An examination of USMCA’s Impact on Manufacturing Jobs and Economic Competitiveness in United States

Abstract

The process of renewing NAFTA for the terms that benefits interest of the United States, coupled with associated benefits of the Mexico and Canada, begins after two decades of NAFTA in action. The new deal known as USCMA provides insight into the labour rights, and adopts policies and regulations for the labour effecting from the deal through introduction of laws and policies that reflects core value of the ILO. Additionally, international power dynamics is shifting from unipolar to multipolar for the last couple of years, and highlights the importance of regional integration of the United States vis-à-vis with other emerging economic power. Regional integration, and diffusion of supply chain across the North American continent provides strategic edge in the economic competitiveness for U.S. companies, especially in the automobile and parts sector, in the domestic and international market against rising economies of the East. The paper concludes with discussion of the manufacturing job, which represents American myth with respect to Mexican ‘fear,’ and does not reflect actual situation at practice. Job loss in manufacturing sector owes to the changing technology, and need of the skilled labour for the capital intensive work. On the other hand, economic competitiveness of the U.S. firms increases due to NAFTA because integrating markets, along with concentration of most of the automobile production in United States, and North America suggest way forward for regionally integrated, and economically competitive environment.

An examination of USMCA’s Impact on Manufacturing Jobs and Economic Competitiveness in United States

Introduction of NAFTA eliminated most of the tariffs on products that were part of the trade flow between all three member countries, and the key focus of the treaty were liberalization of textiles, agriculture, and automobile manufacturing sectors, coupled with safeguarding intellectual property protection, and implementation of environmental and labor regulations. The transformation of economic relations between North American economies in the aftermath of NAFTA are evident of the fact that the liberalization of policies can provide enormous opportunities for all due to elimination of barriers to resource mobility. Within United States polity, NAFTA received bipartisan support and resulted in increasing regional trade three-fold, along with cross-border investments within the region. In the similar way, a bipartisan support enforced USMCA in mid-2020, and major reason for the revision of terms for trade were undermining of manufacturing sector and jobs in the United States.

USMCA is the extension of first (NAFTA) agreement that comprises of two developed countries of Canada and United States, coupled with one developing nation, and highlighting the importance of regional integration at an equitable level. The research attempts to explore the relationship of two effect variable, that is, economic effectiveness and manufacturing job, due to the cause variable of U.S.-Mexico-Canada trade agreement at regional level. The quality research methodology follows qualitative research design for effective understanding of the cause and effect relationship within the context of North American regional integration. The purpose of study is to highlight various components of the deal, and the effect it can have on employment in one sector, along with overall competitiveness. However, the research concludes with a detailed discussion for limitations and prospects associated with the USMCA trade deal.

Literature Review

Chatzky et al. (2020) article in ‘Council on Foreign Relations’ mentions NAFTA as a landmark deal between the three North American countries, which became effective within the year 1994. For one obvious benefit, trade explosion between Canada, Mexico and United States, coupled with closer integration of the three economies, resulted in criticism in United States for outsourcing work, and job losses. President Trump referred to NAFTA as ‘worst trade deal ever made,’ and in the last year at office managed to renegotiate USMCA. Negotiations for the renewal of trade treaty, the process of consultations begin in the year 2017, and key features of the deal were auto exports; markets for dairy, poultry, and egg, markets, coupled with aluminum and steel tariffs. The new deal came into effect on July 01, 2020 upon ratification from members’ states to USMCA, and it is viewed as modernization of NAFTA’s twenty-five years old provisions.

Effect of NAFTA on U.S. Economy?

The experience of NAFTA suggest that the trade potential between neighbors is high vis-à-vis trade with countries that are not in close proximity. Trade liberalization since enactment of NAFTA resulted in tripling the U.S. trade volume with both the neighbors, surpassing the growth rate of U.S. trade vis-à-vis all other countries. A total of one-third exports of United States aim for destination of Mexico and Canada. Additionally, most estimates suggest that NAFTA managed to grow U.S. Gross Domestic Product (GDP) with almost 0.5 percent, coupled with an additional eighty billion U.S. dollar to the U.S. economy. The opponents of NAFTA are of the view that the high concentration in some industries, like auto manufacturing, and the effect of liberalization on manufacturing jobs in the existing literature suggest that the American myth of job loss due to NAFTA lacks empirical evidence; that is, the benefits of trade liberalization are distributed widely in the society, unlike regional economies operating with restrict resource and labor mobility.

