SOME people in Iowa and across the United States are opposing the North American Free Trade Agreement (NAFTA) because they believe it will encourage US firms to move production to Mexico where wages are low. They point out that already US companies are manufacturing some $500 billion worth of goods in overseas production facilities.
This is very true, but low wages are not the principal reason that US companies have located production facilities overseas. According to the US Commerce Department, 85 percent of the overseas production of manufactured goods by foreign subsidiaries of US companies is in industrialized, high-wage countries such as the members of the European Community, Canada, Japan, Australia, and New Zealand. Only 15 percent of overseas production is in low-wage areas such as the Asia Pacific countries and in Central a nd South America.
The US companies in the industrialized countries had total 1989 sales of $429 billion. US manufacturing concerns in less developed, low-wage countries had total sales of only $77 billion.
Understanding how plant sites are determined helps understand why low wages will not necessarily mean more plant relocations from the US. Plant-site decisions are based on the availability of natural resources, the market, and labor. In the case of resource- or market-oriented plants, factors other than labor costs determine the general region where the plant is located. Wage rates and other labor costs are a secondary consideration, if a consideration at all.
The major factor in locating a resource-oriented factory is access to raw materials. The chief concern in a market-oriented plant is to be more competitive in a foreign economy, as by avoiding tariffs and quotas that protect local markets from imports. In the case of processed foodstuffs and other consumer products that involve high transportation costs relative to the price of the product, local production in foreign markets is necessary to be competitive.
In a labor-oriented industry, transportation costs are small relative to the value of the product, and labor costs are important in determining competitiveness. The clothing and electronic-components industries are good examples.
Even in labor-intensive or labor-oriented industries, however, it is a myth to assume that low wages are the dominant factor in plant-location decisions. Wage rates are not necessarily equivalent to unit labor costs. Labor costs depend on productivity as well as wage rates. Productivity, in turn, depends on workers' skills and other factors such as capital, management skills, technology, utilities, and transportation costs.
AS a result, because of cost advantages other than wages, some high-wage countries can produce certain goods with lower labor costs per unit than competing firms in low-wage countries. True, there are some US industries where labor costs are the major consideration for plant-site selection.
But even in those cases, the impact of NAFTA is likely to be small. Many labor-intensive US companies are already taking advantage of lower labor costs in Mexico. Under the maquiladora twin-plant program, foreign companies in Mexico use duty-free imported machinery and parts from the US to assemble and manufacture a semifinished or finished product. These goods are exported to the US with duty paid only on the value added in Mexico. NAFTA will have very little impact on companies already participating in
the maquiladora plan.
Many US companies that market labor-intensive products such as shoes and clothing no longer do their own manufacturing. They contract abroad with independent foreign companies to make the products they distribute.
While it is true that Mexico offers significantly lower wage rates than the US at the present time, it is not necessarily true that US manufacturing concerns will rush to Mexico to take advantage of these lower wage rates. But it is true that, under NAFTA, the Mexican market will be open for many goods produced in the US that have been heretofore taxed or tariffed and have not been economically feasible to purchase in Mexico.
For Iowa and for the US, NAFTA will be an economic advantage.