Seven years ago, Southern California businessman Juan Valle turned his gaze back to his native country of Mexico.
Valle, president of Jonathan Louis, a Gardena, Calif., maker of living room furniture, opened a factory in Tijuana to build sofas, creating 800 to 900 contracted jobs in the Mexican border town.
It was the North American Free Trade Agreement that made his venture possible, tearing down trade barriers between the United States, Mexico and Canada and helping to usher the region's economy into the age of globalization.
“Yes, we have benefited from that,” Valle said of NAFTA. “I think it's easy to do business in Mexico.”
Jan. 1 marks the 20th anniversary of NAFTA's implementation. The controversial trade deal's impact on the American economy remains a matter of debate, even as the United States has entered into other free-trade agreements and is negotiating similar pacts with nearly a dozen Pacific Rim nations and the European Union.
“We're not able to make a definitive statement overall on whether it was a good or bad thing,” said Ferdinando Guerra, international economist at the Los Angeles County Economic Development Corp. “The bottom line is with respect to any free-trade agreement, it's essentially an issue where you're going to have positive impacts and you're going to have negative impacts with regard to jobs.”
NAFTA, negotiated mostly by President George H.W. Bush and signed into law by President Bill Clinton, created a trilateral trade block encompassing the United States, Canada and Mexico. In addition to removing tariffs between the three nations, the treaty allowed for easier and more secure cross-border investment within North America.
NAFTA's encouragement of trade with Mexico and the opening of U.S. factories south of the border represent the treaty's most controversial provisions among American workers. Mexico's allure for many companies comes from that country's far lower labor costs and weaker environmental regulations, which both provide dramatic cost savings.
That led companies to shut down or downsize factories in the United States, sending the associated jobs south of the border. This was true for various industries, including automotive, electronics and furniture.
The Economic Policy Institute, an independent nonprofit think tank, estimates that NAFTA has so far cost U.S. workers 682,900 jobs because of the growing trade deficit with Mexico.
And for companies that kept their production within U.S. borders, labor unions representing workers at those sites often found themselves with much weaker bargaining power because of the threat of jobs relocating to Mexico. This loss of worker leverage from NAFTA and general globalization also has been blamed for stagnant U.S. wages over the past two decades.
“NAFTA has done great harm to American workers,” Rep. Janice Hahn, D-Calif., with deep ties to the labor movement, said in an email. “We've lost good-paying American manufacturing jobs as a result of NAFTA. So as long as working families continue to struggle for good-paying jobs, free trade agreements like NAFTA will continue to be an impact.”
For example, in 2002, Douglas Furniture, known for its dinette sets, eliminated its final 165 manufacturing jobs in Redondo Beach, completing a years-long transition of production from “Made in America” to foreign-produced furniture. By 2005, Douglas Furniture employed about 2,000 workers in a Tijuana factory with only 50 administrative and marketing staff at its corporate headquarters in El Segundo, Calif. Executives affiliated with Douglas Furniture were unavailable to comment.
“So from a labor perspective, there's a lot to lose,” Guerra said. “But there are benefits, too.”
Those benefits come from NAFTA's spurring of trade.
The U.S. Chamber of Commerce estimates that increased trade from NAFTA has created more than 800,000 jobs, a conclusion that conflicts with that of the Economic Policy Institute.
The Los Angeles Metropolitan area's main export market is Canada, accounting for $11.4 billion in goods, Guerra said. The region's No. 2 export market is Mexico, with $6.8 billion in goods.
Those exports support jobs in such sectors as transportation equipment — including aircraft parts related to the local aerospace industry — precision instruments, petroleum products and chemicals.
These are high-end products requiring highly skilled labor, an economic sector in which the Southland remains competitive globally.
Those exports not only translate to local manufacturing jobs, but — combined with greater imports from the two neighboring countries — also have led to jobs from the increased movement of goods, from shippers at the ports of Los Angeles and Long Beach to trucking firms and warehousing operations stretching inland.
“For anybody to say that, yes, this was a fantastic thing or, no, this was not a fantastic thing, is very difficult,” said Carlos Valderrama, senior vice president of global initiatives at the Los Angeles Area Chamber of Commerce.
