US Targets Wage-Repression Model in Mexico, Demands Inspections, Industry Has a Cow

Yves here. I have to confess that even with trying not to get bogged down in the impeachment drama, it has nevertheless been such a distraction as to divert attention from important stories like the state of the so-called NAFTA 2.0 talks. This post describes how Democrats are pushing for wage and working condition protections for auto workers (and enforcement mechanisms with teeth) in Mexico that has put automakers and the Mexican government in a tizzy.

If this actually gets in the pact (a big if), one wonders what Trump would do. If he is serious about his populist talk, he should support these provisions, since they would help wages in Mexico, and therefore reduce emigration to the US, as well as encourage automakers to shift some activities back to the US when the cost savings in Mexico aren’t compelling.

By Nick Corbishley. Originally published at Wolf Street

This week, an 11th-hour demand from Democrat members of the U.S. Congress concerning the U.S.-Mexico-Canada Agreement (USMCA), the trade agreement to replace NAFTA, has put Mexico’s government and global manufacturers in a tight spot. The U.S. lawmakers are calling for a program of inspections to enforce the beefed up labor standards included in the new deal, along with meaningful penalties for companies that don’t comply — including the imposition of tariffs on the goods they manufacture.

The proposed trade agreement, unlike NAFTA, includes protections for workers in all three North American countries as well as a stipulation that 40% of the cars assembled in the region would have to be made by workers earning at least $16 an hour, multiples higher than the average hourly wage earned by Mexican auto workers. The protections include “the right to collectively bargain”, “freedom of association,” and the “right to strike.”

Mexican workers will also be freed to challenge so-called “protection” contracts, which lock in low wages as a precondition demanded by many companies to set up shop in the country.

These protection contracts are part of the wage-repression system in Mexico, established between global manufacturers, local unions, and governments. This system has been able to repress wages in auto plants even as wages in other emerging-market auto plants, particularly in China, have surged. And it has induced automakers to shift production from the US to Mexico, at the expense of US workers.

These contracts are particularly prevalent in Mexico’s auto sector, whose exports to the US market continue to grow even as total deliveries of vehicles to end-users in the US have fallen.

It is hoped that the new measures featured in USMCA will go some way to strengthening, at long last, labor standards and rights in Mexico as well as reduce systematic wage repression. But there are major concerns about just how rigorously the new standards will be enforced. Hence, the new demand that inspections be held in Mexican workplaces to ensure they are being implemented.

While the proposal may enjoy strong support among auto workers in the US and the unions that represent them, it faces stiff opposition south of the border.

Mexico’s chief negotiator on the USMCA deal, Jesús Seade, bristled at the idea of what he called “Lone Ranger inspectors” from the U.S. being drafted in to survey Mexican factories. Seade insists that Mexico is working hard to improve workers’ rights, citing a February 2017 constitutional amendment enshrining labor rights.

The proposal has also aroused fits of apoplexy from business lobby groups in Mexico. After meeting with Seade this week, the Business Coordinating Council (CCE) labelled the U.S. lawmaker’s proposal as “extreme” and “totally unacceptable,” arguing that it “could severely affect competitiveness in Mexico and its partners in North America.”

Aha — worried about getting caught cheating and having to raise wages.

Ever since NAFTA, the central plank of Mexico’s economic model has been to attract global manufacturers by keeping wages and other labor costs miserably low. A recent survey by Mexico’s statistical institute INEGI showed that less than 4% of Mexicans earn over $800 a month.

As Moody’s notes, “Mexico has maintained its comparative advantage through negative real wage growth, at the expense of income levels. As a result, instead of converging through trade, wage and productivity gaps with the US have widened.”

This was a feature, not a bug, of NAFTA, which created a template for economic rules in all three of its signatory countries that ensured that the lion’s share of the benefits would flow to capital, and away from labor.

