In recent weeks, President Donald Trump has made much of the U.S. trade deficit with Mexico, arguing that Mexico has been on the winning side of the North American Free Trade Agreement (NAFTA). According to Trump, the U.S.’s 60 billion dollar a year trade deficit with Mexico demonstrates that most of the benefits of the agreement have flowed south. Indeed, given the apparent windfall accruing to Mexico, Trump has no qualms about demanding that Mexico pay for the wall he plans to build along the border. In a recent television interview (1), I suggested that a country like the U.S. could run a trade deficit for some considerable time without economic growth repercussions. Indeed, since the signing of NAFTA economic growth in the U.S. has been consistently better than Mexico’s. While it's important to acknowledge the fact that many workers in the U.S. have faced stagnant wages and job losses, Mexican workers have, on balance, fared even worse than their American counterparts. Hence, if workers in neither country have benefited, what does this trade imbalance between Mexico and the U.S. actually tell us? And, if workers in neither country have benefitted, who has?
Trade Figures do not Include Profit Remittances
Trade deficit/surplus figures are the difference in the value of a country’s imports versus its exports. These figures do not take into account other types of capital flows out of and into countries. Recall that economic globalization has been about the geographic separation of production across several countries, comprising what is known as global production chains, as multinational corporations pursue cost reductions, most notably (though not entirely) through moving the labor intensive parts of production to low wage countries. This has been the story behind the movement of company operations from the U.S. and Canada to Mexico. The profits made by this type of reduction in cost flow back to the parent corporation headquarters (in the U.S.). In general, these profits are not reinvested in Mexico to create more jobs and prosperity in that country. At one time, Mexico had laws requiring this type of reinvestment by foreign companies but this and other requirements imposed on foreign investors were dismantled in preparation for NAFTA. Nor, it seems, have multinational corporations been using their skyrocketing profits to sufficiently expand decent employment in the U.S. If Donald Trump refuses to abandon the idea of the wall, perhaps he should have the U.S. corporate sector pay for it since they have been the winners in all of this. This is an important reality that trade figures do not tell us.
Global Production Chains make Standard Trade Figures Problematic
However, there is yet another very important way in which trade deficit figures are misleading. When a finished product is exported from Mexico to the U.S. or Canada, that product includes components and services imported from its more developed trade partners. In fact, the final product may even contain components that have crossed the border several times. Trade figures, however, are gross figures and this means that components that comprise a product are counted multiple times—each time they cross a border. Without adjustment, the trade surplus of a poor country such as Mexico with a developed country, like the U.S., is exaggerated. This is so because the gross Mexican trade figures include the very valuable components and services that have come from the more developed economy and have been incorporated into the final product.
International organizations now recognize the complications that global production chains create in arriving at relevant trade figures and are endeavouring to develop trade statistics that show the distinct contributions of foreign inputs and services (known as the foreign value added) to a country’s export performance. Using such an approach, a World Trade Organization report calculated that the U.S. trade deficit with China would be 40 percent lower if calculated in value added terms. Efforts are underway to sort out the Mexican U.S. trade figures but the task is particularly challenging due to the complex nature of the production processes involved. However, the foreign value added in Mexican manufactured exports is high, ranging from 40 to 60 percent. An OECD calculation for 2009 shows that when the foreign value added trade component of Mexican exports is considered, its trade surplus with the U.S. drops by nearly 50 percent.
Let’s be Clear on Who Exactly the “Winners” are
(and it is not Mexico)
Mexico has not, as Donald Trump claims, beat the U.S. “to a pulp on trade.” Trade deficit figures misrepresent the picture of who has gained and who has lost in the era of economic globalization. Mexico currently has an estimated 60 percent of its economically active population working in the informal sector meaning that this proportion of Mexicans lack stable formal jobs with steady pay and benefits. The U.S. and Canada have seen the rise of precarious employment and a decline in decent employment in the formal sector. The winners have been the corporate interests that had a seat at the NAFTA negotiating table in the mid-1990s. Given the state of the North American production process, putting tariffs on goods exported from Mexico to the U.S. will not do anything to improve the employment situation in the United States. This manoeuvre will hurt both Mexican workers and the American workers who produce the inputs and services that comprise Mexican exports. Finding a way out of the quagmire of a global production process that has disregarded the welfare of workers is fraught with difficulties. But the best place to start is probably with a clear understanding of the nature of the problem.