Free Trade, Promise or Menace?

Against the Current, No. 33, July/August 1991

Kim Moody

WITH A NORTH American Free Trade Agreement careening down the fast track to completion, the labor movements of Mexico, Canada and the United States face a new situation that requires some hard rethinking. While effective national trade unions in the context of national economies went the way of the Detroit gas guzzler somewhere between Bretton Woods and the Uruguay Round, habits accompanying the past die hard.

Unions in the United States slept through the U.S. Canada free trade negotiations even while their Canadian counterparts and affiliates fought to defeat it. Since George Bush sent a wake-up call with his Initiative for the Americas and North American Free Trade Agreement (NAFTA), U.S. unions have thrown their waning weight behind the fight to stop it or amend it. For now, they appear to have lost.

Precious little thought has been given to just how unions in North America confront with a drastically new economy or the process of restructuring that goes with it. Even though decades of continental economic integration have gone on behind their backs—already shifting millions of jobs from their traditional locations—U.S. union leaders continue to treat the process of integration simply as one of trade, above all as one of imports.

Their program for fighting its effects—employing traditional lobbying techniques—has been protectionist. Only a handful of unions have ventured into the murky waters of hands-on international solidarity. And only very recently has the AFL-CIO wrapped its anti-free trade fight in internationalist language, taking a step toward a more long-range approach with the formation of the Coalition for Justice in the Maquiladoras.

Yet if anything is clear as negotiations for an open market within the three major North American states draw near, it is that economic integration is already a fact of life. All the problems that the AFL-CIO and its allies documented during the Congressional hearing in early 1991 are already realities to one extent or another.

Already existing trends toward deregulation have accelerated in anticipation of the impending treaty. Crumbling trade and investment barriers between the three nations, disappearing plants and jobs, environmental ruin, declining real wages, and vanishing tax bases have been with us for years now. They are at least in part a function of internationalization in general and North American economic integration in particular. A ratified free trade agreement will exacerbate these crises. But a failed or modified one will not stop it.

Mexico and the U.S. in the World Economy

What, then, are the dynamics behind this process and what are the likely effects in the three countries? What can the labor movements of North America do to prepare for, resist, and affect the hostile forces now gaining momentum?

The new world economic order that emerged in the 1980s remained a relatively closed system dominated by the advanced industrial nations of the OECD and a handful of Third World nations that had developed sufficient industrial infrastructure and operations to participate in the formation of internationalized production. In 1985 the OECD nations accounted for 81.6% of the non-Eastern Bloc world’s manufacturing value added. This was down only slightly from 85.4% in 1970. 75% of the world’s direct foreign investment comes from five OECD nations: the United States, Britain, Japan, Germany and France. About 90% of the merchandise exports from the developing Third World market economies to OECD nations come from ten nations. These ten are: Hong Kong, Singapore, Taiwan, South Korea, Brazil, Mexico, South Africa, Malaysia, Indonesia and India.

At the same time, the leading economic powers are moving toward the creation of three major economic blocks: the post-1992 European Single Market led by Germany; a North American block led by the United States; and an East Asian block led by Japan. The major corporate players in each block hope to cluster around them resources and cost-effective production systems capable of competing in all three blocks and the world in general. Each of the major national players has a contiguous or nearby region in which low-cost production is possible: Mexico, Brazil and other Latin American nations for the United States; Southern and Eastern Europe for Germany and Western Europe; the East and Southeast Asian nations for Japan.

Within each block, the primary consumer market remains in the most developed countries, while the nearby developing nations are sources of cheap labor for “decentralized” systems of production involving outsourcing and subcontracting. Unlike the currency-based protectionist trading blocs which dominated the world between World Wars I and II, these three blocks are deeply integrated with each other in terms of investment, trade and even production. Whereas the protectionist blocks of the interwar years fragmented a previously trade-integrated world economy, the contemporary blocks are accelerating integration.

