The dollar goes farther in Mexico. One dollar is worth around 18 pesos. The peso has been falling even further in recent weeks due to the election victory of left-wing leader Claudia Scheinbaum.
A so-called “living wage” in Mexico averages between 13,177 pesos ($677) to 17,849 pesos ($917) per month, according to the Global Living Wage Coalition. It takes at least $3,900 per month to be considered a liveable wage in the U.S., according to MIT’s Living Wage Calculator. Manufacturers like John Deere can pay much less than U.S. rates and easily provide their Mexico-based workers with a comfortable living or for higher management, an upper-class lifestyle compared to their American counterparts.
Houses are also cheaper. A large, 3-bed, 2-bath, 2,300 square-foot home in Nuevo Leon overlooking the mountains will cost about 4.1 million pesos, or around $219,000.
One of the solutions to labor overhead calculation is for costs to adjust – such as wages. Though this will likely lead to wage stagnation in the U.S., with higher rates of growth in Mexico.
“George Bush and Bill Clinton sold NAFTA to the American people by claiming that the trade agreement would transform Mexico into an affluent country and create 200,000 jobs in the U.S. Thirty years on, we see that Mexican wages are still a fraction of U.S. wages and Mexico is a magnet for U.S. and global companies to shut down U.S. plants and move the jobs to Mexico. With last year’s U.S. trade deficit with Mexico, it’s fair to say that NAFTA has cost the U.S. 750,000 jobs.”
Then there is the dollar.
“Our currency obstinately refuses to fall because of the demand of international investors for dollars,” Ferry said.
That means John Deere gets more bang for its buck in Mexico. That’s another reason why they go there. It’s not the taxes. It’s not the duty-free trade zone. Canada is duty-free for them, too, and much closer to Iowa. (Plus Canada’s corporate income tax for manufacturers is only 15%, according to PwC.)
Mexico is only vaguely interested in having its overhead pricing costs – labor, insurance, taxes – close the gap with American overhead. It is better for Mexico to maintain the conditions of low-wage labor for much of the population, including those making products for Americans, so long as the bulk of Mexicans can see the country growing and getting richer. Those who do not see things that way high-tail it across the border and become part of the record-breaking $63 billion in remittances Mexicans send back home each year.
Mexico’s wages will never be on par with the United States. If so, there would almost be no need for the USMCA except to invite multinationals from around the world to build things there and sell to Americans without tariffs and costly transoceanic shipping.
Judging by the commentary from Mexico’s presidential election earlier this month, Mexicans know it: they feel themselves poor (the lowest 50% of the wage-earning population have negative wealth) and the victims of relentless violent crime (President Obrador’s tactics have largely failed to curb violence, according to the Council on Foreign Relations’ Global Conflict Tracker. Mexico reports over thirty thousand crime-related deaths per year. Mexico’s 2021 midterm elections were the most violent in decades, and anti-corruption reforms have floundered).
“Far from a win-win, USMCA is a lose-lose. By any objective standards, it is the trade pact from hell,” said Ferry. “The solutions for the American economy today include: adjust the value of the dollar, balance trade, identify and target large-scale industries that can reignite growth, invest in them, set clear targets while handing the management over to those best qualified to achieve results, and launch a new century of entrepreneurial and bottoms-up growth.”
Barring that, Mexico is set to replace China as the biggest worry for American industry.
John Deere: Shrinking In Iowa, But Set To Grow In Mexico
John Deere will lay off or offer early retirement to over 200 workers in Iowa, while at the same time the tractor producer is gearing up to move production of mid-frame skid steer loaders and compact loaders from its plant in Dubuque, Iowa to a proposed new facility in Mexico. This is the sign of the times.
Mexico is the big winner of what Janet Yellen likes to call “friend-shoring”. Only, the idea was to leave China and set up shop in Mexico, not leave the U.S. and manufacture there instead. This will be a new trend to watch as China, and Southeast Asia more broadly, become increasingly embroiled in trade cases and threats of new tariffs.
A Deere representative told Industrial Equipment News (IEN) on June 11 that “unrelated to the layoffs”, the company is shifting some production from its Dubuque facility to the new one they are building in Ramos, Mexico, a roughly three-and-a-half-hour drive to the Texas border.
Deere told IEN that “when the facility is operational in 2026, production of mid-frame skid steer loaders and compact track loaders will be relocated from Dubuque to Ramos.”
The Dubuque factory will still be making other loaders, backhoes, and dozers, but for how long is anybody’s guess.
Recent reporting by AgDay TV Host Clinton Griffiths said Deere has offered 103 employees early retirement and let go 650 people spread throughout its Iowa operations this month.
Mexico Labor: An Impossible Opponent
Labor costs account for well over half of the overhead for manufacturing. If companies can be in a place that puts them close to their customers and lowers their overhead at the same time, that is the place most will prefer to be. This is especially true for publicly traded companies that want to show shareholders that they can lower their per unit costs, keep healthy profit margins, while competing with the rival brands coming out of Asia.
Despite new rules in the USMCA trade agreement that are trying to “level the playing field” between workers in Mexico and the U.S., pay rates in Mexico, cost of living, and a dollar valued at 18 to 1 all make Mexico attractive.
With geopolitical headwinds increasing in China, Mexico is set to gain and American companies like John Deere can easily move there and have duty-free access to the U.S. Deere factories in northern Mexico are not any further from many U.S. customers as a Deere factory in Iowa. In effect, with the USMCA, Mexico is the 51st state.