In Mexico, the systemic wage repression, often carried out in connivance with local political and union leaders, has been a major boon for manufacturers, but ultimately a big drag on the Mexican economy, depriving it of the internal demand needed to drive robust, long-term economic growth and development.

But the days of Mexico’s low-cost labor model may already be numbered, as business groups in Mexico come under increasing pressure on wages and labor standards, not only from its NAFTA partners but also at home.

The AMLO government already passed a sweeping major labor reform bill earlier this year and is now pushing for a complete overhaul of the laws governing the outsourcing and subcontracting of jobs in the country.

Millions of jobs have been subcontracted in recent years in order to further depress labor costs, particularly in high-risk sectors such as mining. According to a report by Ernst & Young, subcontracting structures are “commonly used in Mexico by both foreign and Mexican businesses and generally consist of a group of companies establishing one or more operating companies and one or more service companies to provide the labor component of the business activity.”

“Unfortunately”, the report adds (emphasis added), “these structures have been abused” (as opposed to being used in the exact way they were designed to) in order to deprive “employees of their social security, union, and housing benefits, among others.”

The main goal of the new legislation is to combat these abuses, while setting clear parameters for the legal use of outsourcing and subcontracting. It also seeks to render the profits of the operating companies subject to profit sharing and social benefits.

But that appears to be the last thing that manufacturers in Mexico want. Business lobby groups are furiously lobbying against the proposed law. The bill will now go through extensive consultation with stakeholders, including the business lobbies.

The fact that AMLO’s left-wing Morena party holds solid majorities in both houses suggests the business lobbies may get fewer concessions than they’re used to. One thing that is clear is that Mexico’s low-cost labor economy is in dire need of an upgrade — an upgrade that stimulates internal demand, such as though real wage growth.

The people voted to scrap the project that was one-third finished, $4 billion over budget, mired in allegations of corruption, and built on an unstable lake-bed. But it has a life of its own. Read…  Mexico’s Cancelled $13-Billion Zombie-Airport Refuses to Die

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  1. Noel Nospamington

    Canadians consider the lack of universal health care in the USA a form of wage suppression since it restricts employment mobility and collective bargaining for labour.

    Even with private employer provided health insurance in the USA, it at best only provides partial medical coverage, since there are still co-pays and out of network costs which are borne by employees.

    1. JEHR

      Yes, when American companies set up shop in Canada they do not have to give the Canadian employees healthcare as it is provided by the government–another subsidy for the American companies. We should be complaining about being taken advantage of, but we won’t.

      1. Larry Motuz

        Actually, NO.

        The different provinces have different ways of ensuring that Employers do pay.

        In Ontario, where I live, there is an Employers Health Tax, with financial exemptions for small employers but none for the largest. See: Actually, NO.

        The different provinces have different ways of ensuring that Employers do pay.

        In Ontario, where I live, there is an Employers Health Tax, with financial exemptions for small employers but none for the largest. See:

        Other provinces have other mechanisms that have employers contributing to the costs..

  2. Joe Well

    Few things are more revolting than the way affluent Latin Americans wield nationalism, xenophobia and anti-Americanism as a weapon of distraction while they rob the majorities of their countries’ populations. And normally, US elites play along, including IDPol-obsessed US academics who uncritically portray the US as the Great Satan of a monolithic, classless and raceless Latin America. It is a rare thing to see the lie exposed quite so clearly.

    And to talk with young Mexicans who are not affluent and want to get ahead is truly depressing. They face crushing student debt on top of a shocking level of racism and socioeconomic bigotry on the part of the professional managerial class that makes Buttigieg supporters look like BLM activists. And frequently as well the need to work for peanuts to support parents who can’t make ends meet on their own.

    1. Joe Well

      I would just add, when I see Mexico, a highly neoliberalized country with a long tradition of Trump-style fake populism, I see the near-term future of the United States, and it is scary, especially because the US doesn’t have many of the compensatory benefits that Mexico has, like relatively little NIMBYism as to housing construction, vast spending on culture, much better transportation planning, and stronger restraints on the healthcare mafia combined with a basic free clinic system. Mexicans earn little but the basics are taken care of better.