Critics argue that NAFTA led to trade deficit, mobility of companies to Mexico for low factor of production, and low-wage competition as primary factors, which also contributes to wage stagnation and job losses. Additionally, experts like Dean Baker and Robert Scott argues that the increase in import level during post-NAFTA enactment, supplements roughly 0.6 million job loss over the next two decades. As per the proponents of trade liberalization and NAFTA, approximately 14 million jobs in U.S. rely on trade with NAFTA members, while creating 0.2 million jobs with higher wages when compared with the wage rate of lost jobs in the sector; however, there argument limits the scope of analysis to the import growth which would happened either way, even without enactment of NAFTA. The decline in U.S. manufacturing jobs due to businesses moving to Mexico, for low cost of production resources, added 0.35 million jobs loss since the year 1994, which equates to one-third of the total manufacturing industry employment. Additionally, auto sector employment of Mexico increased drastically over the same period from 0.12 million workers to 0.55 million workforce.

On the other hand, economist like Cathleen Cimino-Isaacs and Gary Clyde argues that gains for the overall U.S. economy are higher than job losses in specific sector. The net effect of job loss compensates in the form of newly created jobs, coupled with benefits for consumers in the form low prices of high quality products and services. As per PHE (2014) study on the effects of NAFTA on U.S. society, which suggest that the pact has caused a net loss of fifteen thousand jobs per annum, while contributing in the form of 0.45 million U.S. dollars as gains for each job lost. The two critical factors responsible for the gains vis-à-vis each job-loss are low prices for consumers, and higher productivity levels. Existing literature suggest that evidence based policy-making is required for managing the labor demands of manufacturing sector, and the loss of manufacturing sector jobs owes less to NAFTA and more to the industrial stress the sector was going through long before enactment of NAFTA. Existing literature suggest, as mentioned in David Dorn, David Autor, and Gordon Hanson (2016), competition vis-à-vis China plays a critical role in reducing the employment levels at home since the year (2001) when China joined “World Trade Organization (WTO)”.

For example, Hanson says, “China is at the top of the list in terms of the employment impacts that we found since 2000, with technology second, and NAFTA far less important.” Furthermore, research analysis of Hanson suggest that around 11-17 million jobs loss during the year 2000 and 2010 is attributed to technological change and trade with China. On the contrary, researcher argues that the U.S. auto sector economic competitiveness vis-à-vis China increased due to NAFTA. The development of supply chain for U.S. auto sector at cross-border level reduced cost, positively inclined productivity, and raised economic competitiveness of U.S. firms. Hanson says, “Because Mexico is so close, you can have a regional industry cluster where goods can go back and forth. The manufacturing industries in the three countries can be very integrated,” which reflects in the competitive advantage of U.S. automakers vis-à-vis Chinese firms. The impact of NAFTA on Mexico and Canada are equally advantageous, and it assisted both the countries to connect regionally in economic terms.

Effect of USMCA on U.S. Economy?

The language of USMCA coincides with existing “Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP)”, where Mexico and Canada are already members. Increased working and environmental regulations are at the core of USMCA. Additionally, increased access to the dairy market of Canada, coupled with reduced duty-free limit for consumers in Canada to shop online U.S. goods. Lastly, higher incentives for U.S. automobile production reflects prioritization of local industries, which is under heavy competition from China since the year 2001; and, USMCA promotes economic competitiveness of U.S. automobile industry. As evident form the case of European economic integration, regional integration results in decreased political autonomy which the nations enjoyed in the absence of dependence on each other, at least in economic terms. For example, sunset clause of the sixteen-year is part of the agreement which requires review in every six years, and review of additional sixteen-year term during the preceding six-year review. The sunset clause reflects higher control of individual member states to the agreement, with regard to the evolution and developments of USMCA, but this also raises concerns of greater uncertainty. For instance, the dominance of United States as a huge consumer market, moves firm towards production in United States, which can significantly increase the cost of production for vehicles in the case of automobile. Automobile sector relies on significant investments in the regional supply chains across the North American continent, and higher control in the form of sunset clause can put industries at-risk in a political conflict situation for instance.

