-2—import Penetration by Class of Apparel, 1990a

Apparent Imports as consumption imports percent of

(billions of dollars) apparent consumption

Group 1, women’s outerwear. . . . . . . . . . . . $29.9 $13.8 46%

Group 2, men’s outerwear. . . . . . . . . . . . . . . 23.0 8.6 37%

Group 3, underwear, nightwear, and

infant’s and children’s wear. . . . . . . . . . . . 8.2 2.8 34%

Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $61.1 $25.1 41%

a&oup &finitions differ slightly from those in table 91, but are broadly Consistent.

bus. production pIus imports minus ex~rts.

clmwfl shares are u~erstat~ ~use import figures are based on customs values that exclude U.S. costs in~ud~

in the apparent consumption column for domestically produced goods.

SOURCE: Appare/, Current Industrial Reports, MQ23AS1 -90 (Washington, DC: Bureau of the Census, 1990), table 7.

demonstrated over several decades that they can U.S. jobs in producing the standardized items

compete quite successfully except at the very top found in Group 3-which show lower import

end of the market, where imports tend to come from penetration in part because low costs have been

Europe. Of course, fashion sensitivity varies a great achieved in the United States through mass producdeal within each of the three groups. tion—are vulnerable because such goods can now be
178 ● U.S.-Mexico Trade

made with similar production methods and cheaper

labor almost anywhere in the world.5 Unless U.S.

plants can maintain cost advantages through further

automation (which itself cuts into job opportunities),

production of these price-sensitive goods will continue to move to low-wage countries.

Shorter Product Cycles

Today, even the most basic apparel items, which

previously came in only one style and color (denim

jeans, sweatshirts) now can be bought in many styles

and colors, while shifts in consumer tastes and retail

marketing strategies have led to a proliferation of

fashion seasons. In earlier decades, there were three

fashion seasons; now some designers change their

lines six times a year, and retailers seek almost

continuous changes in stock. Although design has

always been important at the upper end of the

market, constantly changing style and fashion have

come to dominate much larger segments in the last

two decades, as innovative producers and retailers

marketed fashion-oriented goods to low- and middleincome consumers.

Segmentation of markets and rapidly changing

styles have cut deeply into opportunities for producing long runs of identical items sold on a year-round

basis. The result has been to increase the importance

of timely response to market shifts, and production

flexibility generally.6 At the same time, product

quality has become more important.

Traditional Production: The Bundle System

Most U.S. apparel plants continue to base production on the “bundle” system, in which cut garment

parts are delivered to operators tied into bundles of

about 30 pieces. The operator performs one, usually

very small, task—such as sewing a hem or attaching

a pocket-on each item in the bundle. After completing the bundle, she processes a work ticket to keep

track of her output, reties the bundle, and begins

work on another.

By fragmenting the production process, engineers

in bundle-system plants can focus on maximizing

productivity at each step. Operators can be paid

piece rates, according to their actual output. Work-inprocess (WIP) inventories isolate each task from

disruptions that might occur elsewhere in the production chain. Because a man’s shirt, for example,

requires between 40 and 60 operations, and each

operator usually has two bundles waiting at her

station for processing, at any given time there will be

thousands of garment pieces sitting on the factory

floor in bundles. Thus typical plants carry 15 to 20

days of WIP inventory for garments requiring no

more than 20 standard minutes of labor.7 As in other

production systems with large stocks of in-process

inventory, quality suffers because problems can

accumulate for long periods of time before they are

discovered. Moreover, piece workers who see errors

or quality problems have little incentive to report or

correct them since their pay is based solely on the

number of operations they perform.

Automation and Skills

Complete automation of apparel manufacture is

not yet possible because it is so difficult to manipulate limp fabric, particularly partially assembled

garments that have taken on three-dimensional

shape. Once the design has been completed, “markers’ (patterns, one for each size, used for cutting the

cloth for each piece of the garment) can be generated

and stored in a computer, which then guides an

automated cutter. Such operations as making button

holes (and sewing on buttons), preparing collars, and

5 Goup 3 production in tie United States is more capitid inte~ive ~tie o~er two categories:

Capital stock per Average

production worker hourly wages

Group 1, Women’s outerwear, . . . . . . . . . . . $6,640 $5.87

Group 2, Men’s outerwear. . . . . . . . . . . . . . . 7,560 5.87

Group 3, Underwear, nightwear, etc.. ., . . . . 8,020 5.72

These figures, for 1987, come from 1987 Census ofA4anufacturers Indusrry Sen”es, A4C87-I-23A, 23B, 23C, 23D (Washingto~ DC: Bureau of the Census,

1987), tables 3a and 3b. More capital per worker suggests higher levels of automation in Group 3, indicating that U.S. apparel plants have been able

to compete with low-wage offshore producers when they can take advantage of technologically sophisticated production systems.

s Wib o~y a s~gle exmptiou ~ch of more than 4.0 apparel plants visited since 1988 by OTA’S contractors was producing more styles than they

had in earlier years. For discussion of changing apparel markets, see The US Textile and Apparel Industry: A Revolution in Progress, op. cit., footnote

3, pp. 15-18; The Com”ng Revolution in AppareZManufacturing (WashingtorL DC: American Apparel Manufacturers AssociatiorL 1988); and Thomas

Bailey, “Skilts and Education in the Apparel Industry,” ‘l&hnical Report #7, Institute on Education and the Economy, Teachers College, Columbia

University, New York NY, 1989.

7 The Cow”ng Revolution in Apparel Manufacturing, ibid., p. 12.
—

Chapter 9--Apparel ● 179

attaching pockets can be completed before assembly. But eventually, operators must guide the pieces

by hand through a sewing machine.

Through the middle 1980s, many in the U.S.

garment industry saw straightforward, laborreducing automation as the key to meeting foreign

competition .

8 But predictions of ‘lights-out’ factories, freed from the ‘‘labor element, ’ disregarded

investment costs, which frequently could not be

justified based on the small amounts of labor saved.

Highly automated apparel production has so far

proved cost effective only for large production runs

of standardized goods. In particular, it has not made

sense to install specialized material handling equipment in factories that produce many different and

constantly changing styles.

If automation could not eliminate workers, many

apparel firms hoped it could reduce labor costs by

reducing the skills needed to assemble garments.

The savings would come, not through lower wages

for less-skilled workers—because apparel companies pay low wages already-but through reductions

in training costs as automated systems replaced

moderately skilled sewing machine operators with

machine tenders.9 Like automation, deskilling has

its greatest impacts in production of standardized

goods: the division of labor can be taken to its logical

extreme, with workers specializing in a single task

and no requirement for broad skills.

In standardized apparel, then, plant location

decisions turn on the costs of automated production

versus traditional methods in low-wage offshore

plants, and on whether low-wage countries have the

technical infrastructure to efficiently operate plants

with high levels of automation. For style-sensitive

items, product variety and short production runs

work against attempts to routinize, automate, and

deskill production. These segments depend on

versatile workers who can move from one task to

another as needed. Lacking possible advantages

through automation and deskilling, U.S. producers

have turned to immigrant workers to reduce their

labor costs. Lacking employment alternatives, many

immigrants have been willing to accept low wages.l0

Fashion-sensitive production, especially of women’s

wear, concentrates in New York City and Los

Angeles in part for easy access to immigrant labor.

In addition, these cities are centers of apparel design

and marketing, with a constantly shifting mix of

small shops providing a broad range of services.11 

These services-many of them provided internally

in large firms producing standardized clothing—

include design, cutting, technical support, repair,

equipment leasing, credit, warehousing, trucking,

and specialized apparel-related educational institutions. These cities are also at the centers of large

regional markets, which is particularly important for

small producers of fashion-sensitive items, where

constantly changing styles and short selling seasons

put a premium on close cooperation among designers, producers, and retailers. As figure 9-1 shows,

women’s wear (Group 1) accounts for more than

three-quarters of apparel jobs in California-the

only State to enjoy significant growth in apparel

employment during the 1980s. And while New York

has two-thirds of its jobs in Group 1, Texas has a

lower than average percentage, suggesting that

apparel workers there may be especially vulnerable

if a NAFTA accelerates transfers of standardized

production to Mexico.

Quick Response

It can be a year from the time a retailer orders

clothes until they arrive. 12 Retailers want to be able

to stock new styles in modest amounts that can be

g A tWical example, from the trade press:

Our main hope for a return of production of basic apparel items to the U.S. mainland is automation of the production process. Only with the labor

element essentially eliminated through robotic automation can the advantages of the emerging countries be overcome by the U.S. manufacturer.

Sid Riley, “The Industrial Revolution: Our Time Has Arrived,” Bobbin, April 1987, pp. 67-88 (quote on p. 76).

Q plmt smeys suggest that training times for attaching collars can be cut by 60 percent for setting hip pockets in trousers by 40 percenti for making

button holes and attaching the buttons by 30 percent, for setting front pockets in jeans by 70 percent, and for decorative embroidery stitching by 90percent.

Kurt Hoffman and Howard Rush, Micro-Electronics and Clothing: The Impact of Technical Change on a Global Indusyy (New York, NY: Praeger,

1988).

10 Mmy ~ve ~ tie United Smtes tith some sewing skill or experience. See Thomas Bailey and Roger Waldinger, ‘‘primary, Secondary, and

Enclave Labor Markets: A Training Systems Approach,” American Sociological Review, vol. 56, 1991, pp. 432-445.

11 Roger w~~ger, Through the Eye of the Needle: Immigrants and Enterpn”se in New York’s Garment Trades (New Yo*, NY: New York

University Press, 1986).

12 Willla R. Cline, The Fumre of World Trade in T~riles and Apparel, revised edition (Washington DC: Institute fOr International ~onomics,

1990), p. 86.
180 ● U.S.-Mexico Trade

Figure 9-l-Distribution of Apparel Employment, —

1989 --

80 t

70 -n. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

60

50

30

20

10

0

. . . . . . . . . . .

. . . . . . . . . . .

. . . . . . . . . . .

. . . . . . . . . . .

. . . . . . . . . . .

CA NY TX

. . . . . . . . . . . . . . .

. . . . . . . . . . . . . . .

. . . . . . . . . . . . . . .

us.

n Women’s outerwear _ Men’s outerwear

= Underwear, etc.

SOURCE: ti(JntY f%JSilN3SS /%tf6~S.

replenished quickly, rather than risk having to mark

down goods that do not sell or run out of styles that

prove popular. Many U.S. managers assert that

quick response (QR, box 9-A) strategies are critical

for the continued viability of apparel manufacture in

this country.

But implementation of quick response has been

slow. Existing practices have become deeply entrenched in apparel firms. For over a hundred years,

production has shifted first from the Northeast to the

Southeast, and then abroad, as companies sought

cheaper labor. U.S. plants also remain attached to the

piece-rate system, resisting internal QR reforms

based on employee involvement and a workforce

with better skills and a broader understanding of the

overall production process. Such reforms almost

always imply a shift from piece rates at least to

hourly rates and often to group incentive schemes.

Apparel workers themselves sometimes resist abandonment of piece rates and the added responsibilities

implied by group-based production systems. Thus, a

1988 survey found that fewer than 10 percent of U.S.

apparel workers held jobs in plants with such

features of internal QR as modular manufacturing or

group incentive schemes. 13 Preliminary data from a

survey of apparel producers conducted in 1991 and

early 1992 show some increase, but only to the 10 to

15 percent range, and mostly in large plants producing standardized apparel-the firms in Groups 2 and

3 in table 9-1, rather than women’s wear producers

or the more fashion-sensitive men’s wear manufacturers.14 The large majority of U.S. garment factories

still use traditional high-inventory production systems and pay workers piece rates.

Why this resistance? Despite a good deal of

experience in other industries, and some in apparel,

the advantages of internal QR have been hard to pin

down. Innovators keep quiet about the details of

their successes. Common measures of productivity,

such as value added per production worker hour, or

standard labor minutes required to produce a particular garment, fail to capture benefits associated with

flexibility. Work reorganization may not reduce

labor inputs (it may actually increase them) even

though it reduces throughput time from days or

weeks to a few hours, but apparel producers have no

systematic way of evaluating the payoffs. Nor is it

clear how much benefit can be achieved through

external QR without internal QR. Put another way,

how much will retailers pay for shorter delivery

times?

A final set of questions relates directly to production in Mexico: Can QR serve to offset high U.S.

labor costs, slowing the movement of jobs southward? Conversely, might a NAFTA cause some

U.S.-based manufacturers to look to Mexico for

cheap labor rather than implement QR here? Will

U.S.-based firms implement QR strategies in which

Mexican production is an integral component, thus

displacing U.S. labor while helping U.S.-based firms

meet competition from other developing countries?

IS Making the Revolution Work: How to Implement Flexible Manufacturing Through People (WaShingtO% DC: American Apparel wufac~tis

Association, 1989).

14 ~ese Prea resul~ come fioma survey being conducted by Thornas Bailey of a mndom sample of 1,000 apparel ~d textile pl~ts. AS 0~’s

report was being completed, responses were available from 240 apparel plants. Even in plants which have instituted some features of internal Q~ the

approach tends to be piecemeal-best viewed as a series of techniques rather than a fundamental reorganimtion of production. Thomas Bailey,

“Organizational Innovation in the Apparel Industry: Tbchnique or Strategy,” Industrial Relations, forthcoming.
Chapter 9--Apparel ● 181

Box 9-A-Quick Response: Lean Production in the Apparel Industry

During the 1980s, employers, employer associations, consultants, and unions began seeking alternatives to

traditional production methods based on the bundle system, with its high inventory levels and division of production

into narrowly defined tasks. Emerging Quick Response strategies represent the industry’s attempt to create a system

yielding better quality, lower throughput times, and greater flexibility-hence quick response to market shifts.

As in “just-in-time” or “lean” production systems in other industries, QR strategies have two basic

components. ‘‘External” QR (outside the plant) entails better communication and coordination among firms in the

vertical production chain-fiber and textile suppliers, apparel manufacturers, and retailers. “Internal” QR (inside

the plant) entails changes in the production process itself. By working together more effectively with their suppliers

and customers, apparel firms can coordinate their production schedules and deliveries to reduce the time that

materials and finished goods spend on loading docks, in warehouses, and in transit. With shorter lead times, retailers

can adjust their orders depending on what sells. With lower inventory levels inside the plant, and new forms of work

organization, apparel firms can turn out finished garments faster and with higher quality. Moreover, to the extent

that QR shortens delivery times and helps U.S. plants produce a greater variety of apparel, it offers advantages

relative to foreign plants. Nearby producers are in the best position to work interactively with textile firms and

retailers; although many QR techniques can be used with international sourcing of fabric, person-to-person contact

remains important.

Despite many expressions of support and enthusiasm for internal QR by industry managers, they have moved

to implement external QR much more rapidly. Industry representatives worked out bar coding practices to facilitate

electronic data interchange during the mid-1980s, and have devoted much effort to management of in-transit

inventories and deliveries and procedures for reordering. The 1992 death of Sam Walton brought to public attention

the sophisticated links between his Walmart stores-the nation’s largest retail chain-and their hundreds of

suppliers. Each supplier gets information in real time about the sales of their products in each Walmart store. Such

practices have spread to other retail chains.

In many cases, apparel makers have chosen to meet the accelerated delivery requirements of their customers

through the simple expedient of holding larger inventories of finished goods. Such an outcome represents little more

than a transfer of inventories from retailers to apparel producers. To reduce their finished goods inventories, apparel

firms will have to implement internal QR. This will require a fundamental reshaping of human resource practices

and work organization-e. g., production systems based on work groups and employee involvement-steps that

only a few U.S. firms have been willing to take.

In one team-based approach, known as modular production, each worker passes her completed work more or

less directly to the next worker. By avoiding the bundle system, modular production cuts in-process inventories

drastically. Employees must work closely together so that the flow of production is smooth; they must have broader

skills so that they can share time consuming tasks and compensate for potential bottlenecks in the flow of

production. Through employee involvement, particularly in quality control, and constant improvement of product

design and the production process, U.S. plants should be able to compete more effectively.l In addition, lower

inventories reduce operating costs directly.

l~y ~pml-mCM that work reorganhtion has led to productivity in~ though employee involvement. Mak@ the

Revolution Work: How to Implement Flexible Manufacturing Through People (Washington.L DC: AmxkanApparel Manufacturers Association,

1989).

Mexican Apparel Production produced with a workforce larger by only about one

half. Most Mexican apparel firms turn out inexpenAbout 650,000 people work in some 11,000 sive, low-quality goods for the domestic market.

Mexican apparel firms, most of them very small.15 About 80 percent of exports go to the United States

U.S. apparel output is more than 10 times greater, almost all from the maquiladora sector. Although

15 @idio Botella C., Enrique Garcfa C., and JOS4 Bird B., ‘ “Ikxtiles: Mexican Perspective, ’ U. S.-Mtzican [ndustn”al[ntegration: The Road to Free

Trade, Sidney Weintraub, Luis Rubio F. and Alan D. Jones, eds. (Boulder, CO: Westview, 1991), pp. 193-220; “Mexicao Government Initiative to

Revitalize Textile and Apparel Industry, ” cable from U.S. Embassy, Mexico City, to U.S. Department of State, WashingtorL DC, Apr. 16, 1992.
182 ● U.S.-Mexico Trade

Table 9-3-Growth oft he Maquiladora Apparel Sector

1986 1987 1988 198919901991

Employment (thousands) . . . 25.3 30.3 34.7 42.4 40.9 45.7

Exports to the United States

(millions of dollars) . . . . . . . $360$410$468$565$657 $844

Value added in Mexico

(millions of dollars)... . . . $84$101 $128$183$200$250

SOURCE: Insfifuto Nacional de EsfadMca, Geograf(a e /nforrnAtiq

Mexico City, 1992.

maquila production has been growing rapidly, the

300 plants in this sector employ fewer than 50,000

workers (table 9-3).

Despite their low wages, Mexican apparel firms—

burdened with small and inefficient plants, obsolete

methods, and poor quality-have had great difficulty competing with Asian imports since the

removal of Mexico’s trade barriers. As of 1985,

production weighted tariffs on Mexican apparel

imports averaged nearly 50 percent; 100 percent of

domestic production was covered by import licenses. By the end of 1987, import licensing

requirements had been eliminated and average

tariffs had been reduced to 20 percent. The industry’s trade balance went from a $290 million surplus

in 1987 to a deficit of about $450 million in 1990.16

Clandestine imports of apparel also enter Mexico in

large volume, so that the actual trade deficit could be

substantially higher than official figures indicate;

many such imports, which include used clothing,

never enter formal economic channels, but are sold

by unregistered retailers and sidewalk vendors.17

During the last few years Mexican exports have

also grown significantly-from $149 million in

1987 to $254 million in 1990. Maquiladoras, which

have substantial cost advantages over U.S. producers, accounted for almost all the growth.18 Exportoriented apparel firms are much larger and more

efficient than producers oriented toward the Mexican market. But the maquiladoras remain committed to classic mass production techniques for assembling standardized commodities. In contrast, Mexican firms that supply the domestic market, with very

few exceptions, employ small-scale craft-oriented

production processes in which individual workers

often produce entire garments.

The owner of a large maquila in Tijuana, who had

had experience in production for the domestic

market as well, offered the following set of contrasts:

Production in Mexico for:

U.S. Market Mexican Market

Volume Short runs

Basic commodities Varied styles

Severe time pressure Looser deadlines

Growing demand for quality Quality less important

Other interviews tended to confirm this picture.

Maquiladoras produce extremely long runs, while

domestically oriented plants produce in small lots.

One successful pants-maker stated that he sought

orders calling, at a minimum, for 10,000 units a

week or more for at least a year, and would rarely

accept smaller orders; this firm had been supplying

90,000 units a week for one customer.19 In contrast,

a swimwear maker producing for the Mexican

market never makes lots of more than 3,000 suits;

when visited, this plant (with about 100 employees)

had over 100 styles in process. A maker of children’s

clothes for the domestic market had typical runs of

600, producing about 30 different styles a month.

Large U.S. firms have urged the maquilas with

which they do business to increase production rates

and reduce turnaround time. The typical response

has been a traditional mass production approach—

IS ‘~e~xtfle Industry, ’ Review of the Economic Situation in Mexico, B~ex, vol. LXVII, No, 787, June 1991, pp. 249-255. According to official

figures, import penetration now runs around 20 percen~ much of it originating in Asia but entering Mexico through the United States. Gordon H. fianso~

“U.S.-Mexico Free Trade and the Mexican Garment Industry,” report prepared under purchase order No. B9412764 for the U.S. Department of hbor,

September 1991, p. 46.

17 ~Ua carl~~ ‘ ‘Corning Apm at the Seams?” B~si?tess Mexico, December 1990, pp. 50-54.

16 ~~r-~temive se~g (~d cu~g) cos~ up to 50 percent less in Mexico than in the United States. The Likely ImPacr on the United States Of

u Free Trade Agreement with A4exko, USITC Publication 2353 (Washington DC: U.S. International Trade Commissio% February 1991), p. 4-39.

Wlue added figures compiled by the C&rtaraNacionalde (a Indusm”a de la Confecci6n show maquila exports doubling from $101 to $200 million

between 1987 and 1990, while non-maquila exports only grew from $47 to $52 million. According to the U.S. Commerce Department imports from

Mexico in square meter equivalents grew by 59 percent between 1985 and 1990.

IQ A much s~ler ~q~if~ora, witi about 120 workers, usually ran only one style of one color at a time. when visited, this pkmt tid been working

on the same style for three weeks. A third plant that produces a variety of men’s and women’s clothes for U.S. fm placed their typical run size at about

100,000.

