Tony Payan, director of the Baker Institute Mexico Center, testified on transnational labor flows and commerce at an April 10, 2017, hearing of the Texas House Committee on International Trade and Intergovernmental Affairs.

Payan, Tony

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            Testimony  Transnational Commerce and Labor Flows Tony Payan, Ph.D. Françoise and Edward Djerejian Fellow for Mexico Studies and Director, Mexico Center   © 2017 by the James A. Baker III Institute for Public Policy of Rice University This material may be quoted or reproduced without prior permission, provided appropriate credit is given to the author and the James A. Baker III Institute for  Public Policy. Wherever feasible, papers are reviewed by outside experts before they are released. However, the research and views expressed in this paper are those of the individual researcher(s) and do not necessarily represent the views of the James A. Baker III Institute for Public Policy. This paper is a work in progress and has not been submitted for editorial review. 2		Hearing	before	the	Texas	House	Committee	on	International	Trade	and	Intergovernmental	Affairs	Transnational	Commerce	and	Labor	Flows		Tony	Payan,	Ph.D.	Director,	Mexico	Center		April	10,	1017	Good	morning	Mr.	Chairman	and	members	of	 the	 committee.	 Thank	 you	 for	 inviting	me	 to	 share	my	thoughts	on	transnational	commerce	and	labor	flows.	I	will	direct	my	remarks	to	Mexico,	since	the	Mexico	Center	at	Rice	University’s	Baker	Institute	for	Public	Policy	works	to	understand	both	of	these	important	subjects	and	to	figure	out	the	best	policies	to	manage	such	flows	in	an	orderly	and	expeditious	manner.	I	will	address	the	issue	of	trade	first,	and	then	I	will	address	the	issue	of	labor	flows	and	migration.	Finally,	I	 will	 make	 some	 remarks	 regarding	 Mexico’s	 own	 fast	 approaching	 political	 changes	 and	 how	 they	combine	with	the	current	state	of	affairs	in	the	binational	relationship.	Throughout,	I	will	try	to	shed	some	light	on	how	I	believe	Texas	is	or	will	be	impacted.	On	Trade	Flows	One	of	the	crucial	points	of	the	new	U.S.	administration	in	attempting	to	revise	the	country’s	commercial	relationship	with	Mexico,	specifically	the	North	American	Free	Trade	Agreement,	has	been	the	U.S.	trade	deficit	with	Mexico—about	$60	billion.	In	fact,	President	Donald	Trump	has	ordered	an	in-depth	study	of	the	origins	of	trade	deficits	in	each	of	the	United	States’	commercial	relationships,	including	that	with	our	southern	neighbor.	After	studying	the	U.S.-Mexico	trade	relationship,	however,	we	have	concluded	that	focusing	exclusively	on	the	trade	deficit	can	be	misguided,	especially	if	it	becomes	the	basis	to	abrogate	the	accord,	as	a	trade	deficit	(or	surplus)	is	affected	by	several	complex	issues	and	cannot	be	considered	a	simple	zero-sum	game.	Indeed,	 to	 investigate	 the	 trade	 deficit	 with	Mexico,	 one	 must	 research	 the	 overall	 structure	 of	 the	commercial	relationship.	To	do	so,	we	at	the	Mexico	Center	examined	data	from	the	U.S.	Census	Bureau	and	 the	 U.S.	 Bureau	 of	 Economic	 Analysis’	 Department	 of	 Commerce.	 After	 reviewing	 the	 data,	 we	realized	that	the	trade	relationship	is	indeed	not	as	simple	as	it	may	at	first	appear.	And	Texas	is	a	prime	example	of	how	complicated	this	relationship	really	is.	In	the	following	paragraphs,	I	lay	out	the	issues	at	hand,	all	of	which	must	serve	to	provide	nuance	for	any	future	decision	on	NAFTA.	First,	trade	between	Mexico	and	the	United	States	can	be	classified	by	its	nature	and	character.	The	first	is	an	exchange	of	goods	and	services	that	can	be	placed	close	to	the	end	user	in	the	trading	relationship.	