McALLEN, RGV – While President Trump plans to bring jobs from Mexico back to states like Michigan, Wisconsin and Pennsylvania, McAllen Economic Development Corporation’s president says he sees potential reforms to NAFTA as beneficial for South Texas.
Keith Patridge says many U.S. manufacturers will want to keep producing their products in Mexico because that country has free trade agreements with countries all over the world. As a result of likely reforms to the North American Free Trade Agreement, Patridge says he can see a resurrection of the old twin plant concept, with one plant on the Mexican side of the border and one on the U.S. side.
“Under NAFTA, the companies were going into the interior, they were pulling the supplier companies into the interior too and we were not getting anything from it,” Patridge said. “I think what we are going to see is a move back to companies coming to the border again and really going with the twin plant concept.”
Patridge outlined his analysis of what a Trump presidency could mean for trade with Mexico at an MEDC board meeting recently. He explained how U.S. companies operated in Mexico before NAFTA, what happened when China became a manufacturing superpower, and the likely changes Trump will make to rule of origin regulations that determine the percentage of U.S. raw materials that go into a product produced in Mexico.
Patridge pointed out that a U.S. president can, if he or she chooses, place duty or a tax on imports. “He can do so by declaring a particular situation detrimental to the United States,” Patridge said. He also pointed out that President Trump could also pull out of NAFTA if he wished to because the agreement is not a treaty. “All he needs to do is write a letter and six months later we would be out of NAFTA. I don’t think it will happen but it puts him into a negotiating position.”
Rule of Origin
Patridge said some of the changes Trump will make have already been telegraphed by his nominee for secretary of commerce, Wilbur Ross.
“Wilbur Ross has given advance notice to Canada on a provision in NAFTA that they want to open up in the renegotiations. He outlined two areas. One is the rule of origin for products or content. That is, how much of the content has to come from the three NAFTA countries, U.S., Canada or Mexico,” Patridge said.
Patridge then explained the current rule of origin regulations contained in NAFTA. He said there are three different sets of content requirements.
“Under the cost model it is 50 percent. So, 50 percent of the cost of the product has to come from the NAFTA countries. If it is a transactional, that would be like a manufactured product, transforming things into a new product, it has to be 60 percent. And then you have special provisions, things like automotive, which require 62.5 percent. What that means is 62.5 percent of the value of that car has to come from NAFTA, or NAFTA originating, or the car could be classified as an import.”
Patridge said MEDC was not surprised by the message Ross sent to Canada.
“What we think will happen is he (Trump) is probably going to open up the country of origin rule to basically say, well, if the product is coming from Mexico a certain percentage of the value of that product has to come from the United States in order for it to be duty free. That is one of the provisions they are opening up, or have indicated to Canada they are going to open up. “
The second area that could be renegotiated, Patridge said, is how the independent tribunal system will operate when there are trade disputes between the U.S., Mexico and Canada.
Patridge said that in the pre-NAFTA days, the border region was doing well in recruiting manufacturing companies through the maquila model.
“We (MEDC) started in 1988 and from ‘88 to ‘94 we were doing very well bringing in companies and we didn’t have NAFTA. Companies still had a duty that they paid on products coming back to the U.S. However, if you remember, under the provisions of the tariff code, companies could take U.S. goods into Mexico, assemble them into a finished product and return them to the U.S. – provided they didn’t lose their identity. The only duty that was charged would be on the value added. And so, we continued to grow because it wasn’t a big issue for companies to manufacture in Mexico,” Patridge recalled.
“Because of that companies continued to buy from the United States for their plants in Mexico. They would just have the assembly operations on the Mexico side. At that point, if you remember, most of the plants were on the U.S.-Mexico border, partially because they did not want additional freight costs of going into Mexico.”
Emergence of China
“When NAFTA came along, it changed all of that because basically you did not have to buy anything from the U.S. yet you still had access to the U.S. market. There was a little bit of an interruption right after NAFTA because China opened up and when China opened up everyone started focusing on China and the plants in Mexico continued running the way they had always run. All the concentration was on China,” Patridge explained.
A few years ago, Patridge said, manufacturing costs in China started to rise, making Mexico a more favorable proposition.
“Two things happened at that point. One, the companies that had been in China had gotten used to having their suppliers right around the company, literally every component was within five or ten minutes from the plant. When they came back to Mexico they said we want the same type of model as we had in China and started pushing their suppliers in the U.S. to start looking at moving their plants into Mexico,” Patridge said.
“They did not have a lot of luck on that until about two or three years ago, when the companies, particularly the automotive companies started pushing their suppliers by basically saying you need to move to Mexico or we are going to pull out our business and you won’t have our contracts anymore. So, it put the owners of these companies in the position of either/or. They either move (to Mexico) or they lost the business. And so, what happened is a lot of these companies started moving.”
Patridge said this development led, in his opinion, to Donald Trump winning the presidency. He pointed out that many of the suppliers to the auto industry come from five states: Wisconsin, Michigan, Ohio, Indiana, western Pennsylvania. Those, he said, are the states that, against the odds, went for Trump in the November presidential election.
“Those little companies are not generally located in big cities. They are located in little towns in these states and in many cases, they may be the only or principal employer in a city of six, eight or ten thousand people. When that company says, we’re moving to Mexico, they not only took the three, four, five hundred jobs out of that plant, they literally put the whole town in jeopardy of economic crisis. And so, he (Trump) wasn’t getting three or four hundred votes, he was getting eight to ten thousand votes at a time from these little towns. And that, I think, is what caused the election swing.”
Patridge predicted Trump will enact policies to bring those manufacturing jobs back to the rust belt states.
“Companies need to be in Mexico because, don’t forget, Mexico has free trade agreements or trade agreements with 47 countries around the world. So, they still need that plant in Mexico but they cannot supply the U.S. out of that plant. But, they can always put a plant in McAllen and now they have a U.S. manufacturing plant producing for the U.S. market. And that is the old twin plant concept. We are circling back around to the beginning of the maquila program, where it was a twin plant concept. You would have a plant on the U.S. side and a plant on the Mexican side, the same management team and overhead structure runs both plants.”
Patridge said that under the rules of origin regulations, no product produced in Mexico or Canada will be required to have 100 percent U.S. content. “Under NAFTA it would be 50, 60 or 62.5 percent that would have to be the U.S. That means you still have about 40 percent that you could bring from your Mexican plant to incorporate into that product, along with certain requirements, and you still have a U.S. qualifying, duty-free, product.”
Patridge said MEDC may have an early example of a company moving to McAllen because of the likely changes a Trump presidency will bring about.
“Janie and Ralph were contacted by one of our companies, a big one, that said we were thinking about bringing a plant to Reynosa but instead we want to put it in McAllen or Dallas. That is the caveat, or Dallas. We are going to be competing but, it makes sense for them to be in McAllen because that management team can run both plants. And, so, I think we have got an advantage there to move forward with.”
Janie Cavazos runs U.S. business recruitment and retention for MEDC. Ralph Garcia runs Mexico business recruitment and retention for MEDC.
“So, that is what is what we see happening. If it works out that way, then it could be good for the border,” Patridge concluded. “It could be very good to us. We will have to wait and see. No one knows for sure.”
Editor’s Note: Reporter Stephanie Jara contributed to this story from McAllen, Texas.