For the emerging global corporations, the block of origin is becoming more of a launching pad into world markets than a home base of operations. As Business Week has observed, these corporate players are increasingly “stateless,” in that a majority of their sales —as well as their production facilities and, in some cases, their headquarters—are no longer in their nation of origin. Although operative within many national markets, these global corporations are beyond the control of any one national state. Their internationally linked operations are a major motor of trade —as much as 55% of U.S. trade can be attributed to either foreign investment in the United States or U.S. investment abroad.

Of the ten leading Third World producers, Mexico is the most closely integrated with the U.S. economy. Mexico is the third largest buyer of U.S. exports, after Canada and Japan. It is the fourth largest importer into the United States, after Canada, Japan and West Germany. Viewed from the Mexican side, the United States accounts for 70% of Mexico’s annual trade.

While the bulk of U.S. private direct investment abroad is in Canada and Europe, Mexico is second only to Brazil as the object of U.S. investment in Third World manufacturing (1987: Mexico $4.0 billion, Brazil $7.7 billion, total Asia & Pacific $5.3 billion). A few Mexican corporations also invest in the United States. Largely through acquisitions, Cemex is now the largest cement producer in the United States; Vitro the second largest glass container company. But the integration is generally one-sided.

The Past: “Silent Integration”

Mexico went through its period of rapid industrialization from 1940 to 1965, later than the major South American economies (Argentina, Chile and Brazil), which had their first burst of industrial development at the turn of the century. Mexico’s industrialization was also heavily dominated by U.S. capital, unlike that of other Third World players such as Korea, Taiwan and Brazil—whose development was more independent.

From the late 1930s through the 1970s, the state subsidized much of Mexico’s industrial growth through investment in infrastructure and through low cost energy from the state-owned electrical (CFE) and oil (PEMEX) enterprises. This was one source of Mexico’s debt. In terms of actual production, the state sector was smaller, but still significant, accounting for about 15% of value added and 19% of investment by the mid-1980s.

Mexico’s industrialization was aided by a massive transformation of agriculture from peasant small-scale and collective (ejido) ownership to large-scale agribusiness as well as from traditional to “modern” petrochemical-based production of export crops. This so-called Green Revolution was financed by U.S. capital—largely the Rockefellers—and helped to produce a mass, rootless proletariat in relatively short time. U.S. capital then moved in, employing a portion of this desperate and poor mass of workers.

This process was accompanied in the late 1940s by the forced integration of the major unions into Mexico’s ruling Institutional Revolutionary Party’s (PRI) major labor confederation, the Confederation of Mexican Workers (CTM). This was the period of the gangster-style union bureaucrats—”los charros” (cowboys)—symbolized by CTM president Fidel Velazquez. The charms were and still are bureaucrats with close ties to the top PRI leadership. From 1948 to the early 1950s, they crushed attempts by some of the nation’s largest unions (notably rail workers, metal miners, and teachers) to adopt a more militant and independent course.

Exploiting the advantages offered by this hospitable environment, U.S. capital rapidly assumed majority control of major sectors of the Mexican economy, including its auto, rubber, mining and chemical industries. This massive penetration preceded the maquiladora program, which did not begin until 1965 and only really took off in the 1970s.

During this pre-maquiladora period, U.S. exports into Mexico exceeded those of Mexico into the United States—largely because of the needs of U.S. industry rather than Mexican consumers. While Mexico’s industrial output grew five times from 1940 to 1965, its imports of capital goods and replacement parts grew by twelve and a half times in the same period. Much of the emphasis during this phase of “development” was on heavy capital-intensive industry. Seen at the time as an “import substitution” strategy in terms of final products, Mexico’s development was nonetheless highly dependent on the import of expensive capital goods.

Along with this development came a huge increase in the immigration of Mexican labor into various parts of the United States. The largest program of Mexican migrant labor was the “bracero” program of 1940 through 1965, under which Mexican workers first filled U.S. agribusiness’ wartime labor shortages, subsequently providing the labor for its expansion. The debt crisis and industrial stagnation—which have dominated Mexico throughout the 1980s—produced an enormous acceleration of immigration into the United States.

