A new set of house rules for the USA’s Mexican subsidiary Ruthless Criticism

[Translation of sections of article “Trump renoviert NAFTA und kümmert sich um seine Hemisphäre,” GegenStandpunkt 1-20]

A new set of house rules for the USA’s Mexican subsidiary

Trump revises NAFTA and takes care of his hemisphere

The Trump administration – in keeping with its self-appointed mandate – not only has to defend the exceptional position of the USA in world politics against the unfair world export champions, a European Union that treats America very rudely and Chinese who do not know their place in the world, but also has to do a lot to put its region, the American hemisphere, in order. On its own border, an intolerable risk has arisen for the USA: the state there and those further south show a callous disregard for US needs; and now even this part of the world, which is not intended to be used by other countries, has become the terrain of the same competing powers who seek to undermine the USA’s exclusive right to the continent.

The old NAFTA program

More than 25 years ago, the USA had actually already taken contractual precautions against this with regard to its northern neighbor, Canada, and its southern neighbor, Mexico: using its superior negotiating power, it pushed through a North American Free Trade Agreement (NAFTA) between the USA, Mexico, and Canada that took effect in 1994. Economically, this made Mexico, especially, into a politically independent southern subsidiary of the US business sphere, and gave the country a special status vis-à-vis the rest of Latin America due to its direct connection to the interests of American capital.

In President Trump’s view, however, NAFTA, in terms of its effects and undesirable side effects, is simply a “disaster” and a veritable “betrayal of the American people,” which is why reforming it according to US wishes was put at the top of his agenda during his first campaign – in addition to stopping illegal immigration from the south with a “beautiful wall”; despite the fact – and ultimately because of it – that the agreement organized the economic incorporation of the Mexican investment location entirely according to the criteria of US capital.

The NAFTA treaty primarily regulated the abolition of customs duties, the opening up of all important markets (energy, banking, transport), and provided comprehensive investment protections, including arbitration proceedings that grant compensation claims to investors whose profit expectations are disappointed by new laws. Long before Trump, Mexico was always popular with money makers from the North as the source country of the cheapest immigrant labor and, after NAFTA, increasingly drew attention as an American production location where low wages for Latinos, in conjunction with contractually agreed duty-free tariffs, provided a reliable basis for calculating the launch of new businesses and opened up the option of attractive margins between Mexican production costs and US market prices for manufactured goods. Hence, after 1994, an extensive “free trade zone” was established on Mexico’s northern border, where semi-finished products are purchased from the USA, finished, and exported back to the USA. The border cities of Tijuana and Ciudad Juárez now have over a million inhabitants, and production in the “maquiladoras,” the “free trade zones,” now account for around 80 percent of Mexico’s processing industry. Initially, the focus was mainly on textiles, later on electronics equipment, and gradually everything that can be processed into a profitable surplus over costs at eight dollars a day in ten-hour shifts.

The working masses required for this are in any case abundantly available due to a widespread lack of use for the population in the country. and this was further increased by the millions released from smallholder agriculture, which was destroyed in a very short time and collapsed as a result of NAFTA stipulations on the duty-free inflow of highly subsidized US agricultural products. The food supply as well as the food business in general were largely displaced by imports from the USA.

A good one and a half million Mexicans have gradually found employment in the auto industry, which grew rapidly after the agreement came into effect, in both production and the supplier branch which serves the US auto market from Mexico’s tariff-free NAFTA location, but also exports to the rest of Latin America. In the meantime, all the major manufacturers from the USA, Europe, and Japan are represented, combining the low Mexican wage – higher in this industry than in the maquiladoras, but still only about a quarter of the US wage –, exemption from customs duties, and worldwide supplier connections to form attractive “value chains” in which they use the cheapest parts from inside and outside NAFTA, the cheapest parts production in the USA, and/or Mexico and a lot of back and forth transport across the border to ultimately bring about 70% of their highly competitive cars to the US market. Currently, international manufacturers produce nearly five million vehicles per year in 21 plants, some on the northern border, but mainly in Puebla and Potosí in the greater Mexico City area. Mexico has also become the fifth largest car export location in the world.