In	that	sense,	Mexico	sells	fruits	and	vegetables,	medical	equipment,	and	small	cars.	The	United	States	sells	a	variety	of	agricultural	products,	machine	tools,	and	high-end	services.	In	other	words,	each	country	exports	 to	 the	 other	 those	 end-user	 goods	 for	 which	 it	 has	 developed	 a	 comparative	 advantage.	 On	services,	the	United	States	had	a	surplus	of	$9	billion	in	2016,	which	makes	sense,	given	that	the	expertise,	technology,	 and	 know-how	are	more	 advanced	 in	 the	U.S.	On	agricultural	 goods,	Mexico	had	a	 trade	surplus	 of	 about	 $3	 billion	 in	 2016,	 given	 its	 comparative	 advantage	 on	 fruits	 and	 vegetables.	 If	 we	consider	this	kind	of	trade—goods	closer	to	the	end	user—the	relationship	appears	fairly	even.	3		A	second,	more	complicated	 layer	 is	 intra-firm	trade,	often	referred	to	as	party-related	trade	or	 trade	among	affiliates.	This	portion	of	trade	has	been	growing	very	fast	overall.	So,	we	wanted	to	understand	how	it	is	put	together	and	how	it	contributes	to	the	deficit.	With	the	caveat	that	we	have	not	finished	this	analysis,	I	can	relay	some	initial	reflections.	For	several	decades,	U.S.	corporations	have	taken	advantage	of	lower	trade	barriers	in	other	countries—not	just	Mexico—to	establish	specialized	manufacturing	plants	in	order	to	capitalize	on	lower	labor	costs.	These	production	chains	are	often	integrated	across	several	countries,	and	these	firms	move	their	own	inputs	back	and	forth,	sometimes	between	several	countries	and	several	times	across	the	border	until	manufactured	goods	are	finished.	NAFTA	only	accelerated	this	trend	between	the	United	States	and	Mexico.	Establishing	plants	in	Mexico	made	American	companies	much	more	competitive	because	they	could	take	advantage	of	lower	costs	along	the	production	chain	in	Mexico.	 The	 consequence	 of	 NAFTA	 is	 that	 intra-firm	 trade	 between	 the	 two	 countries	 has	 grown	substantially.	Intra-firm	trade	is	in	fact	a	very	important	component	of	binational	trade	today.	The	United	States’	intra-firm	trade	with	Mexico	is	now	close	to	43	percent,	fairly	standard	for	the	U.S.	overall,	and	Mexico’s	intra-firm	trade	overall	is	over	50	percent.	Intra-firm	trade	is	a	sign	of	how	integrated	production	chains	have	become	in	North	America.	In	the	NAFTA	area,	these	goods	cross	the	border	sometimes	several	times	and	get	lumped	with	all	binational	trade,	when	their	nature	is	fundamentally	different	than	those	goods	that	are	traded	very	close	to	the	end	consumer.	We	hypothesize	that	much	of	the	trade	deficit	has	to	do	with	intra-firm	trade,	but	research	on	this	is	still	relatively	tentative,	from	what	I	can	see,	and	it	is	not	yet	well	understood	in	the	literature	we	have	reviewed.	Now	something	about	Texas:	Texas	has	been	Mexico’s	number	one	trading	partner.	But	to	understand	the	nature	of	trade,	we	have	to	consider	Texas’	role	on	the	commercial	relationship.	Texas	has	about	60	percent	 of	 the	 U.S.-Mexico	 border.	 Trade	 with	 Mexico	 comes	 in	 through	 El	 Paso,	 Laredo,	 McAllen,	Brownsville,	 the	 Port	 of	 Houston	 and	 other	 ports	 of	 entry,	 and	 Texas	 international	 airports.	 The	relationship	with	Mexico	is	massive,	and	Texas	is	central	to	it.	Revising	NAFTA	could	have	very	important	consequences	 for	 Texas,	 and	 the	 Texas	 delegation	 must	 be	 made	 aware	 of	 the	 state’s	 interests	 in	renegotiating	 the	agreement.	 I	want	 to	 suggest,	 in	 fact,	 that	Texas’	position	 should	be	 to	 support	 the	expansion,	modernization,	and	enhancement	of	the	agreement,	not	abrogating	it.	In	this	vein,	I	want	to	suggest	that	it	is	not	trade	that	has	hurt	workers,	but	the	inability	or	unwillingness	of	the	government	to	invest	in	retraining	and	redirecting	people	to	new	economic	sectors.	