NAFTA – The OM Blog by Heizer, Render, & Munson

OM in the News: A Brief History of How the U.S. Lost Its Manufacturing Edge

In the 1950s, 35% of private-sector jobs in the U.S. were in manufacturing. Today, there are 12.8 million manufacturing jobs in the U.S., about 9% of private-sector jobs. To understand whether restoring manufacturing to the U.S. is possible, it helps to first understand how the U.S. lost its place as the world’s manufacturing powerhouse.

In the early 1900s, the U.S. pioneered the use of interchangeable parts and organizing factors for mass production. World War II prompted a massive increase in manufacturing capacity. In the postwar years, more Americans joined the middle class, driving jumps in spending on the cars and appliances for their newly purchased homes. America was America’s best customer for manufactured goods.

A North Carolina textile mill in 1960, when U.S. manufacturing was still dominant

Many of these goods were high tech for the time, such as dishwashers, TVs and jets, brought about by wartime innovations. Making them in America, as opposed to some other country, made sense because staying on the leading edge required R&D teams working closely with the factory floor. It helped, too, that the U.S. had the most educated workforce in the world.

After the 1950s, manufacturing’s role in the U.S. economy began to slip, writes The Wall Street Journal (April 14, 2025). More people were going to work for service-sector employers such as hotels, banks, law firms and hospitals. Manufacturing employment leveled off, as services jobs grew. Around this time, less developed parts of the world, where labor costs were much lower, began dialing up manufacturing of nondurable goods in Latin America and Asia. The U.S. started importing more and more of those items. Over time, the same thing happened with light durable items, such as blenders.

In the 1980s, things began to change. American manufacturers of nondurable goods had an increasingly difficult time competing with countries where labor costs were lower. That intensified in the 1990s, in part as a result of NAFTA lowering duties on Mexican goods.

There were also job losses at steel producers after developing countries such as South Korea built up their steel industries and left the world awash in excess capacity. But what happened in the 1980s and 1990s pales in comparison to what happened after China joined the World Trade Organization in 2001, opening its country to foreign investment and gaining access to global markets. Manufacturers of low-tech items such as furniture and small household appliances, in particular, suffered. It was called the China Shock.

The U.S. now exports in excess of $1 trillion-worth of services—far more than any other country.

Classroom discussion questions:

1. How can the U.S. best restore its manufacturing leadership?

2.What makes the U.S. the leader in exporting of services?

OM in the News: Mexico, Nearshoring, and Manufacturing

The United States-Mexico-Canada Agreement (USMCA), which replaced the North American Free Trade Agreement (NAFTA), has played a crucial role in Mexico’s manufacturing growth (to a recent $374 billion), reports Industry Week (June 12, 2024). The USMCA (see Chapter 2 in your Heizer/Render/Munson text) establishes more significant regional content requirements and higher labor standards, encouraging local production.

Supply-chain relocation has benefited investment in Mexico, where there has been an unexpected increase in the demand for industrial warehouses. Foreign direct investment (FDI) is now over $18 billion and has been vital to technological advances and has strengthened the trade relationship with the U.S., Mexico’s leading trading partner in manufacturing.

The fact that Mexico displaced China as the U.S.’s top trading partner made world news. U.S. data shows an import value of $427 billion from China in 2023, down from $536 billion in 2022 and $504 billion in 2021. By comparison, Mexico’s import value to the U.S. in 2023 was $475 billion, up from $452 billion in 2022 and $382.5 billion in 2021. The trend continues in 2024, since during the first four months of the year, the U.S. imported $129 billion dollars from China compared to $162 from Mexico.

The main engine of the Mexican manufacturing economy is the automotive sector. In 2019, Mexican plants produced $94 billion worth of components; by 2023, that reached $121 billion, and this year, it is expected to reach $152 billion, an all-time high. Mexico is now the leading exporter of auto parts to the United States, with 42.5% of the U.S. market—well above Canada, with 10.5% and China, 8%.

In addition to its modernization, the USMCA now demands higher regional content, going from 62.5% under NAFTA to 75% in the USMCA. This motivates the narrowing of value chains and makes Mexico essential to the region’s productive structure.

Classroom discussion questions:

Why is this reshoring occurring?
How does this impact decisions the operations managers in the U.S. make?

OM in the News: Auto Makers Plan to Shift More Manufacturing to North America

Some vehicles assembled in North America use engines or transmissions from outside the region. (Source of engine in gray, transmission in red).

