Key Tronic Is Example Of Nafta’s Complexity

Twenty-one months after the North American Free Trade Agreement took effect with ebullient projections that it would create hundreds of thousands of jobs, the experience of Key Tronic Corp., the Spokane-based manufacturer of computer keyboards, is a reason some critics argue the trade pact has cost the United States dearly.

Key Tronic, which faces stiff competition from Japanese manufacturers, has laid off 277 workers and moved their jobs to a plant in Ciudad Juarez, Mexico, where wages are a fourth of those in Spokane. In fact, tens of thousands of factory jobs in this country have been lost since the agreement took effect for precisely the same reason. But as it happens, Key Tronic is also an example of the benefits created by NAFTA. Ronald F. Klawitter, the company’s chief financial officer, said that Key Tronic’s sales have jumped because of the lower costs of manufacturing in Mexico, which enabled the company to lower prices and win new orders.

And since many of the components used in the keyboards assembled in Ciudad Juarez come from plants near Spokane, overall employment in the area has actually increased to keep up with the demand.

“Some of the business we’ve picked up we wouldn’t have gotten if we didn’t have the Mexican plant,” said Klawitter, who added that without NAFTA the company might have had to consider manufacturing in low-wage Asian countries.

Mexican President Ernesto Zedillo’s visit with President Clinton in Washington last week rekindled discussion of NAFTA.

When NAFTA was passed by Congress in November 1993, Clinton called the agreement “a defining moment for our nation” and his economists said it would create 170,000 jobs in the first year.

Clearly that has not been the case, because of the deep Mexican recession. But many businessmen and economists say jobs was the wrong way to measure NAFTA’s effects; as in the case of Key Tronic and many other companies, NAFTA is all about corporate efficiency.

Even within Mexico there is some disappointment with NAFTA because of its perceived failure to create jobs and the fact that last December’s peso crisis created a deep recession that for the time being has outweighed any potential benefits.

On the political level, much of the debate in the United States has involved hyperbole and over-simplification. Conservatives like Republican presidential hopeful Patrick Buchanan and labor unions have found common purpose in calling for NAFTA’s repeal. Backers say it is just a matter of time before benefits begin to outweigh short-term job losses.

Perhaps more important, the peso crisis, which caused the Mexican currency to plummet by nearly 50 percent and sent the economy into a paralyzing recession, has made it even more difficult to assess just how the lowering of tariffs and other barriers under NAFTA has affected U.S. companies and workers. Clearly, economists say, some job losses in this country are a result of the steep drop in demand in Mexico for goods of all kinds, not NAFTA.

But as the Key Tronic example demonstrates, NAFTA has not been a zero-sum game, where one country’s gains translate into the other country’s losses. The NAFTA experience has borne out the fact that the effects of trade involve a powerful dynamic in which many forces push and pull to reshape the economic structure of both countries, and that those changes are not without much pain.

For instance, one of the big pluses for Chrysler Corp. is not just the potential increase in the sale of its cars and trucks in Mexico - sales are down considerably this year because of the recession, after a huge jump in sales last year - but the fact that it can now sharply increase the efficiency of its Mexican plants.

Chrysler vice president James D. Donlon said one Mexican plant previously produced several models in relatively small numbers, largely for sale in what was then a protected Mexican market that was highly resistant to imports from the United States.

Now, with many of those barriers being phased out, that plant will produce just one model, in far great numbers and thus at less cost per vehicle, in a few years. And those autos will be sold both domestically and in the United States.

In addition, Chrysler will be able to export autos from the United States to Mexico, making a wider range of vehicles available to Mexican consumers.

That, of course, contradicts the Clinton administration’s claims that NAFTA would reduce the floodtide of illegal immigrants by creating more opportunities in Mexico. It also counters the argument of Ross Perot that jobs would flow one-way under NAFTA to Mexico - creating “a giant sucking sound.”

“We reject that,” said Donlon of Chrysler. “We firmly believe that there will be more total jobs and more jobs in the U.S. It is hard for me to put my finger on and prove because of the peso crisis and what that has done to our business. But if you look at what has happened with Canada, there’s one heck of a lot more commerce on both sides of the border.”

Other businessmen say that many low-wage jobs will inevitably migrate overseas, but that now some will move to Mexico rather than East Asia.

“The great sucking sound is not the sucking of our jobs to Mexico, it is the sucking of jobs from the Orient,” said Robert Paltrow, president of NA Communications, a marketing concern based in Armonk, N.Y.

His company has built a plant in Tijuana that assembles 1 million direct mailing packets a day and that also has a section doing high-tech sewing. The plant has 400 employees after 7 months of operation.

Paltrow said that with wages roughly one-seventh the level in the United States, “Tijuana and Baja are going to become monstrously large sewing centers,” and that will fuel expansion in the United States, where design and other knowledge-intensive operations take place.

Jagdish Bhagwati, an economics professor at Columbia University and a strong proponent of free trade, said that the NAFTA experience had left him with some reservations. He said NAFTA does appear to be putting downward pressure on U.S. wages and is causing some net reduction in jobs without providing sufficient help for displaced workers.

The Department of Labor, in fact, has documented the loss of 42,221 jobs because of NAFTA as of Sept. 30. But that is regarded as a low count, since it includes only those workers who have applied and qualified for a government program to assist them in job training and in finding new jobs.

There are also complaints that Mexico is dragging its feet in carrying out some of NAFTA’s provisions. For instance, the United Parcel Service has said that before NAFTA it was able to use only small, inefficient vans to move packages in Mexico, because the government would not grant it the permits to use the big trucks that its Mexican competitors freely used.

NAFTA was supposed to have changed that immediately, but UPS says the Mexican government has refused to grant it the permits. So it has filed the first complaint under a procedure NAFTA set up for resolving such disputes.

Nevertheless, UPS said it still backs NAFTA and believes that in the long run it will benefit both countries. It also says that for every increase of 70 packages that it moves to and from Mexico, one job is created in the United States.

“The main point was not that tariffs were lowered under NAFTA; they were already pretty low,” said Edward Leamers, a professor at Yale and the University of California at Los Angeles. “More important was that NAFTA guarantees the tariffs won’t suddenly be raised. It is a major risk reduction document for investors.”

“If your time clock is year by year, then NAFTA was definitely oversold,” Leamers added. “If your clock runs decade by decade, this is a more important event.”

“Our ability to integrate our marketing and our production represents a total operation well beyond what the two could have been separately,” Donlon said. “But we won’t see the full benefit for two or three years.”

Then there are workers like Manuel Lepe. Lepe, a mechanic who works on apparel-cutting machines, lost his job last year at a Los Angeles factory after 20 years with the company.

The blow was softened by the fact that the company helped Lepe find a new job with another apparel contractor. But there was one problem: his new job came with a pay cut to $6.25 an hour from $8.50.

And consider what has happened to California farmers. Exports to Mexico of many agricultural products, like lettuce and peaches, have risen since NAFTA lowered tariffs on many of those commodities.

“It turned out that it was cheaper to produce lettuce here using Mexican labor than in Mexico,” said Philip L. Martin, an agricultural economist at the University of California at Davis.

“But the perverse effect of that is that it has increased the demand here for Mexican workers,” who are willing to do this tough, low-wage work, Martin added. “We’re still sucking in workers to export these commodities.”