As Paul Krugman Says, Trump’s Nafta Demand For Higher Mexican Auto Wages Is Ridiculous

Now it’s entirely true that we don’t have to take as gospel everything that Paul Krugman says in his New York Times column. He is, when writing there, working as a rhetorician for a certain set of political ideas, ideas which – to put it mildly – not all of us agree with. However, Krugman the trade economist is someone we must, at the very least, take very seriously. That’s not to say that he’s absolutely and entirely right upon everything for no human ever is even within their own subject of expertise.

It’s also true that, at least as far as I’ve seen, Krugman hasn’t derided this latest Nafta renegotiation demand as ridiculous. But we can still derive that result from his writings. Because what Trump and Navarro are demanding, presumably with Trump’s backing, is that Mexican auto worker wages would have to be as high as American ones in order for tariff free access to continue. Which is just to entirely misunderstand how wages work within an economy.

But it is the demand being made:

The U.S. is seeking to complete its overhaul of the North American Free Trade Agreement with new rules that would penalize the Mexican auto industry—unless it boosts wages to about $16 an hour.

President Donald Trump’s administration is winning some support from Detroit auto makers for its Nafta proposals by including terms that would favor U.S.-based manufacturers over Asian and European rivals that produce cars in the U.S.

Support from Detroit might help the administration reach its goal of concluding a Nafta deal by mid-May, which could allow it to push the pact through Congress by year’s end.

Under Nafta, U.S. manufacturers have produced cars and parts in Mexico, where wages are lower, but Mr. Trump’s administration is now seeking to force Mexican factories to pay more for labor—or send auto jobs back to the U.S. or Canada.

Robert Lighthizer, the U.S. trade representative and lead negotiator for the administration, is reworking Nafta to require that 40% of the content of any car that trades duty free within the North American bloc must come from workers who earn above a particular wage level, according to industry officials familiar with the trade negotiations.

It’s just nonsense.

Mexican workers’ wages are at the heart of a major proposal from the United States aimed at breaking through an impasse on automobiles and securing a new North American Free Trade Agreement.

The latest U.S. idea incorporates worker salaries into the formula for calculating which cars can avoid tariffs under the auto rules of origin, several sources in different countries said.

It doesn’t even work on its own terms. Cars made with expensive labour will be expensive. So the American producers don’t need to be protected, by tariffs, against cars made with expensive labour. Which is exactly what the concession is, that if expensive labour is used then the American producers won’t be protected.

Hmm, not really worth having, is it?

There’s also the point that American consumers get shafted either way. Either they pay tariffs upon cheaper cars, or not on more expensive, but either way they must pay more for their cars.

But we’ve also a deeper problem. Wages aren’t set by sector in an economy, not in this manner. Wages are set by the average productivity in an economy, as Paul Krugman has famously pointed out:

– Wages are determined in a national labor market: The basic Ricardian model envisages a single factor, labor, which can move freely between industries. When one tries to talk about trade with laymen, however, one at least sometimes realizes that they do not think about things that way at all. They think about steelworkers, textile workers, and so on; there is no such thing as a national labor market. It does not occur to them that the wages earned in one industry are largely determined by the wages similar workers are earning in other industries. This has several consequences. First, unless it is carefully explained, the standard demonstration of the gains from trade in a Ricardian model — workers can earn more by moving into the industries in which you have a comparative advantage — simply fails to register with lay intellectuals. Their picture is of aircraft workers gaining and textile workers losing, and the idea that it is useful even for the sake of argument to imagine that workers can move from one industry to the other is foreign to them. Second, the link between productivity and wages is thoroughly misunderstood. Non-economists typically think that wages should reflect productivity at the level of the individual company. So if Xerox manages to increase its productivity 20 percent, it should raise the wages it pays by the same amount; if overall manufacturing productivity has risen 30 percent, the real wages of manufacturing workers should have risen 30 percent, even if service productivity has been stagnant; if this doesn’t happen, it is a sign that something has gone wrong. In other words, my criticism of Michael Lind would baffle many non-economists.

Associated with this problem is the misunderstanding of what international trade should do to wage rates. It is a fact that some Bangladeshi apparel factories manage to achieve labor productivity close to half those of comparable installations in the United States, although overall Bangladeshi manufacturing productivity is probably only about 5 percent of the US level. Non-economists find it extremely disturbing and puzzling that wages in those productive factories are only 10 percent of US standards.

The basic demand, Mexican wages in a certain type of factory must be different from Mexican wages more generally just doesn’t work. Because that’s just not how wages are indeed determined.

But then there are some of us who have been saying for some time now that having Lighthizer and Navarro anywhere near US trade policy was going to be a very bad idea indeed, haven’t there?