Trump and the Minimum Wage: How to Trade with Mexico

Now it has come to this. Donald Trump, of all people, is at long last delivering on a key demand of many Democratic Party politicians for when their country concluded bilateral trade agreements. Their main trouble was that even their own party’s presidents couldn’t deliver the goods.

Past U.S. trade agreements, largely under Democratic Presidents, had managed only to establish surrogates for wages, such as workers’ health and safety protections and environmental standards. This never succeeded in reassuring the workers. Nor did it win over the anti-trade activists, to whom these moves were meant to signal virtue.

Trump’s new trade agreement with Mexico contains a significant minimum-wage clause. It is a long-needed signal to U.S. workers that their concerns are taken seriously.

The huge wage differential is what has always made trade with Mexico controversial. In 2017, Mexican workers earned on average (depending on how it is counted) only 16% to 26% of what U.S. workers earned. It is the same differential that makes people nervous about any talk of free trade between rich and developing countries.

The U.S.-Mexico deal undertakes to limit the effects of the existing wage gap. It stipulates that over 40% of auto industry products must be made by workers earning more than $16 an hour, and that 75% of content must come from within North America, not be transshipped from lower wage countries (up from 62.5% previously).

Managed trade? Yes, but

Is this managed trade? Yes, in the same sense that NAFTA was, and the old 62.5% rule was. This does not stop it from being also free trade.

Free trade is always managed with regulations. Lionel Robbins, the great expositor of Adam Smith, reminded us that it is government that liberates the market, which in primordial nature is unreliable and not very free.

The choice is thus between wise regulation that opens up and secures trade, and foolish regulation (including over- and under-regulation) that puts trade at risk.

And that is why it is very smart for a Republican Administration to agree to sensible minimum-wage clauses for trading with Mexico.

Vast wage differential

After all, the two countries’ wage levels vary drastically. Not by a few dozen percentage points, as is the case for trade between the U.S. and the EU (a 1.4:1 ratio), or Europe and Japan (1.1:1). Or Germany and Spain (1.2:1), incidentally the same differential as between New York and Texas.

The U.S.-Mexico wage ratio is in a different order of magnitude — 6:1. That is a ratio that can generate a lot of outsourcing of production and a lot of migration. Even in PPP terms the ratio is 3:1.

Now, there are those who wish that Republicans had not crossed this line and accepted healthy minimum-wage provisions.

These observers base their view on the notion that such outsourcing is a prime way for poor countries to become gradually richer. As well, their previously predominantly agrarian populations get exposure to industry and the plant floor.

Low wage as many as these jobs may be, they are higher than what they could get from local capital, and they do provide families with steady incomes. That helps put children into school – and keep them there.

A bad idea for everyone

At first blush, that sounds like a good thing for global equality. At second blush, it turns out to be a bad idea for everyone.

Why? Because it undermines the stability of the societies of industrialized countries. As we have seen, working class families and increasingly also middle class families do not tolerate having their living standards cut by government policy — much less one that would move them downward to earning a fraction of their accustomed level.

The temporary economic gains in developing countries from any total erasure of borders would be washed away by the tide of instability this would unleash. The excessive form of liberalization would presumably be reined in after a few governments collapsed, but in conditions of chaos.

The wave of illiberalism that we see gradually taking hold in many a Western country is a clear warning sign. To counteract it, more thought needs to be spent on making trade deals politically and sociologically viable again.

The $16 wage standard in the Mexico agreement is a form of doing this. It is admittedly done in an off-the-cuff manner, without the weight of studies behind it. Nevertheless, it is a strong way of broadcasting the intention. And that is perhaps the most important thing about it.

No longer missing the point

In the past, politicians in rich countries had the luxury of missing the point. Until a few decades ago, the workers in these countries were protected from the competition of workers in developing countries — by the protectionist and socialist policies of those countries themselves. No longer.

To be sure, the U.S.-Mexico deal’s measures for addressing the wage differential are industry-specific and country-specific. They have a jerry-rigged style.

It is unclear whether they could ever provide a rational method of managing trade globally. Other approaches, such as limiting the scale of capital outflows, could be explored. But what we have now is a valid start.

At the same time, it is imperative that the United States complete the trade deals, already long in progress, with the other industrialized regions – the EU, Canada and in the Pacific. These deals don’t raise the problem of a need for a wage gap corrective. They ought to be able to be done on the fast track.

Indirectly, the developing countries need these deals too. After all, industrialized countries remain the core of the global exchange and the bedrock of global stability. Keeping it that way is a primary job responsibility of Western leaders.

Conclusion

From the President on down, the Trump Administration is keenly aware that it needs such deals, not just to fulfill that responsibility, but also to consolidate its economic successes and win elections.

And that, in the end, is also why a Republican Congress for once won’t stand in the way of this deal. A Democratic Party President is very unlikely to have been able to pass it.

That is why the Trump Mexico deal is, in a smaller way for now, another of those rare Nixon in China moments. It has the potential to alter the arc of contemporary history.