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October 2017, Volume 23, Number 4

NAFTA, Canada, Mexico

Canada, Mexico and the US held discussions to revise NAFTA in August and September 2017. President Trump wants to raise the required North American content of cars that can move freely within NAFTA countries from 62.5 to 80 percent, while auto companies want to lower the NAFTA content requirement to 50 percent. The US levies a 2.5 percent tariff on cars from WTO member countries.

The US wants to end the Chapter 19 ability of firms to have private arbitration panels rather than local courts decide whether governments have enacted rules limiting trade. All three countries want to address the flow of goods moving via e-commerce, but it is not yet clear whether a revised NAFTA would allow Amazon to ship goods seamlessly from US warehouses to customers in Canada and Mexico.

The US imported goods and services worth $314 billion from Canada and $324 billion from Mexico in 2016. US exports to Canada were $322 billion, and to Mexico $262 billion, that is, the US had a slight surplus in goods and services trade with Canada and a deficit with Mexico. For goods only, the US had a $17 billion deficit with Canada and a $69 billion deficit with Mexico in 2016.

The agricultural trade picture is similar. The US has a slight farm trade surplus with Canada and a deficit with Mexico. The US imported agricultural goods worth $22 billion from Canada and $23 billion from Mexico in 2016. US farm exports to Canada were $23 billion, and to Mexico $18 billion.

The Trump administration released its NAFTA re-negotiation objectives in July 2017, reflecting the internal battle between the economic nationalists who shaped Trump's campaign and the globalists who fill most economic positions in the Trump administration. The globalists won, and the changes sought in NAFTA are largely cosmetic or were already agreed to by the US in TPP negotiations.

The revised NAFTA is expected to have provisions to deal with "currency manipulation" and may move labor and environmental standards from a side agreement to the core agreement. Mexico has suggested that NAFTA re-negotiation should increase labor mobility between the Canada, Mexico and the US.

Canada. Foreign workers enter Canada to work on farms under two programs: SAWP, which had 34,000 admissions in 2016, and the Temporary Foreign Worker Program. In Ontario and Quebec, farm organizations FARMS and FERME handle the recruitment and transportation of guest workers to farms. FERME brought 9,500 guest workers to Quebec in 2015, almost half Guatemalans.

FERME recruitment occurs in Guatemala City, which requires rural workers to make several trips and, for first-time workers, to pass tests of physical ability and dexterity. The average cost of being recruited for first-time workers was $475, and $360 for those who had been in Canada before and did not have to retake medical exams. Many workers also paid fees to intermediaries to get introduced to FERME's Guatemala City recruiter.

The SAWP was criticized in an August 14, 2017 New York Times article for allowing employers to fire complaining workers, who are then required to leave Canada. The article noted that the federal government controls guest worker admissions, but provinces enforce labor laws. The federal government does not always transfer the names of employers of guest workers to provinces, which can slow inspections.

Many SAWP workers are satisfied. After 16 years, a worker employed by 20-acre Beverly Greenhouses in Waterdown, Ontario for an eight-month season earns $15,000 a year or almost $2,000 a month as a supervisor at the cucumber farm.

Mexico. There are 300,000 Central Americans in Mexico, compared with three million in the US. Fewer Central Americans were arriving in Mexico in 2017, but more of those who do are applying for asylum in Mexico, over 1,000 a month in 2017.

The Mexican Commission for Refugee Assistance (Comar) processes applications for asylum: Mexico grants asylum to two-thirds of Central American applicants. Some Mexican immigration agents reportedly deport Central Americans rather than allow them to apply for asylum, and many of those who apply wait far more than the 45 days specified by Comar to make decisions on their applications.

Mexico's economy is booming, with over 517,000 workers added to the social security system in the first half of 2017. The percentage of informal workers fell from 60 percent in 2009 to 57 percent in 2017. A 2012 labor law reform that made it easier for employers to offer flexible contracts increased the share of formal-sector jobs in Mexico, and improved government record-keeping systems have helped to ensure that employers satisfy their payroll tax obligations.

A key export sector is autos, which employs over 600,000 workers and accounts for a third of Mexican manufacturing exports. Cars with at least 62.5 percent North American content can be traded freely in NAFTA countries. About 20 percent of the cars sold in Mexico, Canada, and the US are assembled in Mexico.

Wages in Mexico are low, an average $15,200 in 2015 according to the OECD, compared to $60,000 a year in the US; Mexico's minimum wage varies by region, and was 80 pesos or $4.50 a day in many regions in 2017. The OECD puts average annual wages at $25,000 in Poland, $39,000 in Japan, and $48,000 in Canada.

