by Ugur Akinci, Ph.D.
http://tork.blogspot.com

Does NAFTA (North American Free Trade Agreement) make sense, and if so, for whom? That’s the classic “qui bono” question the U.S. commentators are trying to nail down on this tenth anniversary of the treaty signed between the United States, Canada, and Mexico.
Evaluating NAFTA might perhaps provide some clues regarding what to expect if and when the Turkish-EU relations progress beyond the current Customs Union arrangement and assume a NAFTA-like intensity with Turkey’s future full-membership in EU.
Critics point out that after NAFTA, the trade deficit of the United States has reached monstrous proportions, justifying Ross Perot’s famous warning against the “giant sucking sound” that he said would be heard by all if NAFTA was signed. Perot was of course referring to the jobs that would be lost to the south of the border.
Mexico
Perot supporters point out that the trade deficit that was $1.66 billion surplus for the US before NAFTA, has turned into a $37.1 billion surplus for Mexico. While the steep decline in manufacturing jobs in the United States is not exactly a state secret, Mexico has gained 500,000 manufacturing jobs between 1992-2003. A recent study by Robert Scott, an economist with the Economic Policy Institute, showed that NAFTA has indeed caused a net job loss of 879,280 in the United States.
The fact that 1.7 million American small farmers went bankrupt during the last 10 years is also interpreted by some as an echo of the same “giant sucking sound.”
At one level, the process seems to be unstoppable with or without NAFTA. When minimum hourly wage in the U.S. hovers around $8, and DAILY wage in Mexico is about $4 dollars, U.S. manufacturers will continue to invest in Mexico.
However, that does not seem to be the end of the story. Since daily wages in China hover around $1, even Mexico has already started to lose jobs to China in this “race to the bottom.”
NAFTA-defenders, though, point out that $12 billion of Mexico’s $37 billion trade surplus is attributable to oil exports to the U.S. Even without NAFTA that $12 billion would have to be transferred to Mexico, they claim, as an “overhead” of American lifestyle.
Jobs & Immigration
The other $25 billion seems to be mostly due to cars and computers imported from Mexico. NAFTA defenders argue that these are quality jobs with multiplier effects which helped contain illegal immigration to the United States by keeping Mexican labor in Mexico. Although immigration from Mexico has not stopped by any stretch of imagination (the number of undocumented Mexican migrants in the United States rose from 2 million in 1990 to 4.8 million in 2000) NAFTA-defenders claim that the U.S. would have a much worse immigration problem if it weren’t for the local jobs created in Mexico thanks to NAFTA.
Wages & Productivity
All these discussions about comparative wage levels I believe must be weighed against the key concept of “productivity.”
If a product is manufactured by labor that costs $10 an hour and is produced in half an hour, the portion of labor in the overall cost structure is $5 dollars.
If the same product is manufactured by $5 an hour labor but in a full hour, then the product’s effective labor cost is again $5 dollars.
Thus higher productivity has a leveling effect between disparate wage levels by lowering labor cost per item.
The United States indisputably has one of the highest productivity levels in the world. However, whether such productivity edge is enough to lower labor cost per item to a level competitive with much lower wage levels of Mexico or China is not clear at all. I have a feeling it’s not.
Chinese tsunami
The question might ultimately become obsolete within ten years anyway as China looms over the horizon as a low-wage high-productivity low-regulation tsunami wave ready to clear every regional free trade agreement on its path. That’s when we might hear the mother of all giant sucking sounds coming, not from Mexico, but from the direction of the rising sun.
For example, the U.S. companies that are now paying $15 an hour plus benefits may soon be “competing” (for lack of a better word) against Chinese companies that are heavily subsidized by the Chinese government, do not pay any benefits, and pay 61 cents an hour, according to Michael Ross, the president of the Franklin County Area Development Corporation in Maryland.
If this analysis is correct, then it means that Turkey’s EU application is a much more urgent race against time than we realize.
Timing
Turkey currently has a healthy edge in the European market for items like TV sets (37% for all European sets) and similar household electronic items.
So if Turkey can join EU before the Chinese tsunami arrives, it may gain more business in those non-IT sectors that EU has reached the end of product-cycle and is willing to outsource to peripheral manufacturers like Turkey.
But if the membership process takes too long, China may drain significant business away from Turkey’s EU account.
Turkey has waited too long during the privatization of state enterprises until a good chunk of the available international capital was lured to aggressive-contenders like Brazil, South Korea, Taiwan and India. I hope the EU process will not be a repeat of the privatization episode even though there are more factors in the EU-venture that do not depend solely on Turkey’s political will.
Productivity – Job # 1
That’s all the more reason why Turkey should do its utmost to raise her industrial productivity to a level ready to compete with China’s awesome wage differential. Otherwise all except China will lose in this merciless race to the bottom of the wage spiral.