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January 2018, Volume 24, Number 1

NAFTA, Canada, Mexico

Canada and Mexico in Fall 2017 braced for possible US withdrawal from NAFTA. Mexico exported goods worth $374 billion in 2016, 80 percent to the US.

After five rounds of negotiations between August and November 2017, the major issues were US insistence on changes to NAFTA to reduce US trade deficits with Canada and Mexico by raising the North American content of goods that trade freely among the three countries and a sunset clause that would end the agreement after five years unless all three countries agree to continue NAFTA. Canada and Mexico have rejected these US proposals.

The US wants to reduce the auto trade deficit with Mexico. The US imported $51 billion worth of vehicles and $23 billion of auto parts in 2016. Currently, 62.5 percent of components used in autos must be manufactured in Canada, Mexico or the US; the US wants to raise the NAFTA content requirement to 85 percent, including 50 percent content from the US.

Some auto makers say that, if a new agreement increases NAFTA-content requirements, they will move auto production to China and pay a 2.5 percent tariff on cars imported to the US.

Mexico is the world's largest manufacturer of flat-screen TVs, and the US is the largest buyer. If a renegotiated NAFTA makes production in Tijuana less viable, most analysts expect 15,000 Mexican jobs to disappear and flat-screen TV production to shift to Asia rather than return to the US. Three-fourths of the value of a flat-screen TV is the glass LCD panel that is already imported from Asia.

The US wants to make it harder for private firms to challenge government decisions, the investor-state dispute settlement mechanism, and limit the ability of private firms to challenge government anti-dumping decisions. Mexican truckers since 2015 have been able to deliver cargos throughout the US. The US proposed that they lose this right in the re-negotiations.

Canada was the major trading partner of 33 US states in 2016, and Mexico was first for six states.

Senator Charles Grassley (R-IA) called attention to NAFTA TN-visas, which allow an unlimited number of Canadian and Mexican professionals in 60 occupations who have US job offers to enter and work in the US for three years and renew their TN visas indefinitely. (Americans have reciprocal rights to work in Canada and Mexico.) DOS issues about 15,000 TN visas a year to Mexicans, and there are about 35,000 Canadians in the US with TN visas, suggesting that at least 75,000 Canadian and Mexican TN visa-holders are in the US.

NAFTA accelerated the integration of the economies of Canada, Mexico and the US, but did not reduce the roughly one-to-eight difference in wages between Mexico and the US. Mexico's major minimum wage rose from 80 pesos a day in 2017 to 88 pesos in 2018, about $4.75. About 15 percent of Mexico's 52 million workers earn the minimum wage; some 57 percent are employed in the informal economy. In the formal economy, the average daily wage was 333 pesos ($18) at the end of 2017, $2.25 an hour for an eight-hour day.

Mexico has the most unequal distribution of income among 35 OECD countries: four Mexican billionaires have wealth equal to almost 10 percent of Mexico's GDP. Carlos Slim, the richest person in Latin America, was worth $51 billion in 2017, when Mexico's GDP was $1.1 trillion, making Slim's wealth equivalent to almost five percent of GDP.

The US files more cases against other countries at the World Trade Organization than any other country. Between 1995 and 2017, the US filed almost 900 cases against firms and industries in other countries alleging dumping or selling in the US below the cost of production or the price at home, countervailing cases when foreign governments illegally subsidize goods, and safeguard cases to protect US producers from surges of imports. The WTO in 1995 introduced a dispute-settlement mechanism for countries to appeal other nations' unfair trade practices.

Canada. Some Haitians with TPS migrated illegally to Canada and applied for asylum, receiving C$600 a month and work permits. There is a backlog of 41,000 asylum cases in Canada, and fewer than 10 percent of the Haitians arriving from the US are recognized as refugees.

Several Canadian officials have traveled to the US to warn those considering migrating to Canada that they will not be welcomed with open arms.

Canada will join Uruguay in July 2018 as the second nation to legalize recreational marijuana. Provincial governments decide how much legal marijuana will be taxed, where it can be sold, and to whom. Ontario plans to establish 150 government stores to sell marijuana to those 19 and older. There is speculation that the estimated $8 billion a year black market will continue, perhaps by selling food with marijuana.

Mexico. Mexican newspapers in Fall 2017 reported that drug cartels in Michoacan used Agriculture Ministry records to determine the acreage and production of avocados to extort farmers. The so-called Knights Templar cartel collected $100 per hectare and $0.10 per pound of avocados, generating an estimated $150 million a year between 2010 and 2013. Farmers who did not pay risked having family members kidnapped.

The Mexican government in 2001 supported a $100 billion public-private effort to build a million homes for first-time homeowners that cost $20,000 to $30,000, using the National Workers' Housing Fund Institute (Infonavit) to make almost 500,000 loans in 2008. The World Bank and others added almost $3 billion.

The result, according to a series in the Los Angeles Times on November 26, 2017, was shoddy construction that left some people rich and many homeowners fuming. A million new homes were mini-casas, one bedroom units with 325 square feet, smaller than a typical two-car US garage. The Mexican government stopped subsidizing mini-casas in 2013.

The major issues with Mexico's building boom involve poor planning and incomplete services. Some housing developments were built in flood zones, and many have incomplete water or sewer services. Local inspectors often failed to spot problems during construction, and some cities have refused to take responsibility for streets and water systems because developers did not finish them as required. Many of the houses built during the boom have been abandoned.