For example, opposing sides of the free-trade issue have cited NAFTA in the rise or fall of unemployment since it was signed on Dec. 8, 1993. However, the job market also has been shaped by other major forces since then, including two recessions, a banking crisis and housing market collapse, widespread use of Internet commerce, the rise of China as a major global economy and major trade deals that followed NAFTA.
Also, despite the large amount of trade between Southern California and Mexico, bilateral trade with that country through the Los Angeles Customs District, which includes the twin ports and Los Angeles International Airport, is less than $3 billion a year, Valderrama said. That is out of total customs district trade of $400 billion.
Perhaps that's because much of the sea trade with Mexico goes through other ports, such as in San Diego and Texas, Valderrama said.
Long Beach-based UTi Worldwide, which provides supply-chain services, including freight forwarding and warehousing, has benefited from the rise in international trade, an industry that accounts for tens of thousands of Southland jobs.
In NAFTA's early years, trade with Mexico was overshadowed by the rise of China and India as major U.S. trading partners, said Mike McClelland, UTi Worldwide's senior vice president of distribution.
However, with the rising cost of labor in those two Asian nations, Mexican labor started to look more appealing for manufacturers, McClelland said.
“We're seeing quite a bit more activity with this cross-border traffic with our clients. So NAFTA helps make that a little more of a reality,” McClelland said of trade with Mexico. “Now we're starting to see a strong shift of automotive into Mexico. The way we see it, automotive starts and the other industries follow. It started about three to five years ago.”
McClelland also cited the increasing professionalism of Mexican manufacturing partners and a trend of companies cutting transport costs by seeking production locations and suppliers in close geographic proximity, a dynamic known as near-sourcing.
“NAFTA has been the enabler and ... as manufacturing and things move more toward near-sourcing, I think it will become more of an enabler,” McClelland said.
While companies from various industries have benefited from lower-wage labor in Mexico, such experiences are not always positive.
Ben Nielsen, owner of Cambridge of California, a small upholstery manufacturer in Gardena, tried to benefit from NAFTA by purchasing parts from Mexican manufacturers.
His efforts failed.
“We have tried on several occasions,” Nielsen said. “I have been to Mexico, Guadalajara, Tijuana, to try to do stuff down there. The dependability of manufacturing in Mexico is not up to our standards. We can't depend on them.”
On one occasion, Nielsen said, he ordered samples from a Mexican upholstery manufacturer, but “when the samples came in they weren't even close to what we ordered.”
Another time, Nielsen placed a large order for carved oak trim legs that was supposed to arrive in four weeks. The Mexican supplier delivered the furniture parts 15 weeks late.
Nielsen, who sits on the board of the California Furniture Manufacturers Association, said that a friend of his opened a cutting and sewing operation in Tijuana that led him to go bankrupt because of poor product quality and government corruption and inefficiency.
“That's different for big companies where they can build on both sides of the border and be more in control,” Nielsen said. “But for small companies and medium-size companies here in Los Angeles, it just doesn't work.”
That was the case with Douglas Furniture, Nielsen said.
After opening a 1-million-square-foot factory in Tijuana, Douglas Furniture faced the same problems of reliability that other small and midsize American companies have seen, Nielsen said.
“The controls down there weren't the same, the quality was not the same,” he said. “What I heard from the (Douglas Furniture) principals is they were having problems.”
It is unclear how much those NAFTA-related problems contributed to Douglas Furniture's bankruptcy filing in 2008, which was followed by complete liquidation two years later, as the furniture industry was being splintered under a collapsing housing market and other factors associated with the Great Recession.
But Valle and his Gardena-based furniture company have had better luck in Mexico. He credits his ability to speak Spanish and understand Mexican culture for helping him maintain quality at his manufacturing plant south of the border.
Despite the lower labor costs in Mexico, Valle has retained some production in Gardena, even increasing his local worker count from about 300 people before his Mexican venture to about 600 now.
So Valle's successful use of NAFTA has created jobs on both sides of the border.
Since Valle sells to U.S. furniture stores, having a domestic factory increases trust and credibility with American consumers, he said.
“I just don't want to be in Mexico 100 percent,” Valle said. “I want to have a presence here.”