Regarding	 Texas,	 the	 state’s	 relationship	with	Mexico	 is	 even	more	 complicated.	 First,	 trade	 requires	enormous	 support	 from	 many	 sectors	 in	 the	 rest	 of	 the	 economy—storage,	 logistics,	 services,	transportation,	etc.	Because	Texas	is	the	destination,	origin,	or	transit	area	for	nearly	two-thirds	of	U.S.-Mexico	trade,	one	can	only	conclude	that	thousands	of	jobs	in	these	sectors	would	be	directly	impacted	by	a	revision	of	NAFTA	that	would	scale	the	agreement	back.	It	is	hard	to	calculate	the	jobs	affected—I	hardly	trust	the	numbers	I	have	read,	but	the	number	of	jobs	affected	could	easily	be	in	the	hundreds	of	thousands.	We	could	also	jeopardize	many	other	future	Texas	jobs,	especially	now	that	the	energy	sector	in	Mexico	has	opened	up.	It	is	hardly	necessary	to	remind	you	of	the	enormous	opportunities	for	Texas	in	Mexico’s	newly	reformed	energy	sector.	4		Similarly,	 Texas	 receives	 an	 estimated	 8	 million	 Mexican	 tourists	 per	 year,	 and	 it	 is	 the	 shopping	destination	of	millions	of	Mexicans	each	year	along	border	towns	and	in	major	cities.	Some	preliminary	conversations	point	to	the	impact	of	the	new	political	environment	and	the	way	it	is	affecting	Mexicans’	travel	choices.	Mexicans	appear	to	be	finding	other	destinations	to	visit.	Tourism	to	Canada	and	Europe	is	already	growing	among	middle	class	Mexicans,	for	example,	and	we	do	not	know	yet	how	much	of	it	is	at	the	expense	of	the	tourism	industry	in	the	U.S.	And	we	must	understand	the	variables	affecting	these	choices	in	order	to	not	lose	that	preferential	place	among	Mexican	tourists	and	shoppers.	Overall,	there	is	hardly	any	other	state	that	stands	to	lose	more	from	turning	back	the	clock	on	NAFTA	than	Texas.	Doing	so	affects	not	just	trade	and	jobs	but	also	tourism,	the	ability	to	attract	foreign	students,	shoppers’	willingness	to	visit	Texas,	foreign	direct	investment	from	Mexico	in	Texas,	and	so	on.	On	Migration	and	the	Wall	I	will	now	address	the	issue	of	the	border	wall	and	migration	between	Mexico	and	the	United	States.	I	argue	that	this	story	is	one	of	labor	market	integration—informal,	unauthorized,	undocumented,	if	you	will,	but	ultimately	labor	market	integration.	We	have	simply	failed	to	address	it	as	such.	The	 justification	 for	 building	 the	 wall	 is	 primarily	 the	 need	 to	 stem	 the	 flow	 of	 unauthorized	 border	crossers—most	of	them	seeking	jobs.	The	wall,	in	my	view,	is	10	years	late	and	largely	unnecessary.	By	almost	all	statistics,	from	many	different	think	tanks	and	from	the	government	itself,	immigration	from	Mexico	 has	 now	 slowed	 down	 to	 a	 trickle	 and	 the	 exodus	 of	 Mexicans	 from	 the	 United	 States	 has	accelerated,	 partly	 through	 voluntary	 departures	 and	 partly	 through	 deportations.	 The	 unauthorized	resident	population	in	the	United	States	has	actually	decreased	in	the	years	since	2008.	Texas,	home	to	about	1.7	million	unauthorized	residents,	has	not	been	the	exception.	Even	legal	migration,	which	peaked	at	roughly	250,000	green	cards	from	Mexico	10	years	ago,	is	now	down	to	about	150,000	immigrants	a	year.	Preliminary	evidence	points	to	the	fact	that	even	work	visas	are	harder	to	come	by	these	days.	This	could	mean	that	companies	will	find	it	hard	to	recruit	the	right	kinds	of	workers.	For	public	policy	purposes,	Texas	must	consider	the	types	of	visas	its	economy	requires	and	lobby	for	an	immigration	reform	that	will	expand	those	kinds	of	visas.	Lowering	the	number	of	work	visas	granted	can	indeed	hurt	Texas’	 long-term	growth,	 from	high	tech	to	agriculture	 to	 the	services	 industry.	Seeking	a	Texas-friendly	 immigration	 reform,	 however,	 must	 be	 accompanied	 by	 an	 assessment	 of	 how	 Texas	retrains	its	displaced	workers	for	growing	economic	sectors.	