Most homeowners signed mortgages that deduct 25 percent of their wages to pay for their houses, and most find it hard to avoid these deductions even if developers did not fulfill their promises. Some buyers agreed to loans with rising mortgage payments, and lost their homes to foreclosure when required payments rose faster than wages.

The Los Angeles Times reported that Homex, once Mexico's largest housing developer, engaged in massive fraud, selling bonds for houses that were not built in 150 developments around Mexico. Homex and major builders Casas Geo and Urbi filed for bankruptcy protection in 2014.

Homex was a developer in Culiacan, Sinaloa building 5,000 houses a year when Chicago's Sam Zell in 2002 invested to turn Homex into a behemoth building 55,000 houses a year. Homex had a $3 billion valuation on the NYSE in 2007, a year before Zell sold his Homex shares. Homex built poor-quality homes in areas unsuitable for housing, and often failed to complete promised amenities. When houses developed leaks and streets washed away, Homex blamed homeowners and local governments.

As people began moving away from Homex homes, the government shrank Infonavit loans, prompting Homex to lie about how many homes it sold to reassure investors. Homex's stock price fell from its peak of $69 in 2008 to $1 in 2014, when Homex declared bankruptcy. Homex emerged from bankruptcy in 2015 with a new focus on upscale homes.

Tancitaro, the avocado capital of Michoacan, has a private police force, as do many other Mexican cities and towns plagued by drug violence and corrupt police. Avocado growers organized private guards to protect the town and their orchards, and reportedly determined who would be elected mayor. As a result, Tancitaro is peaceful, but there is little room for dissent.

In Monterrey, business leaders worked with the state's governor to reform the police force and reduce kidnappings, but a new governor in 2015 returned to the practice of appointing friends to office; crime has begun rising.

Analysts say that Mexican political parties are an alternative state, loyal to the party rather than the office they may hold in government. Since many government posts permit only one term in office, those who remain loyal to the party are rewarded with another government post.

Mexico holds presidential elections in July 2018. Finance minister Jose Antonio Meade in November 2017 announced that he would try to become the candidate for the governing Institutional Revolutionary Party (PRI). Meade is perceived as scandal free and close to the business community, but trails ex-Mexico City mayor Andres Manuel Lopez Obrador's National Regeneration Movement (MORENA) in polls.

Northern Triangle. Some three million US residents were born in El Salvador, 1.4 million, Guatemala, 980,000, or Honduras, 630,000; 115,000 newcomers from these three countries arrived in 2014.

Over 55 percent of the three million Northern Triangle?immigrants in the US in 2015 were unauthorized, although a fifth of these unauthorized have a temporary legal status, including 195,000 Salvadorans and 57,000 Hondurans with TPS. Anther 60,000 unauthorized migrants from Northern Triangle?countries have DACA status.

By country of origin, 51 percent of Salvadoran immigrants are unauthorized, 56 percent of Guatemalans, and 60 percent of Hondurans, meaning 725,000 unauthorized Salvadorans, 550,000 unauthorized Guatemalans, and 375,000 unauthorized Hondurans.

There were 5.6 million unauthorized Mexicans in the US in 2015. Apprehensions of Northern Triangle?migrants exceeded those of Mexicans for the first time in FY14, and again in FY16 and FY17, when 163,000 were apprehended. The US deported 76,000 Northern Triangle?migrants in FY16.

Remittances to Northern Triangle?countries are significant, including $4.6 billion to El Salvador in 2015, $7.5 billion to Guatemala, and $3.8 billion to Honduras. Almost a quarter of persons born in El Salvador live in the US, and 30 percent of Salvadoran immigrants are in California, especially in Los Angeles.

Puerto Rico. Hurricane Maria devastated Puerto Rico on September 20, 2017 with 100 mph winds. The Puerto Rican government is bankrupt, as are many government-owned companies, including the Puerto Rico Electric Power Authority (Prepa), which filed for bankruptcy protection in July 2017.

In a failed bid to spur industrialization in the south, most of Puerto Rico's power plants are in the south while most people live around San Juan in the north. Transmission lines crossing mountains in the center of the island were destroyed. Prepa was very slow to repair them, and was criticized for signing a $300 million rebuilding agreement with a small Montana firm rather than seeking help from other utilities with experienced workers.

Two months after the hurricane, restoring consistent electricity remained problematic, increasing unemployment and encouraging 80,000 Puerto Ricans a month to move to the mainland US in Fall 2017. Many moved to the Orlando area, whose Puerto Rican population was expected to more than double from less than 500,000 in 2000 to over a million in 2017.

By the end of 2017, electricity had been restored to half of the residents of Puerto Rico. Deferred maintenance means that more is required than just repairing storm damage.

Puerto Rico had 842,000 nonfarm employees in October 2017, the fewest since 1991. Some predict that Puerto Rico's population could shrink below three million by 2025, reflecting the exodus of 400,000 Puerto Ricans.

The Merchant Marine or Jones Act of 1920 requires goods shipped within the United States to be carried on vessels owned, operated and built by Americans. The WTO considers the Jones Act the world's most protectionist shipping law, but US defenders say that the Jones Act guarantees US sailors and ships in the event they are needed for war.

Venezuela. Some two million people emigrated since 2000, moving to neighboring Columbia and Brazil as well as to Spain and the US. Most were young, suggesting that economic growth may be slowed in future years if productive Venezuelans do not return.