American workers often make three to four times more than their Mexican counterparts. Wage differentials are mostly tightening for production managers, who earn around $56.62 per hour in the U.S. compared to $45.13 in Mexico.
Mexican wages are expressed as a daily pay rate based on a 365-day calendar year. The daily pay rate includes certain benefit entitlements like health insurance, which is at least three times more expensive in the U.S.
U.S. companies pay an average $22,000 each year per employee for health insurance. In Mexico, healthcare is covered by a blend of subsidized and employer-sponsored insurance. An American product manager, for example, sent to Mexico to work instead of Iowa would cost the company around $5,900 annually for health insurance, according to the Mexico-based management offshoring consultancy Tetakawi.
Mexico Vs. U.S. Manufacturing Wages
Includes benefits such as health insurance. Priced in USD.
This data is from Tetakawi, a management consultancy advising U.S. companies on moving to Mexico. The figures are higher than data from the U.S. Bureau of Labor Statistics which measures wages but not the value of benefits. The Tetakawi figures are likely to be more relevant to multinationals which need to look at the total cost of labor, including all taxes and benefits.
Companies have been moving to Mexico for years, either closing factories in the U.S. and building them in Mexico for export here, or maintaining operations in the U.S., but outsourcing to Mexico rather than investing in domestic supply chains or finding an American supplier.
HVAC manufacturer Carrier became infamous for its Mexican move in 2016. That was an election year. Trump won. He convinced Carrier to stick around. But it didn’t last. By 2018, they moved south of the Rio Grande. Indianapolis’ loss was Monterrey, Mexico’s gain.
In Indiana alone, more than 20 manufacturers have moved production to Mexico between 2016 and 2020, resulting in at least 3,000 job losses, according to trade adjustment assistance filings reported by The South Bend Tribune, an Indiana newspaper.
Despite a lower corporate tax rate than Mexico (Mexico’s federal income corporate tax rate is 30%, according to PwC. The U.S. statutory C-corp rate is 21%. This rate is set to expire next year. The prior federal corporate income tax rate was 35%.), U.S. labor costs are often the deciding factor in moving abroad.
Strong Dollar & Cost of Living
The dollar goes farther in Mexico. One dollar is worth around 18 pesos. The peso has been falling even further in recent weeks due to the election victory of left-wing leader Claudia Scheinbaum.
A so-called “living wage” in Mexico averages between 13,177 pesos ($677) to 17,849 pesos ($917) per month, according to the Global Living Wage Coalition. It takes at least $3,900 per month to be considered a liveable wage in the U.S., according to MIT’s Living Wage Calculator. Manufacturers like John Deere can pay much less than U.S. rates and easily provide their Mexico-based workers with a comfortable living or for higher management, an upper-class lifestyle compared to their American counterparts.
Houses are also cheaper. A large, 3-bed, 2-bath, 2,300 square-foot home in Nuevo Leon overlooking the mountains will cost about 4.1 million pesos, or around $219,000.
One of the solutions to labor overhead calculation is for costs to adjust – such as wages. Though this will likely lead to wage stagnation in the U.S., with higher rates of growth in Mexico.
“George Bush and Bill Clinton sold NAFTA to the American people by claiming that the trade agreement would transform Mexico into an affluent country and create 200,000 jobs in the U.S. Thirty years on, we see that Mexican wages are still a fraction of U.S. wages and Mexico is a magnet for U.S. and global companies to shut down U.S. plants and move the jobs to Mexico. With last year’s U.S. trade deficit with Mexico, it’s fair to say that NAFTA has cost the U.S. 750,000 jobs.”
Then there is the dollar.
“Our currency obstinately refuses to fall because of the demand of international investors for dollars,” Ferry said.
That means John Deere gets more bang for its buck in Mexico. That’s another reason why they go there. It’s not the taxes. It’s not the duty-free trade zone. Canada is duty-free for them, too, and much closer to Iowa. (Plus Canada’s corporate income tax for manufacturers is only 15%, according to PwC.)
Mexico is only vaguely interested in having its overhead pricing costs – labor, insurance, taxes – close the gap with American overhead. It is better for Mexico to maintain the conditions of low-wage labor for much of the population, including those making products for Americans, so long as the bulk of Mexicans can see the country growing and getting richer. Those who do not see things that way high-tail it across the border and become part of the record-breaking $63 billion in remittances Mexicans send back home each year.
Mexico’s wages will never be on par with the United States. If so, there would almost be no need for the USMCA except to invite multinationals from around the world to build things there and sell to Americans without tariffs and costly transoceanic shipping.
Judging by the commentary from Mexico’s presidential election earlier this month, Mexicans know it: they feel themselves poor (the lowest 50% of the wage-earning population have negative wealth) and the victims of relentless violent crime (President Obrador’s tactics have largely failed to curb violence, according to the Council on Foreign Relations’ Global Conflict Tracker. Mexico reports over thirty thousand crime-related deaths per year. Mexico’s 2021 midterm elections were the most violent in decades, and anti-corruption reforms have floundered).
“Far from a win-win, USMCA is a lose-lose. By any objective standards, it is the trade pact from hell,” said Ferry. “The solutions for the American economy today include: adjust the value of the dollar, balance trade, identify and target large-scale industries that can reignite growth, invest in them, set clear targets while handing the management over to those best qualified to achieve results, and launch a new century of entrepreneurial and bottoms-up growth.”
Barring that, Mexico is set to replace China as the biggest worry for American industry.
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