Fighting NAFTA, Wilbur Ross Hops In Bed With Lefty Unions

Protectionism makes strange bedfellows. Consider the unlikely alliance of a left-wing Canadian union leader and Donald Trump’s secretary of commerce. The social democrat and the billionaire banker together symbolize an emerging left-right protectionist alliance that could undermine the gains that have been made from freer trade since World War II.

They apparently agree on a key element of renegotiation of NAFTA: The call for tougher labor standards in Mexico. They make it clear, in case anyone had any doubt, that union leaders in Canada and the United States are not pursuing this goal because of their concerns about the livelihoods of Mexican workers. It is just another attempt to save jobs in developed countries. Unfortunately, the move could backfire on all three nations.

Unifor President Jerry Dias, head of Canada’s largest private-sector trade union, says that he and Commerce Secretary Wilbur Ross agreed on a major element of strategy in the renegotiation of NAFTA when they met earlier this week. They agreed that the United States and Canada should present a united front aimed at raising Mexican living standards to create a level playing field in the three countries, according to Dias.

"The issue is Mexican labor standards," Dias says. Both feel that Canada and the United States have been hurt by a siphoning off of manufacturing jobs to Mexico and must work together to pressure the country to drive up wages, he said.

Any attempt to force up wages and other working conditions in Mexico would of course hurt Mexicans, by making it more costly for companies to locate production facilities in Mexico. But it would also hurt Americans and Canadians and the economies of both countries. Wages are lower in Mexico because productivity levels are lower. Poor infrastructure means it takes longer to transport goods. Lower education levels lead to a relative shortage of highly-skilled workers.

As David Ricardo explained when he developed the theory of comparative advantage, relative wage rates allow everyone to focus on what they do best, and earn a continuously improving living at it even if others – in this case Americans and Canadians – earn a better living.

The unholy alliance between Ross and Dias is actually a self-defeating alliance that would only make it more costly produce in North America. The division of labor between Mexican workers, who generally occupy lower-skilled parts of production processes, and Americans and Canadians who focus on higher-value added segments, has helped restrain costs while retaining many higher-value manufacturing jobs that would otherwise have gone to other lower-cost economies. Locating some jobs in Mexico makes better-paid jobs in the United States and Canada more productive and secure, providing a vital link in the continent-wide supply chain.

Major companies like IBM and Coca-Cola do part of their manufacturing in Mexico, and ship parts and partially made products back into the United States tariff-free. Many smaller U.S. companies have been able to compete and survive by outsourcing production of components.

The benefits of cross-border supply chains have been especially evident in the North American auto industry. Some components cross borders within NAFTA 6-8 times before a vehicle is finished and sold. Through cross-border supply chains, Detroit-based companies have been able to leverage lower Mexican wage rates to compete. The result: North American vehicle exports to the rest of the world have increased by an annual average of 10 percent over the past decade. North America now accounts for roughly 22 percent of global auto industry exports, up from less than 19 percent a decade ago.

The Canadian union leader and the Trump cabinet officer may seem like a political odd couple. In fact, Dias and Ross represent two sides of the same coin – symbols of an emerging alliance of neo-protectionists.

But the vast majority of North Americans benefit from free trade, as consumers enjoying lower prices and as workers obtaining improved job security as a result of increased efficiencies. It is up to them to enter the debate, and stop North America from going backward.