The Present: The Maquiladoras Take Off

The maquiladora program was launched in 1965, ostensibly to absorb the hundreds of thousands of migrant workers returning to Mexico with the termination of the bracero program. But this never happened, since the bracero migrants had been primarily male while the new maquila plants initially employed mostly women.

The maquiladora program is designed to produce almost exclusively for the United States and other foreign markets. It allows U.S. parts to be imported tariff-free into Mexico for further processing or final assembly and then re-exported into the United States. Under U.S. tariff items 80007, now Harmonized Tariff Systems (HTS) Item 9802, the value of U.S. parts or components is exempt from any tariff when re-imported. Only the value-added abroad is charged.

Because Mexican labor costs are so low, value added in this relatively labor intensive sector is small. Furthermore, most of the imports from maquila plants are classified as assembled products, even though this category includes auto parts and electronic components. U.S. capital’s response to these new opportunities did not take long. The proportion of U.S. imports under 806/807 grew from 4% of total imports in 1966 to 10% in 1983 and, under HTS 9802, to 45% in 1989.

While Mexico’s earlier industries had included a mixture of labor intensive and capital intensive producers, early maquila plants were mostly labor intensive —and not always “state-of-the-art” in terms of technology. For example, while women in U.S. semi-conductor plants assemble using microscopes, women in maquila semi-conductor plants do so with their bare eyes—and produce 25% more.

In the last few years, more maquila plants are high-tech and capital intensive in nature. According to Harley Shaiken, author of Mexico in the Global Economy, they are as efficient as their U.S. counterparts. In general, these newer plants employ more men, leading to a rise in the proportion of male employment in the maquilas.

According to La Jornada (4/15/91), there are currently 2007 maquiladoras employing about 500,000 workers (up from about 1000 plants and 300,000 workers in 1986), making Mexico the largest Third World supplier of cheap labor to U.S. multinationals. While some maquilas are entirely or partly owned by Mexican capital, 90% are U.S.-owned and 85% of their output flows north.

Maquila production seems to be one of the few areas of the economy that grew during the 1980s, although at a slower rate than during the 1970s—most likely because it was not dependent on declining Mexican buying power. The maquiladora program (along with the continued destruction of small-scale and ejido farming) helped to further change the structure of Mexico’s economy. The proportion of people living in urban areas rose from 55% in 1965 to 71% in 1988.

The “development” of the border area, where all maquilas were located until recently, drew hundreds of thousands of unemployed workers and landless peasants during the 1970s and 1980s—creating new population concentrations. Unemployment rates actually grew higher in the major cities of maquila production (Tijuana, Mexicali, Nogales, Ciudad Juarez, Nuevo Laredo, Matamoros), as the general population swelled. This in turn created more pressure for immigration into the United States, where higher wages were available in jobs just across the border in adjoining U.S. cities (San Diego, El Paso, Laredo, Brownsville). While Mexican law has been modified to allow maquiladoras just about anywhere in Mexico, the vast majority of them are still located in the border areas.

Debt Woes, Exports and Liberalization

Mexico is a leading victim of the Third World debt crisis. Its foreign-controlled industrialization has been financed by U.S. and other foreign banks. Mexico’s total long-term debt grew from $5.9 billion in 1970 to $88.7 billion in 1988. Its annual interest payment grew from $283 million in 1970 to $7.6 billion in 1988, or from 3.5% to 8.2% of GNP.

Mexico’s short-term and International Monetary Fund (IMF) debt-most of which goes to pay the long-term debt-rose from nothing in 1970 to over $12.9 billion in 1988, bringing its total external debt to $101.6 billion in 1988. The interest for the first four months of 1990 was over $7 billion. The Left Business Observer reported (July 9, 1990) that Mexico “secretly borrowed $1.3 billion from the U.S. government earlier this year because of a critical shortage of foreign exchange reserves, which are now at half of 1987 levels.”

The roots of Mexico’s debt crisis lie in its dependence on expensive, imported (largely U.S.) capital goods and raw materials for industrial “development.” During the 1970s, capital imports grew from $1 billion to over $5 billion a year, while raw material imports grew from $800 million to $11 billion a year. Profits and interest repatriated to the United States grew from $1.2 billion in 1974 to $5.5 billion in 1980.

