A fourth to a fifth of Mexico’s million-plus maquiladora workers once produced textiles and apparel, many of them in factories near the U.S. border. Employment peaked at nearly 300,000 workers in early 2001. Since then, widespread layoffs have slashed jobs. By December 2005, they’d fallen to 174,000, a 41 percent drop in five years.

      The industry’s massive downsizing has evoked great concern on both sides of the border, with hand-wringing about unbeatable Chinese competition and the imminent demise of Mexican apparel operations. The situation isn’t that grim, though.

      Mexico’s textile and apparel export industry isn’t going to disappear, although it has shrunk in response to market realities related to trade policy changes. What’s happened reflects a facet of trade liberalization little understood by the general public: trade diversion. Coined by economist Jacob Viner, the term describes how discriminatory tariff policies can undermine the benefits of free trade, leading to inefficient allocation of resources and higher costs for consumers.

      Before joining the European Union, for example, Britain imported most of its lamb from New Zealand, the cheapest producer. Adopting the common EU tariffs made New Zealand lamb more expensive in Britain, opening the door for producers in member countries, particularly the French. For exporting nations, trade diversion can lead to dramatic ups and downs in sales — which is just what occurred with Mexico’s textiles and apparel.

            When the North American Free Trade Agreement took effect in 1994, its proponents emphasized the pact’s efficiency and growth effects. Their arguments rested on the findings of long-dead economists whose writings still ring true. Adam Smith, David Ricardo and others had shown that increased international trade would allow economies to direct resources toward what they produced relatively efficiently, exporting what they didn’t consume at home and importing what their trading partners could produce more effectively. World efficiency would increase. Products would be cheaper. Everyone would be better off.

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