The promotion of the country’s capitalist development in the auto, maquiladora, and other sites has cost Mexican governments a great deal of state money in the form of development costs, loans, and tax breaks because, by joining NAFTA, they have committed themselves, definitively and without alternative, to developing the nation through foreign capital and on the basis of a world market defined by business in dollars; last but not least, with their government expenditures, they also wanted to reduce the government’s dependence on revenues from the oil business of the state-owned production and distribution company Pemex and to put Mexican government finances on a broader basis. Capitalistically, they made progress with NAFTA, but at the price of a new dependency.

The success of free trade: subsuming Mexico to the US ...

After 25 years of NAFTA, Mexico, as a location that has been fully open to international capital, primarily from the US and Europe, is now completely dependent on free access to the USA as the decisive part of the world market. And the credibility of Mexico’s government borrowing is based on the growth produced under these circumstances. All the more so since its former mainstay, Pemex’s oil export business, is no longer what it used to be: In its best days, it was the most important source of dollars in government hands, paying for one-third of expenditures with its transfers to the budget. Today the company is in debt to the tune of 107 billion US dollars, produces only at 1979 levels, and is effectively bankrupt. The company, which has fallen into disrepair as a result of privatization policies and has debts ultimately carried by the tax authorities, is now more likely to damage Mexico’s fiscal reputation than to benefit it.

The markets’ confidence in the state’s creditworthiness is now based primarily on Mexico’s special status as established by NAFTA: on access to the US market, the license for dollar transactions that this guarantees as a result, and the political protection of the USA, which Mexico enjoys as a member of the NAFTA zone, i.e. because of its important role in American business. Other free trade agreements with the EU and Japan have also opened Mexico as a market, but above all as a strategic location in relation to the US market; these complement but do not replace business relations with the USA, for which around 80 percent of all export goods are manufactured and from there paid in dollars. While Mexico’s overall balance of trade has consistently been negative, in 2019, the last NAFTA year, the country achieved a record export surplus with the USA. In the eyes of the financial world represented by the International Monetary Fund, this helps Mexico’s continually rising rate of debt to still be assessed as harmless, even if in 2016 “four out of five debt indicators were already beyond the limit.” All in all, the country’s previous status as a reliably dependent appendage to the world’s most important market and currency area, and the Mexican state’s financial share in it, create enough confidence to give value to the steadily growing debt and give the peso, with moderate devaluation rates, the status of a functioning local currency in the otherwise dollarized location. The credit line of 47 billion US dollars, which the IMF granted to Mexico in 2009 after the outbreak of the financial crisis, has not yet been used.

With resolute optimism, the Mexican government celebrates this rise to the status of a dependency of US capital as an unrivaled “success of North American economic integration”; a capitalist “integration” that, in addition to the immigration of capital to Mexico, has always naturally included the legal and illegal emigration of Mexican workers to the USA; their “remesas” have long been one of the country’s most important sources of dollar earnings, currently making up more than 30 billion dollars.

... and a scandal at the expense of the USA

Trump does not share the enthusiasm for the “exponential growth” in trade between the NAFTA countries since the treaty was signed. He has a very different view of the organized foreign expansion of US capital which has been made into free trade law, given the consequences for the US national location. While US and international capital have taken full advantage of the growth opportunities offered by the wage, tax, and customs privileges of Mexico’s “extended workbench,” in the past 25 years the US have seen some of its former production sites become rather quiet and also a bit rusty. This is why Trump insists that NAFTA is “one of the worst trade agreements in history,” which has led to “job losses, factory closures, and other countries building our cars” (El País, January 29, 2020). This agreement has “foolishly allowed the car industry to move across the border,” so it was an occasion for them to “leave our country, cut wages, and it got worse and worse” (Trump speech in Davos, 2020).

When production disappears in old car cities like Detroit or Dayton, Ohio, and is rebuilt in Mexico, taking advantage of a contract signed by a US government, no matter how good business may be for American carmakers in Mexico – it’s not strengthening American growth at home, as Trump demands in his “America first!,” even if foreigners are opening a few new factories in the union-free southern states and a new IT industry is amassing unprecedented amounts of capital. On the contrary, when cars are imported into the U.S. from abroad, U.S. purchasing power is being siphoned off by foreign capital; to the extent that American companies are involved in the business, they are violating the duties of their capitalist profession by creating Mexican purchasing power instead of domestic, and paying Latinos in heavily discounted wages and livelihoods instead of hard working Americans. Trumps takes the political economic situation, in which US and other capitals develop production capacities in Mexico and at the same time exclude it from the USA, as a scandal: The great USA, in addition to the advantage for its capital in the low wage location to which it is entitled, has been unacceptably damaged by Mexico’s growth.