With the explosion of oil prices after 1973, it was thought that the Mexican economy could afford such a path to industrialization. PEMEX engaged in an aggressive exploration program and U.S. loans flowed into Mexico once again. But when oil prices collapsed in the 1980s, debt dependency became the debt “crisis.”

In 1982, the government of Jose Lopez Portillo announced that Mexico could not meet its debt obligations. As a consequence, U.S. direct investment in Mexican industry stagnated at or below $5 billion a year for most of the 1980s. The average annual growth rate of manufacturing slumped from 7.4% in 1965-80 to .2% in 1980-88. The economy stagnated and average personal consumption dropped by about 10% from 1980 to 1987.

The Lopez Portillo government’s response was to tighten economic controls. The banks were nationalized and trade protectionism was increased. But in 1985, the government of Miguel de la Madrid reversed this policy in favor of what a World Bank report described as “a fast and far-reaching liberalization of the trading regime, aimed at expanding the export sector, opening it to international competition, and encouraging efficiency in both exporting and import-substitution activities.” In 1986 Mexico joined the GAIT (General Agreement on Tariffs and Trade), the international trade treaty designed to promote freer international trade.

This turn in policy represented a giant step toward free trade with the United States. Average tariffs dropped from 28.5% on imports in 1985 to 23.2% in 1988. The reference pricing system–under which import prices are set at a minimum to prevent “dumping”–was abolished by 1988. The number of products requiring import licenses–a standard non-tariff means of increasing protectionism-dropped from 92.2% in 1985 to 23.2% in 1988.

One object of this “liberalization” policy was to boost imports of the capital goods needed to modernize Mexican industry and promote the growth of maquila production. And, to a degree, it worked. Mexico’s Gross Domestic Product (GDP), though low by the standards of the 1960s and 1970s, grew by 3.1% in 1989 and 3.9% in 1990. Maquiladora exports rose by 19.3% from 1989 to 1990; non-maquila exports by 17.6%. Mexico experienced a small trade surplus and its foreign reserves rose $3.4 billion, to a total of $10.3 billion.

But this very success continued the problems which had produced debt in the first place. The maquila plants import 97% of their inputs; most Mexican plants import nearly all of their capital goods. Total imports rose by 27.3% and capital goods imports by 43% from 1989 to 1990.

Maquila production-which was supposed to help redress Mexico’s debt problem-is exacerbating it. The plants tend to be built with loans from U.S. banks, increasing the debt Most of the profits are repatriated to the United States. Mexico receives no import tariffs from the U.S. products that enter Mexico for processing in the maquiladoras. Finally, Mexicans working in border area maquilas spend a significant proportion of their wages in U.S. towns across the border, thereby killing whatever “multiplier effect” these meager wages might have had on the Mexican economy.

The actual impact of the maquila program can be approximated by comparing the ratio of Mexico’s annual debt service to exports with those of other Latin American countries. While Mexico’s annual debt service costs were 23.6% of total exports in 1970 and 30.3% in 1988, the comparable figures for Latin America as a whole were 13.1% and 28.1%, respectively. What these comparative figures suggest is both that Mexico’s debt problem is older than that of most Latin American nations and that neither oil, trade liberalization,” nor maquilas have solved it.

Short of default, the only way a Third World country like Mexico can even meet its interest payments is to continuously increase exports in order to get more “foreign exchange”—dollars—with which to pay. Mexico’s push for more exports gathered steam as oil prices fell and U.S. interest rates rose during the 1980s—diminishing Mexico’s major source of foreign exchange while raising the price of its debt.

For Mexican exports to rise significantly, Washington’s trade policy would also have to be “liberalized.” This is the Bush Administration’s goal. In 1987, Bush met with de la Madrid to sign the “United States-Mexico Framework of Understanding,” which was the first concrete step toward an FTA.

