The real story behind the NAFTA negotiations on autos and labour standards.

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None of the governments of the three countries involved in the NAFTA auto and labour standards discussions have told the real story on the tactics and strategies they are using in the negotiations. In the absence of straightforward communication on the trade negotiations, the public in all three countries has a right to be suspicious until the full legal text of an agreement is publicly released.

 

There is no question that Donald Trump rode a wave of anti-trade sentiment to victory in the 2016 presidential election. This included a threat to rip up NAFTA, which he called “the worst trade deal in the history” of the United States.

Trump’s was a populist message that tapped into long-simmering resentment over the loss of American manufacturing operations – including the loss of auto assembly and auto parts plants – to Mexico. And it resonated strongly with voters in the leading manufacturing states – including the states of Michigan, Wisconsin and Pennsylvania  that ultimately gave Trump his victory.

Therefore, it should be no surprise that at the start of the NAFTA talks, Canadian trade officials believed the success of the NAFTA renegotiation hinged on Trump’s ability to claim a win on the auto front. Further, they believed the route to that victory would be through stricter labour standards to minimize Mexico’s low-wage advantage in attracting auto investment.

In theory, reducing the Mexican advantage in auto wages should have been an area where  Canadian and American interests are largely aligned. Statistics compiled by Unifor, the union representing autoworkers in Canada, explain why:

  • Mexico buys just eight per cent of North American-made vehicles but employs 45 per cent of the continent’s auto workers;
  • Since NAFTA came into effect in 1994, four assembly plants in Canada and 10 in the United States have closed; eight new plants have opened in Mexico.
  • U.S. and Canadian vehicle and auto parts trade deficits with Mexico have grown exponentially – a four-fold increase for Canada, from $1.6 billion pre-NAFTA to $8.7 billion now.

Those  numbers are explained by another stark statistic: Mexican autoworkers earn an average of about $4 per hour, compared to $30-$35 per hour in the U.S. and Canada. As such, using NAFTA re-negotiations to rebalance the North American auto industry so that all three countries get a fair share of investment and jobs would seem to be a no-brainer.

The Canadian strategy

This was the reasoning behind Canadian negotiators first proposing the idea of linking wages to automotive content in a January round of NAFTA talks in Montreal. The idea was to get the United States to take one of its most protectionist demands – that all North American-made autos contain at least 50 per cent U.S. content – off the table. Unifor head Jerry Dias was generally supportive of the proposal (without seeing it as the total solution) and has been kept in the loop on the auto and labour components of the NAFTA talks by Canadian trade officials from Day 1.

Sources suggest that that the U.S. embraced the Canadian idea almost immediately and came up with a proposal to require up to 45 per cent of a vehicle to come from factories paying US$16 an hour. But predictably, the Mexicans balked: Such a requirement would strip their country, with its much lower labour costs, of its ability to compete for auto investment. They presented a counterproposal that would have applied a wage requirement to just 20 per cent of auto content, say sources with knowledge of the Mexican’s negotiating position at the time.

Discussions continued through the spring. U.S. House Speaker Paul Ryan set Friday, May 17, as the deadline for a deal that could be presented to the current Congress for approval.
That was when Canada presented a proposal that included the 40- to 45-per-cent content figure without further negotiation.

Essentially in May, Canada thought it saw an opening for a quick, “skinny” NAFTA deal that would give President Trump a win for his base. With the May 17 deadline looming, Canadian officials offered the Trump administration two big wins: the new auto sector rules detailed above that would move jobs out of Mexico and into the U.S. and Canada, and more access to the protected Canadian dairy market for American farmers. In exchange, they asked that the United States take most of its other demands off the table including the American demand that Chapter 19 be removed from the agreement.

Chapter 19 is a dispute resolution mechanism that gives the United States, Canada and Mexico the right to challenge each others’ anti-dumping and countervailing duty decisions in front of an expert panel comprised of members from both countries involved in a dispute. The reason the U.S. wants Chapter 19 gone is that it wants disputes it is involved in settled in U.S. courts.

Not surprisingly, Mexican negotiators felt blindsided by the Canadian proposal for a “skinny” deal that they had no role in developing. Moreover, they were not ready to agree to the tougher auto rules at that point. And they believed they had an agreement with Canada going into the talks that neither Canada nor Mexico would seek a separate deal with the United States.

The U.S. and Mexico ink a deal

The proposal made by Canada without Mexico’s knowledge helps explain the bombshell of August 27 when it was announced that without Canadian participation, Mexico had basically negotiated a separate NAFTA agreement with the U.S. that went far beyond auto rules.