And if the damage done to the USA is then reflected in negative trade balances, accounted in dollars earned in Mexico, promoted with dollar loans in the hands of Mexican governments, then the US president sees this as yet another violation of the US prerogative to economic success: Then the American money, which is actually its very own means of power, is working in the hands of selfish competitors against its creator, its only really entitled user and guarantor, because “stupid politicians” (Trump) put all these conditions into law through an idiotic trade contract. While Mexico wants to use state credit to promote economic development and the growth of the maquiladora industry and car production is accompanied by a continuously growing national debt, the Trump administration is not interested in the dilemma that Mexico is getting itself into with its debt, but only in the intention of the costly development efforts: here the competition is being deliberately distorted at the expense of the US location.

And where the old and new, US and other companies in Mexico are using the mass supply of labor to cut wages sharply – within three decades the purchasing power of low wages has fallen by 80 percent – Trump is not wrong to notice brutal wage dumping; what bothers him, however, is that the US location and its great American workers are suffering because they are prevented from making America even greater with their work. In short: the US President sees far too much freedom in Mexico’s calculating management of its dependency and in the advantageous arrangements of the capital working there under the terms of NAFTA, which Mexico is taking at the expense of the USA; an intolerable state of affairs because it grotesquely contradicts all the historical and current power relations between the two countries, that is, the right of the USA to undisputed supremacy.

Even before Trump took office, it was a foregone conclusion that things couldn’t continue this way. The new version of NAFTA is one of the first measures for a comprehensive revival of everything, especially the industrial potential of US capitalism. The US had the power to impose on Mexico a treaty that turned the country into the famous “workbench” of US capital and a wonderland of cheap labor for US profit; and it had the power to revise the treaty for its own benefit and to ensure that US capital, but also international capital, will once again gather on US soil in order to advance the economic power there, which is unbeatable in all matters, including productive ones, which the USA deserves as the finance capitalist, industrial and political-military center of the world.

The new USMCA treaty: Discouraging migration from the USA!

With this in mind, Trump, barely in office, terminated NAFTA. The new treaty offer, called USMCA (USA-Mexico-Canada-Agreement), contains nothing less than a revision of the decisive, already precarious politico-economic foundation of the Mexican national economy, based on Mexico’s established dependency: the treaty repeals the principle of free “intra-American” commercial trade. The US government leaves it up to the NAFTA country Mexico – like Canada – to negotiate the wishes of the USA for a new version or not, and thus “imposes its will on Mexico and Canada” (Trump, Handelsblatt, December 11, 2019). Mexico negotiates immediately, Canada hesitates, but then also joins the negotiations; signing will take place at the end of 2019, ratification is expected in 2020.

A particularly important role is played by negotiations on the “automotive sector, the cornerstone of the new treaty,” the provisions of which should fulfill contradictory demands by the USA: On the one hand, they should not immediately destroy the car business on the basis of paying lower wages in the American complementary location of Mexico, but on the other hand should express “the clear will” to “discourage” further migration of this industry from the US location by deliberately making it more difficult and by contributing to “the car industry returning to the national markets, promoting insourcing and local production in the USA” (Boletín Economico de Información Comercial de España 3110, p. 70, 72).

In addition, the treaty aims to subject the business of the major non-American competitors to new rules that are disadvantageous to them. This is served by a series of new conditions for the duty-free status of 2.6 million export cars for the US market: for example, the share of the total value of the product created in the entire USMCA region is increased from the already applicable 62.2 percent local content to 75 percent; for important components, an increase of up to 70 percent will be introduced, with 70 percent of the steel and aluminum used having to come from the contract region. This is directed against European and Asian manufacturers and their suppliers from outside the contract territory and is intended to favor a North American supplier industry.

