NAFTA – Does Canada Secretly Want Out?

Meetings to negotiate a continuation of the North American Free Trade Agreement between Canada, Mexico and the US commenced this week in Montreal and are scheduled to conclude by January 31, 2018.

Canada and Mexico have both expressed a desire to continue in the agreement.  US President Donald Trump, on the other hand, was sharply critical of NAFTA on the campaign trail and remains firm in his willingness to end the agreement if significant changes are not made.

On Monday, January 22, 2018, Trump stated, “I happen to be of the opinion that if it doesn’t work out, we’ll terminate it.”

If Canada, Mexico and the US are unable to come to terms on NAFTA, there is little doubt that Trump will be blamed for it and less doubt that Trump would embrace the blame.  Indeed, it is hard to imagine how Trump would be able to spin an extant NAFTA on the campaign trail in 2020.

However, Canada may have willingly forced Trump’s hand this week by signing on to the Transpacific Partnership (TPP). (See also on this website, “Canada and TPP:  A Pyrrhic Victory?)

In the NAFTA negotiations, Canada is facing US demands to increase the North American content of autos from the current 62.5 percent.  The TPP deal is at cross-purposes to this in that it would allow the duty-free import of parts which contained a maximum of 35 percent of components from TPP nations.

Jerry Dias, head of private sector union Unifor, stated, “The simple reality is what happened with the TPP completely undermined what’s happening in Montreal over NAFTA.”

While it is possible that Canada’s actions with respect to TPP and NAFTA are simply badly organized and the result of human error, it is also possible that Canada may be willing to see NAFTA die, particularly since President Trump would be so willing to take the blame for killing it.

The elephant in the room in Montreal is that NAFTA forces corporations, duty bound to do what is best for shareholders, to take jobs out of Canada and the US and move them to Mexico where the cost of labor is cheaper and the treatment of labor is harsher.

Nowhere is this truth grimmer than in the auto sector, where Mexican workers often make less than $3.00 per hour, a tenth of what their counterparts north of the border in the US or Canada might make.

 

With an average annual wage of $15,230, Mexico ranks dead last in average wages for workers in the OECD group of 34 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 percent to more than $48,000 over that same period between 1994 and 2015.  U.S. wages grew just under 33 percent 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 workforce 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.

The chart below dramatically shows that outside of the oil patch, once NAFTA was implemented in 1994, Canada’s days of enjoying trade surpluses were numbered.

Automobile related manufacturing destined for the US market was certainly a large part of Canada’s post-WWII industrial base.  With NAFTA, as the chart below shows, much of this business was lost to Mexico.

While TPP may not be a good deal for Canada, it may provide the current Canadian government stronger plausible deniability for the blame of having NAFTA die on its watch.

Once NAFTA was history, the onus would be on the Trump administration to close with Canada the type of bilateral trade deal that Trump has stated he favors in lieu of NAFTA.  Canada historically is the largest trading partner of the US, so a trade deal in lieu of NAFTA will be an imperative for both countries.

Both countries could negotiate such a deal free from the need to compete with Mexican labor wages and working conditions.  Canada’s status as a member of TPP could easily be accommodated to the benefit of both countries, once the elephant in the room (Mexican labor) was shown the door.

 

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.

One comment

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