By teaming up to counter the protectionist aims of the United States in the automotive sector, Canada and Mexico are embarking on a journey that promises to be difficult and risky.
Posted at 7:00 a.m.
It was Mexico that first decided to formally challenge the Biden administration’s interpretation of the provisions of the Canada-United States-Mexico Agreement that require 75% regional content for vehicles sold on American soil are exempt from customs duties. This provision, which suited the Three Amigos when NAFTA was renewed in 2020, is being turned into an electoral carrot by the American president, who has his eye fixed on the midterm elections. and the vote of American autoworkers.
Besides the fact that “regional content” sounds like “American content” to the Biden administration, another threat looms over the auto industry in Canada and Mexico. The US government has promised a tax credit of $12,500 for the purchase of an electric vehicle, on the condition that these vehicles are made 100% in the United States by unionized workers.
Mexico has even more to lose than Canada in this battle that begins with the United States. The automotive sector is a pillar of the Mexican economy, which represents 10% of its GDP. The country is even more dependent than Canada on its large American neighbour, which buys 90% of the products exported by Mexico.
Like Canada, Mexico has oil, but it has not been able to derive as much profit from it. The national company, Pemex, is highly indebted and survives thanks to the massive injection of public funds.
The policies of the populist government of Andrés Manuel López Obrador do nothing to help Pemex’s case.
The government wants to stop exporting oil in 2023 to keep it at home, in order to develop the refining industry. It has also restricted foreign investment in the energy sector, depriving it of the capital needed for its expansion.
Many of the decisions of the government of the one often referred to by his initials, AMLO, aroused astonishment and controversy. The president cut his salary in half, sold the presidential plane and increased the pensions of the poorest. He does not travel, but gives press conferences every day. If companies and markets are wary of it, it is very popular with the people.
The country has been badly affected by the pandemic. The president himself has been infected twice with COVID-19. There have been very few measures aimed at curbing the virus and the borders have remained wide open to foreign travellers, which has also allowed young, carefree Quebecers to charter a private plane to go party on its beaches.
The toll in terms of mortality is very heavy, one of the highest in the world, with more than 300,000 deaths in a country of 130 million inhabitants. The economy, which the government had wanted to preserve, took a nosedive nonetheless.
It is thanks to expatriate Mexicans that the country can mitigate the impact of the pandemic. In 2021, Mexicans working abroad, overwhelmingly in the United States, sent more than US$50 billion to their families. This is a 25% increase in one year and a historic record for remesas (“remittances”).
The Mexican president is publicly congratulated on these unprecedented figures. However, it is US economic growth that is responsible for this, not the Mexican economy, which is still in a slump. The country is struggling with runaway inflation, and Mexico’s central bank has already raised interest rates five times in the past year.
The remesas are the second largest source of foreign currency in Mexico, after the automotive sector. This shows how much the fate of Mexico is in the hands of the United States and depends on the outcome of the battle with Canada to save their automobile industry.
This dispute between the signatories of the new North American free trade agreement could have major impacts for both countries. It is the auto sector that is behind the free trade agreement with the United States, NAFTA and CUSMA. The world’s largest free trade agreement may not survive this disagreement, due to the high stakes.