There is a term in Spanish called maquiladora, unique to Mexico, that may sound like a tasty drink with ample tequila but in reality is a series of factories sprung up over the course of the past thirty years.
Unlike your typical factories in which workers finish a product and send it onto the market, however, the maquiladora enjoys tax and tariff breaks that allow it to import raw goods or resources wholesale from afar, assemble them together, and send them back to the host country to be completed in yet another factory.
Since minimum wage in Mexico is approximately $5 per day, it’s far cheaper for an American company to operate one of these sweatshops that would never pass muster in America for assembly of particular parts; big companies like Ford and Microsoft have long since built their own external factories to capitalize on this trend.
The maquiladora, and the American jobs they take away for a pittance, reflect the sad state of American manufacturing in the post-NAFTA era. While Bill Clinton sold the country on a trade pact that would free up the economy for advanced manufacturing and jobs, the reality is that one piece of paper cannot advance business to the point that manual labor becomes obsolete.
As a result, millions of manufacturing jobs have drained out of the United States while Mexico’s GDP has tripled. Indeed, the sole redeeming factor of the North American Free Trade Act is that it propelled Trump into the White House rather than giving Hillary her dream of starting a war with Russia.
Trump didn’t need to provide much detail on the campaign trail, for standing up to the outflow of jobs was persuasive enough, but now that he sits at 1600 Pennsylvania Avenue, implementation of a new trade policy has begun to come into shape.
An eight-page letter to Congress sent at the conclusion of March has shown some insight into how Trump plans to re-negotiate the deal he excoriated left and right. Trump is demanding that US trade partners follow the standards set for labor and workers, potentially eliminating the nations that subjugate their workers to abysmal conditions (the leaked story about Apple’s sweatshops in China a few years back comes to mind).
Democrats, who purportedly take the side of the working man, quickly cried foul at the terrible thought of making sure workers in Vietnam or Brunei make more than pennies per day if they work for American parts.
Companies would be allowed to sue foreign governments who negatively affect their bottom line, such as imposing regulation that is intended to safeguard the environment but ends up lining the pockets of overseas bureaucrats or unfairly propping up their own industries.
Above all, Trump wants to ensure American workers get the biggest slice of the pie, protecting them against unfair practices like steel dumping or the maquiladora import-export process.
One major question about Trump’s new trade policy is that it does not affect or call into question currency manipulation. Indeed, concerns about sweatshops arguably affect Americans less than the changes to China’s money supply and value.
The Chinese government is notorious for altering the value of the yuan; at the height of their economic boom in 2007 they propped it up in order to prevent deflation and ensure greater growth, while today they undervalue it in order to get cheaper imports and compete with neighboring nations who have begun to leech away at their own middle class.
Democrats, eager for a sound byte to play on MSNBC, have compared Trump’s vision for a new NAFTA policy to the Trans-Pacific Partnership, the 13-nation trade treaty that President Trump pulled out of immediately upon taking the office. While it was an easy jab to make, Dianne Feinstein and Elizabeth Warren are (predictably) wrong (again).
The TPP battered down tariffs set up by nations like Japan and Malaysia which encourage US companies to export both products and jobs rather than relying on the domestic market for both; Trump’s new TPP ensures that tariffs are put in place so that workers aren’t subject to overseas outsourcing.
If the big winners will be blue-collar workers and the big losers will be foreign companies that prey on them, it’s not clear which category American companies will fall into. Some economists expect the auto industry to take a hit by eliminating their cost-cutting practices, but the improvement to the quality of their products could offset this.
Investors will need to look at companies with strong overseas operations and consider short-selling these stocks in the event that they divert more of their expenses to their workforce rather than pocketing the profits of sweatshops half the world away.
Regards,
Ethan Warrick
Editor
Wealth Authority
