Minor Changes Expected From NAFTA Replacement
Commentary: Certainly is a lot of border news lately. Most importantly is the completion of the re-negotiation of the NAFTA, replacing it with the United States-Mexico-Canada Agreement, also called USMCA.
As many have commented, USMCA is not a nothing burger, but neither is it a massive rewritten version of NAFTA. The agreement increases the North American content required for autos to qualify for lower tariffs to 75%; it requires that at least 40% of auto parts be made by workers making at least $16 per hour; it opens Canada to U.S. dairy producers; and it increases protection of intellectual property.
There is a 16-year sunset clause that automatically ends USMCA unless the deadline is extended and there is a clause to review the agreement every six years.
The good news for the border is that the new agreement doesn’t change much on the border. The new wage rules likely will cause some auto manufacturing to move north. That may hurt Juarez’s large auto sector. But otherwise there appears little in the new agreement to worry border denizens.
More significant is the new border plan proposed by Mexican President Andrew Manuel Lopez Obrador, better know as AMLO. The plan calls for cutting the Value Added Tax (VAT) from 16% to 8%. AMLO also plans to reduce the income tax to 20%.
Most significant, AMLO plan calls for doubling the Mexican minimum wage in the border region. The current Mexican minimum wage is 88 peso per day, or about $4.65. Doubling it would put the wage at $9.30.
While no doubt Mexican border manufacturers will complain about the higher wage, the net impact is likely to be small. Already, many manufacturers pay more than the minimum wage, especially if you include fringe benefits that many provide, such as free meals provided in employer run cafeterias and free transportation to and from work.
ALMOs proposed tax cuts should be a stimulant for the border in that it will provide an important incentive for producers to re-locate to the border to avoid what soon be higher VAT in the interior.
The border remains a vital engineer of economic development for our region. The 300 or so maquila in Juarez employ 280,000 people. About half manufacture goods for U.S. manufacturers. About 60% of Juarez’s labor force works in manufacturing
But manufacturing remains concentrated on the Mexican side of the border. On the U.S. side are transportation and warehousing, and hospitality.
Christopher A. Erickson, Ph.D., is a professor of economics at NMSU. He has studied the border economy for more than 30 years. The opinions expressed may not be shared by the regents and administration of NMSU. Chris can be reached at email@example.com.