20 One manager interviewed explained that in order to keep his turnaround time dow he tried “never to change anything,”
—

Chapter 9--Apparel . 183

longer runs, more time-and-motion study .20 Indeed,

maquiladoras fight for fewer styles and larger

orders. In contrast, domestically-oriented firms lament their fate as producers of small lots, feeling that

they cannot justify investments in new technology or

more sophisticated work organization practices without much longer runs.

While many of the maquilas are U.S.-owned, and

others have longstanding contractual ties with U.S.

manufacturers, distributors, and retailers, interviews

conducted for OTA indicate that QR techniques

hardly exist in the country. For instance, modular

production evidently has not been tried in Mexico.

Interviews revealed only limited awareness of this

and other teamwork-based, low-inventory approaches,

although consultants have begun advising Mexican

firms and industry associations about these and other

QR techniques.

21 Early in 1992, the government

announced plans to encourage QR as part of a

program to revive the import-battered industry .22

The intent would be to take advantage of QR for

exporting to the United States, capitalizing on

delivery times that should be shorter than for Asian

producers shipping by sea. The slow spread of QR in

the United States suggests that it may be equally

difficult for Mexico to move in this direction.

Trade Management

Quotas and Tariffs

The primary effect of a NAFTA would be to

reduce or eliminate U.S. tariffs on Mexican exports

and weaken or do away with import quotas. The

United States has protected its apparel and textile

industries for many decades.23 For the last 30 years,

the Multi-Fiber Arrangement (MFA), in place since

1974, and its predecessors, the 1961 Short-Term

Agreement and the 1962 Long-Term Agreement,

have provided a structure for controlling the rate of

growth of imports of apparel and textiles. The early

agreements covered cotton textiles and clothing; the

MFA extended coverage to wool and manmade

fibers. In 1986, the agreement was further extended

to ‘‘new-MFA” fibers such as linen, ramie, and silk

blends.

MFA signatories negotiate bilateral agreements

concerning quotas on covered textile and apparel

items. The United States restricts imports from about

40 countries, nearly all of them developing economies. Despite tariffs averaging 17 to 18 percent—

one of the highest duty levels imposed by the United

States-and MFA-sanctioned quota restrictions, which

have the effect of an additional tariff averaging an

estimated 28 percent, U.S. apparel imports have

increased steadily.24 Multilateral negotiations as

part of the Uruguay Round, in progress under the

auspices of the General Agreement on Tariff and

Trade (GATT), seek an agreement on phasing out

the MFA, which limits the ability of Third World

countries to export in a sector in which many have

significant competitive advantages.25 While the

developing world sees the agreement as egregiously

protectionist, the industrial countries see it as a

necessary means of cushioning adjustment in sectors

employing large numbers of relatively low-skilled

workers who have limited prospects for alternative

employment. Proponents also argue that by creating

a multilateral framework, the MFA has forestalled

21 For example, “promoters” at a training center started by the Mexican labor ministry (see ch. 5) in the state of Tlaxcala, visited by OTA staff in

May 1992, have arranged for small local apparel shops to learn the rudiments of production management and the benefits of reducing in-process

inventories

22 C ‘MeXlc~ Gove~ent titiative to Revitize ‘Ikxtile and Apparel Industry, ’ Op. cit., fOO~ote 15.

With a good cleat of pent-up demand to be satisfied, economic growth in Mexico will stimulate domestic clothing sales. A revived and restructured

Mexican industry should be able to take back some of the market share recentty lost to imports from the Far East. But growing Mexican demand will

not stimulate U.S. exports; the United States sends little except partially assembled garments south today, and will not be able to compete on price in

the future.

23 me U.S. T@f &t of 1922 phcd high duties on imported cotton and woolen goods. Quotas on textile and apparel fiports from Japm date to

1936 (and are still in force, although imports from Japan have been small in recent years). Trade Restraints and the Competitive Status of the Textile,

Apparel, and Nonrubber-Footwear Industries, (Washingto~ DC: Congressional Budget Office, December 1991).

~ ~e es~ated ~~uiv~ent of U.S. quotas comes from Trade Restraints and the Competitive Status of the Texfi”le, Apparel, ad

Nonrubber-Foorwear Industries, ibid., p. xv. When added to the actual tariffs, the net impact of the two forms of trade restraint is to increase prices for

garments delivered into the U.S. market by almost half (46 percent), on average.

‘lkxtiles and apparel account for almost onequarter of all tariffs collwted by the United States, according to the American Apparel Manufacturers

Association.

25 kene Trela and John Whdey, ‘‘Do Developing Countries Imse from the MFA?’ Working Paper No. 2618, National Bureau of Economic

Research, Cambridge, MA, June 1988. For an extensive discussion of U.S. trade policy in textiles and apparel, see Cline, The Future of World Trade

in Texn”les and Apparel, op. cit., footnote 12.
184 . U.S.-Mexico Trade

Box 9-B-Quotas on Apparel From Mexico

Since 1%3, the U.S. tariff code has included Table M-Costs for U.S. and Offshore Production

provisions under which goods assembled abroad of Men’s Shorts

from U.S.-made parts or components are charged

duties only on foreign value added. Originally Item Unit cost (dollars)

807, these provisions are now found under Item Offshore

9802 of the Harmonized Trade Schedule, which Us. (807/9802)

took effect in 1989. It is Item 807/9802 that has Fabric and cutting... . . . . . . . . . $1.91 $1.91

permitted the export of textiles or cut fabric to Assembly labor and overhead. . 1.88 .58

Mexico or (elsewhere), with duties charged when Freight and duty. . . . . . . . . . . . . .59

assembled clothing is reimported only on the value $ 3.07 $3.07

added in the maguiladora plant. The 807/9802 NA - Not applicable.

share of total U.S. apparel imports (from all SOURCE: “The US Textile Industry: Challenges and Opportunities,” The

kWk/ngPapers of the MKCommkdm onltisttid Produotivcountries) rose to 10 percent in the late 1970s, and /ty, vol. 2 (Cambridge, MA: MIT Press, 1989), p. 20.

remains at roughly that level. Essentially all imports

of clothing from Mexico enter under 807/9802. Table 9-4 illustrates typical cost advantages of 807/9802 production.

Until 1986, and the establishment of the Caribbean Basin Initiative (CBI), apparel items entering under Item

807/9802 were charged against the relevant quotas (i.e., as negotiated with the country of origin under the MEA).

The CBI contained a special access program for apparel known as Item 807A. Under 807A, apparel imported from

CBI countries (including Mexico) assembled from “U.S. cut and formed” fabric was subject to “generous” quotas

referred to as “Guaranteed Access Levels’ (GALs). These quotas are in practice unlimited. According to the U.S.

Department of Commerce, “the GALs may be increased on request by the exporting government and barring

unusual circumstances of market disruption, increases are virtually automatic and unlimited. ’

Apparel assembled from components cut and prepared in the United States but made of fabric produced

elsewhere is subject to separate quotas referred to as Designated Consultation Levels (DCLs) and Specific Limits

(SLs) which are set lower than the GALs. Apparel assembled from foreign-made but U.S.-cut fabric remains eligible

for Item 9802 tariff treatment, however.

The 1989 “Special Regime” agreement between the United States and Mexico included another set of

provisions. Articles assembled from U.S.-formed fabric or from other fabric were all subject to DCLs and SLs.

Because U.S.-formed and cut fabric was no longer eligible for GALs, there was no longer a presumption, as there

was under Item 807A, that quotas would be raised more or less on request. But in many cases, a large share of the

quota (as high as 80 percent) has been reserved for Special Regime garments. The remaining quota could be used

for 807/9802 items made from non-U.S.-formed fabric (cut in the United States for Mexican assembly) or items not

eligible for 807/9802. If Special Regime items exceeded their share of the quota, any remaining quota for the

relevant category of apparel could be used. But non-Special Regime items are limited to their share of the quota

even if the Special Regime share is not fully utilized. Thus the Special Regime not only encouraged the use of

U.S.-formed fabric, it also restricted the available quota for non-807/9802 items-for example, Mexican-assembled

garments made from Mexican, Asian, or European fabric that was not cut in the United States.

Mexico accounted for about one-fifth of all 807/9802 apparel imports in 1990, and 70 percent of Mexico’s

807/9802 apparel imports came in under the Special Regime. But there is little evidence that the Special Regime

either promoted Mexican imports or boosted the 807 share.2 Despite the complexities of this system of quotas, it

rarely if ever appears to limit Mexico’s shipments to the United States.

Quotas set in annual bilateral negotiations apply to about 75 categories of apparel imports from Mexico. During

the year, Mexico’s government allocates shares of the quota for each item to exporters. In interviews, both apparel

manufacturers and Mexican experts on the subject noted that until the late 1980s the quota allocation system was

cumbersome and often corrupt. Managers spent a great deal of time traveling to Mexico City to negotiate quota

l~s ~o~tion is from an unpublished 1987 Commerce Department summary of the program.

z~e S*fise m 807/9802 shipments after the Special Regime took effect in 1989 was paralleled by ~wth hI non-807/9802 @wrts.

Furthermore, the 807/9802 share dropped in 1990, @ indeed, was at that time below its 1985 share. The fall in overall apparel imports ia 1990

was probably due to the U.S. remwion, which hit this industry in that year and may have had a differential impact on 807~802 operations. Many

muquihdorus operate as contractors and am pticulsrly vulnerable to recessions, as manufacturers are likely to cut contmct production before

laying off their own workers.
——

Chapter 9--Appare[ ● 185

allocations with government officials. In many cases, quota allocations had to be “purchased” Since 1987, the

system has been reformed and decentralized to Mexico’s major garment centers.

Midyear changes in the quotas to which the two governments have agreed are common. 3 For example, the

quota for underwear was doubled during such an adjustment in 1987, and was still more than 95 percent filled by

the end of the year. At the end of 1988, 10 quotas had been fried to the 80 percent level or higher; 9 of these had

been raised during the year. The need for mid-year adjustments dropped off in 1989 and 1990; only 7 quotas were

more than 80 percent full during those years, and most of those received adjustments. The categories that tend to

fill are those in which Mexican suppliers specialize. Trousers is the largest export category and it also has had the

highest utilization rates and the most adjustments.

Thus the quotas have not been irrelevant. But neither have they been holding back a potential flood of imports.

Indeed, the frequency of mid-year adjustments and year-to-year quota increases suggests that quotas follow rather

than restrict exports. With one exception, every apparel maker interviewed (in early 1992) claimed that they could

get all of the quota they needed. One very large maquiladora plant noted that the trouser quota was sometimes a

problem.

3’ ‘Monthly Perfo rmance Reports,’ U.S. Department of Commerce. As these reports show, U.S. and Mexican officials are in frequent

communication concerning quotas and adjustments. But it is not clew whether Mexico has in all cases been gmnted the increases h has sought.

even more restrictive bilateral or unilateral barriers. 35 percent, the effective duty for 807/9802 garments

In addition, by limiting shipments from nations with rarely exceeds 10 percent. Moreover, as discussed in

the lowest costs, countries such as Mexico that the box, quotas on many if not most categories of

otherwise might not have been competitive can Mexican exports to the United States either go

export textile and apparel products.26 unfilled or are increased when they are filled,

The MFA is an exception to GATT principles for following negotiations between the two governtwo primary reasons. First, the MFA permits dis- ments. Because few quotas are binding, they add

little to the “effective” tariff, which has been only criminatory treatment among supplier nations. Sec- about 6 percent.27

end, GATT has always sought markets available to

all nations within existing- tariff structures, with Quotas that are adjustable on demand may still

tariffs preferred to quotas. The agreement does inhibit exports by creating additional costs and

provide for steady expansion of international trade; complications, by injecting a level of uncertainty,

the 6 percent annual increase in quotas (by quantity, and perhaps deterring new investments. But at least

measured in square meters or yards, not value) since 1987, quotas seem to have been at most a

exceeds the growth rate of U.S. apparel consump- minor drag on Mexico’s exports. Moreover, this

tion. drag is confined to a small number of standardized

Under the MFA, the U.S. Government negotiates commodities.

quotas on specific items with each trading partner—

in practice, the rate at which imports from the

country may rise. Imports from Mexico face barriers

that are much lower than average. Almost all come

from maquila plants that assemble garments from

cloth shipped in from the United States. Under Item

807/9802 of the U.S. tariff code, shippers pay duties

only on foreign value added (box 9-B). Because the

nominal duty of 15 to 20 percent applies to a

value-added share from assembly that runs at about

The Structure of U.S. Imports From Mexico

During the first four months of 1992, Mexico

supplied about 6 percent of U.S. apparel imports (by

value), almost three times its share in 1983 (table

9-5). Figure 9-2 shows that imports from many of the

other countries covered by the Caribbean Basin

Initiative (CBI), which was established in 1986 to

provide easier access to U.S. markets, have increased even faster (at least as measured by area).

26 Wlti few exceptiom, industrialized countries have not established MFA quotas against each oth~. Hason, “U.S.-Mexico Free Trade and the

Mexican Garment Industry, ’ op. cit., footnote 16, argues that Mexican apparel exports to the United States benefit from U.S. quotas on imports from

China and other Asian countries.

21 The Like/y Impact on the United States of a Free Trade Agreement with Mexico, op. Cit., footnote 18, p. 4-38.
186 ● U.S.-Mexico Trade

Table 9-5—U.S. Apparel Imports by Country of Origin

1991 First 4 months (January-April)

Value of imports Share of all — (billions of dollars)

(billions of dollars) imports (percent) 1991 1992

Hong Kong. . . . . . . . . . $3.52 13.7940 $1.01 $1.12

China. . . . . . . . . . . . . . . 3.46 13,5 0.96 1.37

Taiwan. . . . . . . . . . . . . . 2.60 10.1 0.76 0.76

South Korea. . . . . . . . . 2,59 10.1 0.69 0.76

Mexico . . . . . . . . . . . . . . $1.49 5.80/0 $0.40 $0.58

Philippines. . . . . . . . . . . 1.01 3.9 0.36 0.39

Dominican Republic. . . 0.94 3.7 0.25 0.33

Italy. . . . . . . . . . . . . . . . 0.77 3.0 0.27 0.26

India. . . . . . . . . . . . . . . 0.69 2.7 0.25 0.35

Others. . . . . . . . . . . . . . 8.63 33.6 2.68 3.44

Total a. . . . . . . . . . . . . $25.70 100.070 $7.63 $9.36

NOTE: Many apparel exports from Hong Kong and Taiwan originate elsewhere in Asia, including China. Transshipment,

in part to evade MFA quotas, has been common in this industry.

aTotals may not add dtie to rounding.

SOURCE: Office cf Technology Assessment, 1992, based on official statistics of the U.S. Department of Commerce.

Figure 9-2—U.S. Apparel Imports from Caribbean

Basin Initiative (CBI) Countries

Mexico

Dominican Republic

Costa Rica

Haiti

Jamaica

Other CBI

ayear ending June 30,

r

1

1:

1

1:

I

I

I

o 50 100 150 200 250

Miilions of square meter equivalents

0 1987 m 1990a

1990.

SOURCE: Texti/e Highlights, American Textile Manufacturers Institute,

September 1991, Table 5.

Imports of clothing from Mexico have been

concentrated in a few standardized items; imports of

more expensive and fashion-sensitive items—

women’s dresses, skirts, and blouses; men’s suits,

jackets, and shirts-have come from other countries.

As table 9-6 suggests, Mexican suppliers have

specialized in inexpensive men’s wear (trousers and

coats), and in similar items for women. Mexican

imports have grown most rapidly in underwear and

nightwear; imports of ‘other’ apparel grew at lower

than average rates. By 1990, pants, underwear, and

nightwear accounted for about 60 percent of all

apparel entering from Mexico.

IMPACTS OF A NAFTA

Any trade agreement is likely to provide a lengthy

transition period and perhaps substantial residual

protection for the U.S. apparel industry. Even so,

there could be some acceleration in the growth of

maquila production of standardized commodities in

expectation of a more predictable future. Most

Mexican suppliers would probably continue to

operate as contractors to U.S. companies. The

current 807/9802 structure creates incentives for

maquilas to limit their production to assembly of

material supplied from the United States. Because

U.S. textiles are generally cost-competitive, there

will be no great incentive in the near term to switch

to materials from third countries.28 Still, U.S.

producers offer rather limited ranges of textiles

compared to many foreign suppliers (Japan, Taiwan,

Germany), while fabrics from low-cost producers

like China might suffice for many of the standardized

goods produced by maquiladoras. American textile

manufacturers sought yarn forward’ North American content requirements as part of a NAFTA to

28 me ~ttm U.S. textile mills are among the world’s low-cost producers. By contrast, Mexican mills have costs that Can be more @tiu thOSe

here. The Likely Impact on the United States of a Free Trade Agreement with Mexico, op. cit., footnote 18, p. 4-39. Also see Trade Restraints and the

Competitive Status of the Textile, Apparel, and Nonrubber-Footwear Industries, op. cit., footnote 23.
—

Chapter 9--Apparel . 187

Table 9-6--U.S. Imports of Apparel From Mexico

Millions of square meter equivalents and

proportion of total imports from Mexico 1985-1990

1985 1990 Increase

Men’s and boy’s trousers. . . . . . . . . . . . . 18.9 (17%) 31.6 (20%) 670/o

Underwear. . . . . . . . . . . . . . . . . . . . . . . . . 6.1 (6°/0) 27.3 (16%) 344%

Women’s, girl’s, and infants’ trousers. . . 14.5 (13%) 22.5 (14%) 55%

Nightwear. . . . . . . . . . . . . . . . . . . . . . . . . . 2.8 (3%) 14.1 (9%) 406%

Brassieres. . . . . . . . . . . . . . . . . . . . . . . . . 6.0 (5%) 7.0 (5%) 180/0

Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62.3 (57%) 71.6 (41%) 15%

Total. . . . . . . . . . . . . . . . . . . . . . . . . . . 109.6 (1OO%) 174.1 (1OO%) 59%

SOURCE: “Major Shippers Reports,” U.S. Department of Commerce, various.

Table 9-7—Workforce Characteristics in Maquiladoras, 1990

Tijuana Monterrey Auto

(border) (interior) Apparel Electronics parts

Percent of workers with prior

industrial experience, . . . . . . . . 57% 33% 68% 60% 49%

Average monthly turnover. . . . . . . 12.7% 3.7% 15.8% 19.5% 9.7%

Average daily wage (pesos). . . . . 33,760 21,840 26,540 34,720 33,700

NOTE: Sector averages include sampled maqui/adoras in the border city of Ciudad Juarez, as well as Tijuana and

Monterrey.

SOURCE: Jorge Carillo, “Mercados de Trabajo en /a /ndustria Maqui/adora de Exporfacidn [Labor Markets in the

Assembly Plant Exporting Industry], El Colegio de la Frontera Norte, Tijuana, 1991, pp. 31, 34, 49.

preserve the market positions they have had under

807/9802.

With the possible exception of trousers and a few

other basic commodity categories, U.S. quotas have

not limited imports from Mexico, There is little

reason to expect removal of restrictions to result in

accelerated imports in categories where quotas have

not been binding, but eliminating formal quotas

could lead to greater imports of other items.

Because current 807/9802 regulations require

cutting to be done in the United States, more of this

work might move south of the border, On the other

hand, the rapid growth of computerized cutting in

the United States would tend to keep these operations here; Mexican firms have little or no computerized cutting equipment today. There is little likelihood of substantial shipments of finished garments

from the United States to Mexico; almost all current

U.S. exports consist of cut fabric for assembly in

maquiladoras. Mexico will continue to import

finished apparel items from the Far East.

331-019 0 - 92 - 7 : QL 3

The Maquilas

The maquiladora sector is much better positioned

to take advantage of a NAFTA than Mexico’s

domestic suppliers. The latter face three significant

barriers to participation in the U.S. market: financing, distribution, and textile quality. None of these

are of great concern for maquiladoras, many of

which have ready access to U.S. financia1 markets

and distribution channels even if they are Mexican

owned, and which rely on imported textiles already.

How rapidly might the maquila sector expand?

Possibly rising wages, high turnover, skill deficiencies, and poor communications and transportation

infrastructure will set the primary limits, as in other

sectors OTA has examined:

1. Wages and turnover. If wages rise without

commensurate increases in productivity, Mexican apparel firms will lose their primary

source of advantage. Apparel firms in the

border cities must compete for workers with

other maquila plants (e.g., in electronics).

Some have been seeking locations in the
188 ● U.S.-Mexico Trade

2.

interior, where both wages and turnover have

been substantially lower (table 9-7). Indeed,

between 1981 and 1988, plants in the interior

increased their share of all maquila apparel

employment from 20 to 40 percent.29

Border firms have so far lived with their

turnover problems: a mass production system

with highly structured tasks is well suited to

absorbing new workers with little or no

training. Given this approach, maquila apparel

firms should be able to continue tapping rural

reserves through busing or moves to the

interior, thus maintaining downward pressure

on wages.

Workforce skills. Maquiladora apparel firms

provide entry into the industrial labor force for

surplus rural labor, and stepping stones for

migrants moving north.30 Mexico’s rural reserve is large and likely to grow as workers in

the agricultural sector are forced off the land.

Given current production methods, lack of

skills is not a serious problem in maquila

apparel plants. But skill deficiencies will make

it difficult for these firms to implement new

competitive strategies, including computerized cutting and QR.

Skill pools differ considerably between the

border region and the interior. Although the

border cities have large transient populations,

there are many workers with industrial experience of one sort or another. Expansion in

interior cities and rural areas more often means

beginning with a nonindustrial workforce.-

Skilled workers, particularly those able to

maintain and repair electronic equipment, pose

the greatest difficulties. But there is still very

little of this equipment; managers stated that

sophisticated electronics were not expected to

play a significant role in currently planned

expansions. Skill deficiencies, then, do not

appear to be a fundamental barrier to more

3.

