Why gutting NAFTA unlikely to create US jobs

Both U.S. presidential candidates routinely criticize free-trade deals they blame for the loss of American jobs.

But tweaking the North American Free Trade Agreement (NAFTA), as Hillary Clinton has pledged to do, or ripping it up, as Donald Trump demands, may do nothing to help companies like Element Electronics Corp, which owns America’s last television factory.

Winnsboro, South Carolina-based Element, and the television industry more broadly, offer a window into the complexity of industrial supply chains and illustrate why pushing manufacturing jobs back to the United States is so difficult.

Element's plant in South Carolina is nearly identical to a rival factory operated by Taiwanese conglomerate Tatung Company that sits on a dusty back street in this Mexican border town. Both import nearly all their components from Asia. The parts often flow in through the same southern California ports.

But there's a big, and costly, difference. The Mexican plant, by sitting just over the border from El Paso, Texas, doesn't have to pay duty on those parts, even when the finished televisions are sold in the United States. But Element's factory has to foot the tariff bill, which makes its televisions more expensive. (For a graphic on the trade loophole, click https://tmsnrt.rs/2ep5QMy )

"It's pretty crazy that I'm disadvantaged for using U.S. labor," says Michael O'Shaughnessy, Element’s president.

That's a sentiment that Trump, the Republican nominee, has forcefully tapped as he makes the case that radically revamping the trade deal would level the playing field and bring jobs back. Many trade experts, though, say it would be a costly disaster to try to unravel these production networks, which essentially treat Mexico as a 51st state.

The Peterson Institute for International Economics, a Washington think tank that favors free trade, released a study last month that predicted imposing stiff tariffs on Mexico and China would disrupt North American producers that have created global supply chains and push the United States into a recession.

"The TV industry is characterized by particularly dense webs of cross-border supply chains with Mexico and China," says Marcus Noland, the economist who directed the study. "There'd be chaos and a trade war."

Even many who oppose NAFTA acknowledge it would be disruptive to suddenly erect barriers, given the way companies have shifted supply chains to integrate Mexico.

NAFTA'S LEGACY

NAFTA, implemented in 1994, forged a common market between the United States, Mexico and Canada. In response, many industries, including television manufactures, have transformed themselves by creating supply chains that crisscross the border.

Televisions once were produced in the United States and elsewhere with hundreds of parts, often tucked into elaborate wooden cases. A modern flat screen, by contrast, has relatively few parts, and more than 70 percent of its value is packed into the glass and the electronics integrated directly into the panel.

The heart of the industry, including that core glass technology and production, is now based in Asia.

About half of all TVs imported to the U.S. come from Mexico, says Paul Gagnon, an expert on the industry's supply chain at IHS Markit, an economic research firm.

"The main reason for that is so the producers can respond quickly to fluctuations in demand," he says. TV sales are highly seasonal, spiking late in the year. In Mexico, some of the factories double their workforce for just a few months to respond to this.

Gagnon doubts the jobs would come back to the United States, because margins on TVs are so low. "If there were any major cost increase (in Mexico), you'd probably see some shift to Asia for production -- rather than seeing that production happen in the U.S."

Some Mexican plants mold the plastic casing and do other tasks in the assembly process. But in many cases -- including at both the Element and Tatung plants -- the assembly plants do mostly finishing touches like inserting printing circuit boards and tuning the units. This creates relatively few jobs compared to the kind of television manufacturing done in the U.S. industry's heyday.

In the 1950s, there were some 150 domestic television manufacturers in the United States, and employment peaked at about 100,000 in the 1960s.

Mexico's cost advantage over the United State is formidable. O’Shaughnessy said he pays his 200 workers, who operate in a converted shirt factory, about $15 an hour. The pay at the Juarez plant is about $2.50 an hour.

Even with this edge, it's getting harder to do the work in Mexico, said Chan-hsing Diao, manager of the Tatung plant. (Tatung doesn't sell televisions under its own name, but rather is paid by other manufacturers to assemble their name-brand products.)

"The industry is consolidating and the cost pressures are enormous," he said, noting that over the last six years, the amount he is paid to assemble a 32-inch television has fallen by half, from about $6 a unit to $3 a unit.

"The profits are this," he said, holding up two fingers almost touching.

The Tatung plant in Juarez occupies a cavernous space that was once a windshield factory. It now features long assembly lines for televisions and produced 15 million TVs over the last seven years, Diao said. Some 13 million of those were sold in the United States.

In January, the company lost its main customer, a Chinese TV manufacturer that Diao declined to identify. Tatung is scrambling to find a new manufacturer that wants to build TVs for the United States. In the meantime, it continues assembling TVs for Mexico and some other Latin American markets.

Diao warned there would be a trade war if a new U.S. administration tore up the NAFTA agreement. With profits already so tight in Mexico, many Chinese producers might find it easier to ship finished goods directly from Asia rather than move production and jobs to the United States, he said.

IN SEARCH OF AN EXEMPTION

O'Shaughnessy, for his part, said he just wants to get the same break on import duties as Mexico gets under NAFTA. His decision to build in the United States, he said, was driven entirely by his only customer for the U.S. plant, Wal-Mart, which uses Element as a centerpiece of its campaign to promote domestic manufacturing. The South Carolina TVs are shipped in boxes emblazoned with American flags and bearing the words "Assembled in the USA."

O'Shaughnessy has appealed for a tariff exemption from his local congressman, Rep. Mick Mulvaney, a Republican. Mulvaney said he is sympathetic but has been unable to win over many fellow lawmakers who consider special exemptions a form of earmarks for special interests, which many oppose on principle.

"Element makes clear the real world implications of these trade deals we have signed," said Mulvaney, adding that it's time to "review" NAFTA to iron out this and other loopholes.

Back in Juarez, the annual ramp-up of hiring is under way at the Tatung plant to supply the surge of televisions bought over the holidays. Employment at Tatung goes as low as 280 each year, for instance, but is now on its way up to 600, Diao said.

"You could never do that in America — at least not easily," he says, referring to this cycle of hiring and firing large numbers.

(Editing by Eric Effron and Edward Tobin)