The NAFTA Trap

In the mid-1960s, during the height of the American auto industry’s success in Detroit and surrounding border states, the US and Canada developed the Auto Pact. The Auto Pact brought Canada into the thriving industrial base in the northern region of the United States and over the years integrated Canadian and American auto production under the labels of the major US auto manufacturers. They developed what was called the Just In Time (JIT) system, where parts produced in Canada or the United States would cross the border to complete the production of a vehicle at a different plant nearby, but over the international boundary. While the immediate border region of Ontario still has much of its production and employment rooted in the manufacturing and auto industry, many of their American counterparts have disappeared, left for more tax friendly states in the US South or left the United States altogether. The traditional relationship did not degrade from lack of will, American and Canadian auto sector workers often shared connected Unions in addition to working for the same company, but with a sharp decline in production in Detroit and northern US states, American workers lost entire communities, and their cousins in Canada lost much of their stable employment as well.

With the Auto Pact being the basis of Free Trade between the two countries, in the late 80s the precursor to NAFTA, the Canada United States Free Trade Agreement (CUSFTA) was signed in 1988. This bilateral agreement sought to expand the auto industry’s relationship between the two countries and add additional sectors to the growing free trade basket. NAFTA was signed in 1994 with the addition of Mexico to the mix. Recently, NAFTA negotiators came to an agreement between the US and Mexico. Canada and the United States are currently discussing issues privately, with elections in both countries determining strategy over good neighbourly common sense.

The Canadian position seems to be one that follows a strategy of including social development goals in their new trade agreements. While The Canada-European Union Comprehensive Economic and Trade Agreement (CETA) included many common social goals, a similar approach in China and India was seen as inappropriate, likely due to a long history of cultural interference during the colonial era by Western powers. A similar strategy with the United States fell on deaf ears. With the recent election of the US President challenging many of the same issues brought up by the Canadians in their negotiations, it would be inappropriate to change American society via trade negotiations so soon after the electorate recently made their decisions on how they wished to develop their own communities, done by vote.

Much of the support gained by the President came from former workers and passive Union support in the border states with Canada. With the post-NAFTA economy routing jobs out of the entire region, support from disaffected former Union workers gave a massive boost to the campaign of President Trump. While there is still substantial employment in the auto sector in Ontario, Canada, the Just In Time system of the past has been substantially degraded, and the logistical reality of having auto plants in Southern Ontario is challenging jobs daily in the region. With the core of Canada-US trade starting from the Auto Pact, to CUSFTA to NAFTA being autos, and the economic reality in states like Michigan, Ohio, and Pennsylvania, it would be short term pain, albeit a lot of pain, for long term gain if trade relations soured between Canada and the US. Auto tariffs would make it more economical for US companies as well as foreign manufacturers in Canada to relocate to the United States. With the recent decline in corporate tax rates for companies operating in the US along with the low but now matched Canadian rate, free(albeit heavily taxpayer funded) healthcare and newly proposed Canadian carbon and energy consumption taxes now put Canada at an economic disadvantage.

Mexico was able to cope and negotiate with the current US policy of raking in US companies back home by proposing to lower corporate tax on companies operating in the border states to a small amount, as well as ensure a higher minimum wage for employees working in the auto sector in Mexico. With so much venom coming from the US on Mexican trade and other issues, the US and Mexico were able to ink a deal that even soothed a hardened President. Canadian leaders who are now in the drivers seat but seek a vehicle for election strategy should be weary of campaigning against perceived political rivals across the border. Alienating the American electorate and giving extra incentives to workers, unions and an Administration that wants you to challenge them will simply hurt Canadians, and while it might return the current government to their jobs in Ottawa, it will rapidly have an effect on an already debt burdened and mismanaged Canadian economy.

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