NAFTA – Plenty of Room for Improvement

Thousands took to the streets on August 16, 2017, protesting that NAFTA is a horrible treaty designed to let the world’s richest companies entrap Mexicans into sweatshop industrial labor. In Detroit? No, in Mexico City.

NAFTA, unfairly or not, is widely perceived as a means for Big US Agriculture, heavily subsidized by US taxpayers, to access 127 million Mexican consumers, steamrolling under Mexican farmers in the process. The numbers bear this out. Pre-NAFTA, Mexico was virtually self-sufficient with respect to food products. Today, Mexico imports some $18.5 billion in agricultural products, mostly from the US. The Mexican agriculture businesses that have prospered under NAFTA are generally Big Agriculture outfits themselves.

The protests on August 16 in Mexico City were by Mexican farmers and agricultural workers, many of whom would like to see NAFTA exclude everything related to food and agriculture.

Meanwhile, some Canadians believe that the current round of NAFTA negotiations will make a bad situation even worse for them. NAFTA provides that disputes over treaty infractions are referred to third party mediation panels with multi-national appointees. The US seeks to eliminate this system and instead give local courts authority over dumping and subsidy cases.

Currently, before reaching mediation, complaints from US companies are referred to the Commerce Department for investigation and then referred to a trade tribunal of Presidential appointees for adjudication of the merits of the complaint and investigation.

Naturally, the companies quickest to avail themselves of such a system are the wealthiest and most powerful large corporations who, critics allege, easily sway the process as they see fit. As proof, these critics point to the fact that the US loses more NAFTA mediations than it wins.

Canadian critics believe that losing mediation record of the Goliaths from the US shows that this system of dispute resolution, at best, keeping the litigious Goliaths in check, albeit with legal bills that belie the notion of ‘free’ trade. The prospect of even more American style business litigation calls into question whether the fundamental goals of the original treaty are a lost cause.

Where the wisely discrete Canadians will be happy to stand by and watch the US Goliath absorb stones, is on the hot button issues of wages and working conditions in Mexico. With an average annual wage of $15,230, Mexico ranks dead last in average wages for workers in the OECD group of 34 member countries.

On an inflation adjusted basis, Mexican wages have actually declined from an average of $16,000 since NAFTA was enacted in 1994. That’s compared with Canada’s average wage, which has grown 38 per cent to more than $48,000 over that same period between 1994 and 2015; U.S. wages grew just under 33 per cent to $59,700 over that span.

Low wages are only part of the story. Industrial labor unions in Mexico function openly as cartels that control jobs, rather than as organizations that represent workers collectively. The contracts that unions negotiate with employers are referred to as ‘protection’ contracts – the employer is legally protected from wildcat strikes and from conventional labor unions trying to organize the workers.

Protection contracts are often consummated before an industrial facility is built and before the work force exists. When the plant is built and the time for staffing comes, the union has monopoly control of the jobs and dictates who is hired, based on an agreed framework with the industrial company. The workers that are hired may never even know that they belong to a ‘union.’ Their relationship with their union is basically an adversarial ‘at will’ contract, where the only fundamental right they have is the right to quit.

About Chris Donnelly

Christopher J. Donnelly, is an experienced attorney, bond analyst and fixed income strategist, with years of experience in structured finance, distressed bonds and bond related litigation in a variety of industries and the emerging markets. He is a graduate of Rutgers University (BA), The University of Pennsylvania (JD) and New York University, (LLM in Taxation). Chris is a Managing Director of Straacom, LLC and can be contacted at cdonnelly@straacom.com. Straacom provides strategic research, analysis and communications for publication and on assignment for private clients.

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