In

widespread hiring of workers in rural areas

except as they limit the ability of Mexican

suppliers to adopt more flexible, QR-related

strategies.

Infrastructure. Mexico’s deteriorated infrastructure presents a problem particularly for

the smaller apparel firms. Nonetheless, while

better roads might take a day off of the 2-day

trip from Aguascalientes to the border, this is

only a small decrease in the typical 3-week

turnaround time for maquila operations in

interior cities.

Note that turnaround time and inventory

levels also depend on the size of production

runs. Given transportation problems, producers ship full truckloads. Very small firms may

take several days to fill a truck, while high

volume apparel firms can fill several per day.

Again, small firms suffer more than large.

the years ahead, and given their advantages

over other Mexican apparel makers-notably greater

access to capital and to U.S. markets--maquiladora

apparel firms will continue to expand. A NAFTA

would probably accelerate this expansion. But the

emphasis on mass production of standard items

seems likely to continue. The highest volume

products account for about 150,000 U.S. jobs

(Group 3—table 9-1)-less than 20 percent of the

total. Some of these jobs will be lost to Mexico in the

years ahead, but others will remain in the United

States because costs can be lowered through capitalintensive automated production-which will also

cut into jobs and job opportunities.

Nonbasics Production in Mexico

It would be very difficult for Mexico to ship

substantial volumes of tailored or other fashionsensitive clothing to the United States in the near

term. Mexico has never been an important source for

such items. Export growth since 1985 has not taken

29 H~ou $ ‘U.S.-Mexico Free TAe and the Mexican Garment Industry, ” op. cit., footnote 16, table 6, p. 71.

In interviews conducted for OTA, managers in border plants worried that freer trade would hurt them because it would lead to higher wages.

According to a company in El Paso, there is atready little advantage in assembling apparel across the border in Ciudad Juarez because wages are rising

and much higher turnover offsets existing labor cost advantages.

Lntenor cities have atso felt the pressures of a tightening labor market. For example, W of the employers intemiewed in Aguasealientes claimed that

wages had risen sharply in the last 2 years. They anticipated more pressure after the opening of a Nissan assembly plant that would employ several

thousand workers. One apparel fm with several hundred workers sent buses up to 25 miles from the city to tap the still substantial rural labor reserve.

30 c~ifo~a app=e] fiisalso seem to benefit. California is the only State with a large apparel industry in which employment has POW in reeent

years. Almost all the workers are Mexicans or Mexican-Americans, and many are reeent immigrants. Some have training and experience acquired in

muquilas. “The Economic Effects of a North American Free Trade Agreement (NAFTA) on the U.S. Apparel Industry: Statement on Behalf of the

International Ladies’ Garment Workers’ Union+ AFL-CIO by Dr. Herman Starobim Reseach Director, ” before the Trade Policy Staff Committee,

Adanta, Aug. 29, 1991, p. 4.
.— —.

Chapter 9--Apparel . 189

Table 9-8—Employment, Wages, and Productivity in Apparela

Union Estimated

Production members as hourly wages:

Production worker Labor share of Mexican apparel

Total worker share of Real productivity production and textile U.S.-Mexico

employment employment employment hourly wages index workers maquilas wage ratio

(thousands) (percent) (1991 dollars) (1991 dollars)

1978. . . . . . . 1,332 1,145 85.9% $7.91 100 NA NA NA

1979. . . . . . . 1,304 1,117 85.6 7.80 96.3 NA NA NA

1980. . . . . . . 1,264 1,079 85.4 7.62 95.8 NA NA

1981 . . . . . . . 1,244 1,060 85.1 7.62 100.0 NA $1; : 5.6

1982. . . . . . . 1,161 981 84.5 7.55 109.8 NA 0.95 7.9

1983. . . . . . . 1,163 984 84.6 7.45 111.7 32.1% 0.77 9.7

1984. . . . . . . 1,185 1,003 84.6 7.39 118.5 26.8 0.78 9.5

1985. . . . . . . 1,121 945 84.3 7.34 126.8 27.3 0.70 10.4

1986. . . . . . . 1,101 927 84.2 7.26 131.4 24.0 0.56 13.1

1987. ., . . . . 1,099 923 84.0 7.09 137.5 22.8 0.52 13.7

1988. . . . . . . 1,088 915 84.1 7.01 138.3 22.4 0.63 11.1

1989. . . . . . . 1,074 906 84.3 6.94 133.6 21.0 0.69 10.0

1990. . . . . . . 1,028 862 83.8 6.85 NA 19.3 0.70 9.8

1991 . . . . . . . 1,024 856 83.6 6.75 NA 18.1 NA NA

NA = Not available.

aslc (Standard Industrial Classification) 23.

SOURCES: U.S. employment and wage dat%Emp/oymenf and Earrrings, March 1992. Union membership-Barry T. Hirsch and David A. McPherson,

“UnionMembership and Contract Coverage Data from the Current Population Survey,” Department of Economics, Florida State University, May

1992. Mexlca n wages--A4aqui/a&va /miustryAna/ysis, CIEMEX-WEFA, September 1991. Labor productivity—Wayne Gray, Clark University,

and the National Bjreau of Economic Research. -

place in these categories. While Mexican firms make

women wear for domestic consumption, they do so

using traditional production processes that are neither technologically advanced nor suited to fast

turnaround. Quality is poor by U.S. standards. The

firms in this part of the industry have no existing

distribution in the United States, little access to

financing and to imported fabrics, and little or no

experience in what is a highly competitive business

internationally.

In addition, most of the obstacles to maquiladora

expansion also apply to this sector; indeed,

workforce skill problems are more serious. High

quality, rapid turnaround, and QR-related techniques require greater workforce skills and management sophistication than needed in either the maquiladoras making standard items for export or in

domestically oriented Mexican fins. In interviews,

large U.S. manufacturers that currently supply many

of their commodity needs from maquilas report that

they expect to implement QR through their U.S.

plants.

If Mexico could move into nonbasics, it would be

the California and Texas industries that would suffer

first and more than New York’s (because of logistics). But the California industry, centered in the Los

Angeles area, is growing today, with an emphasis on

women’s outerwear. In most categories of women’s

wear-which accounts for over 60 percent of

California apparel employment—less than half the

Mexican import quota has been used. Large wage

differentials have not been enough to drive this

production across the border.

Effects on U.S. Jobs

During the past 15 years, U.S. apparel employment has declined by more than 300,000 jobs (table

9-8). Some cities with large apparel sectors, such as

New York, have experienced particularly severe job

loss. Despite the low average wages in the industry,

about 30 percent of displaced apparel workers who

found new jobs in the 1979-1989 period suffered

earnings declines of 25 percent or more (ch. 4, table

4-3). Moreover, displaced apparel workers left the

labor force during the 1980s at rates about 30 percent

higher than for manufacturing as a whole, while

more than a quarter of those who lost jobs had not

found new work by the time they were surveyed.

Many apparel workers have poor basic skills (e.g.,

reading, arithmetic). They have been poorly served

by existing training and retraining programs. Global

competition and the threat of relocation to low-wage

sites will place continuing downward pressure on

wages for production workers in apparel; real wages

will probably continue to decline.
190 ● U.S.-Mexico Trade

Job Loss in Standardized Production

From an overall perspective, the pattern of Mexican imports contrasts sharply with the pattern of

U.S. apparel employment. Underwear (including

brassieres) accounts for about 30 percent of U.S.

imports from Mexico, but provides jobs for only

about 8 percent of U.S. apparel workers; underwear

plus men’s and women’s trousers accounts for

almost two-thirds of imports from Mexico but about

30 percent of U.S. employment.

Thousands of U.S. jobs remain in basics, and

these jobs are at risk (along with the job opportunities associated with growth in demand). In interviews, two very large firms that produce basics, both

with extensive manufacturing in Mexico already,

reported that, while they do not expect to cut U.S.

employment significantly, they do expect future

growth to take place in Mexico or in other CBI

countries (which have expressed the fear that they

will lose jobs to Mexico in the event of a NAFTA).

Indeed, the fastest growing garment industry in the

Americas lies just south of Mexico, dispersed

through the capital city and remote rural areas of

Guatemala (box 9-C).

How many jobs or job opportunities might be

lost? From 1986 through 1991, maquila employment grew at an annual rate of about 12 1/2 percent

(despite the U.S. recession that began in 1989). As

table 9-3 showed, maquiladora apparel employment

stood at almost 46,000 in 1991. Continued growth at

12 1/2 percent per year through the end of the

decade, with one-for-one loss of U.S. jobs, would

mean a decline in U.S. apparel employment of about

86,000 (with maquila employment rising to 132,000).

This is about 8 1/2 percent of current U.S. production

employment in the industry. Much of this job loss

might take place even without a NAFTA, given the

history of accommodating quota negotiations. If

cutting, which has remained in the United States

because of 807/9802 requirements, also moved to

Mexico, job losses would be higher. But a NAFTA

would require that textiles originate in North America if the assembled garments are to enter the United

States with minimal restrictions. Given that Mexico’s textile industry is uncompetitive, such a

provision would help to keep some cutting jobs here.

More than the 86,000 jobs estimated above could

move to Mexico if a NAFTA led U.S. apparel

managers to view Mexican production as easier or

safer, so that they accelerate transfers of production.

Interviews suggest that many larger U.S. apparel

firms are taking a new look at Mexico in light of a

possible NAFTA. On the other hand, the 86,000

estimate assumes a constant 12 1/2 percent increase

in maquila employment; because maquila employment has been growing from a relatively low base,

it might be more realistic to assume some decline in

the rate of increase as employment reaches higher

levels.

Losses in jobs and job opportunities will be

geographically concentrated. Texas seems particularly vulnerable. Figure 9-1 shows that the distribution of apparel employment in Texas is similar to

that of Mexican imports (in contrast to California

and New York). Texas is a major supplier of men’s

pants and jeans, along with women’s pants. During

the last few years, a number of large manufacturers

have moved across the border, including, for example, Farrah, which closed a plant in El Paso in favor

of a maquila. Levi Strauss also has shut down

operations in Texas and expanded in Mexico. Other

vulnerable sectors include men’s pants production in

Georgia, Tennessee, and Mississippi, women’s underwear in Pennsylvania and New York, and men’s

underwear in Georgia and Pennsylvania.

Job Loss in Fashion-Oriented Segments

A NAFTA will not make a large enough difference for Mexico to challenge Asian producers of

fashion-sensitive clothing. Apparel firms in centers

like Hong Kong and Taiwan have the skilled

workers and managerial expertise needed to succeed

despite their distance from major markets. The

apparel industries in these countries consist of dense

networks of small firms, often connected by family

ties. In Hong Kong, both companies and the

government provide training for sewing machine

operators to step up to jobs as sample makers and

design makers. These highly skilled workers help

create advantages when competing for apparel work

in a global marketplace. Many companies have the

ability to offer a comprehensive package of services

to buyers; they can quickly translate orders from

U.S. retailers into finished goods, arranging for

fabric sourcing, production, delivery, and credit—

making use of their own facilities or contract

suppliers in many countries.

While U.S. firms tend to specialize in particular

lines of clothing, so that retailers may have to deal

with different manufacturers for each type of cloth-
Chapter 9--Apparel . 191

Box 9-C—Apparel Production in Guatemalal

From around 2,000 workers in 1984, Guatemala’s export-oriented apparel assembly industry has mushroomed

to 70,000 workers, mostly women between the ages of 14 and 25—more than in Mexico’s maquiladora apparel

sector. Between 1986 and 1991, Guatemala’s garment exports to the U.S. rose from $22 million to $350 million,

putting Guatemala behind only Costa Rica and the Dominican Republic among CBI countries. The growth of the

Guatemalan industry illustrates both the potential for rapid expansion of the Mexican apparel industry in remote

rural areas and the intense competition that these areas will face from even lower wage regions.

While Guatemala passed regulations designed to encourage export assembly production in the 1960s, these

had little impact until the election of a civilian government in 1986. The new government implemented a

stabilization program similar to Mexico ’s. As in Mexico, this led to depreciation of the national currency and rapid

inflation. Guatemala’s wages dropped to around 20 cents per hour-perhaps l/30th of U.S. levels and one-quarter

of wages in Mexican maquiladora apparel plants. To help investors take advantage of these very low wages,

Guatemala’s government established a “One Stop to Export” licensing center for new plants, while the U.S.

Agency for International Development provided financial, technical, and marketing support for local entrepreneurs.

By comparison with apparel industries in other parts of the Caribbean, Guatemala has a much higher

concentration of Asian, primarily Korean, investment. Since 1988, the number of Korean-owned plants has jumped

from 6 to 50, accounting for about half of apparel exports. Korean multinationals own a dozen of these plants

(Samsung alone has five), most of them large; small and medium-sized firms account for the rest. For Korean

apparel manufacturers, Guatemala provided a way around U.S. quotas and a means to contain costs following

Korean currency appreciation and wage increases in the second half of the 1980s. An estimated 300 to 500 Koreans

work as managers and supervisors in Guatemala, with others in the United States handling marketing and

distribution. Korea’s Embassy acts as an intermediary for investors.

Alongside the Korean operations stand over 200 locally-owned firms, typically employing less than 100

workers each. U.S. firms account for only 10 percent of total investment in the Guatemala industry. Van Heusen,

the biggest U.S. player, employs over 1,000 workers assembling 20,000 men’s shirts per month. Since 1989, Van

Heusen has been helping San Pedro, an indigenous village 20 miles outside Guatemala City, move into production

for export. San Pedro is a traditional center of production for the domestic market, with over 3,000 sewing machines

distributed through homes or shacks each containing 6 to 20 machines.

While the export apparel industry has brought badly needed employment to Guatemala, the new jobs have been

accompanied by low wages, very long hours, poor health and safety standards, child labor (particularly in rural

areas), and weak protection of worker rights to organize. Attempts to form unions have been met with bribery,

discharge, threats of plant relocations, actual relocations, and death threats. Many workers move from job to job

to escape bad treatment or in search of slightly better pay, leading to turnover of 15 to 30 percent per month-and

25 to 40 percent in Korean plants, known for intense pace and harsh discipline. Guatemala’s need for investment

has discouraged government action to improve labor standards.

Guatemalan plants do not assemble high-fashion goods, but they do produce a range of apparel that goes well

beyond the most standardized items. Recent capital-intensive investments promise to increase the industry’s ability

to meet the needs of large U.S. distributors, showing that, with good management-in this case from

Korea-low-wage countries can rapidly increase production and move into wider ranges of apparel products.

Finally, experience in Guatemala demonstrates that, in this industry at least, the issue of labor standards may have

to be addressed in a broader venue than just North America-perhaps the Organization of American States or

GATT. If garment trade with CBI countries is liberalized following a NAFTA, or if the MFA is phased out, the

United States and its trading partners might consider basing liberalization (or growth in quotas during a transition

period) on respect for worker rights, perhaps including the enforcement of a minimum wage scaled to a country’s

average wage or per capita income. Lacking such provisions, trade expansion would come at the expense of Mexican

and Guatemala as well as U.S. workers.

l’rhjs box is based on Kurt Peterson, The Maquiladoru Revolution in Guatemula (New Have4 CT: Orville H. Schell Jr. Center for

International Human Rights, Yale Law School), July 1992). Also see Shelley Ernling, ‘‘U.S. May Probe Alleged Labor Abuses in Guatcmal&’

Washington Post, August 1, 1992, p. A18.
192 ● U.S.-Mexico Trade

ing, many Asian firms are broad-line suppliers.

Some U.S. fins, such as M.A.S.T. Industries, have

been successful with a comprehensive approach to

order packaging, but U.S. apparel makers generally

appear to be well behind in developing a complete

packaging strategy. There have been no signs so far

of movement of fashion-sensititve production from

garment centers in cities such as New York or Los

Angeles to Mexico. A NAFTA, by itself, seems

unlikely to make such transfers attractive. Moreover,

given that Mexico would bring little in the way of the

skills needed for competing with the strategies of

Asian fins, a NAFTA would not directly strengthen

the North American apparel complex as whole in

segments less sensitive to labor costs. Rather than

U.S. producers in these segments moving to Mexico,

a NAFTA seems more likely to attract Asian firms

seeking to transfer their commercial skills and take

advantage of guaranteed access to the U.S. market.

NAFTA and Quick Response in the United States

Would a NAFTA encourage or discourage movement toward QR in the United States and/or in

Mexico? Thus far, much of the implementation of

QR has involved planning and coordination among

firms (external QR), with relatively few changes in

actual production processes (internal QR). A NAFTA

would not slow the movement toward greater

interfirm coordination in the United States, and

could accelerate it. Maquiladoras that supply U.S.

firms could be incorporated into external QR without much difficulty, since some are U.S.-owned and

many others are contractors that already work

closely with large U.S. firms. An extra day or two in

transit will not be a barrier. This implies that

successful implementation of external QR in the

United States would not necessarily prevent shifts of

production to Mexico.

The effects on production processes and internal

QR are more problematic. Despite the demonstrated

success of workplace reorganizations based on

employee involvement and work groups in other

industries, U.S. apparel firms have shown little

enthusiasm. But some of the firms that have made

the most progress in internal QR are basics producersthe same group of companies that have transferred

production to Mexican maquiladoras. These firms

may be tempted to move even more production to

Mexico, opting for cheap and pliable labor rather

than implemention of internal QR in the United

States.

At the same time, because Mexico is not a

significant force in fashion-sensitive markets, it

seems unlikely that a NAFTA would have much

impact on the spread of internal QR among producers of such apparel. Nor is it likely that producers in

Mexico would move quickly towards technologically and organizationally sophisticated systems of

flexible production; so long as they see the solution

to their problems in terms of long runs and “not

changing anything,’ ‘ they will resist QR even more

than U.S. firms. Thus, Mexican production using

either traditional or more modem methods does not

seem a very attractive option for U.S. firms seeking

to compete more effectively in fashion-sensitive

goods. Instead, the primary strategic alternatives to

Asian imports appear to lie in continued reliance on

low-cost immigrant labor, combined with the agglomeration economies in existing U.S. apparel

centers, with or without internal QR techniques.

Only if tighter limits on Asian imports accompany

a NAFTA will it have a major effect on the choices

facing makers of fashion-sensitive goods.

The Uruguay Round and the MFA

Among the forces at work in the world apparel and

textile industries today, some of which might push

the Mexican industry and U.S.-Mexican trade in

unforeseen directions, the most significant is the

ongoing Uruguay Round GATT negotiations. An

end to the MFA would create opportunities for

growth in many countries that have labor costs well

under those in Mexico. On a smaller scale, a NAFTA

that liberalized U.S. imports of apparel from Mexico

would probably mean eventual liberalization for

other CBI countries. These countries will seek to

keep their playing field level with Mexico’s, and the

U.S. Government will find it difficult to say no.

On the other hand, should the Uruguay Round

come to nothing, while a NAFTA took effect, the

United States might well seek tighter restrictions on

Asian apparel imports in government-to-government negotiations. NAFTA provisions would probably limit transhipments from Asia into the United

States via Mexico. But it is not so clear that a

NAFTA would discourage Asian investments in

Mexico. If it did not, sophisticated producers based

in Hong Kong and elsewhere would have strong

incentives to set up close to the lucrative U.S.

market.
Chapter 9-Apparel . 193

CONCLUDING REMARKS

In the United States and the rest of the world,

apparel employment has grown during early stages

of national economic development. The industry is

typically one of the frost large manufacturing sectors

in developing countries and often provides the first

industrial jobs for agricultural workers. As development proceeds and wages rise, apparel jobs migrate

to lower wage regions. Thus, during the 1960s,

Japan accounted for about one-third of all U.S.

apparel imports, but by the 1980s Japan’s share had

dropped below 5 percent.

In the United States, apparel jobs migrated from

the Northeast to the Southeast during the decades

after World War II. During the 1970s and 1980s, the

Southeast lost jobs to Asia and the Caribbean. A

NAFTA, if it generated rapid economic growth in

Mexico with wage increases, would accelerate the

process through which Mexican producers would

lose advantages based on low wages alone. Within

Mexico, this process has already started. Apparel

maquilas in the border cities must now compete with

other manufacturers, at least some of which can

afford to pay higher wages. But continuing competition for Mexican producers in both labor markets

and product markets provides little consolation for

U.S. workers who have lost, or will lose, jobs to

Mexico.
Chapter 10

Agriculture
—.

Contents

Page

SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197

MEXICAN AGRICULTURE: TRADE AND STRUCTURE . . . . . . . . . . . . . . . . . . . . . . . . 198

Subsistence Farming: The Traditional Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200

Industrialized Agriculture and Food Processing: The Modem Sector . . . . . . . . . . . . . . . 201

COMPETITION AND COMPLEMENTARITY: VEGETABLES AND BEEF . . . . . . . 202

Frozen Broccoli and Strawberries: Cheap Labor Is Not Enough . . . . . . . . . . . . . . . . . . . 205

Tomatoes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 206

Beef . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . 207

THE FUTURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 210

Output Growth in Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 210

NAFTA Impacts . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . 212

CONCLUDING REMARKS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 214

Boxes

Box Page

1O-A. Seasonality in Fruit and Vegetable Production . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 204

1O-B. Pesticides In Food: Cause For Concern? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 205

1O-C. Boxing Beef: Will It Go To Mexico? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 208

1O-D. Increasing Irrigated Fruit and Vegetable Acreage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 210

Figures

Figure Page

10-1. Cultivated Acreage by Crop in Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200

10-2. Monthly Fresh Tomato Production by Growing Region, 1990 . . . . . . . . . . . . . . . . . . 204

10-3. Productivity of Irrigated and Rainfed Farming in Mexico, 1985 . . . . . . . . . . . . . . . . 21O

Tables

Table Page

10-1. U.S.-Mexico Agricultural Trade, 1991 ● . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 199

10-2. Cost Comparison for Frozen Broccoli, 1990

. . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 206

10-3. Costs for Fresh Tomatoes, 1990-91 ... ... ... ... ,.. ... .,, ,O O

. ... ,O O O. .. O O. O.,.. 207

104. Estimated Costs of Cattle Feeding and Meat Packing . . . . . . . . . . . . . . . . . . . . . . . . . 209

10-5. Potential for Increased Horticultural Production in Mexico’s

primary Exporting Regions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 211
Chapter 10

Agriculture

SUMMARY

The agricultural and food processing sectors of

the United States and Mexico complement and

compete, depending in part on static factors such as

climate, rainfall, and arable land, and in part on

dynamic factors including technology, labor costs,

capacity utilization, transportation costs, and government policies (subsidies, trade restrictions). Agricultural imports from Mexico compete primarily

with products from warm-weather States, and Florida more than California or Texas.