The background to the Mexican-U.S. agreement was that in July, Mr. Lighthizer invited the Mexican team to keep negotiating without Canada. American and Mexican officials reassured their Canadian counterparts that there was nothing to worry about: That the U.S. and Mexico were simply working out their differences on the auto issue – which Canada had already agreed to – and other bilateral matters that did not concern Ottawa. Once these were finished, they said, Canada would be invited back to the table.

For a month, the U.S. and Mexico negotiated without Canada, again insisting that they were merely working out maters that did not concern their northern neighbour. But on August 27th, Mexico and the U.S. unveiled a nearly complete NAFTA deal and pressed Canada to sign on or risk getting kicked out of the trade pact.

Canada had at least some inkling that discussions had gone further than mere bilateral issues. Canadian officials acknowledged in late August that the U.S. and Mexico had negotiated some trilateral matters. But they insisted any such discussions would have been preliminary in nature.

When the U.S.-Mexico talks ended Aug. 27, the truth came out: Mexico and the U.S. had negotiated  a complete deal to overhaul nearly every aspect of NAFTA. Sources suggest that Canadian officials were caught off-guard by the comprehensiveness of the U.S. – Mexico agreement.

Here is what we know about the auto component of the U.S.-Mexico deal. The full text has not been publicly released so some details may change as Mexican and American legal teams work out the technical details of their agreement. And the details may may change again if the final deal involves Canada.

The original NAFTA already had relatively restrictive rules of origin in place. NAFTA required 62.5 percent of the value of a car be made from North American content in order to cross the border from Mexico into America tariff-free.

Trump’s deal with Mexico makes those regulations even tighter. Reports suggest that the agreed minimum content has been increased to 75 percent. And a second and newly-added Trump requirement is that 40 to 45 percent of the value of a car will have to be produced by workers earning at least $16 per hour. Remember the average wage in the Mexican auto sector is currently $4.00/hr.

However, economists and other trade experts suggest low wages are only part of the Mexican problem. They point to a raft of poor working conditions, including companies refusing to allow workers to take their agreed-upon holiday time and work weeks of 60 hours or more.

The key problem according to many observers is Mexico’s system of “protection unions” – “labour” organizations that keep real, independent unions out by signing agreements with Mexican companies that keep wages low and working conditions poor.

These groups – the largest of which are the Confederación de Trabajadores de México (CTM), the Confederacion Revolucionaria de Obreros y Campesinos (CROC) and the Confederacion Regional Obrera Mexicana (CROM) – are aligned with the PRI political party, which has governed Mexico for most of the past century. The PRI negotiated the U.S. – Mexican re-work of NAFTA as the newly elected left-of-centre president Andrés Manuel López Obrador, won’t take power until December 1.

In Mexico’s labour relations system, a corporation will sign a labour deal with CTM, CROC, CROM or another protection union before they even open the plant or hire any workers. The advantage for the company is that having a company-oriented union in place from Day 1 makes it harder for the workers to join other, more independent unions. These independent unions would be forceful advocates for workers and, unlike the company unions, would fight hard for better working conditions and higher wages.

When a company is going to open a factory, it buys a contract. The union signs the contract without having even met a worker. When a worker is hired, they’re already bound by an agreement they had no input into, which was decided by the owners of the factory.

Reports suggest that beyond the auto content and wage provisions detailed above, Mexico has agreed to pass a law giving workers the right to independent union representation, and to adopt other labour laws that meet international standards set forth by the United Nations.

These are much-needed labour reforms, and in theory, address many of the concerns that U.S. and Canadian labour unions had about the lack of labour standards in the old NAFTA.

The problem is that any rules allowing for an independent Mexican labour movement will  be extremely difficult  to enforce. It’s one thing to make trading partners adopt strict labor laws, but making sure they enforce those laws has proven much, much harder in other trade agreements. Unless the NAFTA fine print  comes up with strong, transparent mechanisms to sanction Mexico if it doesn’t keep up its end of the labour rights component of the deal, the labour standards provisions in the new NAFTA will be close to meaningless.

In strictly economic terms, everything is in place for Mexico to raise wages in its auto sector. Productivity is growing and employment is growing. There is not any reason to keep the wages as low as they are – except for the fact that Mexico lacks an independent trade union movement.

