Earlier this week, the Carrier Corporation announced that it would be closing its plants in Indiana and moving production to Mexico. Carrier said that the move was necessary in order to “remain competitive.” The move garnered more attention than usual, thanks to an employee who captured the announcement on video along with workers’ angry reaction, and thanks to Republican candidate Donald Trump pouncing on the story to illustrate the need for his plan to implement tariffs in order to bring back manufacturing jobs from places like Mexico, China and Japan.
The above-linked Reuters article makes it easy to understand the rationale behind Carrier’s move. The Indiana workers are paid an average of $20.00 per hour, while workers in Mexico will be paid $3.00 an hour. A savings of $17.00 spread over 2,100 workers is a total labor cost savings of about $71 million.
If you’ve been a follower of this blog, you know that the research I’ve done each year into America’s trade results has found that there’s absolutely no correlation between wages and our balance of trade. For every example of a nation with whom we have a large trade deficit in manufactured goods where wages are low, as is the case with Mexico, I can offer an example where just the opposite is the case. If low wages cause trade imbalances, how do you explain our trade deficits (which are even larger in per capita terms) with high-wage nations like Japan, Germany, France, Taiwan, Italy, Switzerland and a host of others? The one thing that all of these nations do have in common is high population densities.
But I have to admit that Mexico does seem to be one glaring exception. Carrier is just the latest in an almost countless stream of manufacturers that have shifted production to Mexico. Mexico’s population density is about double that of the United States – enough to be a serious driving force for a significant trade imbalance – but much lower than the population densities of some other nations like those mentioned above. If I plot population density vs. trade imbalance, Mexico falls pretty much in line with what their population density would predict, but a bit high.
Here’s the thing that puzzles me about Mexico. They’re actually not that poor of a country. Wages shouldn’t be that low. With a purchasing power parity (PPP) of about $18,500 per capita – about one third that of the U.S. – wages in Mexico should be about one third that of Americans. The wages that Carrier pays its manufacturing workers – about $20.00 per hour – is pretty typical in the states. So Mexican manufacturing workers should be making about one third of that, or close to $7 an hour. And, given the rate at which manufacturing jobs have shifted to Mexico, wages there should be rising fast like they have in China and other countries that have a booming manufacturing sector. Instead, they’re stuck at a measly $3 an hour.
The CIA’s World Fact Book has this to say about Mexico’s economy: “… growth is predicted to remain below potential given … a large informal sector employing over half of the work force, weak rule of law, and corruption.” In other words, over half of Mexican workers are “off the books,” beyond the reach of labor laws and standards. And you have to believe that there is corruption involved in suppressing wages. Whether or not American companies are complicit in such an effort is a matter of conjecture. Add all of this up and you have a country that is a virtual slave labor state. Mexico is America’s plantation of the 21st century.
Again, whether or not American companies are involved in suppressing wages in Mexico is unknown (to me, at least). Let’s give Carrier the benefit of the doubt. While everyone is angry at Carrier for making this move, that anger is misplaced. They’re only doing what makes sense from a business perspective. Any other business owner would probably do the same. The real culprit here is the American federal government who, through its misguided blind faith in “free” trade policy, has encouraged this situation. Our trade agreement with Mexico should be torn up and replaced with one that employs tariffs to assure a balance of trade. Like his predecessors, Obama hasn’t had the backbone to take this on. Let’s hope our next president does.