Today, many of Mexico’s agribusiness establishments, some of which are foreign-owned, have

relatively low costs and high yields and productivity

levels. But their yields—if much higher than in

Mexico’s small-scale, traditional farming sector—

lag well behind those routinely achieved in the

United States, depending on the crop and location.

This lag reflects a broadbased deficit in agricultural

technology-including cultivation practices, mechanization, and seed varieties and agricultural chemicals (fertilizers, herbicides, pesticides) suited to

Mexican conditions. With a few exceptions where

Mexico’s climate creates large advantages, Mexican

farmers and food processors, like their counterparts

in manufacturing, rely on low labor costs to compete.

Fruits and vegetables—particularly those that

require picking, trimming, and packing by hand

rather than machine-are much more labor intensive

than other agricultural products. These are the

products—tomatoes, cucumbers, broccoli, radishes,

green onions—in which Mexican growers and

packers have been able to undercut U.S. costs. But

even here, the seasonal nature of production means

that Mexican products may compete with those from

some parts of the United States, while complementing production elsewhere. For instance, Florida

cucumber shipments reach their highest levels

during November-December and April-May, while

California ships at relatively constant levels from

May through November. Imports of cucumbers from

Mexico reach their peak during the DecemberMarch gap.

OTA’s analysis of U.S.-Mexico trade and competition in agriculture leads to the following conclusions:

●

●

●

●

Despite lower labor costs for most agricultural

products, Mexico could not expect to achieve

across-the-board advantages in agriculture even

if all trade restrictions were removed. The

United States would retain large advantages

rooted in agricultural research (including biotechnology). These advantages include superior plant and livestock varieties and cultivation

practices creating yield and productivity margins sufficient to offset Mexico’s low labor

costs. Indeed, costs increased more rapidly in

Mexico than in the United States during the

1980s, in part because Mexico’s government

has been reducing subsidies (e.g., for fertilizers,

fuel, and electricity).

Mexico’s primary agricultural exports—fresh

winter fruits and vegetables-compete most

directly with production in Florida, which has

a similar growing season. Florida is as far or

farther from many major U.S. markets (e.g., the

West Coast) as the regions in Mexico with

which it competes; as Mexico’s transportation

system improves, the advantages Florida has

historically gained from rapid, reliable, lowcost shipping will diminish. Florida farmers

would probably experience a greater share of

adjustment costs following a North American

Free Trade Agreement (NAFTA) than farmers

in other States.

Growing seasons in California less frequently

overlap those in Mexico. While substantial

production and processing capacity-notably

for broccoli—has moved to Mexico, California

growers have had little trouble in switching to

other crops. Generally speaking, farmers in

States other than Florida and California are less

likely to face direct competition with Mexico.

U.S. farmers produce grains at much lower cost

than Mexican farmers, much of it for animal

feed. Transportation costs for feedgrains would

probably preclude the widespread relocation of

cattle feeding to Mexico, even if Mexico could

achieve comparable efficiencies. Because it is

more costly to ship cattle than feed, beef

–197–
198 ● U.S.-Mexico Trade

●

●

●

packing will remain concentrated in the U.S.

grainbelt. While some meatpacking jobs may

be lost to Mexico, U.S. packers have been

aggressive in driving down domestic wages

and working conditions, reducing the attractions of Mexican labor. Because transportation

is less of a barrier for poultry than for beef,

Mexico’s low labor costs could attract production and processing of chicken and turkey.

Cow-calf imports from Mexico to supply U.S.

feedlots would probably grow following a

NAFTA, at the expense of competing operations in Texas and other border States. But

limits on Mexican range land, water, and feed,

along with transportation costs, would probably limit the market share of imported feeder

calves to about 5 percent (compared to past

shares in the range of 3 percent).

Mexico itself faces fundamental limits on

production of food, for domestic consumption

as well as for export, beginning with limited

amounts of arable land and water for irrigation.

Competition for water is increasing as the

economy industrializes and urbanizes. These

factors limit Mexico’s ability to expand production for export, reducing the potential threat

posed to U.S. agriculture as a whole. Because

the population is rising rapidly, and because of

U.S. advantages in grain production, Mexico

will continue buying wheat, corn, and

feedgrains from the United States. Mexico also

has the potential to become an important

market for grain-based products such as beef as

income levels rise.

A NAFTA would probably increase the rate at

which ejido farmers are displaced, exerting

additional downward pressure on wages for

unskilled workers in both Mexico and the

United States.

Although the two agricultural sectors have been

integrating, the pace has been slow. Three factors

account for this: Mexican Government policies;

U.S. policies, especially trade restrictions; and the

technological advantages of the United States,

which for products such as Florida tomatoes have

enabled farmers in potentially vulnerable regions to

maintain or even increase cost- and quality-based

advantages.

For 75 years, Mexico’s government has supported

small-scale, traditional agriculture through distribution of ejido lands and a wide variety of subsidies.

The results included farms and food processing

plants below minimum efficient size, discouragement of a modem agricultural sector, and rising

imports of food. These policies began to change

during the 1980s, with restrictions on land ownership lifted in January 1992. While some ejidos will

be consolidated, much of the land is too poor to

produce at competitive cost levels regardless of

money spent on improvements.

Where Mexico has achieved competitive costs, it

has been in cases where low wages offset low

efficiency. Despite high labor costs compared to

Mexico, U.S. growers benefit from a broad range of

government policies. Some enjoy low cost water for

irrigation. Tariffs have helped preserve market share

and profits, as have better distribution, superior

quality, and longer in-store shelf lives for perishable

commodities. Moreover, many U.S. growers faced

with low-cost imports in their traditional products

have successfully switched to crops more suited to

the changing competitive environment.

In the United States, both the private and public

sectors are eager to develop and introduce new

agricultural and food processing technologies. Government has helped diffuse best practices through

the agricultural extension program. In contrast,

Mexico has neither the seed companies and agrochemical firms to develop and supply new products,

nor the agricultural research organizations to support

the underlying technology base. Mexican farmers

must usually be content with seed and fertilizers

developed for U.S. conditions.

MEXICAN AGRICULTURE:

TRADE AND STRUCTURE1

Only Japan and the former Soviet Union buy more

U.S. agricultural products than Mexico. And only

1 This discussion is based in part on “Agricultural Issues in U.S.-Mexico Economic Integration,” report prepared for OTA under contract No.

13-0310 by B. Kris Schulthies and Gary W. Williams, April 1992. Information otherwise uncited comes from this report, which relies heavily on Mexican

Government statistics.

For summary information on Mexican agriculture, see Foreign Agncuhure 1990-91 (Washington DC: U.S. Department of Agriculture, Foreign

Agricultural Semice, August 1991), pp. 82-83. Also “U.S., Mexico Seek Economic Boost from Free-Trade Pac4° Farrrdine, February 1991, pp. 2-6;

and The Likely Impucf on the United Sfates ofa Free Trade Agreement with Mem”co, USITC Publication 2353 (lWshingto% DC: U.S. International Trade

Commission February 1991), pp. 4-3 to 4-17.
Chapter 10--Agriculture ● 1 9 9

Table 10-1-U.S.-Mexico Agricultural Trade, 1991

U.S. exports U.S. imports

to Mexico from Mexico Balancea

(millions of dollars)

Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Livestock and livestock products (all). . .

Fats and of fals. . . . . . . . . . . . . . . . . . .

Hides and skins. . . . . . . . . . . . . . . . . .

Dairy products. . . . . . . . . . . . . . . . . . .

Beef. . . . . . . . . . . . . . . . . . . . . . . . . . . .

Cattle. . . . . . . . . . . . . . . . . . . . . . . . . . .

Poultry. . . . . . . . . . . . . . . . . . . . . . . . . .

Pork. . . . . . . . . . . . . . . . . . . . . . . . . . . .

Other . . . . . . . . . . . . . . . . . . . . . . . . . . .

Grains and feeds (all). . . . . . . . . . . . . . . .

Wheat and wheat flour . . . . . . . . . . . . .

Corn. . . . . . . . . . . . . . . . . . . . . . . . . . .

Sorghum . . . . . . . . . . . . . . . . . . . . . . . .

Other . . . . . . . . . . . . . . . . . . . . . . . . . . .

Fruits and vegetables (all)b

. . . . . . . . . . .

Tomatoes

Fresh . . . . . . . . . . . . . . . . . . . . . . . . .

Processed . . . . . . . . . . . . . . . . . . . . .

Broccoli and cauliflower, fresh

and frozenc. . . . . . . . . . . . . . . . . . . .

Peppers . . . . . . . . . . . . . . . . . . . . . . . . .

Onions . . . . . . . . . . . . . . . . . . . . . . . . .

Cucumbers. . . . . . . . . . . . . . . . . . . . . .

Squash . . . . . . . . . . . . . . . . . . . . . . . . . .

Strawberries. . . . . . . . . . . . . . . . . . . . .

Grapes . . . . . . . . . . . . . . . . . . . . . . . . . .

Mangoes . . . . . . . . . . . . . . . . . . . . . . . .

Melons. . . . . . . . . . . . . . . . . . . . . . . . .

Citrus, fresh and processed. . . . . . . . .

Other . . . . . . . . . . . . . . . . . . . . . . . . . . .

Coffee . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Seeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Sugar and related products . . . . . . . . . . .

Oilseeds and related products . . . . . . . . .

$2,998

1,128

207

137

121

185

133

131

68

146

739

48

148

372

171

183

4

—

—

—

5—

—

—

—

—

—

—

174

2

87

114

524

$2,527

392

1

4

3

—

361

0

0

24

64

—

—

—

64

1,233

250

18

102

111

90

73

50

37

54

54

98

78

320

333

6

33

43

$471

736

206

133

118

185

(228)

131

68

122

675

48

148

372

107

(1,050)

(246)

(18)

(102)

(ill )

(85)

(73)

(50)

(37)

(54)

(54)

(98)

(78)

(146)

(331)

81

481

aparentheses denote negative balance (U.!3, imports from Mexico greater than U.S. exports to Mexim).

bTotalinCIUdeSfre~ha~prweSSedfrUi~ ~ndv~getables;subheadings refertofreshpr~uceunle~othe~ise fiOtf3d.

~he U.S. Department of Agriculture provides only the combined total for importsof fresh and frozen broccoli and

cauliflower.

SOURCES: Foreign Agricu/tura/ Trade of the United States: January/February 19!22(Washington, DC: Department of

Agriculture, Economic Research Service, 1992), table B-3, pp. B4-B42; Foreign Agricu/twa/ Trade of the

United States, Ca/end.w Year 7997 Supp/ernent(Washington, DC: Department of Agriculture, Commodity

Economics Division, Economic Research Service, July 1992), table 23, p. 399.

Canada ships more agricultural goods to the United

States. But the relationship between the United

States and Mexico is hardly symmetrical (table

10-1): Mexico needs inexpensive U.S. grain and

milk products far more than the United States needs

Mexican feeder cattle or tomatoes. Mexico sends

more than three-quarters of its agricultural exports to

the United States, but the United States buys only

about 12 percent of its agricultural imports from

Mexico,

Crop production accounts for 58 percent of the

value of Mexico’s agricultural output, livestock for

33 percent, and forestry, fishing, and hunting for the

remaining 9 percent. As noted in chapter 3, agriculture accounts for about 9 percent of Mexico’s gross

domestic product (GDP). The majority of the

country’s 4 1/2 million farms are small and inefficient. Many still use traditional practices, producing

corn and beans for subsistence and local consumption. Corn grows on about a third of Mexico’s arable

land (figure 10-1). Over half of the agricultural labor

331-019 0 - 92 – 8 : QL 3
200 ● U.S.-Mexico Trade

Figure 10-1-Cultivated Acreage by Crop in Mexico

Corn

Dry Beans

Sorghum

Wheat

Coffee

Sugar Cane

Soy Beans

Other

0246 8 10 12 14 16 18

Acreage (millions)a

a Average, 1985-19~.

SOURCE: “Agricultural issues in U. S.-Mexica Economic Integration,”

report prepared for OTA under contract No. I3-O31O by B. Kris

Sehulthies and Gary W. Williams, April 1992, table 4, p. A3.

force works in the traditional sector, many on a

casual or seasonal basis; the modem sector, which

accounts for only a small minority of farms,

produces perhaps three-quarters of total output.2

Land and water set fundamental limits for Mexican agriculture. Only 12 percent of the country’s

land is arable-some 57 million acres-compared

with 464 million arable acres in the United States (a

little over 20 percent of all U.S. land). Although the

United States has eight times more arable land, it has

only half as many farms. About half of the arable

land in Mexico could be irrigated, but 60 percent of

this land remains rainfed.3 Mexican agriculture

suffers from salinity in much of its limited supply of

water and from widespread erosion. Irrigated as well

as raided lands in Mexico are subject to the vagaries

of weather, since most irrigation water comes from

reservoirs rather than underground aquifers (many of

which are being rapidly depleted in any case).

After Mexico’s revolution, foreigners were barred

from owning land. Thus, foreign direct investment

(FDI) in agriculture has been very low, with

officially recognized investment totaling only a

cumulative $30 million in 1990 compared with $18

billion for industry. Food processing plants operated

by a dozen or so U.S.-based multinational corporations (MNCs) account for about half a billion dollars

of Mexico’s FDI ($470 million in 1989, included in

the industry total), and a substantial share (perhaps

one-third) of Mexico’s total food processing capacity.4

Subsistence Farming:

The Traditional Sector

In January 1992, the Salinas government’s land

reform program went into effect.5 The intent is to

modernize traditional farming, beginning with changes

in laws governing land ownership and use that date

to 1917. The ejido system was intended to reduce the

power of prorevolutionary landowning families by

redistributing their huge holdings to the peasantry,

while ensuring that peasants retained their land. The

state held title to ejido plots—in principle 10

hectares (about 25 acres), but in practice averaging

less than half that-and granted peasants usage

rights. Ejidos could not be legally sold, rented, or

used as collateral. Over the years, slightly over half

of those eligible received land.6 The Mexican

Government also maintained highly restrictive

ownership policies on land outside the ejido sector.

For example, individuals cannot own more than 100

2 ~ejm~o po~e5 ad LSIKtXI Bent@ “Industrial Development and Labor Absorption: A Reinterpretation” The informal Economy: Studies in

Advanced and Le.ss Developed Countn”es, Alejandro Portes, Manuel Castells, and Lauren A. BentoL eds. (Baltimore: Johns Hopkins University Press,

1989), pp. 589-611. Many ejialrtatios must seek employment on larger, more prosperous farms in the modem sector to supplement their income. Martine

%nackere, “Conditions of Agricultural Day-Labourers in Mexieo,” International Labour Review, vol. 127, 1988, pp. 91-110.

3 Lloyd E. Slater, ‘‘Food: U.S. Perspective,’ U.S.-Mexican Industrial Integration: The Road to Free Trade, Sidney Weintraub, Luis Rubio F., and

Alan D. Jones, eds. (Boulder, CO: Westview, 1991), p. 276.

d Libby es~bfish~ a food p~cessing facili~, c~ntiy owned and operated by Heinz, in 1929. other examples of U.S. MNCS with professing

facilities in Mexico include: Green Giant, KeUogg, Gerber, Del Monte, and Ralston Purina. Slater, “Food: U.S. Perspective,” ibid., pp. Z80-281, and

industry interviews. In additiorL a number of U.S.-owned agro-rnaquilas, like their counterparts in manufacturing, import everything from tmctors to

com to cardboard packaging, perform labor-intensive processing (e.g., of tortilla chips) in Mexico, then send the ftished products back to the United

States, But these operations are not very representative. While the agro-maquila seetor has been expanding rapidly, in 1990 there were fewer than 50

such fins, producing goods valued at around $100 million. Joel Millmaq ‘‘ ‘There’s Your Solution’,’ Forbes, Jan. 7, 1991, pp. 72,76.

5 ~s di~ussion is bed on SD intelview with Guillermo Ramos, Agricultural Counselor, Embassy of Mexieo, WSShingtOIL DC, Jtiy 14, 1992.

6 Some 2 1~ ~~on Mexic~ stilI Mve outs@cJing claims, while 3 million have received hd. “The Legal Proposal for Mexico’s Agricultural

Reform: Background InformatiorL” Embassy of Mexico, Washington, DC, November 1991, p. 5.
Chapter 10-Agriculture ● 201

hectares of irrigated farmland.7 Corporations could

not own land at all.

Today, modem agriculture is concentrated on

irrigated land in northwestern Mexico, with the bulk

of the ejidos in the central part of the country. Crops

are raised on a little over 20 percent of ejido acreage;

the rest is wooded or used for grazing. Ejidatarios

had little incentive to leave their land, which they

could not sell, nor to invest in improvements; only

17 percent of ejido croplands are irrigated.

The burden of these policies finally proved

unsustainable. As noted in chapter 3, Mexico was

left with a great many people in agriculture in

proportion to output, while the government continued pumping money into price supports and subsidies for fertilizer, water, electricity, and diesel fuel.8

Both price supports and subsidies have been heading

downward since the middle 1980s, a consequence of

crisis and apertura.

The 1992 reforms substantially changed the rules

for land ownership and use. Ejidatarios will get title

to their lands. While individuals are still limited to

100 hectares, foreigners can purchase land on much

the same basis as Mexican citizens. Corporations,

domestic and foreign, may own up to 2,500 hectares

(about 6,200 acres).

Steady reduction in subsidies, coupled with the

changes to the ejido system, promises to displace

many small farmers from marginal land, which will

no longer be worth cultivating. Meanwhile, the

modem sector will expand as more prosperous

farmers assemble larger plots and purchase higher

quality ejido acreage. More ejidatarios will be able

to join the modem sector; others will be displaced

and seek work in market-oriented agriculture or

move to cities. Management of this transition by

Mexico will have consequences for the United

States, most likely in higher levels of immigration,

as well as for the future of the Mexican economy.

Industrialized Agriculture and Food

Processing: The Modern Sector

While the traditional sector came close to collapse, the modem sector increased in scale and

scope, becoming substantially integrated into the

North American regional market. The modem sector

has drawn to considerable extent on U.S. know-how,

buys U.S. farm machinery, and relies to some extent

on U.S. capital. Even so, it remains on average

significantly less advanced than commercial farming as practiced in the United States. The development of large commercial farming and food processing operations in Mexico has been driven, not only

by exporting, but by the need to feed a rapidly

growing urban population.

Mexican farmers devote only 2 to 4 percent of

their land to fruits and vegetables, but horticultural

products account for 9 percent of total output value

and for more than half of Mexico’s total agricultural

exports. 9 Mexico supplies more than 80 percent of

all fresh vegetables imported by the United Statesnot surprising given that fresh vegetables do not

travel well.l0 Tomatoes account for nearly half of

7 Limits vary by use: up to 400 hectares (967 acres) of grazing land and 200 hectares of nonirrigated farmin g land, but for certain crops (e.g., cotto%

coffee, bananas, fruit trees), 150hectaresof irrigated land or 300 hectares of nonirrigated land. These restrictions, like those on ejido holdings, have been

circumvented in various ways. For example, a large farm might be put together with title to the land distributed among family members. Many ejido

lands are leased and many are part of Mexico’s modem farrnin g sector.

8 me a~mltwd ~~r force con~u~ to tise at ]Ut through the 1980 census, ~wing from m estimated 4.8 ~lion ~ 1950 to 5,6 ~fion ~

1980, despite the industrialization and urbaniza tion taking place over this period. Francisco Alb& “Migrant Labor Supply and Demand in Mexico and

the United States: A Global Perspective,” U.S.-Mexico Relations: Labor Market Interdependence, Jorge A. Bustaman te, Clark W. Reynolds, and Radl

A. Hinojosa Ojeda, eds. (Stanfor& CA: Stanford University Press, 1992), pp. 243-256.

With CONASUPO (Compania Nacional de Subsistencias Populares, the government’s agricultural distribution and marketing organization)

purchasing com and many other farm products at guaranteed prices, subsidy and support levels in some years exceeded 60 percent of the value of

agricultural output. “Mexico After the Oil Boom: Refashioning a Development Strategy,” World Bank Report No. 6659-ME, Washingto% DC, June

23, 1987, p. 38; Myles J. Mielke, “Govemm ent Intervention in the Mexican Crop Sector, ’ Staff Report No. AGES89-40, U.S. Department of

Agriculture, Economic Research Service, Washington, DC, September 1989. As recently as the mid- 1980s, the government subsidized purchases of

diesel fuel by 30 percent and fertilizer by about 60 percent. NAFZA: Effects On Agriculture; vol. w Fruit and Vegetable Issues (Park Ridge, IL: American

Farm Bureau Research Foundation, 1991), p. 104. The government also used negative subsidies to discourage some types of production.

YN~A: Effects on Agriculture; vol. W Fruit and Vegetable Issues, ibid., pp. 4, 6.