Rebalancing Trade to Support Manufacturing

According to the “Office of the United States Trade Representative,” USMCA is going to prove distributive through creation of balanced and reciprocal trade opportunities, which assists in supporting jobs for Americans in high-paying categories. ‘Product-specific’ rules, as part of new rules of origin and origin procedures, incorporates light trucks, passenger vehicles, and automobile products. The objective of the introduction of new rules is to incentivize sourcing of materials and goods within United States, and North America in general. Additionally, deal mentions seventy-five percent of content related to automobile industry to be produced within North America, and it is a regional-level policy for encouraging economic growth at regional level, and manufactures in United States. The rules are aimed at incentivizing resource mobility, especially capital, and they are aimed at preserving and re-shoring parts of production within United States, coupled with transformation of supply chains around United States’ content. Transformation of supply chain is extremely useful because it will allow content that facilitates high-paying jobs, along with facilitation of automobile production in future. Finally, new rules will allow removal of previous practices under NAFTA’s agreement that incentivized parts production, in addition to incentivizing low wages in the sector of automobile. The aim of USMCA is to provide level playing field for companies in the private sector, similar to NAFTA, coupled with reducing disparities in wage within member countries. An attempt at enhancing working conditions and employment opportunities within United States, is also an attempt of involving USMCA’s core stakeholders, that is, companies operating within Mexico. Furthermore, USMCA guides employers for investing resources in understanding various provisions of the agreement through education of employees for ensuring compliance through oversight.

Santos (2019) argues in favor of reimagining trade agreements between North American nations, that is, United States, Mexico, and Canada, in terms of consideration for the stakeholder of workers. Author argues that liberal globalization prevailed in the North Atlantic countries in the post-Cold War world order, and backlash against it with increasing concerns for the conditions, wages, and economic opportunities for workers associated with regional trade agreements. Over the last three decades, the central component for debate over international trade agreements, especially between Mexico, United States, and Canada, are concern for impact of the negotiations on wellbeing of the worker’s associated with employed industry. The limitation of the liberal globalization policies in North American continent attempts to accommodate labor rights progressively; however, the actual impact of positively shaping the wellbeing and working conditions of workers are limited. The new agreement United Sates-Mexico-Canada (USMCA) has the potential to positively regulate domestic labor laws, and other issues workers are facing. Author emphasize in achieving balance between the power of labor and capital within the context of new trade agreements, which needs to supplement with reforms at home. There is no denying from the fact that the inequitable consequences of liberal globalization has negative consequences for the labor employed at home industry, coupled with grievances of emerging nationalist movements in economic terms, which are significantly powerful. Without improving the lives of ordinary workers, reshaping globalization through trade agreements, is not going to solve the problem because addressing the grievance is the way forward, and not the other way around. One of the reason for backlash against liberal globalization is the generation of inequitable consequences over the last three decades, and a revised trade agreement requires accommodation of the stakeholders with economic grievances. The changes brought in revised agreement of USMCA pertains to domestic labor law reforms for Mexico, putting limits on ISDS with drastic reduction in rights of investors, and explicit stimulation of production across North America with the intention of preventing job losses in United States through regulation of auto industry.

USMCA and Workers

Santos (2019) also argues that the labor provisions in NAFTA showed evolution in three axes. First, a shift from domestically defined labor rights to international defined labor rights based on core values of ILO, that is, standards related to collective bargaining, child labor, and freedom of association, non-discrimination, and forced labor. Second, USMCA includes chapter of labor rights as part of the trade agreement, which reflects on the higher value as stakeholder in the process of negotiations and deals. Technically, dispute settlement system and other obligations of trade applies to labor rights which previously did not apply. Lastly, if a party violates labor rights then the reaction in the form trade sanctions is the eventual outcome, which includes imposition of tariff on part of the affected part, or compensation for the breaching party. Furthermore, labor provisions in the Trans-Pacific Partnership (TIPP) paved way for enacting USMCA, which provided ‘gold standard,’ stated Hillary Clinton, within trade agreements for protection of worker’s rights.

