Why gutting NAFTA not likely to create US jobs

Barriers could be disruptive

CUIDAD JUAREZ, MEXICO, Oct 25, (RTRS): Both US presidential candidates routinely criticize freetrade deals they blame for the loss of American jobs.

But tweaking the North American Free Trade Agreement (NAFTA), as Hillary Clinton has pledged to do, or ripping it up, as Donald Trump demands, may do nothing to help companies like Element Electronics Corp, which owns America’s last television factory.

Winnsboro, South Carolinabased Element, and the television industry more broadly, offer a window into the complexity of industrial supply chains and illustrate why pushing manufacturing jobs back to the United States is so difficult.

Element’s plant in South Carolina is nearly identical to a rival factory operated by Taiwanese conglomerate Tatung Company that sits on a dusty back street in this Mexican border town. Both import nearly all their components from Asia. The parts often flow in through the same southern California ports. But there’s a big, and costly, difference. The Mexican plant, by sitting just over the border from El Paso, Texas, doesn’t have to pay duty on those parts, even when the finished televisions are sold in the United States. But Element’s factory has to foot the tariff bill, which makes its televisions more expensive.

Crazy

“It’s pretty crazy that I’m disadvantaged for using US labor,” says Michael O’Shaughnessy, Element’s president.

That’s a sentiment that Trump, the Republican nominee, has forcefully tapped as he makes the case that radically revamping the trade deal would level the playing field and bring jobs back. Many trade experts, though, say it would be a costly disaster to try to unravel these production networks, which essentially treat Mexico as a 51st state.

The Peterson Institute for International Economics, a Washington think tank that favors free trade, released a study last month that predicted imposing stiff tariffs on Mexico and China would disrupt North American producers that have created global supply chains and push the United States into a recession.

“The TV industry is characterized by particularly dense webs of cross-border supply chains with Mexico and China,” says Marcus Noland, the economist who directed the study. “There’d be chaos and a trade war.”

Even many who oppose NAFTA acknowledge it would be disruptive to suddenly erect barriers, given the way companies have shifted supply chains to integrate Mexico.

NAFTA, implemented in 1994, forged a common market between the United States, Mexico and Canada. In response, many industries, including television manufactures, have transformed themselves by creating supply chains that crisscross the border.

Elaborate

Televisions once were produced in the United States and elsewhere with hundreds of parts, often tucked into elaborate wooden cases. A modern flat screen, by contrast, has relatively few parts, and more than 70 percent of its value is packed into the glass and the electronics integrated directly into the panel.

The heart of the industry, including that core glass technology and production, is now based in Asia.

About half of all TVs imported to the US come from Mexico, says Paul Gagnon, an expert on the industry’s supply chain at IHS Markit, an economic research firm.

“The main reason for that is so the producers can respond quickly to fluctuations in demand,” he says. TV sales are highly seasonal, spiking late in the year. In Mexico, some of the factories double their workforce for just a few months to respond to this.

Gagnon doubts the jobs would come back to the United States, because margins on TVs are so low. “If there were any major cost increase (in Mexico), you’d probably see some shift to Asia for production — rather than seeing that production happen in the US.”

Some Mexican plants mold the plastic casing and do other tasks in the assembly process. But in many cases — including at both the Element and Tatung plants — the assembly plants do mostly finishing touches like inserting printing circuit boards and tuning the units. This creates relatively few jobs compared to the kind of television manufacturing done in the US industry’s heyday.