Reportedly, 2 percent of Mexican agribusinesses account for threequarters of value-added. Steven E. SandersoU The Transformation of Mexican

Agriculture: International Structure and the Politics of Rural Change (Princeton, NJ: Princeton University Press, 1986), p. 100.

10 Of Mexico’s total tipmen~ of vegetables to the United States, 85 percent is shipped fresh 10 percent froze% and 5 percent canned. N~A:Effects

on Agn”culture: vol. W, Fruit and Vegetable Issues, op. cit., footnote 8, pp. 19, 20. l%e percentages quoted here and below fluctuate depending on price

levels, which in turn reflect output as influenced by the vagaries of the weather in the growing regions of both countries.
202 ● U.S.-Mexico Trade

Mexico’s flesh vegetable shipments to the United

States, although Mexico also exports cucumbers

(taking about 40 percent of the U.S. market),

peppers, broccoli, strawberries, melons, and much

else besides.

Some of the products of the export-oriented

modem sector compete directly with those from

growers in California, Florida, Texas, and other

warm-weather States. Others complement U.S. production, supplying U.S. supermarkets during winter

months. Many of the imports are controlled by a few

large distributors, typically located in Arizona, who

have longstanding ties with Mexican growers and

U.S. buyers.

Legal restrictions on land ownership hindered but

did not foreclose commercial agriculture. Contract

growing evolved to meet the needs of U.S. distributors and processors, who agree to purchase the

farmer’s output at a stipulated price (which may

depend on the market price at the time of sale), and

frequently provide seeds and technical advice as

well. Contract production reduces risks for both

parties; it also transfers know-how from the United

States to Mexico.

11 Agribusiness operations benefited from many of the same subsidies as small

farmers, especially cheap water from government

irrigation projects and subsidized electricity. With

the elimination of these subsidies, their costs have

risen substantially.

U.S.-based processors and distributors have moved

into Mexico for three major reasons:

1. low costs;

2, rising U.S. demand for fresh fruits and vegetables in season and out; and

3. Mexico’s expanding domestic market for processed food, and for off-season fresh produce

that can be supplied from the United States.

Investments will continue, but—given that, for

instance, a canning plant for tomato products costs

$35 million to $40 million---only where significant,

long-term cost advantages seem assured. At present,

Mexico has considerable excess capacity for processing frozen vegetables. This promises to discourage additional investment for export until the market

expands, unless new plants can achieve absolute cost

advantages against competitors pricing at variable

cost.

As U.S.-based companies began to penetrate

Mexico’s processed food sector, the government put

in place policies to support and protect domestic

fins, several of which were able to develop

nationwide distribution and widely recognized brand

names like Bimbo Bread.12 These large firms use

much the same processing and packaging technologies as their U.S.-based counterparts. But the policies of Mexico’s government also ensured the

survival of a large number of smaller firms with a

local or regional focus that operate plants resembling those found in the United States before World

War II. A NAFTA would expand the market

opportunities for larger Mexico-based as well as

U.S.-based food processors as the two industries

integrate on a regional basis. It would also accelerate

the consolidation and rationalization of the Mexican

food processing industry, with new competition

leading to the exit or merger of smaller firms without

a defendable market niche or other source of

advantage.

COMPETITION AND

COMPLEMENTARITY:

VEGETABLES AND BEEF

Farmers in northwest Mexico, particularly in the

state of Sina.lea, have marketed winter vegetables in

the United States for years. During the “tomato

wars’ ‘ of the 1960s and 1970s, Florida growers

sought protection under U.S. trade law from Mexican producers and U.S. distributors, accusing them

of dumping and other “unfair” practices. In fact,

with their warm winter weather, farmers in northwest Mexico can often produce tomatoes and other

fruits and vegetables more cheaply than U.S. growers. Because of variations in soil and climate, yields

(output per acre per year) vary greatly from place to

place and year to year in both countries, but in most

cases are higher in the United States. While Mexican

t 10ne U.S. processor interview~ by OTA reported a contract price for jalapeno peppers from Mexico of about 35 cents per pound (including duty),

compared with spot prices that fluctuated wildly above and below this figure (peaking above 60 cents per pound). Production costs are about the same

in the Mexico and the United States, at 15 to 18 cents per pound, with transportation costs, in refrigerated trucks from Mexico to Tkxas, adding about

4 cents. This processor contracted for peppers in Mexico to ensure supplies during times of the year when U.S. peppers might not be available at an

acceptable price.

12 SIater, ‘(Food: U.S. Perspectives,” op. cit., footnote 3, pp. 281ff.
-. .,. . . . --- Chapter 10-Agriculture ● 2 0 3

farmers have lower per-acre production costs, lower

yields coupled with transportation, marketing, and

other distribution expenses can offset this, depending on the product and its final destination (and on

U.S. tariff levels) .13 Hence, landed unit costs at the

U.S. border are frequently similar to U.S. costs.

Mexico sends not only tomatoes and other horticultural products northwards, but coffee and cattle as

well. At the same time, with population growth

outstripping the country’s ability to feed its population, Mexico purchases corn, soybeans, and, in

recent years particularly, milk products and wheat

from the United States. Indeed, Mexico imports

more dairy products than any other country in the

world—nearly all in the form of surplus dried milk

from the U.S. Commodity Credit Corp. Government

agencies purchase about 40 percent of Mexico’s

imports of agricultural products.

Mexican farmers ship fresh fruits and vegetables

to the United States primarily in the winter months

(box 1O-A). This puts them in direct competition

with Florida, but Mexican crops come in before

those in California.

14 Given normal weather, Winter

fruits and vegetables from Mexico supply west coast

U.S. markets, those from Florida the east coast. In

the center of the country, produce from Mexico and

Florida competes on the basis of delivered costs.

With this primary exception, then, Mexican agriculture complements more than it competes with U.S.

agriculture. In most years, depending on tomato

prices, coffee is Mexico’s biggest agricultural export

to the United States, which grows coffee only in

Hawaii.

Where the two countries compete, both governments have called on a broad range of direct and

indirect policies-including tariffs, import licenses

(Mexico), and agricultural marketing orders (the

United States)---to manage trade and protect domestic farmers. Many U.S. tariffs on fresh fruits and

vegetables are seasonal; that is, they apply or

increase during domestic harvesting periods.15 Although Mexico has reduced many of its trade

barriers since joining the General Agreement on

Tariffs and Trade (GATT) in 1986, import licenses

were still required for corn, wheat, and a number of

other commodities as the NAFTA negotiations

concluded. Typically, the government would not

issue licenses until the domestic crop had been

bought Up. 16 In some cases, Mexico’s government

has raised tariffs after removing licensing requirements.

On the U.S. side, the Agricultural Marketing

Agreement Act of 1937 permits fruit and vegetable

growers to enforce standards for grade, size and

other characteristics through marketing orders that

apply to imports as well as domestic produce.

Foreign growers often claim that marketing orders

have been artificially manipulated to keep out their

products (e.g., by imposing minimum size requireIJ Stephen Fuller and Charles H~, ‘‘The U.S.-Mexico Free Trade Agreement: Issues and Implications for the U.S. and lkxas Fresh Vegetable/Melon

Industry, ’ TAMRC [ntemational Market Research Report No, IM-2-91, Texas A&M University, College Station, TX, April 1991. Production costs in

Sinaloa (which currently accounts for 40 percent of Mexico’s horticultural exports to the United States) are signitlcantly lower (40 to 80 percent) than

in Texas, but are often similar to those in California and Florida. Transportation (usually by truck because of perishability) arrd marketing costs can exceed

production costs; delivered costs of Mexican vegetables in the United States breakdown approximately as follows: production and handling, 50 percent;

tramportation and marketing within Mexico, plus border crossing costs, 30 percen~ and, transportation and handling within the United States,

20 percent.

14 Bmause northern Mexico is on tie same latitude as Florida growing seasons are similar. Florida farmers compete With Mexico Pfitily ti

tomatoes, cucumbers, peppers, and squash. NAFTA: Effects On Agriculture; vol. II? Fruit and Vegetable Issues, op. cit., footnote 8; Nicholas G.

Kalaitzandonakes, and Timothy Taylor, ‘‘Competitive Pressure and Productivity Growth: The Case of the Florida Vegetable Industry’ Soufhern Journal

of Agn”culrural Economics, December 1990, pp. 13-21.

15 US,-JfeXi<.o Trade: TrendS and Impe&ments in Agn”cu/mral Trade, G,40/NSIAD-9&85BR ~ashingto~ DC: U.S. General Accounting of fiW,

January 1990). The United States tends to use tariffs to restrict imports of products for which Mexico has a delivered cost advantage. Also see [J. S.-Me.xico

Trade: Extent to Which Mexican Horticultural Exports Complement U.S. Production, GAO/NSIAD-91-94BR (Wasbingtom DC: U.S. General

Accounting Office, March 1991); and U.S. Mexico Trade: Impact of Liberalization in the Agricultural Sector, GAO/NSIAD-91- 155 (Washingto~ DC:

U.S. General Accounting Office, March 1991),

lb For co~ tie quo~s imposed through licensing have had the effect, on an annual average basis, of a tariff of about 55 pcrccnt.silc~ Robinsow

‘‘Agricultural Policies and Migration in a U.S ,-Mexico Free Trade Area: A Computable General Equilibrium Analysis, ’ presentation at the Symposium

on Economy-Wide Modeling of the Economic Implications of a ITA with Mexico and a NAFTA with Canada and Mexico, U.S. International Trade

Commission, Washingto% DC, Feb. 24-25, 1992.

Mexico also imposes export tariffs, charging, until early 1990, $60 per head for feeder cattle shipped to the United States. This tax has since been

reduced in stages to $5 per head, and is scheduled to be eliminated completely. NAFTA: Effects on Agn”culturc; vol. 11, Lii’extock and Dairy Issues (Park

Ridge, IL: American Farm Bureau Research Foundation, 1991), p. 58.
204 U.S.-Mexico Trade

Box 10-A--Seasonality in Fruit and Vegetable Production

Growers in Florida and Mexico ship fresh tomatoes from November through May, with California, and to a

lesser extent the Baja area of Mexico, the primary suppliers during the summer (figure 10-2). It is only from January

through March, when Florida weather is somewhat colder (and more variable) than that in Sinaloa, that Mexican

production has been fully competitive. Only in Dade Country, the southernmost growing region in Florida, does

production peak during these months. Over the last 10 years, Florida’s share of the U.S. winter tomato market has

ranged from 56 to 68 percent. Prices fluctuate wildly when weather disrupts production in either Florida or Mexico.

Fresh strawberry imports exhibit a similar seasonal pattern, with shipments from Mexico rising from

November through March, before ending in April. The California harvest peaks in May and declines steadily until

December, when it begins to rise again. Florida’s growing season, in contrast, is limited to the period

November-April, with peak harvests when California production is relatively low. Mexico’s Bajío region (not far

from the Federal District) has a growing season similar to Florida’s, but obsolete technology and inferior product

quality have led to a steady decline in share of the U.S. strawberry market.

Figure 10-2-Monthly Fresh Tomato Production by Growing Region, 1990

350

300

250

200

150

100

50

0

SOURCE: WVTA:EtkXs on AgnWture; W W Frdtand Vbgetable Issues (Park Ridge, IL: American Farm Sureau Raseamh Foundation, 1991),

table X-3, p. 287.

ments that imported fruits and vegetables do not Mexico with excessively high levels of pesticide

meet) .17 Claims are also heard that sanitary and residues. 18 As explained in box 1O-B, there is little

phytosanitary regulations serve as nontariff barriers, evidence suggesting that pesticide residues on fresh

while concerns have been raised that a NAFTA produce imported from Mexico constitute a signifiwould increase imports of food products from cant danger to consumer health.

17 U.S. ~ke~ Or&rS cove~d 14 per~nt by value of agricultural imports fmxn Mexico in 1989. U.S. -Me.aico Trade: Extent to Which Mexican

Horticultural Exports Complement U.S. Production, op. cit., footnote 15.

IS h OTA ~tewiews, for exwple, Florida growers have questioned the adequacy and timeliness of monitom at the border and whetim current

procedures are capable of detecting deliberate violations.
—- ———-. . .

Chapter 10--Agriculture . 205

Box 10-B—Pesticides In Food: Cause For Concern?l

Do pesticide residues in foods imported from Mexico, particularly fresh fruits and vegetables, exceed U.S.

standards (e.g., because of excessive or inappropriate application) and therefore constitute a potential hazard to

consumers? In theory, produce with residual levels of pesticides exceeding U.S. tolerances, or for which no

tolerances exist (because the pesticide is not registered for use in the United States), will be detected and stopped

at the border. In practice, excessive levels might not be detected.

Both exporters and the Mexican Government take steps to ensure that fresh Mexican produce will not be barred

from the United States because of pesticide violations. Mexican pesticide regulations increasingly resemble those

here. As in the United States, pesticides must be registered before they can be sold or used. The number of pesticides

registered in Mexico that have no U.S. tolerances has been reduced from 35 in 1988 to 19 in 1991. If they intend

to ship to the United States, Mexican growers must register with export associations that provide information on

the types of pesticides permitted and appropriate application practices. U.S. and international agencies provide

information, training, and technical assistance on pesticide use to Mexican growers, and multinationals assist their

contract growers.

The U.S. Environmental Protection Agency sets standards for pesticide residues, with the Food and Drug

Administration (FDA) responsible for sampling shipments at border crossings. Although less than 10 percent of all

U.S. food imports enter from Mexico, and less than one-quarter of horticultural imports, one-third of all samples

analyzed by the FDA originate in Mexico. Intensive sampling dates to 1979, when the U.S. Government undertook

to improve Mexican compliance with U.S. regulations.

In recent years, violation rates have been relatively low. In 1991,3.8 percent of food shipments from Mexico

failed to meet the standards. About three-fourths of these were “no-tolerance violations’ most were cases in which

the pesticide had not been approved for that product, although the levels detected were below those allowed for that

pesticide on other foods.2

1 ~~ ~x ~w~ ~m N~:Efiecr~ *n AgncuJmre; vol. ~, Genera/Issues (P~Ridge, ~: ~1-ic~F~ BW~U Research Foundation,

1991); lkofdo Ozuna and Ramon Guajardo-Quiroja, “The U.S.-Mexico Free Trade Agreement: Natural Resource and Environmental Issues,”

TAMRC International Market Research Report No. IM-8-91, Tkxas A&M University, College State, TX, April 1991; Food S@ety and Quality:

Neurotoxicity: Identifying and Controlling Poisons of the Nervous System (WaahingtoU DC: GfRce of ‘Rcbnology Assessment April 1990);

Five Counm”es’ Eflorts to Meet U.S. Requirements on Imported Produce, GAO/RCBD-90-55 (Washington DC: U.S. General Accounting

Office, March 1990); Pesticide Residues in Food: Technologies for Detection (WashingtorL DC: OIllce of Tkdmology Assessment, October

1988); and Pesticides: Comparison of U.S. and Mexican Pesticide Stanabrds and Enforcements, GAO/RCBD-92-140 (WSShingtom DC: U.S.

General Accounting Office, June 1992).

2 NO tol~~e vio~tions do not n~ssmy mean that the pesticide in question constitutes a health hazar~ but tittk level above which

it can be a hazard has not been established for a particular food, perhaps because the manufacturer chose not to incur the costs of registration

for the crop in question.

According to the American Farm Bureau Research Foundation the “results of surveillance indicate that the levels and types of pesticide

residues on current imports of agricultund products from Mexico are similar to residues on domestic products and imports from other countries

. . . . These findings do not indicate the use of banned pesticides that give Mexican producers a competitive advantage at the expense of the health

of the U.S. consumer.” NAFTA: Effects on Agriculture; Vol. I, General Issues, ibid., p. 48. The U.S. Department of Agriculture concurs that

produce exported to the United States from Mexico is generally free of dangerous pesticide residues. See U.S.-hfexico !hde: Tren.cik and

Impediments in Agricultural Trade, GAO/NSIAD-90-85BR (Washington DC: General Accounting Office, January 1990), p. 17.

Frozen Broccoli and Strawberries: exports consist of these two products, and almost all

Cheap Labor Is Not Enough19 of these exports go to the United States. California

grows most of the U.S. broccoli and as Mexico’s

Broccoli, along with cauliflower, is perhaps the production and exports expanded, California farmmost labor intensive of all vegetables to freeze, and ers switched from frozen broccoli to fresh, or planted

was the first for which processing moved to Mexico. their fields with more profitable crops. Thus, output

Indeed, almost all of Mexico’s frozen vegetable is down, and there is excess processing capacity in

19 ~s SatIon &aws Uwn NAFTA: Eflects On Agn”culmre; vol. W, Fruit and Vegetable Zssues, op. cit., footnote 8, pp. 97-138, 171-2~; David

Runsten and Sandra O. Archibald, “Technology and Labor-Intensive Agriculture: Competition Between Mexico and the United States,” U. S.-Mem”co

Relations: Lubor Mar&erlnterdependence, Jorge A. Bustamente, Clark W. Reynolds, and Ratil A. Hinojosa Ojeda (Stanford, CA: Stanford University

Press, 1992), pp. 449-476; and industry interviews.
206 ● U.S.-Mexico Trade

both countries. Shipping costs are significant, and

California processors increasingly supply frozen

broccoli to West Coast markets only. (There is little

demand for frozen food in Mexico currently, in part

because many households do not have freezers.)

Processing, not cultivation, gives Mexico its

advantages in broccoli (table 10-2). Growing broccoli is not particularly labor intensive compared to

other horticultural products: cultivating strawberries

takes 25 to 30 times as much labor as broccoli, which

in turn requires 25 to 30 times as much labor as

wheat.20 Removing the current tariffs of 17.5 percent

on frozen broccoli and 25 percent on fresh would

permit Mexican farmers to undercut prices for

California production by even larger margins.

A very different picture emerges for frozen

strawberries. Packers in Mexico have been sending

strawberries north since about 1950, but California

farmers have maintained huge yield margins. They

can produce an average of 23 to 24 tons per acre,

compared with about 8 tons per acre in Mexico, and

have better quality.21 These advantages have been

more than enough to counter Mexico’s lower costs

for labor and other inputs, even for this very labor

intensive crop. (Tariffs on frozen strawberries are

too small to have much effect.)

The most important reason that Mexico has been

cost-competitive in broccoli but not strawberries

appears to be that U.S. agribusiness firms invested

not only money but know-how in Mexican broccoli

production. By contrast, U.S. investors financed

strawberry cultivation in Mexico, but left production

to local growers. Technologically based productivity increases were rapid in California, while Mexico

fell behind in strawberry yields and quality. U.S.

success came with painstakingly developed highyield plants having a longer growing season, thus

permitting more crops per year. Mexico uses the

same plant varieties, but they are not designed for

Mexican growing conditions. California farmers

Table 10-2-Cost Comparison for Frozen

Broccoli, 1990

Mexico California

(cents per pound)

Harvested product. . . . . . . . . . . . . 12.0¢ 18.5¢’

Freezing and packaging. . . . . . . . 23.0 39.0

Transportation to border. . . . . . . . 2.5 NA

Customs fees and border crossing

costs. . . . . . . . . . . . . . . . . . . . . . 1.0 NA

U.S. import duty (17.5 percent). . 4.6 NA

Total, , . . . . . . . . . . . . . . . . . . . . 43.1 ¢ 57.5¢*

NA - Not applicable.

SOURCE: N4FLA: Effects on Agriculture; vol. IV Fmit and Vegetable

/ssues (Park Ridge, IL: American Farm Bureau Research

Foundation, 1991), pp. 123, 126.

also rely on such practices as fumigation, which, at

costs of $1,000 per acre, far exceed the budgets of

Mexican farmers.

Tomatoes 22

About three-quarters of Mexico’s tomatoes are

sold fresh, many of them in the United States. The

rest are processed as tomato paste, ketchup, salsa,

and the like. Tomatoes grow in many parts of the

country, with the fresh export industry concentrated

in Sinaloa, Sonora, and Baja California, and the

processing tomato industry in Sinaloa and Sonora.

Farms in Baja--many of them under U.S. ownershipmatch or nearly match southern California yields for

fresh tomatoes, but yields of processing tomatoes are

nearly twice as high in California.

Sinaloa is Mexico’s tomato processing center,

producing about 85 percent of its tomato paste.

Lower yields, together with shipping costs and a

tariff of 13.6 percent, have prevented Mexican

farmers from achieving a sustainable cost advantage. But if the tariff goes to zero under a NAFTA,

the price of tomato paste from Mexico would

probably fall below prices for imports from Europe

20 ~ U.S. a~c~~e, kbor, on average, accounts for about 15 percent of direct production costs, but about 50 percent for vegetables md fmits. H.L.

Goodwiq Jr. “The U.S.-Mexico Free Trade Agreement: Agricultural Labor Issues,” TAMRC International Marlcet Research Report No. IM-1 1-91,

lkxas A&M University, College StatiorL TX, April 1991.

21 Bo~ c~o~a ~d ~o~~ ~owers ~ve mfit~ed a si@lc@t advantage in quality over tbek Competitors in Mexico. DifffienCes in W@

are particularly important for fresh strawberries. It is not unemnrnon for fresh strawberries grown in these two States to cornmand prices that areas much

as a third higher than those from Mexico.

22 TMS s=tion draws on AJAF’XA: Efiects on Agriculture; vol. N, Fruit and Vegetable Issues, op. cit. footnote, 8, pp. 1-23 and pp. 234-237; Barney

H. MacClure, “Growing Importance for Mexican Lrnports,” Supermarket Business, March 1991, pp. 23ff; and presentations at the Conference on the

Impact of the Free Trade Agreement with Mexico on the California Fruit and Vegetable Industry, Santa Clara University, Nov. 4, 1991.
Chapter 10--Agriculture ● 207

Table 10-3-Costs for Fresh Tomatoes, 1990-91

Sinaloa Florida

Preharvest cost

(including seed, chemicals,

land, labor, machinery). . . . . . .

