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October 2018, Volume 24, Number 4

Nafta, Canada, Mexico

Mexico and the US agreed on a revision of NAFTA in August 2018. The new agreement increases local content requirements for autos that can trade freely in North America from the current 62.5 percent to 75 percent and requires 40 to 45 percent of car components to be made by workers earning at least $16 an hour. Mexican cars made by workers who earn less than $16 an hour may be subject to a 2.5 percent tariff. If Mexican auto exports exceed 2.6 million a year, there may be a 2.5 percent tariff.

The revised Mexico-US accord is a 16-year agreement with a review after six years.

Almost a million US workers are employed in autos and auto parts, and US auto employment is expected to rise slightly. Many Mexican auto workers earn $3 an hour; only 269,000 of Mexico's 54 million workers earn 308 pesos ($16) an hour or more. At current wages, a third of Mexican-produced cars may not qualify for free trade, including the Honda HR-V, the Volkswagen Jetta and Golf, the Nissan Sentra and the Ford Fiesta and Fusion.

Americans bought 16 million new cars in 2017, including a quarter imported from Canada and Mexico. The integrated auto supply chain created by NAFTA means that almost all cars produced in North America include some Mexican-made parts.

One reason for the rising share of Mexican-made parts is low Mexican wages. Mexico's minimum wage is 88 pesos or $4.75 a day. Most Mexicans employed in auto parts or assembly factories earn $1.50 to $2.50 per hour, or $12 to $20 a day. BMW is opening a new $1 billion plant in San Luis Potosi that is expected to produce 150,000 cars in 2019.

After the Mexico-US agreement was announced, Canada made an agreement September 30, 2018 that preserved the 25-year old tripartite pact renamed the United States-Mexico-Canada Agreement (USMCA). Canada's GDP is $1.4 trillion, and 75 percent of Canada's exports go to the US.

The new tripartite agreement retains Chapter 19 dispute settlement using independent bodies, raises the North American content requirements for free trade in autos, and increases US access to Canadian dairy markets. Trump sharply criticized Canada's diary supply management system that sets milk prices, allocates quotas to Canadian farmers, and limits dairy imports. Many of Canada's 11,000 commercial dairies are in Quebec, and some will be threatened by cheaper US milk.

The USMCA includes rules for cross-border financial services and digital business, items not included in NAFTA. NAFTA was the first trade agreement between an industrial and a developing nation, and helped to set the stage for globalization and the backlash against freer trade.

Canada. Canada received over 50,000 asylum applications in 2017, more than double the 24,000 of 2016. Some foreigners apply in Canada even though their applications for asylum were rejected in the US. The 2002 Canada-US Safe Third Country Agreement does not allow foreigners to apply for asylum in both countries unless the foreigner illegally enters Canada.

Many foreigners in the US take a bus from New York City to Plattsburgh, where taxis charge $50 to $75 to drive them 30 miles to the end of Roxham Road, a 100-yard dirt path that leads to Canada. After criminal checks, most unauthorized applicants are released and can apply for public assistance, health care and work permits while they wait for decisions on their asylum applications. Canada has been approving 60 percent of asylum applications.

Mexico. President-elect Andres Manuel Lopez Obrador in August 2018 said that Mexicans would vote in October 2018, before AMLO takes office, on whether to continue to build a new Mexico City airport. A third of the $16 billion for the new airport has been spent.

The central government provides 80 percent of state government revenues. The spending of federal funds has not been closely monitored, which is one reason why many state governors face corruption charges. Almost 85 percent of Mexico's police are employed by states and cities, where they earn only $400 to $500 a month, making them susceptible to bribes.

Mexico is growing slowly despite rising levels of education and integration into the world economy via free-trade agreements and foreign investment. Between 1996 and 2015, Mexico's economy expanded by 1.2 percent a year in real per capita terms, and labor productivity rose by 0.5 percent a year, even though average years of schooling rose from 7.7 to 9.6.

Levy argues that slow productivity growth in Mexico is due to a persistent misallocation of resources, as too much labor and capital goes to informal firms that evade taxes and regulation and not enough capital goes to formal-sector firms that are globally competitive. There are growing gaps between formal and informal firms, and between salaried and non-salaried workers, that are due to Mexico's social insurance system, tax policies and poor enforcement of contracts.

The net effect of these formal-informal differences is that larger formal firms with salaried workers subsidize informal firms with non-salaried workers, exactly the wrong prescription for increasing productivity and incomes. Levy recommends that social insurance be provided to all workers, severance pay be replaced with unemployment insurance, and all exemptions to the value-added taxes that are now paid mostly by formal firms be eliminated.