Lack of enforcement in previous NAFTA labour side agreements may be repeated

When NAFTA was first signed in late 1993, it included labor protections for workers in all three countries in side agreements appended to the main NAFTA text. Basically, each country agreed to enforce its own labor laws and follow standards set by the UN’s International Labor Organization. But labour complaints filed through the NAFTA labor dispute process have led nowhere.

About two dozen complaints of workers’ rights violations were filed against all three countries in NAFTA’s first decade — the vast majority in Mexico, according to a Human Rights Watch report. Companies accused of violating local labor laws include General Electric, Honeywell, Sony, General Motors, McDonald’s, Sprint, and the Washington state apple industry.

In Mexico, those complaints included allegations of retaliation against workers who tried to unionize, denial of collective bargaining rights, forced pregnancy testing, mistreatment of migrant workers, and life-threatening health and safety conditions. None have led to any type of sanctions, which workers’ rights groups say is because there are no rules about how to resolve these disputes and government mediators have chosen to take a hands-off approach.

According to a 2015 report by Human Rights Watch:

The dominance of pro-management unions continues to obstruct legitimate labor-organizing activity. Independent unions are often blocked from entering negotiations with management, while workers who seek to form independent unions risk losing their jobs. A 2012 labor law failed to address the lack of transparency and democracy in the powerful pro-management unions, and failed to protect workers’ right to form independent unions and carry out collective bargaining.

The worry by American and Canadian labour leaders on the new NAFTA auto rules – especially those designed to allow for a truly independent Mexican labour movement – is that enforcement will again be lacking. This will also be a key issue should the Democrats regain control of the U.S. House of Representatives in teh upcoming mid-term elections because of their close relationship with the U.S. trade union movement. Congress must ratify the trade agreement under the U.S. political system for it to become law.

Trump threatens auto tariffs against Canada

Enter the threat of U.S. imposed auto tariffs on Canada.

Once Canada realized that the U.S. – Mexican negotiations had resulted in almost a complete NAFTA re-write, they scrambled to get back into the discussions. While Canadian negotiators had problems with the intellectual property and cultural exemption components of the U.S. – Mexican deal, the two real potential deal breakers from Canada’s point of view, were a significant weakening of Canada’s supply management system in dairy and the elimination of the dispute settlement mechanism contained in Chapter 19.

In early September, Canada re-entered negotiations but while it was willing to make some concessions on the supply management issue (which will be made public only after the October 1 Quebec provincial election), it pretty much stuck with its initial position to keep the dispute settlement mechanism contained in Chapter 19 intact. This has met staunch opposition from U.S. Trade Representative Lighthizer and the Trump administration more generally.

More than anything else, it is Canada’s firmness on maintaining Chapter 19 that has angered the Trump Administration and was behind U.S. President’s Trump’s recent threat to impose tariffs on Canadian vehicles and parts, worth about $80-billion a year.

Congress  set a deadline of  September 30 for an agreement to be struck. The reason for the end-of-September deadline was to meet  the Congressional timeline required for a renegotiated NAFTA to be signed before Mexico’s presidency changes hands on Dec.1.

Late on September 30th, Canada and the U.S. reportedly signed a tentative agreement. In the agreement,  Canada seems to have preserved most of the Chapter 19 dispute settlement mechanism but made major concessions in dairy giving U.S. farmers greater access to the Canadian dairy market. The deal seems to have also preserved most protections for Canada’s cultural industries.

According to reports, the agreement failed  to get the recently imposed steel and aluminum tariffs lifted. Canada also agreed to extending pharmaceutical patents, a move opposed by Canada’s generic pharmaceutical industry and a concession that will surely lead to higher drug prices in Canada.

Finally, a side agreement guarantees the Trump Administration will not impose auto tariffs on most Canadian auto exports.

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Rory hartAndrew EMarty Dogwood Recent comment authors
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Marty Dogwood
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Marty Dogwood

Canadians have a reputation for “nice”. Trump has a reputation for …well sorry. Neither of us has the time to read through twelve pages. Did I already say Canadians have a historical reputation for exemplifying battlefront tenacity and courage? Nice is not synonymous for patsy.

Andrew E
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Andrew E

Since 1994, the value Canadian (and U.S.) consumers get for their auto dollar has increased dramatically.
Trade issues are a classic example of concentrated versus difuse benefits and harms. Freeing Canadiams to buy what they want from whom they want benefits everyone, but takes back some of the favors enjoyed by politically advantaged groups.
We should simply deny our government the power to impose tariffs, and let us make our own choices.

Rory hart
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Nothing new. Poor working conditions and wages and pollution in mexico give them advantage over cda and usa