Foreign car makers are considering moving more of their manufacturing to North America following the recent U.S. trade deal with Canada and Mexico, writes The Wall Street Journal (Oct. 8, 2018). As the U.S. and Canada reach a pact to replace the roughly 25-year-old North American Free Trade Agreement, foreign car makers suggest changes to their supply chains that would result in more auto-parts manufacturing in the U.S., Canada and Mexico.

Daimler said the new agreement could force the company to move more engine manufacturing to the U.S., where it builds vehicles at a factory in Tuscaloosa, Ala. The Renault-Nissan-Mitsubishi alliance said the new pact would spur the car-making group to invest more in both the U.S. and Mexico.

The deal, which replaces Nafta, requires auto makers to build at least 75% of a car’s value in North America to remain duty-free within the region, up from 62.5% currently. Cars that don’t comply with the new rules will be subject to a 2.5% tariff. (Foreign-based car brands made up 56% of light-vehicle sales in the U.S. last year.)

The new rules will be phased in over the next 2-5 years, about the time it takes to develop a partially or fully revised car model. Car makers are likely to look at moving engine and transmission production first, because those parts make up roughly 30% of a car’s value.

Classroom discussion questions:
1. What is the significance of the graphic on the left? (Click to blow it up).

2. What will be the impact on domestic car manufacturers?

OM in the News: The Mexican Medical Supply Chain

Workers at the Greatbatch Medical plant in Tijuana

“Nafta has transformed Tijuana from a gritty party spot to a world capital of medical devices,” writes The New York Times (April 1, 2017). Boulevards are lined with factories bearing the names of American-run companies: Medtronic, Hill-Rom, DJO Global and Greatbatch Medical. Inside, Mexican workers churn out millions of medical devices each day, from intravenous bags to artificial respirators, for the global market. Nearly everyone in America who has a pacemaker walks around with parts from here.

A proposed border tax could fracture the industry’s sophisticated global supply chain and force American hospitals to pay more for vital necessities. Hospitals in the U.S. rely on bandages and surgical gloves from China, suturing needles and artificial joints from Ireland, and defibrillators and catheters from Mexico. Annual imports of medical devices has reached $43.9 billion, with Mexico as the leading supplier, ahead of Ireland, Germany and China. Tijuana houses the highest concentration of Mexico’s medical device firms, 70% of which are U.S.-owned.

The high-tech operations emerged after Nafta helped transform Mexican border factories, called maquiladoras, into industrial powerhouses. Now, instead of being garment sweatshops, many maquiladoras in Tijuana employ a new generation of Mexican engineers and skilled technicians to make medical devices. Technicians at these factories earn $14 an hour, compared with $25 an hour for technicians at U.S. factories.

Mexico’s medical device industry buys much of its raw materials and capital machinery from American suppliers. The American-owned Integer plant in Tijuana, for example, buys 90% of its raw materials, duty-free, from the U.S.: stainless steel to be stamped into cups used for hip replacements and plastic to be molded into catheters. Then half of the factory’s output is shipped back to the U.S. and much of the rest to American-owned companies elsewhere. The company, like many others here, is seamlessly integrated: Employees in Tijuana videoconference with R&D teams in the U.S. to fine-tune product designs.

Classroom discussion questions:

What factors appear to threaten this supply chain?
Why is it hard to move the medical factories to the U.S?

OM in the News: Nafta and the Global Car Industry

“Ending the 1994 Nafta trade pact is relatively easy,” writes The Wall Street Journal (Nov. 11, 2016). The U.S. legally can pull out of Nafta 6 months after notifying Mexico and Canada. But for the auto industry, such a change would be substantially more complicated because of the multilayered connections between U.S. and foreign suppliers and assembly points. The tens of thousands of parts that make up any vehicle often come from multiple producers in different countries and travel back and forth across borders several times.

This is a tenet of modern manufacturing: Where a product is ultimately assembled increasingly has little bearing on where its component parts are made. More than half the parts in the Ford Focus, for example, are made outside the U.S. and Canada, including 20% in Mexico. Ford also ships in some of the car’s engines from Spain and transmissions from Germany.

Similarly, only 10% of the parts that go into the 200,000 BMW luxury crossovers built each year in Spartanburg, S.C. come from U.S. and Canadian plants. The rest are imported from Europe and elsewhere. BMW in turn exports most of the crossovers around the world. By contrast, 70% of the components in the Honda CR-Vs assembled in Guadalajara, Mexico are currently made by U.S. and Canada-based factories. The parts that make up a car or truck, from bolts to motor blocks, window lifts to oil filters, account for 2/3 of its value.