Harvest cost, including

transport to packing point. . . . .

Grading and packing. . . . . . . . . . .

Boxes. . . . . . . . . . . . . . . . . . . . . . .

Marketing and miscellaneous. . . .

Transport to border. . . . . . . . . . . .

Customs fees and

border crossing costs. . . . . . . .

U.S. import duty, . . . . . . . . . . . . . .

Total. . . . . . . . . . . . . . . . . . . . . .

(Dollars per box)a

$2.75 $3.41

.36 .84

.28 1.77

.88 .67

.91 .15

.67 NA

.30 NA

.38 NA

$6.53 $6.84

aA box of tomatoes holds 25 pounds.

NA - Not applicable.

SOURCE: NAFLA: Effects on Agriculture; vol. Iv Fruit and Vegetable

/ssues (Park Ridge, IL: American Farm Bureau Research

Foundation, 1991 ), p. 281, table X-1.

(which are heavily subsidized) and Chile, the

apparent low-cost producer.23

For fresh tomatoes--a much more important crop

for both U.S. and Mexican farmers-the situation is

very different. California and Florida produce threequarters of U.S. tomatoes, but west coast winters are

too cold for tomatoes. Only Florida can compete

with Mexico from December until May or June,

although freezes in some years harm the Florida

crop, driving up prices (as in the winter of 1989-90).

Growing, harvesting, and packing costs are all

substantially lower in Sinaloa than in Florida, Even

so, Florida growers have managed to compete

successfully because of higher yields. Tomato plants

suited to staked cultivation, plastic mulch, and

mechanized harvesting have offset higher labor

costs. Nonetheless, costs in Sinaloa and Florida have

tended to converge, with U.S. import duties—38

cents to 52 cents per box (25 pounds), depending on

time of year-keeping delivered costs similar (table

10-3). There is little question that with comparable

technologies, and even comparable wages, farmers

in Sinaloa-with their superior climate---could produce tomatoes considerably more cheaply than

Florida growers.

Photo credit: John Colwell, Grant Heilman Photography

Transplanting tomatoes.

Beef

Mexican ranchers buy semen and breeding stock

from the United States to support both beef and dairy

herds. While selling almost all their beef and dairy

products domestically, Mexico does ship feeder

cattle to U.S. producers for fattening and slaughter,

more than a million of them in 1990, about one-third

of all cattle fed in the Texas panhandle.24

Mexico cannot grow enough grain to feed many

more cattle. Transportation costs for imported grain

approximately offset Mexico’s labor cost advantages for feeding and slaughtering cattle. The cost

estimates in Box 10-C indicate that, even after

improvements in Mexico’s transportation system,

costs in the northern part of the country would drop

only slightly below those in the United States.

Because there is substantial U.S. overcapacity, and

per capita beef consumption is decreasing, neither

feeders nor packers have much reason to contemplate investments in Mexico.

Trade data also indicate that Mexico does not

have significant cost advantages in the production,

slaughter, and packing of beef. Mexico is currently

the third largest export market for U.S. red meats,

taking $472 million, or 11 percent of exports, and

23 At prewn~ Mexico supplies about 17 percent of U.S. imports of tomato paste. A Uruguay Round GATT agreement tiat dmsticWy r~uc~

subsidies and duties on tomato paste would enable both Chile and Mexico to displace higher-cost U.S. producers and most imports from Europe.

Everything else the same, Mexico would appear to be able to gain a cost advantage of 3 to 5 cents per pound in the U.S. market.

u Mefico’~ ~pom of b~ Smen iII IWO were vdued at $3.4 milIion, imports of dairy cattle al $36 million (for 30,000 be@, ad imPoflS of ~ef

cattle at $18 million (for about 35,000 head). NAFTA: Effects on Agriculture; vol. II, Livestock and Dairy Issues, op. cit., footnote 16, pp. 80, 85, 117,

146. In reeent years, the total number of beef and dairy cattle in U.S. herds has averaged a bit under 100 million.
208 ● U.S.-Mexico Trade

Box 10-C—Boxing Beef: Will It Go To Mexico?l

Years ago, beef was a growth industry in the United States. Cattle were fattened on the range, then shipped

by rail to Chicago and other Midwestern cities for slaughter by unionized workers in packing plants designed around

gravity-driven disassembly lines. Boxed beef made these plants obsolete by simultaneously reducing labor,

inventory, transportation, and feeding costs, while improving quality.2 Meat packers built new plants in low-wage

regions closer to feedlots. To minimize transportation costs of grain and cattle, most production takes place in such

States as Texas, Kansas, and Nebraska, where feed is abundant. After butchering, boxed beef is shipped to the

customer, reducing costs for supermarkets which could avoid many of the meat cutting operations once performed

in the store by butchers.

Meat products cannot enter the United States unless they originate in packing plants approved by the U.S.

Department of Agriculture (USDA). Mexican packers lost their approvals in 1984, after USDA found that the

inspection procedures in use in Mexican plants could not detect chemical residues at the required levels. Only in

1989 were five Mexican packing plants again approval, all in the border region.3 But given that wages are so much

lower in Mexico, isn’t it possible that meat packing will migrate there? The answer to this question turns on

transportation costs for cattle and feed and the ability of Mexico to increase the size of its herd.

The Mexican cattle herd averages about 20 million. Each year, Mexico exports about 1.2 million feeder cattle

to the United States for finishing-essentially all the steers that meet U.S. quality and type specifications. Mexico

does not have enough rangeland, water, or croplands suitable for feedgrains to increase cattle production. As table

10-4 shows, even with improvements in the country’s transportation system that reduced shipping costs to U.S.

levels, costs for importing feed and shipping beef back to the United States would add more than $30 per animal

for feedlots in northern Mexico, and about $60 for feedlots near Mexico City. Labor costs per animal (including

benefits) in the United States, for both feeding and packing, are in the neighborhood of $40 to $50.

Actual costs in Mexico would in most cases be higher than shown in table 1044 These estimates assume that

cattle are held in feedlots in both countries for 180 days, which is at least 30 days longer than currently required

by the most efficient U.S. feeding operations. Today, even the best Mexican feedlots and packing plants are

relatively small and inefficient, using practices characteristic of the 1960s in the United States (in part, because the

low cost of labor has discouraged mechanization).

Both feedlots and packing plants exhibit large economies of scale in purchasing, production, sales, and

distribution, which reduces the vulnerability of large, efficient U.S. plants to competition from Mexico.s At present,

the United States has considerable excess capacity in both sectors, much of it below efficient size and thus likely

to be closed at some point in the future. In 1990, for example, 205 U.S. feedlots with capacities of 16,000 head or

more accounted for more than half of production (52 percent); 44,000 smaller feedlots supplied the remainder.

Ninety-one plants accounted for more than 90 percent of all U.S. beef packing (again in 1990) in an industry with

more than 1,000 packing plants. One of the largest packers, IBP, has recently been operating at around 75 percent

of capacity.

1 ~s~x is -don i.ndu.qry interviews; annual r~orts and 1O-K filings; NAFZA: l?~ects on Agriculture; vol. H, Livestock and DaJ”?y

Issues (Park Ridge, IL: American Farm Bureau Research Foundation 1991); Z991 Meat Facts (WashingtorL DC: Amenean Meat Institute,

August 1991); Livestock & Poultry: Situation and Outlook Report (Washington DC: Department of Agriculture, Economic Researeh Service,

January 1992); and U.S. Indusm”af (%&wk ’92 (WashingtoxL DC, Department of Commeree,Jan- 1!W, pp. 32-3 to 32-V ~d 011.

2 Ka~~n Smey, “~eRole of Immigrant and Refugee Labor in the Restructuring of the Midwestern Mc+wking bdustry,’ con-t

report prepared for the U.S. Department of IA&M, October 1988, pp. 10-18,

3 fJ.S.-MeXI’co Tr@: Trenh and Impediments in Agricultural Trade, GAO/NSIAD-90-85BR (W@dngtoQ ~: U.S. ~ne~

Accounting Office, January 1990), p. 16. Six more maquila packing plants had been certified by early 1992, although not all were producing

beef for export to the United States. Mexico sends some exports to Japan from these plants,

4 my, shim~ ~sts for ~~ evid~fly r~d~ feedlots in northern Mexico unprofitable, on average. SOme have gone out of busin~s.

NMTA: Effects On Agriculture; vol. 11, Livestock and Dairy Issues, op. cit., footnote 1, p. 28.

s Clement E. war4 Me@aC&ing Cornpeiition and Pricing (Blacksburg, VA: The Research Institute On Livestock priC@, JUIY 1988),

PP. 21-33.
Chapter 10--Agriculture ● 209

Unless U.S. red meat consumption rises more rapidly than expected-unlikely given consumer trends-there

will be little incentive to move production operations to Mexico. Depressed wages in the U.S. industry also reduce

the attractiveness of relocation, as does competition for water with other industrial and agricultural sectors in

northern Mexico.

Table 10-4-Estimated Costs of Cattle Feeding and Meat Packinga

Cost (dollars per steer)

Northern Mexico

Texas Mexico City

Feedlot costs

Feeder steer Purchaseb. . . . . . . . . . . . . . . . . . . . $552.48

Purchase price of feedc. . . . . . . . . . . . . . . . . . . . . 250.79

Additional transportation costs for feed. . . . . . .

Management fee and Iabore. . . . . . . . . . . . . . . . . 21::

Veterinary medicine. . . . . . . . . . . . . . . . . . . . . . . 3.00

Interestf

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35.44

Attrition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.18

Packing costs

Wages, salaries, and benefitsh

. . . . . . . . . . . . . . . 33.93

Supplies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.41

Overhead . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22.66

Additional transportation costs to U.S. market. . NA

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $940.89

$550.50

250.79

22.32

12.00

3.00

37.72

8.18

11.31

13.41

22.66

8.93

$940.82

$550.50

250.79

41.16

12.00

3.00

36.21

8.18

11.31

13.41

22.66

17.85

$967.07

akumes a NAHA iS in @~e ati that Mexico’s transportation system has improved so that rail costs are the same

in both countries. 8ased on industry interviews, along with Livestock & Poultry: Situation and Out/ook Report

(Washington, DO: Department of Agriculture, Economic Research Service, January 1992), table 36, p. 26; and 1991

Meat Facts (Washington, DC: American Meat Institute, August 1991), p. 33.

b~ums f~wcattle ~fixe ~fia ad ~mmi~ion the ~me in Mexi~n and the l.jnit~ States, with transport to

U.S. feedlots at $3.96 per steer, and half as much for transport to Mexican feedlots. Each steer is assumed to yield

714 pounds of beef.

C~sumes 4,~0~~ of fed per animal, over 180 days (to achieve a weight g~n of 5~ pounds). OTA’S estimates

assume the same feed mix and purchase prh for both countries. Mexico prohibits the use of corn as a feedgrain,

although it can be imported as part of prepared cattle feed; sorghum is the primary feedgrain in Mexico. Alfalfa is

seldom fedtocattle in Mexico, but it is assumed that substitutes cost the same. The assumed feed mix: 1,500 pounds

of corn (U.S. cost of $104.50 per ton); 1,500 pounds of grain sorghum ($84.46 per ton); 800 pounds of alfalfa ($134.75

per ton); and 400 pounds of cottonseed meal ($240,00 per ton).

d~umes 3,4oo Pouncjg of feed must be imported into Mexico, with the other 600 pounds purchased locally. The

northern Mexko estimate assumes grain is shipped by rail from Kansas to the border region ($1 3.13 per ton, including

elevator costs), then trucked to the feedlot. The Mexico City case assumes shipping by rail to New Orleans ($10.57

perton), byseato Mexican ports ($8.18 per ton, including unloading, fumigation, and customs clearance at $4.54 per

ton), then by rail to the feedlot ($5.45 per ton).

e~umes $10.50 ~nagement f- in both countd~, including overhead. U.S. labor, $1 0.50; Mexican labor, $1.50.

f~~ on an annual interest rate of 10.54 percent on the purchase price of the steer, minus COmmiSSim and

transportation tothefeedlot, for 180days, plus halfthecost of feedgraln and feedgraln transportation charges. (In fact,

interest rates are significantly higher in Mexico.)

9At 1.5 percent of the purchase price of the steer.

hMex~n plank are as~med to have less automation, hence require more labor.

i~~on 1,000 mil~ofinmemntal transprtation from Mexico City, 500milesfrom northern Mexioo. Transportation

by truck, 44,000 pound capacity, at $1.10 per mile.

NA - Not applicable.

SOURCE: Office of Technology Assessment, 1992.

also imports beef from South America and Australia, cuts and products that have little appeal here. Thus,

(It is also a net importer of chicken and pork, both of the pattern by which Mexico sends feeder cattle to

which require significantly less feed to produce a the United States and imports beef in return seems

pound of meat.) Most of the U.S. beef goes to supply unlikely to change.

the tourist trade and wealthy consumers who can Mexican cow-calf operators can compete successafford it, although Mexico also buys some cheap fully with their U.S. counterparts because both labor
210 ● U.S.-Mexico Trade

Box 10-D-Increasing Irrigated Fruit and Vegetable Acreage1

Figure 10-3 shows that irrigated land produces Figure 10-3-Productivity of Irrigated and Rainfed

higher yields per acre. Of Mexico’s 12.1 million Farming in Mexico, 1985

acres of irrigated land, about 2.5 million acres, or 20

percent, is planted in horticultural products. Corn t 1

. t

Cucumbers . .

grows on 19 percent of the remaining irrigated land. !

. .

. .

. , .

Past subsidies for irrigation water led to inefficient Tomatoes i

.

.

use, while subsidies for corn encouraged planting

.

Cantaloupe 1

. .

.

on irrigated land.

. ,

.

. .

Onions “

I

.

.

.

1 The ~~ion of irrigation in this box is based on inter- ::: :

views, plus Santiago Izvy and %veder van Wijnbergeu,

. .

“Transition PmbIems in Economic Reform: Agrieukure in the ::;::

Mexico-US Free Trade AgreemenC” Economy-Wide Mo&ling

.

.

Sorghum

. .

of the Economic Irnplicair”ons of a FZA wa”th Mexico and a

.

.

N~A w“th Canadia and MexI”co, Addendum to the Report on o 2 4 6 8 10 12

Investigation No. 332-317 Under Seetion 332 of the ‘IhriffAct Tons per acre

of 1930, USITC Publication 2S08 (Wsshingtonj DC: U.S.

J.nternstional Trade Comrnissio% May 1992), pp. 299-357; 0 Rain fed NAFZA: Eff2cts On Agricuhure; vol. IM Frw”t and Vegetable - Irrigated

iSSWS @ark Ridge, ~: American Farm Bumsu Research

Foundstiotq 1991); and “Agricultural Issues in U. S.-Mexim SOURCE: “Agricultural issues In U.S.-Mexico Economic Integration,”

Economic Integrstiou” report prepsred for OTA under contract

report prepared for OTA under contract No. I34I31O by B, Kfis

Schulthies and Gary W. Williams, April 1992, tabte 9, p. AS.

No. 13-0310 by B. Kris Schulthies and Gary W. Williams, April

1992.

and land costs are important in breeding and raising on irrigated land. If Mexico could increase its

calves for sale to feedlots. But Mexico’s cattle

raising capacity is fundamentally limited .25

Feedgrain production in Mexico will likewise continue to be severely restricted by shortages of water

and suitable land; in the end, Mexico needs to grow

food for feeding people, not animals.

Currently, no more than half of Mexico’s population can afford beef, even at CONASUPO’s subsidized prices. Rather than investing in maquila-like

operations in Mexico, U.S. feedlot operators and

packers--facing a saturated market in the United

States—will probably seek to expand into Mexico

through acquisitions, joint ventures, and whollyowned subsidiaries with the aim of serving the

Mexican market as it expands. The terms of a

NAFTA, and government policies within Mexico,

will shape these strategies and their outcomes.

THE FUTURE

Output Growth in Mexico

Mexican farmers can compete effectively in some

crops already, notably hits and vegetables grown

production of these crops, it might pose more serious

threats to U.S. growers. Mexico could increase

production by bringing more land under irrigation,

shifting irrigated land now planted in other crops to

horticultural products, or by increasing yields from

existing acreage. For reasons explored below, increased yields through better technology offers the

best prospects for Mexican farmers to increase their

output.

Irrigated Horticultural Production

If Mexico irrigated all its suitable land, and shifted

all irrigated land now planted in corn to exportoriented horticultural crops, farmers might be able to

devote another 2 million acres to horticultural

production (box 10-D). This would be a large

increase for Mexico, but not so impressive relative

to the 9 million acres currently under irrigation in

California. Still, Mexico might in principle be able

to increase its production for export by a factor of

about 4. In fact, such an outcome is unlikely for

reasons discussed in the box. Moreover, growing

Mexican demand would absorb much of any in-

~ ~~g ~d~ we ~e~tively ~r ~ qu~i~, and Meady stretched to capacity; Mexico’s cattle herd has declkd substitislly over the last 4 Ybecause of drought. 13xamina tion of these limits leads to estimates that Mexico could not send more than 2 or 2 1/2 million feeder cattle per year

northwards-rougldy 10 percent of the number of cattle on feed at any one time in the United States. Most of the impacts of these shipments will continue

to be felt in lkxas. Ibid,, pp. 27, 7072.
Chapter 10-Agriculture ● 211

In principle, land now planted in corn could be switched to horticultural products, while more land could be

irrigated for growing fruits and vegetables. Horticultural exports have come from the 12 Mexican states listed in

table 10-5.2 A total of 1.2 million acres in these states is currently irrigated but planted in corn. An estimated 0.77

million acres not now under irrigation has potential for irrigation. Mexico might thus be able to add as much as 2

million acres of horticultural production, an increase of 78 percent, by switching from com and irrigating land that

is now rainfed. This suggests that Mexico might in theory be able to increase its production of fruits and vegetables

for export by up to four times, assuming that all the new horticultural acreage produces for export. But such an

outcome is unlikely. With rapid economic development in northern Mexico, the prime growing region for fruits and

vegetables, demand for water for industrial uses and growing cities has cut into the water available for irrigation.

Even today, most irrigation projects provide only enough water for one crop per year. The Mexican Government’s

high priority for industrialization suggests that investments in new, large-scale irrigation projects will proceed at

modest rates. And to the extent that agriculture might prove unable to compete for water with industrial and urban

consumption, horticultural acreage could even decline.

Table 10-5-Potential for increased Horticultural Production in Mexico’s Primary Exporting Regions

Land under Irrigated Potential new Possible

irrigation corn irrigated land increase

(thousands of acres)

Sinaloa. . . . . . . . . . . . . . . . . . . . . .

Tamaulipas. . . . . . . . . . . . . . . . . .

Michoacán. . . . . . . . . . . . . . . . . . .

Sonora. . . . . . . . . . . . . . . . . . . . . .

Jalisco. . . . . . . . . . . . . . . . . . . . . . .

Guanajuato. . . . . . . . . . . . . . ~.. . .

Guerrero. . . . . . . . . . . . . . . . . . . . .

Nayarit. . . . . . . . . . . . . . . . . . . . . . .

Colima. . . . . . . . . . . . . . . . . . . . . . .

Morelos. . . . . . . . . . . . . . . . . . . . . .

Baja California. . . . . . . . . . . . . . . .

Total . . . . . . . . . . . . . . . . . . . . .

2,280

968

677

1,655

388

981

106

232

104

96

541

8,028

245

310

169

166

78

97

54

15

20

30

12

1,196

455

32

101

7

32

7

47

54

27

12

—

774

670

342

270

173

110

104

101

69

47

42

12

1,970

SOURCE: Santiago Levy and Sweder van W@bergen, “Transition Problems in Economic Reform: Agriculture in the Mexico-US Free Trade

Agreement,” Economy-Wkks Modeling of the Ewnomic Impiicatkms of a FLA with Mexico anda AMFZA with Canada and Mexbo,

Addendum to the Report on Investigation No. 332-317 Under Seetion 332 of the Tariff Act of 1930, USITC Publication 2508

(Washington, DC: U.S. International Trade Commission, May 1992), pp. 299-357.

2 s~oloa (47 pat of ~xw~s ~ 1989-90), Sonora (14 Wment), ~d Bajac~ornia(11 pment) ~wwt for the W of (xports. For

1989-90 production in the other exporting regions, see NAFLA: Effects On Agriculture; Fruits And Vegetable Issues, vol. fv, ibid., table IV-1,

p. 49; and Levy and van Wijnbergerq Mexican Agriculture in The Free Trade Agreement, ibid., p, 48.

crease. Currently, Mexico exports no more than 18 ture output at reasonable cost than bringing more

percent of its horticultural production.26 land into production. Here the hurdles begin with

lack of the agricultural research necessary for

Technological Improvements developing technologies optimized for local condiIncreasing yields on existing horticultural acreage tions, including the varied microclimates in this arid 27 Mexican farmers grow- to levels comparable to those achieved in the United and mountainous country.

States has greater potential for increasing horticul- ing winter vegetables for export buy almost all their

26 Ro~~ Cw~ “Mefic~ Free Trade Agrwment: Who Will Be The Winners And I.msers?” American Vegerab/e Grower, February 1992, p. 30.

27 R~ten and Archibald, ‘“reelmoIogy and Labor-Intensive Agriculture,” op. Cit., footnote 19.
212 ● U.S.-Mexico Trade

seed from the United States because Mexican- 28 But most of this seed is produced seed is inferior.

adapted for U.S. growing conditions, not those in

Mexico. Viruses plague farmers particularly in the

central and southern part of the country; Mexico

lacks resistant varieties or other means of control.

