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Jim Stanford is an economist with Unifor, Canada's largest private-sector trade union.

You could hear jaws dropping onto factory floors right across Ontario's auto belt last week. Export Development Canada (EDC) announced a loan of €400-million (about $530-million) to Volkswagen. The money was not to lure the company – which this year may rank as the world's largest auto maker – to Canada. On the contrary, we're helping finance Volkswagen's growth 4,000 kilometres away, with expanded factories in Mexico and Tennessee, and a new plant in Mexico.

EDC is a federally owned agency, offering loans and other supports to Canadian exporters. Why on Earth would it help Volkswagen expand in Mexico and Tennessee? It's not as if Volkswagen needs our help. With revenues last year of €200-billion, and profits of €12.7-billion, it can easily raise all the commercial capital it needs.

And officials with EDC emphasize its support for Volkswagen is not contingent on buying anything from Canada. That would violate the rules of "free trade." The only requirement is that Volkswagen network with Canadian suppliers to discuss business opportunities in Mexico and Tennessee. For $530-million, that had better be one heck of a "meet and greet."

Even if a Canadian supplier wins a Volkswagen contract, it's unlikely the work would occur in Canada. Canadian parts suppliers have opened dozens of factories in Mexico and the Deep South – often required to locate near assembly plants. But EDC doesn't mind: Helping Canadian-owned firms open plants in Mexico is part of its strategy.

Mexico's auto industry, powered by cheap labour, a growing supply base and lucrative subsidies, is scooping up virtually all new greenfield auto investment in North America. Eight new assembly plants have been built or announced there since 2009. The "giant sucking sound" predicted by Ross Perot in the debate over NAFTA has become a reality. That's bad enough. But watching a Canadian government agency assist that southward migration is incredible.

There's an ugly side to Mexico's industrial boom. Contrary to promises of prosperity and democracy, its workers remain desperate. Real manufacturing wages have not grown; labour costs are now cheaper there than in China. Trade unionism and other political activity is suppressed, often violently – evidenced horrifically by last year's murder of 43 student protesters, in which the local mayor and police have been implicated. The normal institutional forces that, in a free society, would allow Mexicans to win a fairer share of the wealth they produce have been short-circuited.

Mexico produced 3.4 million vehicles last year, worth $100-billion. Canada exported $484-million in parts to Mexico last year – and our exports are shrinking (down 30 per cent since 2001). Each dollar of Mexican output now has less than one half-cent of Canadian content. Our auto deficit with Mexico exceeded $10-billion last year; our total deficit with Mexico was $23-billion.

EDC claims its loans will help us capture a few more crumbs from the auto industry's southward migration. Its convoluted logic highlights the contradictions of Canada's approach to autos under NAFTA's lopsided rules. We aren't allowed to "subsidize" purchases of Canadian products. So why must we bribe companies just to look at our products – something that should be automatic under true competition?

Volkswagen sold $4-billion worth of vehicles in Canada last year. Shouldn't we demand some Canadian purchases from the company, in return for all that business, instead of begging for it?

Meanwhile, back home in Germany, Volkswagen is 20-per-cent state-owned, and benefits from various public technology, training and capital supports. German wages are significantly higher than Canada's, yet Volkswagen hasn't closed a German factory in decades.

Ottawa could try the same thing. Instead, it sold off its General Motors shares this month (for the short-term gain of balancing its budget). It has a fund to entice auto investment to Canada, but can't seem to spend it (auto makers don't like its unwieldy rules, and they're infatuated with Mexico anyway). We could use other government levers (including EDC) to attract auto makers here. Instead, Ottawa signs more trade agreements with places (such as Korea) that have no more interest in Canadian cars than Mexico does.

The fatalism of EDC's strategy is stunning. But the incoherence of Canada's overall auto strategy is even worse.