The Future: Pressures for a NAFTA

Mexico’s need for accelerated exports explains why the PRI leadership under President Carlos Salinas de Gortari—as well as both the U.S.-owned sections of “Mexican” business and much of indigenous Mexican business—favor a FTA with Washington. An FTA will remove barriers for the non-maquila capitalists, allowing them to export the products of their relatively cheap labor to the United States. Potentially, this would help Mexican capital repay its portion of the debt and provide a larger tax base for the government.

Mexico’s IMF-inspired drive for social austerity—the Pacto Social—makes clear that an FTA is directed toward increasing exports to the United States rather than forging a new market for U.S. consumer goods. The prospective FTA is less about Mexicans as consumers than as cheap labor that can make Mexican goods competitive with Japanese and European products.

This “Mexican” strategy fits well with those sectors of U.S. capital who see outsourcing as the means of becoming competitive with (and within) Japan and post-1992 Europe. While Mexican production will threaten U.S. supplier and contracting firms who do not locate there themselves, it will also mean cheaper inputs for corporate giants producing consumer durables.

A recent study by Mexican economists Alicia Giron and Edgar Amador indicates that the investment climate in Mexico today is highly favorable. Return on foreign investments went from 55.9% in 1989 to 63% in 1990; about half of that was repatriated to the country of origin. Mexican hourly wages are lower than those in any of the four Asian Tigers: Korea, Taiwan, Singapore and Hong Kong.

Mexico’s political and social climate is also appealing to U.S. capital. Until recently, the FRI could guarantee low wages and abundant surplus labor. The PRI’s control of politics and the unions—as well as its willingness to use extreme repression when necessary—has made Mexico a haven for U.S. investments since the 1940s.

Falling Wages and Austerity

Despite the industrialization of 1940-65 and the subsequent maquila program, Mexico did not move smoothly toward becoming an industrialized nation. As a growing amount of its production became dependent on the U.S. economy during the 1980s, Mexico suffered a slowdown in overall manufacturing growth. Whereas GDP had grown at an average annual rate of 65% from 1965 to 1980, it grew only 0.5% a year from 1980 to 1988. The integration of production with the United States meant that Mexico suffered more from the 1980-82 recession than it had from the 1973-74 recession. In 1991, The Wall Street Journal reported that once again a U.S. recession was hurting Mexican production, particularly near the border.

High inflation rates and a series of devaluations in the peso during the late 1970s and throughout the 1980s have meant lower real wages for Mexican workers. The hourly wages of Mexican auto workers—among the best paid in Mexican industry—has dropped from a dollar equivalent of $5 in 1981 to about $1.60 in 1988. Wages in the maquila plants average $.55 an hour. Average hourly compensation costs—including benefits and wages—for manufacturing production workers in Mexico have dropped dramatically since 1975:

1975 1980 1981 1982 1983 1984 1985 1986 1987
$2.00 $2.96 $3.71 $2.54 $1.85 $2.06 $2.09 $1.50 $1.57

Source: Handbook of Labor Statistics, 1989, 578.

According to the newsletter The Other Side of Mexico, the share of worker income in the national income fell from 49% in 1981 to 28% in 1989. The level of class struggle has risen accordingly, as the recent Ford, Modelo/Corona, and teachers’ struggles indicate [see “Mexican Workers Battle Ford and the Thugs” in ATC 27]. Moving beyond just strikes, the more militant unions have led a growing movement to break free from the grip of the CTM.

The renewed labor militancy is also a response to the restructuring of the economy: the continued decline of older sectors, the privatization of many public enterprises, the modernization of public and private enterprises, and the continued growth of the maquiladoras. Traditional sectors geared toward the domestic market are being rationalized in order to compete with Asian and North American imports.

When the final trade barriers come down, plants oriented toward Mexico’s domestic market will be swept away because most of them are too small to shift to competitive economies of scale, regardless of their technology and low wages. While CTM leader Velasquez might rhapsodize about the interests of Mexican workers and the many new jobs free trade will bring, there will also be many lost jobs.

The auto industry represents a key example of restructuring in the private sector. Domestic-oriented production has been cut back in favor of export-oriented production. Employment in the traditional domestic auto industry dropped from 90,000 in 1981 to 45,000 in 1986. Meanwhile, the export-oriented auto industry has grown as Ford and GM build new maquila plants. In this sector, the companies are fighting to maintain low wages and to introduce “flexibility” in workforce deployment Conditions in both sectors have declined.

