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July 2017, Volume 23, Number 3

NAFTA, Mexico, Canada

President Trump on May 18, 2017 informed Congress that he plans to re-negotiate rather than withdraw from NAFTA, the 1994 agreement that lowered barriers to trade in goods and investment between the three countries. When launched, NAFTA was the first reciprocal and rules-based trade agreement between an industrial and a developing country.

The US had a $62 billion trade deficit with Mexico in 2016. While campaigning in 2016, Trump called NAFTA the worst trade deal ever negotiated by the US, and threatened to launch procedures for US withdrawal.

NAFTA has forged integrated supply chains between Canada, Mexico and the US, especially in the auto industry. Over 40 auto firms assemble cars in Mexico including Nissan, the largest Mexican producer and the seller of a quarter of cars bought in Mexico. Mexican-produced cars have an average 40 percent US content.

Some 3.5 million cars and light trucks were produced in Mexico in 2016. Most were exported: Mexico is the fourth largest car exporter, after Germany, Japan and South Korea. By 2023, Mexico is projected to make over five million cars a year. US agricultural exports to Mexico rose from $9 billion in 1993 to $38 billion in 2016.

Ford cancelled plans to move the production of Focus subcompacts from Michigan to Mexico after complaints from Trump, but in June 2017 announced that it would produce Focus cars in China and export them to the US. China is the world's largest car maker, producing as many cars each year as the US and Japan combined. Auto wages in China are similar to auto wages in Mexico, about $1,200 a month plus $300 in overtime.

Trump bemoaned the US trade deficit with Germany, almost $65 billion in 2016. German auto firms have invested heavily in southern states such as South Carolina that supported Trump, raising questions about how to balance Trump's America First mission with the creation of good jobs such as those at BMW in Greer, South Carolina, which produced over 400,000 vehicles in 2016.

Trump may return the US to negotiating bilateral trade deals, where the US often has more leverage. Unions and affected US industries often oppose these bilateral deals, prompting President Obama to push for multilateral trade agreements.

Mexico produces six million tons of sugar a year and exports 1.2 million tons, including 1.1 million tons to the US in 2016. NAFTA limited Mexican sugar exports to the US for 14 years, but since 2008, Mexico can export an unlimited amount of sugar to the US. Mexican sugar exports surged in 2013-14, prompting voluntary Mexican restrictions on exports, but US sugar producers sought more restrictions. In June 2017, Mexico agreed to reduce its exports of refined sugar.

Mexico has 190,000 sugar growers who employ a peak 450,000 workers, and threatened to block imports of US high-fructose corn syrup if the US blocked Mexican sugar imports.

Mexico. Mexico is second to Israel in free-trade agreements, helping the country to attract investment from businesses seeking to serve diverse markets. Wages for Mexican auto workers averaged $2.04 an hour in 2017 and are not rising as fast as wages for Chinese workers; Mexican employers also pay for a wide range of work-related benefits.

One reason for stagnant Mexican wages is that most union contracts are negotiated factory by factory by affiliates of the Confederacion de Trabajadores de Mexico (CTM), the largest union federation whose affiliates have four million members. CTM unions often sign so-called protection contracts with new plants when they are announced, so that all newly hired workers are union members and their dues are deducted from their wages. By pre-signing with one union, other unions cannot try to organize workers at a pre-signed plant.

A third of the governors of Mexico's 31 states have been indicted or are under investigation for corruption. Governors, who serve one six-year term, control state legislatures, state auditors and state prosecutors, leaving the federal government to investigate allegations of corruption.

A 2015 study of 25 exporters of tomatoes, bell peppers and squash in the Yaqui Valley of Sonora found that the farms offered only half of their hired workers social security coverage. All of the employees should have been enrolled in social security, but some farms said they paid the medical expenses of workers directly to clinics, which was cheaper than paying social security taxes to the government. About 60 percent of hired workers are from the Yaqui Valley, and half of the farms said that they have mostly local workers.

Across the 25 farms and multiple crops, there were an average of 4.7 hired workers per hectare. Gross revenue per hectare was 571,000 pesos or about $30,600, and farmers reported significant profits. A spaghetti squash grower reported hiring 20 employees to harvest 1,000 kg of squash per hectare, and selling the squash for $18 per 16 kg box. However, only the equipment operator among the 200 employees had social security coverage.

Canada. Canada is the great immigration exception, a country of 36 million that increases its population almost one percent a year via immigration, with generous social welfare programs and few anti-migrant activists. There are many reasons for Canadian exceptionalism on migration, including the fact that the point-selection system ensures that most newcomers are well educated.

There are other differences as well. The long-standing presence of both French and English speakers led the Canadian government to embrace multiculturalism. To head off Quebec separatism in the 1970s, the government made multiculturalism official policy and introduced the point selection system for immigrants. Both major parties, the Conservatives and Liberals, appeal to immigrants to support them.

Perhaps the major difference between Canada and most other richer countries is geography. There is little illegal immigration, and little sense that immigration is out of control.

Jacobo-Hernandez, Carlos, Melissa Barron-Borquez, and Sergio Ochoajimenez. 2016. Sustainability and Performance in Agribusinesses: The Case of Vegetable Export Businesses in Mexico. Management of Sustainable Development.