“This industry, particularly in North America, has integrated a lot,” said a Federal Reserve economist. “You can’t buy an American-made car anymore. You can buy an American-assembled car,” adds a Ford veteran.

U.S. and Canada-based factories shipped $29 billion worth of parts to Mexico in 2015, while Mexican plants in turn sent more than $61 billion worth of parts to the 2 Nafta partners. About 1/3 of Mexico’s 1,300 suppliers, which employ some 720,000 people, are U.S. owned. Mexican, Asian and European parts suppliers provide jobs for nearly 600,000 Americans.

Classroom discussion questions:

Explain the purpose of Nafta.
Identify the 1st, 2nd, 3rd, and 4th tier suppliers in the attached seat graphic.

Teaching Tip: Explaining NAFTA to Your Students

Making car mats in Mexico. NAFTA put U.S. automakers in competition with Mexican workers.

Your students have undoubtedly been hearing about Donald Trump’s threat to “break” the North American Free Trade Agreement. Auto industry workers offered up some of his loudest cheers. But there are still more than 800,000 jobs in the U.S. auto sector, and The New York Times (Mar. 30, 2016) makes the case that without NAFTA (see Chapter 2), there might not be much left of Detroit at all. To be sure, the deals to reduce trade barriers threaten the livelihood of workers in the industries exposed most directly to foreign competition. NAFTA put them in direct competition with Mexican workers earning 1/5 of their compensation.

The American trade deficit in autos and parts tripled in the 2 decades after the NAFTA deal took effect in 1994, to about $130 billion in 2013. The industry lost 350,000 jobs, 1/3 of its workers, a massive shift in a flagship industry. Still, NAFTA itself had a relatively modest impact on the size of the U.S. trade deficit with Mexico. And autoworkers in Detroit were not just competing with cheap workers in Mexico. They were also competing with American workers in the union-averse South, where many car companies set up shop. They were competing with robots and more efficient Japanese and Korean automakers.

The integration of production across countries with complementary labor forces — cheaper workers in Mexico to perform many basic tasks, with more highly paid and productive engineers and workers in the U.S. — turned out to play a central role in reviving our auto industry. The Honda CR-V assembled in Mexico, for example, uses a U.S.-made motor and transmission– and 70% of its content is either American or Canadian. This regional integration gave the U.S.-based auto industry a competitive edge that was critical to its survival. There was a concern 20 years ago that an auto industry supply chain would develop across Asia, including China and Taiwan and Southeast Asia. Now, as Chinese wages rise, almost every car manufacturer is setting up shop in Mexico.

Classroom discussion questions:

Explain the purpose of NAFTA.
Why is this an OM issue?

OM in the News: Mexican Truck Drivers and the Supply Chain

July 6, 2011 marked the resolution of a long-simmering NAFTA dispute between the US and Mexico over long-haul, cross-border trucking. Although NAFTA came into effect 17 years ago, the trucking deal was still bogged down over two legitimate issues: (1) border security and (2) union and independent trucker opposition to the loss of high-paying jobs to lower-priced Mexican drivers (who earn about 1/2 of their US counterparts).

Businessweek (July 20-27, 2011) reports that transporting goods across the Mexican border is a complicated business, involving customs brokers, warehouses, and lengthy inspections for drugs and illegal immigrants. Under the current system, Mexican trucks haul their merchandise to the border, where a transfer truck takes it across. A US truck picks it up on our side. In time, a Mexican driver will be able to haul goods from any Mexican city straight through to Chicago or New York. To qualify for service on US roads, Mexican drivers will have to learn rudimentary English and US highway laws.

Is it a good trade-off? Businessweek strongly endorses the idea. With trade among Canada, Mexico, and the US at$1 trillion (triple since the start of NAFTA), the magazine writes: “US potato farmers, along with producers of pork, cheese, and other goods, can look forward to reduced Mexican tariffs with the resolution of the trucking deal. Higher wages and wider prosperity in Mexico are very much in the US national interest”.

US truckers will strongly disagree. While Mexican drivers will surely benefit, American drivers are loath to travel into Mexico. The country lacks the smooth roads, fuel stations, and accommodations available in the US–and has violent drug gangs to boot. In effect, the trade-off balances a more efficient supply chain with the disruption of workers in this industry. It’s no wonder the Obama administration announced the agreement with little fanfare.

Discussion questions:

1. Is the lower transportation cost good, or bad, for OM?

2. How does this change impact the supply chains served by the truckers?