      1. synoia

        Considering the Neo liberalism, I don’t see much difference between Neo liberalism, and the practices in the UK from the start of the Industrial Revolution, and possibly before in the Feudal System.

        In the UK’s feudal system it was at one time illegal for a vassal to be outside one’s parish on Sundays. A feature not yet tried in modern Feudalism, however it could become a feature of Climate Change mitigation.

        Especially with the abundance of public spirited License Plate reading companies.

      2. Dirk77

        Last night, I stopped channel cruising briefly to watch the halftime of the Pac-12 championship game. Two people were competing for tuition money. $100K to the winner. I knew student debt was bad, but it was still shocking. Hunger Games.

  3. Susan the Other

    Mexico should also do recovery, recycling, etc. industries. Mexico should do maintenance. For a decent wage.

      1. Joe Well

        I don’t get what Susan is saying, either. Mexico, like any other country, has recycling industries, and from what little I have seen, people and businesses are far more likely to maintain goods rather than throw them out and replace them. I assume it is the upshot of low labor costs.

        Certainly no one here would be suggesting a country import waste from other countries (with a huge carbon footprint due to the transportation). That has not gone well in Asia and Africa.

        1. Susan the Other

          I’m concerned that the old model for social stability is dead. Because we can’t expand industry and manufacturing like we did last century. Expanding industry, growing populations, growing prosperity – they only worked until we began to run out of cheap resources, our populations began to fall (yes there are still too many of us but that doubles the misery when everything slows down) and prosperity plummeted. So now we need a new model for prosperity and security. I’d just suggest that that model should be one of well paid services, maintenance, recycling, waste management and etc. And we should stop putting all our expectations on the backs of the automobile industry. It is one of the worst polluters of all time.

          1. Scott1

            I was a young believer in the UN. I’m 66 now and when I was 12 I read an article in The New Yorker about all the great things the UN was doing and would be doing.
            So far the promises of the UN have not really materialized.
            How about banking? It is not as if we do not have the practical sense to determine
            what “Best Practices” are or would be.
            Economic warfare is what these agreements amount to. Were there to be a stronger UN it would issue economic war rules that regulated agreements like NAFTA.
            I imagine a currency that was fungible alongside any other national currency infused in such amounts to mitigate the deleterious effects of economic war based on the interests of
            those generals in the econ wars out to collect every single deed.
            For instance starting with the disparity of pay for women. The UN currency would make up the difference between men & women aye?
            Somehow you want to make all labor get a living wage.
            I have said that if you cannot even imagine utopia you ought not call yourself a human being. There are all these movies that well present imagined dystopia. Dystopia would seem right easy to imagine.
            There have been and will be people who live in utopia and still are miserable so it is
            not as if we have to make everything horrible to maintain individual dramas & misery.
            One guy I have read I would trust to come up with some economic principles for a worldwide utopian base is Michael Hudson.
            Mr. Hudson is a pick particularly for his positions on land use.
            Affordable housing is a phrase in the mouth when it is really all about affordable
            security in the deeds to the land you live on. Thanks

  4. WJ

    Given the current logic of U.S. politics, Trump will either support these provisions or will orchestrate an overthrow of the Obrador regime.

      1. JBird4049

        Of course, Nicaragua of all countries is a grave threat to the national security of the United States. Nicaragua was doing just great under the peaceful, prosperous, lawful Somoza administration until those awful Sandinistas under commander Daniel Ortega’s leadership overthrew it in 1979.

        It is unfortunate that the Contras despite fighting for years to liberate their fellow Nicaraguans from the Sandinistas were unable to. It is rumored that the freedom fighters were quietly supported by President Ronald Reagan who had to go around the unfortunate legislation forbidding him to.