Can NAFTA re-negotiations raise Mexican wages, which have risen little since NAFTA went into effect in 1994? Wages averaged $18 a day in May 2017 for workers enrolled in the Mexican Social Security Institute. The Mexican government wants more jobs, and is reluctant to push up wages quickly, as exemplified by state and local officials quashing efforts to form independent unions.

Mexico's agriculture is concentrated in a few states: Baja California Norte and Sur, Sonora, and Sinaloa accounted for 55 percent of the value of Mexico's agricultural output in 2014. Mexico's southern states of Chiapas and Oaxaca, among the poorest Mexican states, bore the brunt of an offshore 8.2 earthquake September 8, 2017. These states are the source of internal migrants for export-oriented agriculture in northern and central Mexico.

Mexico's berry production is booming: some 88,000 acres of berries generated almost $1.3 billion in revenue in 2016. US berry growers complain that some Mexican berries are sold in the US below their cost of production, as with blackberries sold for less than $10 a case (12-six once containers) when Georgia producers say they need $12 a case to cover their costs.

Large US growers such as Driscoll's who produce berries in all three countries want to continue the current rules, while smaller US growers who produce only seasonally want more protections from Mexican exports.

Under current NAFTA regulations, US farmers complaining of unfair competition from Canada or Mexico must show they were harmed over an entire calendar year. The US has proposed that US producers only have to show injury over part of the year to bring an anti-dumping case.

The Mexican government relies on oil taxes for a third of its revenues, so declining oil output and prices reduce government revenues. Oil production averaged 2.5 million barrels a day in 2016.

Mexico's drug wars heated up in 2017. Killings peaked in 2011 and were falling until 2015, but began rising as arrests of some gang leaders set off a battle for control of the drug trade. A new justice system supported by the US that presumes innocence and limits pre-trial detention has led to the release of suspected drug dealers, some of whom try to kill rivals.

The US Department of State updated its travel warning for US citizens visiting Mexico in August 2017, advising caution in destinations such as Cancun, the Riviera Maya and Los Cabos. Some 28 million Americans visit Mexico each year, helping to make Mexico the eighth largest destination for foreign visitors and tourism a $20 billion a year Mexican industry.

The municipality of Los Cabos, Baja California Sur includes two major cities, San Jose del Cabo and Cabo San Lucas. In 2017, they had almost 300,000 residents, up from fewer than 50,000 in 1990, to serve over two million visitors a year. There was little planning for the influx of residents who provide services to mostly US visitors. Some 10 percent of residents live in informal settlements north of Los Cabos cities with pirated electricity often running to cinder-block houses that lack running water and sewer service and have unpaved streets.

Residents say that local governments subsidized developers instead of services for workers, allowing youth from poor neighborhoods to be attracted to drugs and crime. The El Zacatal section of San Jose del Cabo has had multiple homicides as rival drug gangs battle for control.

Monterrey, Mexico has four million residents in an affluent core and suburbs that are experiencing rising crime. Some say that security in Mexico has been transformed from a public to a private good, as affluent residents who hire private security guards reduce their support for an effective police and judiciary.

Between 2013 and 2015, the number of private security companies in Mexico nearly tripled to over 1,100. Some rural landowners hire vigilante groups for protection, which can prompt poorer neighborhoods to follow suit and leave police marginalized. Restoring security as a public good may be a challenge.

Pew Research Center in September 2017 reported that 94 percent of Mexicans oppose US plans to build a wall on the Mexico-US border. Two-thirds of Mexicans had unfavorable views of the US, up from a third in 2015. A third of Mexicans said they would like to move to the US, but only an eighth said they would move to the US without authorization. Mexicans are also dissatisfied with their leaders, with 85 percent saying that political corruption, drug violence and crime are pressing concerns.

Puerto Rico. Puerto Ricans can move to the mainland US, and over 400,000 did so between 2000 and 2017, reducing the island's population to 3.4 million, compared to 5.2 million Puerto Ricans on the mainland. The Puerto Rican government borrowed to pay its bills, and faced $123 billion in debt ($74 billion) and pension obligations ($49 billion) in 2017 to be repaid from a shrinking pool of taxpayers. Many towns have become nurseries and nursing homes, with mostly very old and very young residents.

Some say the status quo is not as dire as it looks at first glance because many Puerto Ricans work off the books, enabling them to receive welfare benefits and making reports of ever-fewer employed workers misleading.

Hurricanes Irma and especially Maria devastated Puerto Rico and the US Virgin Islands in September 2017, leaving these US island territories with little electricity and limited cell phone service. The government-owned Puerto Rico Electric Power Authority (Prepa) said that it may take months to restore electricity to all parts of the island. Prepa has $9 billion in debt, and has not maintained its power plants and transmission lines.

Optimists hope that federal rebuilding aid can restore the island's electrical grid, which has been neglected for decades.