In 2013, over 90 percent of businesses in the Mexican economy were informal. These firms employed 55 percent of workers, and workers in informal firms were half as productive as workers in formal firms. Most informal businesses are small, with fewer than five employees. Levy warns that rising levels of education are "wasted" if graduates employed by small informal firms do not experience rising productivity over time.

Neither employers nor workers value the health, pension, housing and other services that add 30 percent to wage costs for formal-sector salaried workers. Levy says that most workers will not qualify for pensions or health care in retirement because of frequent job changes and tough eligibility requirements. Payroll taxes add 30 percent to wages, but employers and workers value the benefits received from the programs that these taxes finance at less than 20 percent of wages (pp37-8).

Small firms with less than two million pesos ($107,000) in annual sales do not pay IMSS or Infonavit payroll taxes and cannot be sued for dismissing workers. They pay only a two percent tax on their revenues (up to $2,140), and their employees are entitled to free social services (p44). Such policies provide incentives for firms to remain small and to hire informal workers.

A farm in General Cepeda, Coahuila hired 25 migrants from Veracruz with two-month contracts. However, the farm provided poor housing and required the migrants to work seven days a week, leading to complaints and an inspection in August 2018 that resulted in the workers being removed from the farm and returned to their homes.

Central America. The Northern Triangle countries of El Salvador (6.4 million people), Guatemala (16.9 million), and Honduras (8.9 million) have 32 million residents and a growing dependence on remittances from the US.

The number of US-residents who were born in El Salvador (1.5 million), Guatemala (1 million), and Honduras (600,000) has been rising. Remittances were $5.1 billion in El Salvador in 2017, $4.3 billion in Honduras, and $8.5 billion in Guatemala, which makes them 20 percent of GDP in El Salvador and Honduras and over 10 percent in Guatemala.

The US government provided $2.6 billion in aid to Central America between FY15 and FY18.

Venezuela. Almost two million Venezuelans emigrated in 2016-17, and another two million are expected to leave in 2018. Venezuela had the highest per capita income in Latin America until the 1990s. Hugo Chavez took power in 1999 and implemented a version of socialism that began to collapse as the price of oil dropped. The downward spiral continued under Nicolas Maduro, who took power in 2013. Inflation is projected to top 1 million percent in 2018.

As Venezuelans migrate to neighboring countries, there were attacks on Venezuelans in Brazil border towns in summer 2018 after residents accused Venezuelans of robbery. Ecuador in August 2018 began to demand passports from Venezuelans, who cannot get them from the dysfunctional government.

Brazil. Brazil is experiencing a wave of emigration linked to crime and political uncertainty. A June 2018 poll found that 43 percent of all Brazilians, over half those earning more than $2,500 a month, and over half of college graduates, would like to emigrate. Over 60 percent of those 16 to 24 would emigrate if they could, citing high unemployment and few prospects for good jobs. An estimated three million Brazilians live abroad, including a million in the US.

The Danish watchdog group Danwatch in 2016 released a report accusing coffee sellers McDonald's, Dunkin' Donuts and Nestle of not verifying that the farms from which they bought beans had no forced labor. In summer 2018, workers filed a complaint with the OECD that accused these and other firms of lax oversight of their supply chains.

Brazil produces a third of the world's coffee, often with the help of migrant workers from Bahia, a poor northeastern state. Some farms in Minas Gerais, which produces half of Brazil's coffee, treat workers poorly. As multinationals step up monitoring of labor conditions on farms, more are mechanizing.

Murder. Latin America has eight percent of the world's people, but accounts for a third of global murders. A quarter of the world's murders occur in four countries: Brazil, Venezuela, Mexico and Colombia. Latin America includes the ten world cities with the highest murder rates.

Between 2000 and 2017, some 2.5 million people were murdered in Latin America and the Caribbean. Almost 64,000 people were murdered in Brazil in 2017, compared with 17,250 in the US and 5,400 in the EU. In the 1950s, Singapore and Caracas had similar murder rates of 6 to 10 per 100,000 residents, but today Singapore's rate is 0.4 and the rate in Caracas is 110.

There are many reasons for high murder rates in Latin America, including economic inequality and informality that makes breaking laws more acceptable. Weak educational systems, few good jobs for young men, and drug gangs with plenty of guns also fuel murder. The US is the major market for illegal drugs, and Latin America is the only region growing coca.

Levy, Santiago. 2018. Under-Rewarded Efforts: The Elusive Quest for Prosperity in Mexico. IADB.