        Now, once again, all these years later that perfidious Ortega is once again a threat to the peace and security of not only the United States, but to all of the Americas. Maybe this time we can defeat the Sandinistas.

        Ya know, I am not that old and yet, somehow my life feels like Groundhog Day with the superficial, yet friendly and charming, President Reagan being replaced by the superficial, yet mendacious and boorish, President Trump. The Cold War replaced by Cold War, The Reality Show:This time it’s really stupid!

        Maybe I died as teenager and was sent either to Hell or Purgatory for my sins. Or maybe, I am in a coma complete with bad dreams. Did my pneumonia actually kill me or that bad spaghetti? Was the pot spiked or the beer? Or maybe I got hit by a train? I swear the more I read the news the more I think I’m the crazy person here.

        1. mpalomar

          “the superficial, yet friendly and charming, President Reagan being replaced by the superficial, yet mendacious and boorish, President Trump. The Cold War replaced by Cold War, The Reality Show:This time it’s really stupid!”

          – Is it possible this counts as some sort of improvement? The scrims are slowly being removed, we’ve arrived at the boorish boob stage, next come the monsters. Some recognize them already.
          As far as what we’re doing here in this bizzarro world I once asked a Buddhist friend what the hell kind of past life could possibly account for it; Buddhists theoreticians suggest not dwelling too much on the unknowable.

    1. Joe Well

      Just FYI, it’s Lopez Obrador. Obrador is his second last time (mother’s maiden name), which is standard per naming conventions in Mexico.

  5. JBird4049

    I just have to say that I love the title. Now, can this title also be applied to China too someday?

      1. cnchal

        If Chinese wages were to double evey decade, how many decades would it take to reach parity with your wages?

        I predict you will die decades before that happens, even if you are teenager today.

        1. Peter

          It is funny that wages seem to be the only indicator for social development and social health and progress, in typical US citizen fashion ignoring the systems that make live cheaper like universal healthcare, efficient infrastructure.

          My wife and I live on a combined pension of 1750€ = 1935.28$.

          We live in Portugal, in the middle of the Atlantic and possess a house (farmhouse with central building about >130years), with a >3000m^2 garden, keep a used car, are as pensioners excempt from paying health care insurance which for the average person employed costs about 120€/family (afaik).
          The tax on the property was 150€ – last year we paid 0.
          Car insurance is 190€/year, car tax is 58€.
          Internet, cellphone, TV and landline cost together as a package about 50€/month, electricity about 50€/month.
          Bus fare to the city from the station 100m from the house to town is about 2€/person.

          With the funds we receive monthly (combined Canadian and German pension fund) we are able to afford the mortgage for new roof, windows and doors of 25 000€ at 350€/month, a short term loan I took out for 2 e-bikes at 100€/month, and am still able to put aside 300€/month for the yearly cost of house insurance and the life insurance for the mortgage and the about 600€ income taxes.

          The average income on the island here is about 650 – 750€, so usually both parents have to work, which is made possible through the fact that children from the age of three visit school for the whole day for free, with a meal available for 2€/day.

          The personal tax exemption is close to 7000€, so very little tax is due and the social insurance cost is already paid for. Social insurance is a package including pay for pensions (which is rather small), healthcare, maternity and unemployment insurance.

          On those incomes by a family of 2 working parents most families own (or the bank owns it) their house which is of cinder block construction and clay tile roof constructed according to the seismic safety code and costs about between 80 – 150k€. with a mortgage of roughly 350€/month.
          Lately metal stud frame houses are available that are much more affordable at around 50k€

          Not to romanticize anything, lives are maybe not as easy as perhaps in a typical middle class family in the US, but people here are generally under much less stress and have considerable time for family and each other, have few complaints aside from those against government corruption which still seems to have a place in Portuguese political live quite similar to that of any country in the world.

