Did NAFTA Kill the U.S. Machine Tool Industry?
I was at a fact-finding mission at a South Florida machine shop. The machine tool veterans talked of decades of sweat and toil in a proud industry. They ended the interview on a dramatic note. I should explore in our newfangled blog how NAFTA killed the American machine tool industry.
When the trade accord between the United States, Mexico and Canada passed in the Clinton era, you could hear the sucking sound of jobs being shipped south to confirm the fears expressed by candidate Ross Perot in the 1992 U.S. Presidential debate, according to these machine tool veterans.
Is this true? Did NAFTA kill the American machine tool industry?
The simple answer is no. The more complicated view is that NAFTA did have an effect on the American machine tool industry and manufacturing in general.
First of all, what is NAFTA?
We posed this question to Christopher Wilson, Associate at the Mexico Institute of The Woodrow Wilson Center, a Washington DC-based think tank. Wilson is an expert on United States-Mexico economic relations. Here, he describes NAFTA and its broad macro-economic effects:
NAFTA is a trade and investment agreement. The trade-side being the biggest element of what it did. It lowered tariffs on most goods that are traded between the United States, Mexico and Canada. As a result of lowering some of these barriers for trade, the amount of trade between these three countries has grown enormously. It’s now five times bigger than it was pre-NAFTA.
The effect of NAFTA on the U.S. machine tool industry was a wash.
The changes in the tariff structure for the industry were “not particularly big,” according to Wilson. Mexican machine tool companies received a “slight advantage” selling to the American market. The machine tool industry in the United States gained significantly from increased exports to a manufacturing sector gaining traction in Mexico.
The American machine tool industry has greatly benefitted from what Wilson terms “re-regionalization,” a relatively recent trend and “second wave of globalization” where the manufacturing sectors of all three NAFTA countries are more closely integrated.
The auto industry is an example. A “screw widget” is produced in Mexico and shipped to Canada and placed in a fuel injector. The fuel injector is then shipped to the United States and placed in a finished vehicle.
“This ‘back and forth’ is something that is pretty unique to North America,” Wilson explains.
“It doesn’t always make sense for American manufacturing companies to chase cheap wages around the world. It also makes sense to keep manufacturing closer to your market because of transportation costs and logistics of supply chains.”
In other words, American manufacturing, a big market for the local machine tool industry, is coming home.
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