Legally, Santos (2019) highlights the critical role of International Labor Organization (ILO) in reflecting the concerns of worker’s within global economic order. Author argues that the ILO over the last twenty five years, since the end of Cold war and emergence of liberal globalization, has worked to address worker’s concerns through incorporation of a chapter on minimum standards for labor within trade agreements. However, the evolution of labor provision in North American Free Trade Agreement (NAFTA) reflects on the shift from locally defined labor rights to “… internationally defined ILO core labor standards on freedom of association and collective bargaining, forced labor, child labor, and non-discrimination (Santos, 2019; pp. 407).” Additionally, introduction of chapter on labor rights in trade agreement also highlights on mechanism for dispute settlement, which is similar to that of trade obligations. Lastly, violation of labor obligations may result in trade sanctions on part of the affected party, which includes imposition of tariff or compensation on part of the party in breach.

USMCA and Economic Competitiveness of U.S.

The regional integration of North American countries, namely Mexico, United States of America (USA), and Canada, is an opportunity to integrate in economic and infrastructure terms. USMCA aims to enhance U.S. economic competitiveness vis-à-vis other Global Economic Powers like China. For example, supporting auto industry through spatially limiting the seventy-five percent production in U.S. economy, coupled with supply chain ranging from Canada in the North, to Mexico in South of North America, increases U.S. economic competitiveness vis-à-vis China.

Research methodology

The research design of the paper adopts qualitative research techniques, which involves literature review of the existing published work of experts and organizations in the field. Digital tools are also adopted for effective search and research of the content, which positively contributes to the quality of research, and the data is primarily secondary. Research paper for the research analysis are based on peer-endorsement from professor in the class, coupled with guidance and direction available in the existing literature for research exploration.

Discussion & Findings

Gowa’s (1989) research explores the impact of bipolar and multipolar world-orders on free trade, and argues that bipolar power structure of international politics has advantage over its multipolar counterpart, in relation to reducing barriers for open-markets between states at international level. Furthermore, existing literature preceding publication of Gowa (1989), relies on prisoner’s dilemma structure for states and their respective preferences vis-à-vis trade, which results in scarcity of international markets. Gowa’s (1989) analysis provides argument against limitation of the prisoner’s dilemma structure in an anarchic international system for an objective assessment of states behavior within Free Trade Agreements (FTAs). That is to speak, author argues that bipolar global power structure has strong incentives for states to adopt altruism within its alliances, and consequently less credible threats of exiting alliance.

Simmons (2000) argues the nature of international legal commitments that sovereign governments undertake, and the subsequent effect of these commitments on the behavior of state. Author performs examination of the patterns related to compliance and commitment with respect to international monetary law. For example, “reputational concerns explain patterns of compliance” during “the signal governments try to send by committing themselves through international legal commitments.” Findings of the research highlights understanding of government commitments through status of legal obligations of other countries to the agreements within their respective regions. Author also argues that the overt policy pressure from International Monetary Fund (IMF) are not useful ‘enforcement’ mechanism, although competitive market forces does. Nevertheless, ‘legal commitments’ have significantly positive effects on the governments that facilitated the process of restrictive policies, as part of free markets; moreover, governments desire to have reputation for compliance also reestablishes.