In turn, a requirement that 40 percent of the end product must be manufactured by workers who earn at least 16 dollars per hour as wages is directed against Mexico’s low-wage competition. In addition, Mexico is contractually obligated to “strengthen workers’ rights,” promote unions and, in the event of a violation of an old trade act from 1974, is subject to a unilateral power of prosecution by the USA, all of which nobody would misunderstand even without Democrat Nancy Pelosi’s remark that “Today we are celebrating a victory for American workers.” Trump’s domestic opposition celebrates itself for doing even better than Trump in ensuring that “it becomes less attractive to move jobs to Mexico” (Handelsblatt, December 11,.2019). These courageous labor leaders sincerely wish for the highest possible wages for Mexicans – preferably, so high that in the end no reasonable capitalist pays them any longer and prefers to produce in the USA. No changes to contracts in the maquiladora industry are planned. Their business model with the lowest wages should apparently not be touched.

Trade according to the logic of economic war

On closer inspection, it becomes clear that in drafting the USMC the US didn’t waste any thoughts on the legal security of the Mexican auto location. When it thinks of security, it thinks of its national security, which it has long since developed into a kind of universal reservation even in customs and trade issues. And not as a cheap excuse with which it only wants to gain a business advantage – the powerful USA would not need to do this, especially in relation to Mexico – but because it quite fundamentally sees disadvantageous trade relations as an attack on the material foundations and potentials of its political system and thus an essential question of sovereignty. This is why it subsumes its trade policy to the field of imperialist security issues, and why it judges international business and the competition for national profits in terms of armed conflict, as a struggle which comes down to asserting itself as a national power and not allowing itself to be harmed by its competitors in the perpetual trade conflicts of nations. In the agreement with Mexico and Canada, this national sovereignty standpoint is emancipated from any particular business relationship or product and takes the form of a general clause that subjects all relationships covered by the treaty to the criterion of guaranteed national indemnification for the US and places them under the proviso of punishment and termination.

This means that the car manufacturers producing in Mexico are granted a duty-free quota of 2.6 million units for export to the USA if the requirements are met, but that does not mean they always have to allow it. The treaty in no way repeals an old law dating from 1962 – the Trade Expansion Act – which authorizes the Secretary of Commerce to examine whether the import of any commodity impacts national security and, if so, to adjust imports accordingly, whether through tariffs or quota regulations. The same applies to Article XIX of the time-honored GATT agreement of 1947, revised in 1994, the application of which is stated in Article 10.2 USMCA and gives the USA the right to take “emergency measures” if this should be necessary to prevent damage to domestic producers from the import of certain goods. Producers in Mexico, who are thus under the permanent threat of unforeseen additional tariffs, hope that, should worst come to worst, they will be protected by the quotas granted, but can’t invoke any explicit exclusion from such measures in the treaty if a relevant investigation by the US Department of Commerce should go badly for them.

This is supplemented by all sorts of special offenses and petty executive provisions under which Washington could resort to punitive measures in the form of border taxes. These include, for example, the obligation of USMCA members to submit all data on the import, export and transit of any goods to the US authorities, which they use to combat dumping, subsidies, and the enactment of “emergency measures,” i.e. to defend against unreasonable attempts to gain advantages at the expense of the USA. The treaty also contains a ban on making free trade agreements with “non-market economies” such as China, although China does not need to even be mentioned in the passage. In the event of a violation, the contracting parties have the right to terminate the entire agreement and thus cancel all customs privileges for the USMCA country that enters into such economically and politically “immoral” relations. Observers of the treaty negotiations assume that the Trump administration sees the clause as a model for all of its future trade agreements.

The U.S. government secures for its Mexican subsidiary all options for free investment activity, as was already provided for in NAFTA, supplemented by regulations in the field of data collection and intellectual property, which it unhesitatingly bases on its national law. It closes gaps identified in the new treaty by securing further freedom of movement for its financial capital at the expense of public credit institutions or by granting rights to its transport industry in Mexico that it denies Mexican logistics companies in the North, etc.

All in all, therefore, a work of successful political-economic blackmail in the legal form of a multilateral contractual relationship in which the USA absolves itself of any binding contractual obligations; conversely, it takes the treaty diktat as a legally effective securitization of the interests of the USA to be observed in this relation and finds any disturbance of such interests a reason to switch to the enforcement of good conduct with the weapon of punitive tariffs. All questions of free trade and industrial competition are thus defined by the USA as questions of its unchallengeable sovereignty, in which nothing matters but its enforcement and the subordination of its southern neighbor, which is therefore subject to constant suspicious supervision by the supreme power.