An important aspect of restructuring in Mexico involves privatization. When Salinas took office, the government owned or controlled 618 productive enterprises. Today only 269 remain in state hands. While most were sold to or merged with private firms, many were simply liquidated. In either case, the ensuing rationalization of production meant a net loss of jobs.

The “modernization” drives underway at those state-owned enterprises destined for privatization also has an impact on workers lives. At TELMEX, for example, the union has accepted wage increases in return for management’s total flexibility over the workforce. There is rank-and-file resistance to this “modernization,” but the government has the upper hand.

The estimates of new jobs to be created under free trade range from one-half to one million in the next decade. But these estimates fall to count the jobs destroyed in preparation for, or as a consequence of, a fully open market. The destruction of thousands of jobs in Mexico’s traditional sectors has led to an estimated real unemployment rate of 20%, even after three years of growth. The loss of over 100,000 jobs in the domestic Mexican auto and auto parts industries has yet to be surpassed by maquila auto jobs, which now total about 90,000. Indeed, the creation of only 500,000 jobs after over two decades of the maquila program is not exactly impressive in a nation of 88 million.

The rate of job creation in relation to the pace of investment is likely to slow down as high-tech plants become a large portion of direct investment. In the last few years growth has been higher for the high-tech plants than for the labor intensive ones that originally characterized maquilas. What is more, if the maquila jobs are any indication, the wages of workers in the newer export- oriented plants will be lower than wages in the older industries of central Mexico.

For example, autoworkers in central Mexico were making $9-1 a day, while in the maquila plants they were only making about $47. Even workers in the newest high-tech plants in the north, such as the Ford Hermosillo plant, make less than those in central Mexico. Although there will quite likely be net job gains due to accelerating U.S. and other foreign investment, higher-wage jobs will be replaced by lower-paying ones.

As Mexico’s more militant unionists recognize, effective long-term opposition to these policies requires a break from the CTM. Isolated pockets of resistance are already pointing the way. The September 19 Garment Workers Union, which was formed after the 1985 earthquake of that date, has managed to sustain its independent status and receive official recognition. The Ford strikers have attempted to switch affiliation from the CTM to a smaller federation, the COR. (Although the COR is also affiliated to the PRI, it functions independently.) In 1990, a “united front” of dissident unions (the Frente Sindical Unitario) was formed by several unions, including the enormous teachers union.
There have been attempts to build independent unions and labor federations in Mexico before. Up until now, the PRJ has been able to crush these efforts without facing any organized political opposition—other than student rebellion.

But the crisis of the Mexican economy has spawned divisions within the ruling class and the political elite as well. Today, the PRJ faces two credible electoral opponents, the right-wing National Action Party (PAN) and the left-of-center Party of the Democratic Revolution (PRD) led by Cuauhtémoc Cárdenas.
The PRJ’s program of privatization may also be contributing to its demise. The massive patronage of state industry—as with PEMEX and its 185,000 employees—provided much of the PRJ’s political glue.

Although PEMEX is not yet up for sale, Mexico’s banks, phone service and tobacco and sugar processing plants are—for starters. The motivation for selling these state assets appears to be the immediate need to make interest payments on the debt But the PRJ’s fire sale will ultimately deprive the state of badly needed long-term revenue and undermine its “bonapartist” rule.

As in most Latin American nations, politics in Mexico are shaped not only by major electoral parties, but also by the revolutionary left and the mass popular organizations. In Mexico, the Revolutionary Workers’ Party (PRI) plays an especially important role in many of the popular movements and is a significant electoral force in some areas as well. It has been important in a number of recent strikes and in the formation of a national network to oppose the free trade agreement.

The erosion of the major institutions through which the PRJ commanded working class loyalty—combined with growing economic pressure on workers, the unemployed, and the peasantry—points toward growing unrest in the political and industrial sectors. The PRJ’s ability to maintain control by any means other than open repression is certain to slip further.