Skonieczny (2001) article relies on empirical evidences from newspaper advertisements for demonstrating “myths contributed to the discursive construction of NAFTA.” NAFTA got approval from the U.S. House of Representatives in the year 1993 with “discursive construction of the trade accord”, as the author states, which confirms to decades old American myths. Although, Mexico was formally acknowledged with 1993 trade accord as equal trading partner vis-à-vis northern states of Americas, that is, Canada and America. However, the acceptance of Mexico as an equal trading partner challenged already established notion of the country, and Latin American countries in general, that is, as dependent, inferior, suspicious, and childlike (Johnson, 1993; Cottam, 1994). One of the reason for lack of NAFTA’s effectiveness is deeply ingrained image of Mexico in United States, which creates obstacles in legislation and policy making process at congressional level for accepting economic integration at equal levels with Mexico. Author argues that NAFTA is the product of discursive construction due to dilemma of treating Mexico as an equal trading partner due to accepting Mexico at simultaneous level as an inferior country. NAFTA was a policy success for President Clinton, and embodies deep rooted American myths, and became the first international trade arrangements between countries that accepted Mexico as equal trading partner vis-à-vis developed, wealthy, and powerful nations.

Manufacturing Sector of U.S. Economy

Hicks and Devaraj (2015) explores the effect of domestic demand (cause variable), and productivity change (cause variable), on employment levels in the United States manufacturing sector. Manufacturing sector includes production and shipment of goods, which comprise a large part of the domestic and national economy. The industry continue to grow at sustainable growth rate; however, demand for labor is the most debated aspect of the industry due to the dependence of lower strata of society on the manufacturing work opportunities, especially in economic terms. Author argues effect of foreign trade, productivity change, and domestic demand on the employment levels in the United States. Manufacturing is a growing sector within U.S. economy, and the employment levels for the sector faces stagnation for several years in the post-Cold war era of liberal globalization. One of the primary reason for the stagnation of employment level in the manufacturing sector owes to the productivity growth in production processes of manufacturing sector. Trade, domestic demand, and productivity are primarily the three factors contributing to the changes taking place within manufacturing sector of United States. Out of the three variables of trade, domestic demand, and productivity, the impact of productivity change on manufacturing employment is most significant. Empirical evidence also suggest that eighty-eight percent of the job loss in manufacturing industry is due to the growth taking place in productivity capacity. On the other hand, domestic demand has a modest effect on manufacturing jobs. Growth in demand for manufacturing goods at home, roughly accounts for 1.2 percent job growth in the sector. Lastly, trade plays a critical role in negatively or positively impacting growth of domestic production and employment levels in the United States (U.S.). Over the last decade, before publication of Hicks and Devaraj (2015), net exports remained negative and contributed to approximately 13.4 percent of the job losses. There is no denying from the robustness of the manufacturing production; however, productivity growth in manufacturing processes remain the largest facilitator of job displacement, which explains consideration of domestic policy reforms.

Manufacturing Base

Eaton et al. (2011) suggest that the cyclical downturn (recession) adversely effects demand for durable consumption goods, coupled with business equipment and plant, which are evident in Figure 1, during Great Recession (2017-2009). The decline in manufacturing production due to Great Recession owes a great deal to the sensitivity of the sector due to its operations encompassing business plant, equipment’s, and durable and consumer goods, which also resulted in large-scale unemployment in the regions where manufacturing operations takes place in United States.

Figure 1: Manufacturing Index for U.S. Economy
Source: Board of Governors of the Federal Reserve System

The complete recovery of the manufacturing economy takes place by the year 2014 when the level of production is record breaking, which supplements the notion of distinctive and long-term growth feature of the sector over the past century of American history. American manufacturing has remained health healthy for most part of America’s history, and the total value of goods produced (GDP) has also grown sustainably. Nevertheless, the relative stagnation of the manufacturing employment owes to the sector’s resilience to sustain trade agreement regimes and recession time-periods, especially in the context of over last seven decades.

The statistics from BLS, ‘Current Employment Statistics,’ (CES) program comprise of approximately 140 thousand government agencies, and 440 thousand websites, which are monthly based on establishment or payroll survey. The employment level of the United States Manufacturing Industry since April 2020 suggest that there has been significant growth in the month of June, while fluctuating around the figure of between 1.5 and 2 percent growth within the range of 12,000 and 12,400 (Figure 2).