Central	American	migrants	are	 important	 to	mention	as	well.	Many	of	 them	continue	to	 flow	 into	the	United	 States,	 albeit	 at	 numbers	 about	 50	percent	 lower	 in	 2017	 than	 in	 2016,	 but	 Central	American	migration	must	be	redefined	as	a	binational	issue.	It	is	not	purely	an	American	issue	and	it	is	not	purely	a	Mexican	issue.	And	Texas	is	particularly	affected	in	the	binational	cooperation	dynamic	because	most	of	these	migrants	are	currently	coming	to	the	Texas-Mexico	border.	Thus,	precisely	because	most	of	them	end	up	coming	 to	 the	Texas	border,	 it	 is	 important	 to	 involve	Mexico	 in	 solving	 the	Central	American	migration	question.	5		Building	the	wall	is	also	questionable	for	another	reason.	It	is	entirely	possible	to	think	that	building	a	wall	between	Mexico	and	Texas	could	stoke	nationalist	feelings	among	Mexicans,	for	the	same	reasons	that	it	is	being	built	by	the	U.S.:	It	is	a	powerful	symbol	of	rejection.	The	outrage	in	Mexico	could	grow	so	that	Mexican	 citizens	may	 seriously	 consider	 electing	 somebody	who	 is	willing	 to	 openly	 oppose	 the	wall,	including	ceasing	all	cooperation	with	the	United	State	and	revisiting	NAFTA	from	Mexico	City	rather	than	Washington	DC.	That	much	has	been	said	by	Andrés	López	Obrador,	the	front	runner	in	Mexico’s	2018	presidential	election,	who	is	now	pushing	back.	The	wall	itself	may	make	many	Mexicans	decide	to	stay	away	from	visiting,	shopping,	and	investing	in	Texas—we	must	consider	that	about	$17	billion	in	foreign	direct	investment	from	Mexico	flowed	to	the	U.S.,	and	Texas	is	a	major	recipient	of	such	funds.	Clearly,	a	more	anti-American	stance	in	Mexico	could	hurt	Texas	interests.	What	Texans	do—and	especially,	what	the	Texas	congressional	delegation	in	Washington	does	in	defending	the	state’s	interests—is	going	to	be	crucial	for	Texas’	future.	Defending	the	U.S.-Mexico	relationship	is	defending	Texas.	On	Mexico’s	Own	Political	Landscape	This	last	point	leads	me	to	say	something	about	what	is	happening	in	Mexico.	The	Republic	of	Mexico	is	entering	 a	 complicated	electoral	 season.	 In	 June	2018,	 just	 over	 a	 year	 from	now,	Mexico	will	 hold	 a	presidential	election.	Upon	examining	recent	polls,	it	has	become	evident	that	the	National	Regeneration	Movement	 (MORENA),	 the	party	of	López	Obrador,	 is	poised	to	do	very	well	and	perhaps	capture	the	presidency.	López	Obrador	has	two	assessments	that	are	similar	to	those	of	the	U.S.	administration.	First,	he	does	not	believe	that	NAFTA	has	been	good	for	Mexican	workers.	He	has	stated	that	he	cannot	wait	to	renegotiate	NAFTA	himself.	 Second,	he	has	 said	 that	his	energy	policy	will	 be	 the	 renationalization	of	hydrocarbons	 in	 Mexico,	 something	 that	 could	 affect	 Texas’	 business	 opportunities.	 These	 are	complicated	promises,	and	probably	not	likely	to	be	accomplished	easily,	constitutionally,	legislatively,	or	in	terms	of	public	policy,	but	he	has	taken	advantage	of	the	current	U.S.	positions	to	argue	that	he	will	revise	 the	binational	 relationship	himself.	Texas	may	also	be	caught	 in	 the	middle,	especially	given	 its	strategic	position	on	trade,	energy,	and	the	economic	vitality	of	the	U.S.-Mexico	border.	Mr.	Chairman,	members	of	the	committee:	I	know	I	have	covered	a	lot	of	terrain	in	my	remarks,	but	these	are	complicated	issues.	I	am	looking	forward	to	engaging	you	in	a	further	discussion	on	the	issues	I	have	brought	forth	today.			

Transnational Commerce and Labor Flows

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Transnational Commerce and Labor Flows

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