Without investments in research, in diffusion of best

practices, and in training of agricultural research

workers, farmers, and agribusiness managers, Mexico will remain dependent on seeds and agrochemicals developed for conditions in the United States

and elsewhere, on farming practices improved

through slow-paced trial-and-error, and on animals

bred for conditions in other countries.29

Plainly, there is a great deal of room for improvement. Yet in many respects, the country’s agricultural sector declined during the 1980s—a consequence of withdrawals of government support, as

well as the troubled economy. Seed production fell,

along with fertilizer consumption and Mexico’s

stock of tractors and other farm machinery (prices

for imported equipment increased rapidly with peso

devaluation during the 1980s).30 With government

investments low, multinationals have been the major

channel for inflows of agricultural know-how. Their

interests focus on the fertile northwest, where the

modem sector and FDI have concentrated, providing

little or no help in meeting the needs of small farmers

in other parts of the country.

Applications of biotechnology will diffuse relatively slowly into the agricultural sectors of both

Mexico and the United States. Because most potential applications involve manipulations of multiple

genes, research is difficult and expensive. Mexico’s

expenditures on both traditional agricultural research and on biotechnology are tiny fractions of

those in the United States, ensuring that Mexico will

be a follower rather than a leader.

Because there are few apparent limits to improvements in agricultural productivity through technology in the United States, growers who have been

able to maintain advantages in delivered costs

through yield and productivity improvements in the

past have good prospects for continuing to do so in

the future. Mexico will have to achieve substantial

increases in productivity to maintain its competitive

position over time, and may be hard pressed to do so.

NAFTA Impacts

Agriculture is heavily regulated and subsidized

around the world, primarily for domestic political

reasons. The United States and Mexico are no

exceptions. Government policies affect prices and

output levels, and hence trade patterns. The current

Uruguay Round of GATT negotiations seeks to

moderate subsidies in agriculture. If it succeeds,

trade between the United States and Mexico would

be affected. Regardless of the outcome of the GATT

negotiations, a NAFTA would contain provisions

affecting trade and therefore employment in the

agricultural sectors of both countries, no doubt

including transition periods and ‘‘snapback’ provisions (triggering increases in tariffs if imports rise

beyond specified levels) to protect vulnerable sectors. The U.S.-Canada Free Trade Agreement, for

instance, provides for staged tariff reductions over a

20-year period for some agricultural products.

California produces more fruits and vegetables

than any other State. Despite their apparent vulnerability to competition from Mexico, California growers expect a NAFTA to have only limited adverse

consequences. The common view: impacts would

limited, and felt over relatively long time periods.31

There will be some losers, but winners will predominate, These views reflect confidence in California’s

advantages, which are both broad and deep. Those

advantages include, for example, the workforce

skills needed to keep expensive farm machinery

operating continuously during critical planting and

harvesting periods. They also include the capabilities of research organizations, universities, and the

28 David R. Mares, penetrating the Interwtional Market: Theoretical Considerations and a Mexican Case St@ mew York NY: Columbia

Univershy Press, 1987), p. 32.

Although two-thirds of ejido farms make use of fertilizers and/or herbicides, only about 40 percent grow crops ffom improved seed varieties. NAFTA:

Effects on Agriculture; vol. R Fruit and Vegetable Issues, op. cit., footnote 8, p. 8.

29 me pr~~s of ckweloping hybrid seeds in Mexico, particularly by agencies of the gov ernment has been criticized for paying insuffkient attention

to local conditions. John Heath, “An Overview of the Mexican Agricultural Crisis, ” The Mexican Economy, George Philip, ed. (hndon and New York:

Routledge, 1988), pp. 129-163.

MNAFTA: Eflects on Agriculture; vol. W, Fruit and Vegetable Issues, op. cit., footnote 8, pp. 23,24.

J] ~dusm ~tewiews; and Comerace on the Impact of the Free Trade Agreement with Mexico on the California Fruit and Vegetable Industry, Santa

Clara University, Nov. 4, 1991.
Chapter 10-+Agriculture ● 213

agricultural extension system. The views of California growers also reflect three other factors:

1.

2.

3.

The complementary nature of production in

California and Mexico.

Superior management skills, marketing, and

distribution.

Confidence that vulnerable sectors will get

protection, or at least transition periods long

enough for growers to shift to other crops.

Florida competes more directly with Mexico.

Many growers are worried that transition periods

will be too short and that they will have trouble

identifying new crops and mastering new techniques. Overall, Florida’s agribusiness industry

exhibits little of the dynamism, innovation, and

confidence evident in California. Even so, growers

in the various parts of Florida can be expected to

specialize on the basis of comparative production,

transportation, and marketing costs, and to succeed

in carving out new markets.

Impacts of a NAFTA on U.S. jobs in agriculture

would be localized, with farm workers in Florida

most likely to be displaced. Mexico’s advantages in

growing and freezing broccoli also threaten jobs in

California. By and large, these are not good jobs,

although for those who hold them now, a bad job

may be better than no job.

Hired (nonfamily) agricultural workers are paid

less than workers in any other U.S. industry .32 In

1990, seasonal agricultural workers earned median

hourly wages of $4.85. Fewer than half are covered

by unemployment insurance; fewer than a fourth

have health insurance. Seventy percent of seasonal

agricultural workers are Hispanic, 62 percent are

foreign born, and perhaps 20 percent are undocumented. Because demand for hired farm workers has

been declining in the United States (from about 4.7

million at the end of the 1950s to a little over 2

million currently), those displaced—most of whom

are poorly educated and few of whom have other

skills-will experience substantial difficulty in finding new jobs.

The 600,000 or so jobs in food processing pay

better than farm work. The range in 1991: from an

average of $7.07 per hour for poultry workers (about

one-third of all food processing workers) to $9.39

per hour in fruit and vegetable processing (two-fifths

of food processing workers). Wages for meatpacking workers, the other major group of food processing workers (about one quarter of the total), have

been under great pressure during the last 15 years as

the industry restructured (see box 10-C, earlier in the

chapter), In 1978, meatpacking workers earned 80

percent more than poultry workers; in 1991, they

averaged $8.91 per hour, only 26 percent more than

poultry workers. This relative decline is the result of

radically lower union coverage and the breakdown

of pattern bargaining as packers decentralized and

built new plants in rural areas near feedlots. Many of

these plants depend heavily on immigrant workers.

Injury rates increased as wages fell; the combination

of machine pacing and a vulnerable, sometimes

illegal immigrant workforce brought work conditions not seen in decades in this industry. But

because fresh rather than processed food accounts

for most U.S. agricultural imports from Mexico, and

because there seems little likelihood of meat packing

moving to Mexico, a NAFTA itself would probably

make little difference for most U.S. food processing

workers, with the possible exception of those in the

poultry sector.

In the longer term, new entrants in Central and

South America may pose greater threats to U.S.

production of both fresh and frozen horticultural

products than exports from Mexico. Countries

including Chile, Peru, and Guatemala have been

expanding production for export in regions with

extended growing seasons. Their agribusiness sectors promise continuing competition for both Mexican and U.S. farmers .33 On balance, U.S. producers

of grain and beef should benefit from increased

exports to Mexico, although some small feedlots and

packing plants near the border could close.

Mexican agriculture faces a more troubled future

than U.S. agriculture, particularly in the traditional

sector. Rapid population growth, urbanization, and

rising per capita income suggest that demand for

32 F1ndlng~F~om the NQtio~[Ag-icUl~~~! WO~~~~S sunq (NAsW) 1990, Office of ~o~~ fionofics Resexch Repofi No. 1 (wmhhl@C)I+ DC:

Department of Labor, July 1991). Also see Victor J. Oliveira, Trends in the Hired Farm Work Force, 1945-87, Agriculture Information Bulletin 561

(Washington, DC: Department of Agriculture, Economic Research Service, April 1989); and Runsten and Archibald. “lkchnology and Labor-Intensive

Agriculture, ” op. cit., footnote 19, pp. 449-486.

33 Taiwan ~d china, as well as Chile and Peru, for example, send canned asparagus to the United States, while Canada, Chile, and Peru ship frozen

asparagus. NAFTA Effects On Agn”culture: vol. IV Fruit and Vegetable Issues, op. cit., footnote 8, pp. 78-79.
214 U.S.-Mexico Trade

food could increase at 5 to 6 percent per year, with

Mexico likely to become more dependent on imported food. The agricultural sector must overcome

a decade of declining investment, adjust to lower

government supports and subsidies, and contain

rapidly rising costs per unit of output-all the while

depending on outsiders for technology.

CONCLUDING REMARKS

A NAFTA would accelerate the integration of

North American agribusiness. Mexico must buy

food abroad, and the United States will be the

preferred source for many products. In return,

Mexico will send larger quantities of fruits and

vegetables northwards. These shipments will not

overwhelm U.S. farmers, who have amply demonstrated their flexibility and resilience in the face of

manmade as well as natural obstacles. Still, gains

and losses from a NAFTA will be concentrated

geographically and by product, and for growers who

have trouble switching to new crops there will be

little solace in a NAFTA that benefits U.S. agriculture as a whole.

The seasonal nature of fruit and vegetable production means that Florida competes most directly with

Mexico. But restricted supplies of land and water

will limit Mexico’s capacity to expand production,

and, together with rising domestic demand, limit the

volume of fresh fruits and vegetables shipped to the

United States. OTA’s analysis, finally, suggests that

Mexico poses little threat in cattle feeding and meat

packing. Limited grazing lands and rising beef

consumption will preclude a dramatic increase in

exports of feeder cattle. Transportation costs for

grain counterbalance Mexico’s low labor costs in

feeding and packing. Indeed, Mexico will probably

import greater quantities of U.S. beef in the years

ahead.

Movement of people, rather than movement of

goods, may have the greatest implications for the

United States. Mexico’s agricultural reforms will

drive large numbers of people off the land. Many of

these people will move to urban areas where they

will put downward pressure on wages for lowskilled jobs, with spillover effects here. Some will

emigrate to the United States.
Glossary

Apertura: opening, referring to the opening of the

Mexican economy beginning in the mid-1980s (see

ISI, below).

Big Three: the three major U.S.-owned automobile

manufacturers--General Motors, Ford, and Chrysler.

CANACINTRA, Cámara Nacional de Industrial de

Transformaci6n: Mexico’s association of small manufacturers, with which industry-specific chambers and

individual manufacturers are affiliated.

CBI, Caribbean Basin Initiative: a package of trade and

investment incentives extended by the United States to

Mexico and other nations in the Caribbean, intended to

permit those countries to increase their “nontraditional” exports to the United States. Nontraditional

exports include, for example, apparel and winter

vegetables (as opposed to bananas, sugar, and coffee).

CETS, Centros de Enseñanza Terminal: Mexican vocational-technical schools.

CIMO, Capacitaci6n Industrial de la Mario de Obra; a

Mexican Government program that provides business

advice and training to smaller companies.

CO switch, central office switch: a large telephone

exchange, typically computerized.

CONALEP, Colegio Nacional de Educación Profesional Técnica: Mexican program for vocationaltechnical education and worker training.

CONASUPO, Companía Nacional de Subsistencias

Populares: the Mexican Government’s agricultural

distribution and marketing organization.

Contracto leyes: literally, law contracts-sectoral labor

contracts established under Mexican labor law.

CTM, Confederación de Trabajadores Mexicanos: Confederation of Mexican Workers, the dominant labor

union federation in Mexico.

EC: European Community.

EDWAA, Economic Dislocation and Worker Adjustment Assistance: U.S. Government program providing training and job-placement assistance to displaced

workers.

Ejidos: plots of land owned by the Mexican Government

with usage rights extended to farmers known as

ejidatarios. Land reform policies now being implemented include privatization of ejidos.

FDI, foreign direct investment: assets within a country—

e.g., equity holdings in a corporation-wholly or

partially owned by foreign residents, individual or

corporate.

GATT, General Agreement on Tariffs and Trade: an

organization and set of rules under which more than

100 nations negotiate trade agreements and seek to

resolve trade-related disputes.

GDP, gross domestic product: the value of goods and

services generated within a national economy, generally on a yearly basis.

GNP, gross national product: GDP adjusted for revenues that enter and leave an economy as a result of

financial flows associated with foreign investments.

Greenfield plant: a new plant built on a new site (as

opposed to a remodeled ‘‘brownfield” plant).

Inexistente: illegal, referring to labor strikes ruled not to

exist for a variety of procedural or substantive reasons

by Mexican arbitration boards.

IRCA, Immigration Reform and Control Act of 1986:

among its provisions, RCA provides amnesty for

qualifying undocumented aliens already in the United

States, while penalizing employers who knowingly

hire undocumented workers.

ISI, import substitution industrialization: Mexico’s

industrial development strategy up until the middle

1980s, which relied on trade barriers to protect

Mexican firms and investment controls to attract

foreign manufacturers.

JIT, just-in-time: a production system that minimizes

inventories, generally requiring close working relationships between labor and management and suppliers and customers.

Keiretsu: groups of Japanese companies linked by partial

equity holdings.

Knock-down kits: parts and components shipped ready

for assembly, typically in a foreign plant.

Lean production: a form of production organization,

especially in the auto industry, that relies on just-intime manufacturing and rapid product development.

Mainframe computer: a large and powerful computer,

normally intended for general-purpose data processing.

Maquiladora, maquila: a Mexican plant that imports

components duty-free from the United States and

exports finished goods to the United States, paying

duty only on the value added in Mexico.

–215–
216 ● U.S.-Mexico Trade

Mestizo: a Mexican of mixed Spanish and Native

American ancestry.

MFA, Multi-Fiber Arrangement: an international framework for negotiating bilateral agreements on quotas for

textiles and apparel items.

Microcomputer: small computer designed around a

single-chip processing unit.

Minicomputer: intermediate in cost, size, and processing

power between a microcomputer and a mainframe.

MNC, multinational corporation: a company with

substantial foreign direct investments that seeks to

operate on a more or less integrated basis in the

countries in which it does business.

NAFTA, North American Free Trade Agreement:

proposed agreement negotiated by representatives of

the United States, Mexico, and Canada that would

remove many existing barriers to the free movement of

goods, services, and capital in North America. Implementation would require ratification by the legislative

branches of the three countries.

NIC, newly industrializing country: examples include

Singapore, Taiwan, South Korea, and Hong Kong.

NIE, newly industrializing economy: term used to

distinguish Asian countries such as Indonesia, Thailand, and Malaysia from the NICs. The NIEs are less

developed than the NICs, but industrializing rapidly.

NLRA, National Labor Relations Act of 1935 (Wagner

Act): protects the right of U.S. workers to organize and

bargain collectively.

NLRB, National Labor Relations Board: established

under the NLRA to adjudicate disputes.

NTB, nontariff barrier: any trade restriction other than

a tariff or duty on imports+. g., a numerical quota or

requirement for licensing.

OSHA, occupational Safety and Health Administration:

a part of the U.S. Department of Labor with responsibility for issuing and enforcing workplace health and

safety standards.

Pacto, Pacto de Solidaridad Econ6mica: wage and price

control policy to bring down inflation, established by

the Mexican government in consultation with business

and labor in 1987. Subsequently renamed the Pacto de

Estabilidad y Crecimiento Económica.

Pattern bargaining: collective bargaining that limits

variation of wages and benefits within an industry by

establishing similar union contracts at competing

companies.

PBX, private branch exchange: a small telephone

exchange typically installed in offices.

PC, personal computer: a general-purpose microcomputer.

PEMEX, Petróleos Mexicanos: Mexico’s state-owned

oil company.

PRI, Partido Revolucionario lnstitutional: the dominant

political party in Mexico, with roots tracing back to

1929.

PRONALF, Programa Nacional de Alfabetización:

Mexican literacy program.

Scientific management: see Taylorism.

SECOFI, Secretaría de Comercio y Fomento Industrial:

Mexico’s Secretariat (or Ministry) of Commerce and

Industrial Promotion.

SEDUE, Secretaría de Desarrollo Urbano y Ecologia:

Mexico’s former Secretariat of Urban Development

and Ecology, with responsibilities paralleling those of

the U.S. Environmental Protection Agency. SEDUE

was merged with the large social welfare agency,

PRONASOL, in 1992 to form the Secretariat for Social

Development (SEDESOL).

SEP, Secretaría de Educaci6n Pública: Mexico’s Secretariat of Public Education.

SIC, Standard Industrial Classification: U.S. Government classification system for industries and industrial

groupings.

SMEs: small- and medium-sized enterprises (typically

those with less than 500 employees).

SPC, statistical process control: method for ensuring

product quality based on statistical distributions of

measurements.

STPS, Secretaría del Trabajo y Previsi6n Social: Mexico’s Secretariat (or Ministry) of Labor and Social

Welfare.

Strategic alliance: corporate relationships intended to

further the interests of both partners such as joint

ventures and cooperative marketing agreements.

Surface mount technology: method for assembling

printed circuit boards using an adhesive solder (rather

than pins inserted into holes on the board).

TAA, Trade Adjustment Assistance: U.S. Government

program that provides income support and training to

workers displaced because of international trade.

Taylorism: workplace organization, especially common

in assembly line production, based on simplifying

individual tasks and setting effort levels through such

methods as time-and-motion study.
Glossary ● 217

TelMex, Teléfonos de México: Mexico’s monopoly crease the time between ordering by retailers and

provider of telephone service, state-owned until privat- delivery of new stock to them.

ized in 1990,

Transplant: a plant built in the United States by a foreign UAW: United Auto Workers.

manufacturer to serve the U.S. market, often to UI, unemployment insurance: U.S. system for provid- substitute for exports that had previously been shipped

to the United States. ing income support to unemployed workers, typically

for periods of up to 26 weeks.

QR, Quick Response: org anization of production and

distribution in the apparel industry intended to de- Wagner Act: see NLRA.
Index

ADDS Corp., 167

ADTEC, 172

Agricultural Marketing Agreement Act, 203

Agriculture. See also specific products by name

biotechnology and, 212

competition with U.S. markets, 202-210

contract production, 202

ejido system, 67-68, 70, 72, 82, 198, 200-201

foreign direct investment, 200

fruit and vegetable seasonally, 204

irrigation and, 210-211

modem sector, 201-202

NAFTA impact, 212-214

pesticides, 205

production comparisons, 17-19

production increase issues, 210-212

seasonal workers, 213

sectoral policies, 63

“tomato wars” of the 1960s, 202

traditional sector, 200-201

U.S.-Mexico trade and, 59, 199

Aid to Dependent Children, 87

Air quality standards, 124

Amalgamated Clothing and Textile Workers Union, 44-45

American Social Security Act, 87

Apertura, 68,70

Apparel industry

automation issues, 178-179

bundle system, 178

807/9802 requirements, 184-185, 186-187, 190

El Paso garment industry, 21-22

fashion-sensitive products, 175, 176, 179, 188, 190, 192

maquiladoras and, 175-176, 181-189, 192

NAFTA impact, 176, 183, 186-192

product cycles, 178

production comparisons, 14-17

quick response strategies, 14, 17, 179-181, 192

standardized products, 175, 177-178, 179, 190

trade issues, 51, 183-186, 187

U.S. employment in, 175, 176, 177, 189-190, 192

U.S.-Mexico trade and, 59

worker rights, 51

Apple Computers, 170

Asia. See also specific countries by name

apparel industry, 175, 176-177, 182, 186-187, 192

comparison of developing countries with Mexico, 105-106

electronics industry, 157, 160, 164-165, 166, 170

immigrants, 116

industrial stucture, 106-107

ASSA. See American Social Security Act

AT&T, 162, 170

Automobile industry

assembly plants, 134, 137, 147, 148

costs, 140-142

engine plants, 146, 148

export-oriented plants, 137

flexibility case examples, 84-85

Global Auto Pact, 50

health care costs, 141-142

Japan, 138-143

joint ventures, 140

labor market, 143-144

Mexico, 134-138

NAFTA impact, 147-148

Parts, 137-138, 142-143, 146-147, 148

policy options, 11

production comparisons, 12-14

rebates, 139

sectoral policies, 63

state and local government incentives, 143

suppliers, 142-143

transplant assemblers, 133, 140-141, 144, 150

United States, 99, 101, 138-144

U.S.-Mexico trade and, 59

Basic skills certification, 35-36

Baucus, Max, 129-130

Beef

boxed beef, 208-209

feedgrains and, 197,207

production costs, 207

Bidding wars, 41-42

Biodiversity in Mexico, 124

Biotechnology, agriculture and, 212

Border issues

air quality, 124

binational commission, 51

Border Area, 122-126

environmental issues, 123-130

immigration, 115-123

soil erosion, 126

waste generation, 126

water quality, 124-125

Brady, Nicholas, 68

Broccoli, 197, 205-206

Bundle system of apparel production, 178

Bureau of Labor-Management Relations and Cooperative Programs, 43

Bureau of Labor Statistics, 153

Bush administration

“Action Plan” on labor and environmental issues, 78

economic aid to Mexico, 52

California

apparel industry, 179, 189

broccoli production, 205-206

NAFTA impact on agriculture, 212-213

strawberry production, 206

tomato production, 207

Camacho, Avila, 69

Canada

automobile industry, 50, 134, 142, 148, 149

electronics industry, 154, 160

health care system, 39-40

Labor Force Development Boards, 32

labor law reform, 42

Social Charter, 48

technological capability comparisons, 107-108

union representation and, 45, 46

Canadian Auto Parts Manufacturers Assn., 50

–219-
220 ● U.S.-Mexico Trade

Canadian Auto Workers, 50

Caribbean Basin Initiative, 51, 184, 185, 191, 192

CBI. See Caribbean Basin Initiative

Centros de Enseñanza Terminal, 102

Certificate of Initial Mastery, 35

CETS. See Centros de Enseñanza Terminal

Chile, agricultural exports, 213

China, textile industry, 186

Chinese Exclusion Act, 118

Chrysler Corp., 133, 137, 142

CIMO program, 103, 104

Ciudad Juarez, Mexico, 115, 123, 160

Coffee, 203

Comisión de Seguimiento y Evaluación del Pacto, 70

Commission on Environment and Infrastructure, 38

Commission on the Future of Political Democracy in North

America, 54

Commission on the Skills of the American Workforce, 35

Compañia Nacional de Subsistencias Populares, 63

Compaq Computer, 168, 170

Components industry, 155-157, 159, 160, 167

Computer industry, 159, 161, 166, 168, 170

Computer programs, 155, 156

CONALEP, 102

Conek, 106

Confederación Trabajadores de Mexico, 69,79,82

Consumer electronics, 154, 159, 165

Continental policy options

border issue commission, 51

economic assistance, 52

enhancing democracy, 54

European Works Councils, 52-53

functions, 47-48

labor dispute resolution, 53

managed trade, 50-51

North American Social and Environmental Charter, 48-50

summary list, 25

workplace health and safety issues, 51-52

Contracto Ieyes, 80,85,86,87

CTM. See Confederación Trabajadores de Mexico

Cucumbers, 197

Dell Computer, 166-167

Denmark

industrial networks, 36

technology service centers, 36

Department of Labor

Bureau of Labor-Management Relations and Cooperative

Programs, 43

Office of Work-Based Learning, 32

Developing countries. See Newly industrializing countries;

