NAFTA has been made out to be one of the villains of the 2016 U.S. Presidential election. While some aspects of NAFTA surely have contributed to changing employment trends, other policy issues may cause as much tension as a renegotiation of NAFTA itself.
Relations between the U.S. and Mexico seem to be openly sour, but both NAFTA partners may suffer some severe consequences with a change in other non-NAFTA related policy developments.
Mexico seems to be in a more dire situation than Canada with regard to possible new trends in U.S. foreign policy. While American jobs are perceived by some to be lost to Mexico, the restrictions the new U.S. administration might place on Chinese manufacturing may raise the cost of Chinese goods coming into the United States and make Mexican goods more competitive.
The boom in Chinese exports to global markets came at a time when Mexico was reaching its peak in manufacturing processes and technology which made the country a good location to produce higher value goods. The rise in wages in Mexico since the beginning of NAFTA made low-wage labor in places like China more attractive to international companies. The growth in Chinese manufacturing affected Mexico greatly, and an attempt by the United States to hinder Chinese imports may have a residual positive effect on Mexican exports.
U.S. policy seems to concentrate on the trade deficit between nations, and with other factors contributing to funds leaving the U.S. and going to Mexico, the U.S. may take a long-term policy approach on the factors that create the greatest job losses over punishing Mexico over a small trade deficit.
Mexico’s greatest exports over the last 20 to 30 years have been their oil and gas industry, run mostly through state-run PEMEX, and Mexicans themselves. What is often not accounted for is that people sending funds back to their relatives from abroad is a massive economic engine for Mexico. While this trend has varied over time, the size of remittances of Mexicans working abroad as a share of the national economy of Mexico is often so large that at times it brings in more money into the country than oil and gas exports.
With millions of individuals residing abroad, the Mexican state often does not have to provide local services for those individuals. In addition, many Mexicans send money back to their relatives to add another source of funding for locals who would otherwise rely on state social safety nets. Families and communities often grow with funds earned and sent from abroad, and while individual Mexicans and their funds are not linked directly to NAFTA, the effect on hindering these funds coming from abroad may create a larger loss for Mexico than any renegotiation of NAFTA itself.
A clear goal for the current Mexican administration will be to not let the U.S. hinder the remittances from abroad, but also to maintain a balanced approach to immigration so as not to push the U.S. add excessive taxes on funds coming into Mexico from citizens or dual citizens in other countries.
Canada has always been in a good position since the late 1960s when the Auto Pact was signed, giving Southern Ontario linked access to U.S. car manufacturing in Michigan, Pennsylvania and New York State. Now that most of the manufacturing plants have disappeared across the border, the Canadian automobile sector has no logistical partner in the United States.
While the Canadian government has been nervously seeking assurances from the new U.S. administration on NAFTA and trade, the reality is that many American companies are in Canada because of the favorable exchange rate, better healthcare coverage and lower corporate tax rates.
A NAFTA renegotiation has been assured to not affect Canada, but with a competitive U.S. tax rate coming into effect, no auto partners over the border and the Canadian and Ontario government pushing debt financing and high taxes, zero tariffs will not make a difference if there is nothing being produced in Canada to sell.
Added to that, a carbon tax will add costs to producing in Canada at the precise time costs will shrink in the United States. While NAFTA may not change, severe debt and ever increasing taxes and energy costs will surely push the main source of jobs in Southern Ontario out of Canada completely.
To survive a nationalistic U.S. policy approach, Mexico needs to choose its fights wisely and Canada needs to make policy decisions for the benefit of its citizens, their future employment and for the sake of economic reality. Beyond the issue of NAFTA, Mexico and Canada could benefit greatly from a boom in the U.S. economy if it is accompanied by wise domestic policy decisions placing jobs and economic growth above political credit.