The specter of class struggle and political revolt in Mexico is the best defense for the Mexican, U.S., and Canadian working classes alike. It is simultaneously the greatest disincentive to U.S. capital flight to Mexico. It is the sole hope for raising Mexican living standards and forcing a different strategy of economic development onto Mexico’s political agenda. And it is the foundation on which a North American labor strategy can be built that would serve as an alternative to the racism inherent in the U.S. labor bureaucracy’s protectionist stance.

Impact on Canada and the United States

Speculations regarding the precise impact of the NAFTA on the economies of Canada and the United States range from optimistic to alarmist. The U.S. Trade Commission concludes that there will be relatively little impact because the Mexican economy is much smaller The AFL-CIO, on the other hand, sometimes speaks as if all U.S. industry will migrate to Mexico.

On the purely quantitative plane, the three-year-old experience of the U.S.-Canada Free Trade Agreement lends some credibility to the alarmist view. The Canadian Labour Congress estimates that Canada lost about 260,000 jobs during that period; a comparable shift in the United States would cost 2.5 million jobs. While some of these were probably casualties of the recession that hit both countries in 1990, anecdotal stories about jobs moving to the U.S. South indicate that there was a considerable and rapid shift of production from Canada to lower wage areas in the United States.

As free trade negotiations move forward, first between Washington and Mexico City, and eventually between all three governments, this continental shift of jobs will intensify. The U.S. working class—dubious beneficiary of the U.S. pact with Ottawa—could join its Canadian counterpart as a big loser under a NAFTA.

Rural Mexicans: Their livelihoods may disappear under free trade.

The locus of production in consumer durable as well as key service and transportation industries is certain to shift southward. Manufacturing industries such as auto—with its combination of decentralized and just-in-time production—have already undergone such a shift, first to the U.S. South and, recently, to Mexico.

This restructuring of traditional “Fordist” production involves increased outsourcing and subcontracting. Although this can and has been done on a global scale, it is far more effective when the different phases of production are within transportation range of just-in-time delivery. Northern Mexico has an enormous competitive advantage over both the U.S. South and East Asia by virtue of wages and geography.

The racist notion that Mexican production cannot meet competitive quality standards has been laid to rest by the example of Ford’s Hermosillo plant. Employing a workforce with little or no previous auto production experience, this state- of-the art facility produces both cars and engines of world-class quality standards.

Combined with the cluster of parts plants now in place in northern Mexico, the Hermosillo example has led MIT researcher James Womack to speculate that “by the end of the century, the entry-level products [in the auto industry] for the entire North American region will be manufactured in northern Mexico in bottom-to-top production complexes built by multinational assemblers —American, European and Japanese—and their first tier suppliers.”

But such shifts in employment are not limited to traditional manufacturing. They will occur in such industries as telecommunications, where new technology allows traffic to by-pass older, more costly U.S. installations for cheaper ones in Mexico. A supervisor in a Toronto telephone installation told visiting Mexican telephone workers that it was possible to re-route excess Canadian traffic from Toronto through Mexico. With Mexican telephone workers making one-tenth of U.S. of Canadian wages, there is no reason to limit such re-routing to excess traffic. Using related and identical technology, businesses can—as some already have—relocate many of their clerical and financial services to Mexico.

Even a ground-bound industry like trucking will be susceptible to the competitive discipline of continental deregulation. Even before negotiating a NAFTA, the United States and Mexico have agreed to allow Mexican trucking firms to bid for jobs in the United States. Canadian truckers, losing jobs to their U.S. counterparts, have already felt the sting of an FTA. Twice they have blocked the Detroit-Windsor Bridge in protest. When a Detroit TV station interviewed a U.S. truck driver about the Canadian protest, he said that he understood. He had delivered a load from Texas and knew that in the future he would be bidding against Mexican drivers—even for runs all the way to the Canadian border. Like the Texan, the Mexican driver might well be delivering auto parts to a Detroit assembly plant on a just-in-time basis.

