Lighthizer’s NAFTA narrative built on a false assumption about U.S. jobs and Mexico

The fourth round of talks to renegotiate NAFTA came to an end yesterday with U.S. Trade Representative Robert Lighthizer expressing his disappointment in both Canada and Mexico as well as the U.S. business community.

In post-round remarks, Lighthizer returned to a theme of his that a major problem with the current version of NAFTA is that it gives too much incentive to U.S. companies to locate production in Mexico. This is an echo of the old charge that NAFTA has unleashed a “giant sucking sound” of investment and jobs fleeing the United States for low-wage Mexico. Like many false assumptions, this one dies hard, but the facts simply do not support it.

Any enhancement of economic freedom, such as NAFTA, will allow U.S. producers to deploy their resources in ways that make more sense economically. In some cases, that has meant relocating manufacturing operations to Mexico to produce goods that are more labor intensive, but there has been no exodus of investment or jobs to Mexico as a result of NAFTA.

In fact, according to the U.S. Bureau of Economic Analysis, from 2011 to 2016, the annual outflow of direct manufacturing investment from the United States to Mexico averaged $3.1 billion. To put that number in perspective, during that same period, annual investment in domestic manufacturing plants and equipment in the United States averaged $217 billion. That means U.S. investment in manufacturing in Mexico has averaged a mere 1.4 percent of what companies invest in our domestic economy.

The trend in manufacturing jobs is similar if a bit more complicated. The number of manufacturing workers in Mexico that are employed by U.S. affiliates has indeed been trending up in recent years, but at a slow and uneven pace. In 2000, the majority-owned affiliates of U.S. multinational companies employed 641,900 manufacturing workers in Mexico. After declining for the next decade, that number rebounded to 706,200 in 2014, based on the most recent data from the BEA on the activities of U.S. multinationals.

Meanwhile, since 2000, the number of manufacturing workers in the United States has declined from 17.2 million to about 12 million — a decline of 5 million net manufacturing jobs. But here too the trend was downward from 2000 to 2010, followed by a modest recovery of jobs since then.

President Trump and his trade advisors routinely blame job losses in manufacturing on trade deals such as NAFTA and the outsourcing they supposedly encourage, but objective studies show otherwise. The biggest reason for the decline in manufacturing employment in the United States since 2000 has been dramatic productivity gains fueled by automation. U.S. companies are not shipping jobs wholesale to Mexico. They are investing heavily in their U.S. factories so they can produce more valuable products more efficiently with fewer — but also better educated and better paid — U.S. workers.

Even if you assume that any increase in Mexican manufacturing employment by U.S. companies in Mexico resulted directly from jobs that moved south from the United States, the changes in Mexican employment are trivial compared to changes in the U.S., as the nearby chart shows.

On top of that, the correlation runs the wrong way for the “giant sucking sound” narrative. From 2000 to 2010, when the U.S. economy was shedding those 5 million net manufacturing jobs, U.S. manufacturing affiliates in Mexico were also trimming their payrolls by a net 119,300. From 2010 to 2014, affiliate employment in Mexico grew by 183,600, but during the same period U.S. manufacturing employment grew by 656,400. In fact, yearly changes in manufacturing employment at Mexican affiliates and at U.S. factories are positively correlated.

When we examine the best available evidence on manufacturing investment and employment, there is no evidence that NAFTA or any other cause has spurred a systematic or wholesale transfer of manufacturing activity from the United States to Mexico.

The Trump administration’s chief motivation for demanding that NAFTA be renegotiated is built on a false assumption.