Globalization and Free Trade Agreements

I recently read an article in the Wall Street Journal that analyzed capital investments by multi-national car manufacturers in North America. These multi-billion dollar investments in car manufacturing facilities both completed and planned covered the period from 2005 through 2020. The time line of investments completed and planned during this period shows four (4) in the American Southeast and seven (7) in Mexico. The author’s thesis is that a significant reason that these companies have decided to make these huge investments in Mexico rather than the American Southeast is because of the greater number of Free Trade Agreements that Mexico has negotiated with other countries representing large current and future markets.

Certainly, the USA and Canada currently represent a significant market for manufacturing facilities in Mexico. The NAFTA trade agreement has been a significant factor in this trade relationship. Even so, I would assume that the differences in labor costs / component material costs are not sufficient to justify the significant investments in local infrastructure, local suppliers and local work force training over many years.

I think that we are seeing a shift in strategic planning by these companies (Audi, Nissan, Mercedes-Benz, and BMW). The Mexican Free Trade Agreements with the European countries, South American countries and those in the Far East will offer in the future a competitive pricing edge that cannot be matched by products manufactured in America’s Southeastern facilities. The current reluctance by some in the US Congress to accept Free Trade Agreements seems like an exercise in futility. As the saying goes – “That horse has already left the gate!”.

From a moral perspective, we should congratulate Mexico for its far sighted thinking since Free Trade Agreements work both ways. They have opened themselves to trade coming in the other direction. I have read that the NAFTA Agreement has caused significant harm to Mexican small farmers since the American farmers are enormously productive.

So what do I take away from this discussion? Globalization is no longer defined by how we address a market confined to a specific country, but how to efficiently serve many markets (which happen to be divided by political country boundaries).

The WSJ article is “Trade Pacts Give Mexico An Edge” by Dudley Althaus and William Boston (March 18, 2015).