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Higher factory wages in Mexico is good but there is a cost


The United States-Mexico-Canada (USMCA) trade agreement was put into effect on July 1, 2020, replacing its predecessor the North American Free Trade Agreement (NAFTA), which had been in effect since January 1, 2004. The USMCA modified NAFTA in areas such as automotive manufacturing, pharmaceuticals, and energy. The new agreement also incorporated new labor provisions among the three partners. According to the U.S. Department of Labor website, “The agreement contains a labor chapter that prioritizes labor obligations by including them in the core of the agreement and making them fully enforceable. This is a major change from NAFTA, which only contained a side agreement on labor, and it will dramatically benefit American workers and businesses.”

This new provision allows the U.S. to bring a formal complaint against factories in Mexico under the Rapid Response Labor Mechanism, when they are failing to comply with what are called domestic freedom of association and collective bargaining. The U.S. has long accused powerful Mexican unions such as the Confederation of Mexican Workers (CTM) of colluding with the government to control workers and their wages. Certain plants have been accused of not allowing their workforce to properly unionize, to the extent of threats and violence being used. Under the new labor provisions, violators that do not correct the problem can face trade sanctions.

With the new provisions in place, the Biden Administration has brought six cases against production plants in Mexico, accusing them of violating workers’ rights to unionize. It has been vocal that this administration is the first to use the provisions to get tough on labor violations in Mexico. At face value, this seems to be a good policy. Mexican workers should earn a decent salary. This will allow them to have a good living and provide for their families. Moreover, from the standpoint of the U.S. government, this will have the effect of allowing millions of Mexicans to stay in their own country rather than seek better economic activities elsewhere. However, there is a balance or even downside.

The irony is that higher labor rates in Mexico mean higher prices for goods made there and exported to the U.S. Potential rising labor rates in Mexico could come at a time when inflation is a major concern in the U.S. and world economies, even though the wage for an entry level worker in Mexico is $4.90 per hour, significantly below the $7.25 per hour minimum wage in the U.S. Workers in Mexico’s maquiladora industry typically earn more than minimum wage, the average entry level being $6.57 per hour.

According to the Dallas Federal Reserve Bank, “In 2021, maquiladoras accounted for 58 percent of Mexico’s manufacturing GDP (as well as a majority of the country’s manufacturing exports) and 48 percent of industrial employment.” Employment in Mexico’s maquiladora industry is more than 2.7 million, with more than 300,000 employed in the maquiladora industry in Juarez alone. Manufacturing accounts for 19 percent of Mexico’s total GDP, or almost 20 percent of total employment.

Thus, we are dealt with the analogy of squeezing a sausage at one end and seeing it blow up on the other end. Higher labor rates in Mexico should lead to a more stable country. This also will go a long way to solve immigration issues that have been an issue between the U.S. and Mexico for decades. In the U.S., we take it for granted, or we consider it a right, to have a decent place to live, an automobile with which to travel, cable television at home, food in the refrigerator, and disposable income to spend on entertainment such as concerts and movies. This is part of the American dream and lifestyle. Shouldn’t Mexicans have the opportunity via higher wages to experience the same?

Manufacturing in Mexico, a lower labor-cost country than the U.S., has allowed companies to produce products at lower prices than if they were produced in a high-wage country such as the U.S. Maquiladoras are making automobiles, consumer electronics, medical devices, aviation equipment, and food that is exported to the U.S., and consumed by U.S. citizens. It boils down to how much do Americans want to pay for products, and what is a fair price? We should want Mexican workers to earn better paychecks. It is humane and also works in the U.S.’s foreign interests. However, there is a cost to this, and we should not be surprised to pay it in the future.

Jerry Pacheco is President of the Border Industrial Association and Executive Director of the International Business Accelerator.