Newly industrializing economies

“Developmental” development path, 70-72

Digital Equipment Corp., 155

Discrimination, women and minorities, 101

Displacement of workers

apparel industry, 189

automobile industry, 149-150

ejido workers, 198

electronics industry, 162

labor issues, 92-93

DOL. See Department of Labor

Domestic policy options

labor issues, 42-47

low-productivity curtailment, 38-42

productive economy promotion, 30-38

Summary list, 2 5

EC. See European Community

Economic Development Admimstration University Centers, 37

Economic Dislocation and Worker Adjustment Assistance, 5,

33-35

Education and training

average educational levels, 100-101

comparison with developing countries in Asia, 105-108

displaced apparel workers, 189

Employment and Training Boards, 32-33,37

higher education, 103, 105

loans for, 35

multiemployer EPCs and, 47

skill certification, 32

skills development, 171-172

training levy, 32

U.S. investment in, 27-28

vocational-technical system, 101-103

worker training, 10, 103

EDWAA. See Economic Dislocation and Worker Adjustment

Assistance

Ejido system, 67-68,70,72,82, 198,200-201

El Paso, Texas

environmental problems, 115, 123, 124

garment industry example, 21-22

Electrical equipment, 160

Electronics industry

governme nt policies, 154-155, 162

imports, 160-162

labor market, 162-164

maquiladoras and, 65, 66, 155, 158-159, 160

in Mexico, 153-159

NAFTA impact, 164-165, 169-171

product development, 98

production comparisons, 14-15

sectoral policies, 63

in United States, 159-171

worker skills, 102-103

Employee Participation Committees, 43-45, 46-47

Employment. See also Displacement of workers; Labor issues;

Unemployment insurance; Wage and tax policies

apparel industry, 175, 176-179, 181, 189-190, 192, 193

electronics industry, 163

food processing workers, 213

job competition, 98-100

NAFTA influence, 149-150

poultry workers, 213

seasonal agricultural workers, 213

service sector workers, 46-47, 88, 90

Employment and Training Boards, 32-33,37

Employment Retirement Income Security Act, 90

Employment Service. See Federal-State Employment Service

End-product manufacturers, 98, 100, 161-162

Engine plants, 146, 148

Engineers

automobile industry, 150
Index 221

electronics industry, 168-169

students, 103, 105, 106

Enterprise union/nonunion model, 84-86

Environmental issues, 115

environmental laws, 126-127

NAFTA and, 5-6, 127-130

permits and inspections, 127

scope of the problem, 123-126

U.S.-Mexico agreements, 128

Environmental Protection Agency, 126, 128-129

EPA. See Environmental Protection Agency

EPCs. See Employee Participation Committees

Ericsson, 155, 158

ERISA. See Employment Retirement Income Security Act

ETBs. See Employment and Training Boards

European Community, 52

electronics markets, 162

European Social Charter, 48

European Works Councils, 52-53

Fair Labor Standards Act, 39, 87

Farrah, 190

Fashion Industry Development Commission, 22

Fashion-sensitive apparel, 175, 176, 179, 190, 192

FDI. See Foreign direct investment

Federal District, 123

Federal Law of Ecological Equilibrium and Environmental

Protection, 126

Federal-State Employment Service, 33

Feedgrains, 197,207

Financial assistance. See Loans

Florida

NAFTA impact on agriculture, 213

tomato production, 202, 207

winter vegetables, 203

FLSA. See Fair Labor Standards Act

Ford Motor Co., 12, 133, 142

Foreign direct investment, 4, 100, 154, 156, 169, 171, 200

Free trade theory, 6

GATT. See General Agreement on Tariffs and Trade

General Agreement on Tariffs and Trade, 4,50,51,63,68, 125,

203

Uruguay Round, 183, 185, 192, 212

General Motors Corp., 87, 133, 137, 138, 142, 147

Germany

apprenticeship programs, 32

multiemployer horizontal industrial networks, 37

textile industry, 186

works councils, 44

Global Auto Pact, 50

Globalization, 97, 99

Great Lakes Manufacturing Technology Center, 36

Guadalajara, Mexico

electronics industry, 102, 172

environmental problems, 123

Hewlett-Packard plant, 105

Guatemala

agricultural exports, 213

apparel industry, 191

Gulf of Mexico, 124

Harmonized Trade Schedule, 184

Health and safety issues

policy options, 10-11

standards, 48-49

technical assistance on, 51-52

Health care

agricultural workers and, 213

Canada and United States comparison, 39-40

costs, 40, 141-142

TAA and, 35

Hewlett-Packard, 105, 155

High-productivity development, See also Low-productivity

curtailment

continental policy options, 25, 47-54

costs, 28

domestic policy options, 25,30-47

market economy institutions, 25, 26-27

service sector and, 29-30

High Skills, Competitive Workforce Act, 32-33

Hills, Carla, 129

Hitachi, 165, 169

Hong Kong

apparel industry, 190

education, 106

small companies in, 72

Horizontal networks, 36

Human Development Index, 59

Human resources. See Labor force

Hyundai, 98

IBEW. See International Brotherhood of Electrical Workers

IBM, 105, 155, 156, 170, 172

Illiteracy, 100-101

ILO. See International Labor Organization

Immigration

competition for jobs, 119-121

demographic and socioeconomic factors, 121-122

legal and illegal immigrants, 115, 116-117

migration networks, 122

NAFTA impact, 5

U s . immigration policy, 118, 122-123

Immigration Act of 1990, 118

Immigration and Nationality Act, 118

Immigration and Naturalization Service, 117

Immigration Reform and Control Act, 117-118, 118, 122

Import substitution industrialization, 60,63,64,68,97,98

Indetel, 155, 158

Indonesia, 105

Industrial extension programs, 36-37

Industrialization issues

agriculture, 67-68

apertura, 68, 70

infrastructure problems, 70, 106-107

maquiladoras, 64-67

state-led development, 59-60, 64

U.S.-Mexico trade, 58-64

Integrated Environmental Plan for the Mexican-U.S. Border

Area, 4-5, 128-130

Internal Revenue Service, 41

International Boundary Commission, 128

International Brotherhood of Electrical Workers, 162

International Labor Organization, 53

International Monetary Fund, 68
222 ● U.S.-Mexico Trade

Irapuato, Mexico, 5

IRCA. See Immigration Reform and Control Act

ISI. See Import substitution industrialization

Italy, networks of small firms, 36

Japan

automobile industry, 14, 134, 138-143

electronics industry, 154, 157, 162, 170

industrial Structure, 106

investments in Mexico, 51

Japan-North America Auto Pact, 50

lean production, 84-85

rnaquiladoras and, 66

NAFTA impact, 7

technology extension centers, 36

textile industry, 186

Japan-North America Auto Pact, 50

JIT. See Just-in-time production

Jobs. See Employment; Labor force

Just-in-time production, 166-167

Korea

automakers, 149

chaebol, 72

education, 106

electronics industry, 168, 170, 171

engineers, 106

Hyundai, 98

research and development, 105

La Paz Agreement, 128

Labor force. See also Education and training; Employment;

Labor issues; Wage and tax policies

automobile industry, 143-144, 145

comparison of Mexico with U.S. and Asia, 97-108

electronics industry, 162-164, 168-169

low-skilled workers, 4,97, 120, 159

NAFTA impact, 4-7

policy options, 10, 11

Labor Force Development Boards, 32

Labor issues

displacement of workers, 92-93, 149-150, 162, 189, 198

Employee Participation Committees, 4345,4647

enterprise union/nonunion model, 84-86

labor dispute resolution, 53

Labor Market Productivity Center, 43

lean production, 84-85

‘‘managerialist’ model, 89-90

mass production era and, 86-88

Memorandum of Understanding between U.S. and Mexico,

49

Mexico’s system, 78-82

negotiated flexibility, 83, 84-85

network unions, 46

post-war decline in union coverage, 88-90

PRI-affiliated labor movement, 69

representation issues, 45-46

service sector workers and, 46-47, 88, 90

shopfloor relations, 81-82, 84-85, 87-88

social corporatist model, 85-86

social stability, 93

unemployment and underemployment, 91-92

union formation, 79-80

U.S. system, 86-93

wages and wage setting, 40-41, 80-81, 89, 91

work day and work week length, 53-54

Labor Market Productivity Center, 43

Labor unions. See also Labor issues; specific unions by name

electronics industry, 163-164

right to form, 4-5

Laissez-faire development path, 70-72

Layoffs. See Displacement of workers

Levi Strauss, 190

Loans

International Monetary Fund, 68

Mexico and, 52

to workers, 35

World Bank, 72

Long-Term Agreement, 183

Los Angeles, California, apparel industry, 179, 189

Low-productivity curtailment. See also High-productivity development

bidding wars and, 41-42

U.S. Social Charter, 38

wage and tax policies and, 38-41

Make-or-buy decisions, 98, 100

Malaysia, 105

‘‘Managerialist “ model, 89-90

Manufacturing Technology Centers, 36

Maquiladoras

apparel industry, 175-176, 181-189, 192

automobile industry, 137, 144, 147, 148

electronics industry, 153, 155, 158-159, 160, 165, 172

environmental issues, 123, 129, 130

establishment, 65

Japanese, 66

labor force make-up, 67

labor unions and, 80,81

location, 65

wage setting, 81

Marine Mammal Protection Act, 125

Market economy institutions, 25,26-27

Matsushita, 165

Meatpacking industry, 89, 213. See also Beef

NAFTA impact, 17

Medical insurance, 35, 141-142

Memorandum of Understanding between U.S. and Mexico, 49

Metalsa, 106

Mexican Ministry of Commerce, 171

Mexicana de Aviation, 81

Mexico. See also Maquiladoras

agriculture, 17-19, 197-214

apparel industry, 14-17, 181-183

assembly plants, 134, 137, 144-146

auto decrees, 136

automobile industry, 12-14, 134-138, 144-147

bidding wars and, 41-42

border issues, 115-130

comparison with Asian countries, 105-108

contracto leyes, 80, 85, 86, 87

“corporatist” view of society, 79

dairy product imports, 203

development paths, 19-21,70-72

economic assistance, 52, 68
Index . 223

economic growth factors, 57-58

education and training, 100-105

electronics industry, 153-172

enterprise union/nonunion model for labor relations, 84-86

environmental issues, 115, 123-130

foreign direct investment, 59

future issues, 69-73

globalization and offshore production, 99

health and safety issues, 51-52

human resources, 100-105

import substitution industrialization, 60, 63, 64

industrialization issues, 11-12, 58-68

Japanese investment in, 51

labor issues, 42, 53,78-82

modem sector industries, 57

multiemployer horizontal industrial networks, 37

oil crisis of the 1980s, 68-69

parts industry, 137-138

quality of life, 59

rail transportation, 70

shopfloor relations, 81-82

social corporatist model for labor relations, 85-86

social traditions, 72

Solidarity program, 72

technological capability, 107-108

telephone service, 70

traditional sector industries, 57

tripartite structures and labor-management committees, 79

union formation, 79-80

U.S.-Mexico trade, 58-64

wages and wage setting, 80-81

Mexico City, Mexico, 123, 126, 134

Mexico City Agreement on Pollution, 128

MFA. See Multi-Fiber Arrangement

Minimum wage, 38-40,79, 81,89

Ministry of Labor and Social Welfare, 79, 103, 104

Memorandum of Understanding, 49

Minorities, 101

MNCs. See Multinational corporations

Modem sector industries, 57

Monterrey, Mexico, 106-107, 123

“Monterrey Group, ” 64

Multi-Fiber Arrangement, 51, 183, 185, 192

Multinational corporations

agriculture, 200

electronics industry, 155-156, 163, 167

labor quality, 100

new plants, 11

research and development, 105

NAFTA. See North American Free Trade Agreement

National Accord on Raising Productivity and Quality, 83

National Board for Professional and Technical Standards, 32,

46-47

National Commission on Unemployment Insurance, 34-35

National Labor Relations Act, 42-43,46,87

National Labor Relations Board, 40,47

National Origins Act of 1924, 118

National Science Foundation, 105

National Technological Institute, 102

NEC, 158

Network unions, 46

New York City apparel industry, 179

Newly industrializing countries

comparison with Mexico, 105-106

electronics industry, 157, 168

technological capability, 107-108

Newly industrializing economies

comparison with Mexico, 105-106

technological capability, 107-108

NICs. See Newly industrializing countries

NIEs. See Newly industrializing economies

Nissan, 12, 133, 137, 148

NLRA. See National Labor Relations Act

NLRB. See National Labor Relations Board

North American Commission for Labor and Social Welfare,

48-49

North American Development Bank, 52

North American Environmental, Labor, and Agricultural Standards Act, 48

North American Free Trade Agreement. See also Policy options;

specific issues

agriculture, 212-214

apparel industry, 176, 183, 186-192

automobile industry, 147-150

economic integration, 3-4

electronics industry, 164-165, 169-171

emigration, 115

environmental issues, 5-6, 116, 127-130, 129-130

free trade theory, 6

future development possibilities, 19-22

immigration, 5

industrial development prospects, 11-19

long-term impacts, 6-7

Mexican perspective, 97

policy options, 7-11

short-term impacts, 4-5

U.S. jobs and, 149-150

Northeast-Midwest Institute, 54

Northern Telecom, 170

NSF. See National Science Foundation

Occupational Safety and Health Act, 90

Occupational Safety and Health Administration, 52

Office of Work-Based Learning, 32

Offshore production, 98,99

Oil crisis of the 1980s, 68-69

Orderly Marketing Agreements, 66, 162

Organization of American States, 51

Pacto de Solidaridad Econ6mica, 68-69,70,81

Partido Revolucionario Institutional, 52,58,68,69,71-72,79,

82

Pemex, 63, 64

Personal computers, 14, 157, 166

Peru, 213

Pesticides, 205

Petrochemicals, 63

Philips, 158

PICs. See Private Industry Councils

Pillsbury Green Giant, 5

Policy options

continental, 25, 47-54

domestic, 25, 30-47

summary, 7-11
224 ● U.S.-Mexico Trade

Polytechnic institutes, 103

Portable computers, 168

Portillo, Lopez, 68

PRI. See Partido Revolucionario Institutional

Printaforma, 157

Private Industry Councils, 35

Procurement Assistance Centers, 37

Productive economy promotion

basic skills certification, 35-36

EDWAA and UI enhancement, 33-35

High Skills, Competitive Workforce Act modifications, 32-33

Regional and Community Adjustment Corporation creation,

37-38

small and medium sized enterprise modernization, 36-37

TAA enhancement, 35

Productivity. See High-productivity development; Lowproductivity curtailment

“Program for the Modernization of the Computer Industry,”

156

PRONASOL, 126

Puebla, Mexico, 104

QR. See Quick response strategies

Quick response strategies, 14, 17,179-181, 192

Quota Act, 118

Radio communication, 159

R&D. See Research and development

Regional and Community Adjustment Corporation, 37-38

Research and development

electronics industry, 156, 161, 167-168

incentives, 105

“Retained management rights” doctrine, 88

Review of U.S.-Mexico Environmental Issues, 128

Safety. See Health and safety issues

Salinas de Gortari, Carlos, 68,69,73,82,83,200

San Diego, California, 123, 125

Sanyo, 66

Sealed Power Mexicana, 85

Seasonal agricultural workers, 213

SECOFl, 171

Secretariat for Social Development, 126, 130

Secretariat of Public Education, 102

SEDESOL. See Secretariat for Social Development

SEDUE, 126, 127, 128-129, 130

Semiconductors, 159, 170

SEP. See Secretariat of Public Education

Service sector workers, 46-47,88,90

Short-Term Agreement, 183

Siemens, 158

Sinaloa, Mexico, tomato processing, 206

Singapore, 105, 170, 171

Small and medium sized enterprises, modernization, 36-37

Small Business Administration, 37

Small Business Development Centers, 37

SMEs. See Small and medium sized enterprises

Social and Environmental Charter, 48-49

Software. See Computer programs

Soil erosion, 126

Solidarity program, 72

Sony, 165, 169

Spain, 86

Standardized apparel, 175, 177-178, 179, 190

STPS. See Ministry of Labor and Social Welfare

Strawberries, 206

Subcontractor Incubator Project, 22

Subsecretariat of Environmental Improvement, 126

Sweatshops, 21-22

TAA. See Trade Adjustment Assistance

Taft-Hartley Act, 46, 87

Taiwan

apparel industry, 190

electronics industry, 170, 171

engineers, 106

research and development, 105

small companies, 72

textile industry, 186

Tandem, 155

Tariffs. See Trade issues

Tax policies. See Wage and tax policies

Technology

comparisons of technological capability, 107-108

technological change, 98, 100

technology transfer, 4, 172

Telecommunications, 155, 158, 161, 170

Telegraph services. See Telephone and telegraph services

Telephone and telegraph services, 159, 162, 167

Telephone Workers Union, 83

Television, 168, 169, 170-171

TelMex, 63,64, 81,83,85, 155

Texas, apparel industry, 190

Thomson-RCA, 165

Tijuana, Mexico, 123

Tlaxcala, Mexico, 104

Toledano, Vicente Lombardo, 69

Tomatoes

exported to United States, 201-202

fresh, 207

processed, 206-207

“tomato wars” of the 1960s, 202

Trade Adjustment Assistance

EDWAA, TAA, and UI comparison, 33-35

enhancement of, 35

Trade Adjustment Assistance Centers, 37

Trade issues. See also General Agreement on Tariffs and Trade;

North American Free Trade Agreement

apparel imports, 175-176, 182, 183-186

continental trade and investment, 50-51

fresh fruits and vegetables, 203

industrialization, 58-64

marketing orders, 203-204

quotas and tariffs, 183-185, 187,203

Traditional sector industries, 57

Training. See Education and training

Treaty on the Utilization of Waters of the Colorado and Tijuana

Rivers and of the Rio Grande, 128

Truman, Harry S, 87

UI. See Unemployment Insurance

Underemployment, 91-92

Unemployment insurance, 87, 89,213

EDWAA, TAA, and UI comparison, 33,34-35

Unions. See Labor issues; Labor unions

United Auto Workers, 144, 149, 150
— — —-.

Index ● 225

United Nations Development Program, 59

United Nations Educational, Scientific and Cultural Organization, 100-101

United States

agriculture, 17-19, 59, 199, 202-210

apparel industry, 14-17, 175-181, 183-187, 189-190, 192, 193

automobile industry, 12-14, 134, 138-144

border issues, 115-130

comparisons of technological capability, 107-108

development policy, 19-21

education and training, 100

electronics industry, 159-171

engineers, 103, 105

environmental issues, 115, 123-130

immigration, 116-123

labor relations, 86-93

Mexico as production location, 7,98-100

Uruguay Round, 183, 192, 212

U.S. Commodity Corp., 203

U.S. Congress

House Resolution 146, 129

NAFTA policy, 7-11

U.S. Mexico Border Environmental Agreement, 128

U.S. Social Charter, 38

Velasquez, Fidel, 69

Vertical networks, 36

Vocational-technical system, 101-103

Volkswagen, 104, 133, 137, 148

Wage and tax policies. See also Employment; Labor issues

agricultural workers, 213

automobile industry, 141, 144

electronics industry, 163-164

immigrant, 120

living standards, 91

minimum wage increase, 38-40

NAFTA impact, 4,7, 149

tax incentives, 42

wage setting, 40-41, 80-81, 89

worker commitment, 41

Wage setting, 40-41, 80-81,89

Wages. See Wage and tax policies

Wagner Act. See National Labor Relations Act

WARN, See Worker Adjustment and Retraining Notification

Act

Waste

hazardous waste, 126

municipal solid waste, 126

Water quality, 124-125

Water Treaty of 1944, 128

Weiler, Paul, 89

Western Governors’ Assn., 54

Wildlife

conservation agreements, 125

habitats, 124

Women

discrimination in Mexico, 101

immigrants, 117

job competition, 120

Work day and work week length, 53-54

Worker Adjustment and Retraining Notification Act, 33

Workforce, See Labor force

World Bank, 72, 103, 104

Xerox Corp.

Aguascalientes plant, 70

unions and, 44-45

Zenith, 14, 66, 153, 161, 162, 165

U.S. GOVERNMENT PRINTING OFFICE : 1992 0 – 331-019 : QL 3