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opinion

As the North American free-trade agreement approached its 20th birthday a couple of years ago, the deal's main architects began pushing for a NAFTA 2.0 that would reboot the process of continental integration that a distracted U.S. administration seemed to have abandoned.

The proponents, who included such heavy hitters as former U.S. trade representative Robert Zoellick and former Canadian finance minister Michael Wilson, offered a compelling case for a North American economic and security union fit for the challenges of the 21st century. NAFTA 2.0 would mean a deepening of Canada-U.S.-Mexico supply chains, freer cross-border labour mobility and a continental approach to infrastructure, energy and climate-change policies.

We now know how seriously U.S. President Barack Obama took the pitch. U.S. negotiators recently left their Canadian and Mexican counterparts gobsmacked by a proposal that would allow auto parts with as little as 30-per-cent content from Trans-Pacific Partnership countries to enter North America tariff-free, a development that would reverse two decades of supply-chain integration on this continent and undermine the billions of dollars suppliers have invested in plants in Canada and Mexico.

The President has never been a fan of NAFTA, given the long-standing (but misplaced) hostility toward free trade among organized labour, a key Democratic constituency. Indeed, Mr. Obama has depicted his support for the TPP, the still hypothetical trade bloc of Pacific Rim countries, as a way to "correct" NAFTA's shortcomings on labour and environmental protections.

That now sounds a bit disingenuous given the U.S. proposal on auto parts. It would allow parts from non TPP-countries such as China and Thailand – neither of which is considered a model of progressive labour or environmental standards – to account for up to 55 per cent of cars assembled in Japan that could be imported into North America without duties.

Under NAFTA, car parts can move tariff-free among Canada, the United States and Mexico if at least 60 per cent of their content comes from those three countries. Cars, engines and transmissions can move duty-free among NAFTA countries as long as they contain 62.5 per cent North American content. Those rules are the basis of a flourishing trilateral auto-parts trade.

It's true that the biggest Canadian-based auto parts makers – Magna International Inc., Martinrea International Inc. and Linamar Inc. – have invested more heavily in plants in Mexico and the United States than in Canada in recent years. But while that may mean fewer Canadian factory jobs, it increases to the global footprint of Canadian companies, supporting high-paying head office jobs here.

It also means a growing Mexican middle class creating demand for other Canadian-made products. While Mexican auto parts and assembly plants pay a fraction of Canadian wages, they provide among the highest-paying industrial jobs in a country where 60 per cent of the population still works in the informal economy, struggling to get by as street vendors or taxi drivers.

Many of those Mexican factory workers, who are more likely than other workers to own their own homes, take out mortgages at Scotiabank Inverlat SA, Bank of Nova Scotia's Mexican subsidiary. Scotiabank is also a leading lender to Canadian companies doing business in Mexico.

With the recent opening up of Mexico's energy and telecommunications sectors, and the country's massive investments in infrastructure, there is every reason for its NAFTA partners to push for deeper economic integration. There are suddenly big, new opportunities in Mexico awaiting Canadian and U.S. engineering firms, electrical utilities and telecoms. But this logic seems lost on Mr. Obama, whose approach to trade is dictated more by geopolitical objectives than economic ones.

Indeed, as he tries to sway skeptical Democratic members of Congress, Mr. Obama has consistently characterized the agreement as a foreign policy aimed at enhancing U.S. influence in a region dominated by China. That may help explain the U.S. willingness to grant such favourable trade terms to Japanese auto makers, the main beneficiaries of lower TPP content rules. A stronger Japanese economy is a critical counterweight to China's growing might, while more Japanese sourcing of Chinese auto parts could ease rising military tensions between the two Asian countries. Trading partners typically don't go to war with each other.

But NAFTA risks becoming collateral damage in Mr. Obama's grand plan. Canada and Mexico pushed to join the TPP as a defensive move to protect their NAFTA gains and ensure they would not be denied trade concessions the United States offered other TPP countries.

So far, however, each is feeling a bit betrayed. And any hopes for a NAFTA 2.0 have sunk to the bottom of the East China Sea.