Figure 2: Employment Level Manufacturing Industry (United States) During COVID First Year
Source: https://www.economy.com/united-states/manufacturing-employment

Manufacturing Jobs

Fisher (2004) argues that the manufacturing jobs in United States are on decline for the last five decades, and the major cause of the occurrence of phenomenon are labor-saving technology, while state tax policy and economic conditions at international level have played a relatively minor role. The percentage of employed population in U.S. manufacturing industry has reduced from 25 percent during 1960’s to 12.5 percent during 2000’s. Fisher’s (2004) central argument, and concluding note, states the future prosperity dependent on advances in technology for service-oriented economy. This is evident from the fact that United States has the reputation of having highest long-term economic growth rate in the world; and according to conservative estimates, standard of living in every thirty-year doubles for average American.

Transformation of U.S. Manufacturing Industry

Charles, Hurst, and Schwartz (2019) investigates the causes of decline in employment rate in the manufacturing sector, and focusing the analysis on post-2000, which is declining. Author argues that the decline in manufacturing rate also owes to the local opioid use, and associated deaths. Other factors for the decline of manufacturing sector employment includes, mediating factors, that is, sectoral switching, private and public transfer receipt, and inter-region mobility.

Manufacturing Sector Jobs during COVID-19

Kluver (2021) is director of Organizational Development, Alexandria Industries, and states in early 2021, within the context of manufacturing jobs during COVID-19, “those of us in the manufacturing industry, however, this challenging time has generated opportunities to resolve our ongoing worker shortage issue.” As per statistics, manufacturing industry is going to be short of six million employees around year 2030.

Lucas and Bennett (2021) article suggest that the pursuit of capital-intensive corporate policies at industry level within manufacturing industry is creating ‘skills mismatch,’ which reflects the gap between worker’s existing skills vis-à-vis skill demands of the manufacturing sector. The overall workforce participation rate for the manufacturing sector declined to 61.2 percent in the year 2021 is due to the factor of Boomer generation getting older than 65 years, and less likely to participate in employment opportunity, although the total output of manufacturing increased with five percent annual growth rate. As per the analysis of Charles, Hurst, and Schwartz (CHS), the decline in manufacturing jobs during year 1980 and 2016 amounts to 7.5 million (2019). The lower level of manufacturing employment relied on men and women within age bracket of 21 to 55, and education level of less than a high school degree, created a social strata of lower-income generating class. Subsequently, the 7.5 million manufacturing job loss initiated in creating instability in the lower-social strata of the society, which relies on manufacturing jobs due to low education level, and the phenomenon consequently resulted in reducing the overall labor force participation rate.

As per conservative estimates, the total job loss of manufacturing sector within April 2020 and February 2021 amounts to 582,000 individuals, which reduced the overall participation rate from 63.4 percent in February 2020 to 60.2 percent in the April month, which is the lowest figures since 1973 in the history of United States. Author states, “While the manufacturing sector largely avoided the disastrous impact of COVID-19 that the service sector experienced, it is being affected by a long-term decline in employment levels of older, skilled workers and an unexpected dip in labor force participation in all age groups coincident with the pandemic.”

Conclusion

The program announced this year under Biden administration objectivizes increasing the available skilled workers required to meet the manufacturing sector demand. The expansion of apprenticeship programs, along with relaunch of federal Advisory Committee for Apprenticeship. Additionally, the National Apprenticeship Act 2021 also provides statutory authority for Department of Labor in creating ecology for increasing manufacturing participation rate through introduction of skilled labor for rapidly changing capital-intensive industry.

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Appendices

Appendix No. 01: Manufacturing Sector Performance, 2006-2013

Source: U.S. Bureau of Labor Statistics and U.S. Bureau of Economic Analysis

Appendix No. 02: Average Product of Labor, Productivity Growth, and GDP Growth, 1998-2012

Source: U.S. Bureau of Economic Analysis

Appendix No. 03: Potential Manufacturing Productivity Employment Effects, 2010

Source: U.S. Bureau of Economic Analysis and U.S. Bureau of Labor Statistics.

Appendix No. 04: Impact of Productivity, Trade, and Domestic Demand for Manufactured Goods, 2000-2010

Source: Hicks & Devaraj (2015) calculations using data from the U.S. Census Bureau.