          Compare those incomes to the income in China:

          For the world as a whole, average real per capita GDP was $20,055.65, while the median figure was $12,981.40. The large difference between the average and the median income means that world income is concentrated in a few rich countries, thus suggesting a high level of global inequality…………
          The figure shows that China’s average real per capita income is $12,472.51, which is in line with the world median income but far below the world average…………………
          The figure suggests that the high average income enjoyed by Beijing and Shanghai does not necessarily translate into high living standards because the cost of living was also extremely high in these two cities. In other words, the living standards in Beijing and Shanghai in terms of the purchasing power of yuan were not necessarily higher than the poor provinces, but were instead much lower. Hence, measured by average living standards in the provinces, inequality in China is not as severe as people often think.

          Now compare that to Portugal, a member of the EU:

          The national minimum wage in Portugal in 2019 is €600 per month (based on 14 payments in a year, or €700.00 based on 12 payments). …………..
          The average salary in Portugal in the second half of 2018 was €1,148.29, according to data from Trading Economics – up from €1,144.61 in the previous period.

  6. Carolinian

    If only those dratted Republicans hadn’t pushed NAFTA through Congress. Oh wait.

    Should the bill pass maybe Bill Clinton could appear at the signing ceremony and apologize. Of course he claimed at the time that labor protections would be pursued but of course they weren’t. Indeed all the bad things that were predicted to happen because of NAFTA did happen and both Mexicans and American workers have suffered.

    1. jrs

      This is simply wrong, Republicans actually DID push NAFTA through Congress.

      House Democrats voted against NAFTA period. Trump says otherwise,but Trump lies constantly. You can say to a degree it was bipartisan (Clinton afterall) but making Republicans out as playing no part of it is not true.

      “Democrats in the House of Representatives voted against NAFTA by a margin of 156 to 102, while Republicans supported NAFTA by a margin of 132 to 43. Clinton would have been dealt a significant legislative defeat in his first year in office had the Republicans in Congress not supported his position on NAFTA.”

      1. Carolinian

        I didn’t say the Republicans played no role and if memory servers NAFTA was actually Bush Sr’s idea but it wouldn’t pass until Bill Clinton picked it up. He would have been dealt a legislative defeat if those 102 Dems hadn’t voted for it.

        For over a couple of decades now NAFTA has been very much associated with Clinton and used as evidence of the neoliberal change of course that he brought to the Dems. Are you claiming that he is just a minor figure in what happened?

      2. ewmayer

        Yes, Clinton and Phil Gramm were best buddies on multiple pieces of toxic legislation, including that pair of infamous financial-deregulatory ones, Gramm-Leach-Bliley (did away with Glass-Steagall) and the Commodities Futures Modernization scam, in which Gramm’s wife Wendy also played a key role.

  7. Donna

    It seems to me this could just be Lucy and Charlie Brown with the football. Democrats will be able to say they fought for these protections but of course in the end they had to compromise it all away. I am glad to hear that last time the Democrats voted against NAFTA, Today’s Democrats are much more in the pocket of industry than they were under Clinton. I have become very cynical and mistrustful. I hope I am proved wrong.

  8. inode_ buddha

    As a blue collar rust belt worker, I think it would be nice if the US investigated wage repression in the US.

  9. Keith McClary

    “attract global manufacturers by keeping wages and other labor costs miserably low.”

    In the US it’s called “Right to Work”.

  10. Sound of the Suburbs

    Why do US firms off-shore to Mexico?
    US companies prefer Mexico with its cheap labour, lax health and safety standards, and lack of environmental regulations. They can expose workers to hazardous chemicals and just pump toxic waste straight out into the environment, without incurring the costs associated in dealing with them in an environmentally friendly way.

    Female workers are best as they are less likely to stick up for themselves and are easier to exploit. Most of them are single mothers as well, they really need that wage to look after their children, it’s perfect.

    Every avenue must be explored to reduce costs.
    The lower the costs, the higher the profit.

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