A decided shift of U.S. economic activity southward spells disaster for a large number of urban areas, their workers and unions, the generally immobile African-American populations of the Sun and Rust Belts, and the immigrant workers who have sought jobs in El Norte. Meanwhile, south of the border, PRI policy almost assures that new jobs will pay low wages; that Mexico’s advanced labor laws will go unenforced; that environmental damage will be massive; and that unemployment will remain high and possibly even grow with the further erosion of the agricultural sector and the privatization or demise of much of the public sector.

Opposition and Beyond

The AFL-CIO’s campaign against the NAFTA has largely been waged within its traditional protectionist parameters. Nonetheless, in a departure from past practice, the federation has also been careful to support workers’ programs to raise their standard of living. It has also projected a long-range approach to stop capital flight. The labor-backed Coalition for Justice in the Maquiladoras includes many organizations working to improve conditions in the border area. Partly because of the CTM’s support for the NAFTA, some AFL-CIO affiliates have even considered working with non-CTM unions or with groups in the Democratic Current. But the basic thrust of the coalition’s proposed activities revolves around pressuring U.S. corporations to do the right thing and stay home.

Hence even in its more unconventional aspects, the AFL-CIO’s campaign—hampered by its leadership’s ongoing loyalty to U.S.- based multinational capital—is limited. Important as it is to fight for jobs and to limit the employer’s ability to move work at will, the focus of any successful long-range strategy must be to raise Mexican wages and cancel Mexico’s crippling debt.

The barriers to both of these changes are primarily political rather than economic. Both require the opening up of Mexican politics. This, in turn, could be greatly aided by consistent support from the U.S. and Canadian labor movements. The labor-based New Democratic Party’s (NDP) 1990 victory in Ontario was partly a response to the 1988 U.S.-Canada FTA. NDP support for debt cancellation would help legitimize the issue.

If the debt is the major force pushing Mexico’s economic and political elites toward free trade, it is the falling real wages of Mexican workers that attract much of U.S. capital. The wage gap between Mexico and its two northern neighbors has grown steadily for many years. While in 1981 hourly compensation (wages and benefits) for manufacturing production workers averaged $3.71 in Mexico and $10.84 in the United States, the comparable figures for 1988 were about $1.50 and $13.90. Mexican labor costs had gone from one-third to 11% of U.S. costs. This was not caused by inexorable market forces, but by repeated devaluations of the peso and the Mexican government’s ability to restrain the unions.

Rising wages in growth sectors of Third World economies are by no means unusual. In the wake of mass strike movements, labor costs in South Korea rose 25% in 1988 and 73.8% in 1989. From 1975 to 1981, when the economy was still growing fairly fast, Mexican labor compensation rose 86%. Mexico’s economic crises of the 1980s might explain a slower rate of wage growth or even stagnation. But real wages fell for the entire economy and for the growing maquila sector. The major barrier to higher real wages remains the government’s ability to control or repress labor.

Repression against Mexico’s labor militants remains the government’s most effective way of tying labor’s hands. Here, however, U.S. and Canadian unions can play an important role by conducting solidarity campaigns modeled in some respects on those done with Central American and South African unions.

The difference in the context of the NAFTA and the acceleration of economic integration is that solidarity must flow in all directions. U.S. and Canadian unions will also be under more intense pressures to make concessions of all kinds. Retreats among higher-waged workers will not help Mexican workers in any way. Solidarity must become truly international.

Within the democratic labor movements of the three nations, there is the need for a commonly held strategic outlook. It should involve not only the big programmatic questions—such as debt cancellation—but concrete support for Mexican labor, organization to resist another round of retreat in the United States and Canada as the leveling forces of free trade mount; dense grassroots, plant-to-plant labor networks within the North American production structures of multinational corporations; and alliances with other socially progressive groups in the three countries such as small farmers, progressive churches, women’s organizations, and both African American and Latino community groups in the United States and Canada.

In the 1990s, international solidarity must have an organizing thrust Mexican workers must be free to organize genuine democratic unions, the U.S. South must finally be organized, and immigrant laborers must have full rights and union organization, wherever they come from or wherever they work.

July-August 1991, ATC 33