Part 5: In NAFTA We Trust

Charles de Gaulle once said that "in politics it is necessary either to betray one's country or betray the electorate. I prefer to betray the electorate."

As a nation and as a people we are too often too trusting of our leaders. The renowned seventeenth century scholar, Robert Burton noted that “stylus virum arguit, - our style betrays us."

Our political leaders have taken advantage of our trust and enacted a free trade agreement that after fourteen years has borne out the dour admonitions proclaimed by Pat Buchannan and Ross Perot.

History, I believe, will judge NAFTA to be a golden trough where rapacious U.S. NAFTA companies gorge themselves to the bursting point with ill gotten gains.

I’ve explained how the U.S. NAFTA companies have mislead and subordinated the Mexican Government and misled the hapless Americans sent to work in Mexico. Now let’s see how the U.S. NAFTA companies have deceived we the people and how our politicians made it feasible.

Our business and political leaders assured us that NAFTA would benefit all of the citizenry of the three partner nations, i.e., the United States, Canada and Mexico. The term used was “win-win-win for all.”

We discounted the gloomy warnings of Pat Buchannan and laughed at Ross Perot’s sucking sound. I believe we Americans owe both Pat Buchannan and Ross Perot an apology for our derision.

We were assured that NAFTA was devised to secure an international trade region where the enterprises of the United States, Canada and Mexico would flourish and jobs would be created for all.

What good are these assurances when tens of thousands of Americans working in Mexico are defrauded out of Mexican mandated compensation? Why does the Mexican Government refuse to abide by the laws of the land and provide equal protection for all workers?

Transparency International issues three indices pertaining to governmental corruption, i.e., The Corruption Perceptions Index, The Global Corruption Report, and The Bribe Payers Index. All three indices rate Mexico as a corrupt Government with weak public integrity. The affects of the corruption brought about by drug money is common knowledge. The corruption brought about by rapacious businessmen is obscure.

An example is Carlos Slim Helú, the youngest son of a Lebanese immigrant to Mexico. Through his influence with the Mexican Government, Carlos Slim has succeeded in parlaying a modest investment into the powerful quasi-monopoly called TelMex. Simultaneously, Carlos Slim has become the second most richest person in the world. Meanwhile, the citizenry of Mexico pay all too high rates for TelMex services.

Carlos Slim is not a the only example. Mexico can hold up numerous industrialists who’ve obtained the acquiescence of the Mexican Government to detrimentally control vital sectors of commerce. Numerous private and public sector monopolies and duopolies in energy, telecommunications, construction, food production, broadcasting, financial services, and transportation have long been a drag on competitiveness and job creation in Mexico.

Realizing that U.S. NAFTA companies are blatantly violating Mexican Laws without any repercussions demonstrates the collaboration between public and private organizations to breach the public trust in the name of personal and corporate gain.

But, the payroll and tax shenanigans are merely the grease that lubricates the wheels of the corporate gravy train. Article 303 of NAFTA is meant to protect NAFTA region manufacturers from undue competition from materials made in non-NAFTA countries. Article 303 provides that duty paid on imported materials cannot be drawn back (refunded) if and when the materials are incorporated into NAFTA qualifying articles that are then shipped to another NAFTA partner.

The intent of Article 303 was to provide an incentive to use NAFTA region made materials in lieu of non-NAFTA made materials. The articles of all non-NAFTA countries are to be subject to the usual import duties provided for in the tariff schedules of the importing NAFTA countries.

This was supposed to induce the NAFTA partners to invest in the manufacturing facilities to provide the materials necessary to make the articles to be marketed within and outside of the NAFTA region. Article 303 was one of the pillars of what was supposed to lead to a multitude of new jobs.

The truth is the United States and Canada have lost millions of manufacturing jobs and Mexico’s manufacturing employment is stagnant. If we are to believe the NAFTA pundits that NAFTA trade has tripled and quadrupled, where are the manufacturing jobs for the increased trade? Where are the materials coming from that are integrated into NAFTA articles?

Some would point to the growth of U.S. exports to Mexico. While exports to Mexico have grown, the export numbers contain a large portion of non industrial goods such as agricultural commodities, foodstuffs, metal scrap and used vehicles. Also, a significant portion of the exports contain redirected materials and circular non-commercial transactions. So, I reiterate - where are the materials coming from?

The answer - PROSEC, Presidential Proclamations, an Amended U.S. Customs Harmonized Tariff Schedule and trade supports. PROSEC is a Mexican Government duty exemption program that allows NAFTA companies to apply for duty exemption for foreign materials they will integrate into NAFTA articles.

Article 303 disallowed duty drawback (refund) so PROSEC exempted the duty. Now NAFTA companies can import materials duty free from subsidiaries in Asia and elsewhere and subject them to perfunctory operations that changes the tariff identity and viola - a duty free NAFTA qualifying material. An example would be installing Chinese electronic components onto a PC Board. The components have lost their identity and have become a NAFTA made PC Board.

The NAFTA Rules of Origin are intended to rule out NAFTA benefits being granted to non-NAFTA materials. The Rules of Origin require that vendors and manufacturers issue a binding Certificate of Origin claiming NAFTA origin for all materials incorporated into articles claiming NAFTA benefits.

Numerous Presidential Proclamations have modified and diluted the Rules of Origin in the U.S. Harmonized Tariff Schedule. The dilution led to conflicts and confusion. So, in 2006, a new Amended Harmonized Tariff Schedule was put forth. About 80% of the tariff classifications and most of the Rules of Origin were revised in the new Amended Harmonized Tariff Schedule.

What could the U.S. NAFTA companies gain from all of this tomfoolery? I will lay forth a feasible theoretical set of circumstances. Let’s suppose U.S. Co. “X” has operations in the Orient. These operations supply many companies and/or subsidiaries of Co. “X“. Co. “X” does not want to duplicate these operations in Mexico in order to supply NAFTA operations.

The host countries of Co. “X” Asian operations offer tax breaks and subsidies for materials exported to other countries. For most countries, these tax breaks and subsidies reduce the cost of otherwise expensive materials. Since these countries do not have domestic competing industries - the tax breaks and subsidies are welcome.

Not so in most of the major industrialized nations. Terms such as dumping and countervailing duties crop up. But, if a related Asian company is shipping to a related Mexican company - whose to know. The two companies will operate on Transfer Pricing Schedules and the companies can put forth whatever numbers they deem adequate.

Whose to stop them? Not the corrupt Mexican Government officials. So, the forbidden tax breaks and subsidies become lost in the various layers of Transfer Pricing Schedules and audits by corrupt government officials. The artificially lower cost materials require lower cost inputs to sustain NAFTA qualification. By deception the foreign materials become NAFTA qualifying materials and Co. “X” makes a few million more.

Another advantage to this flow is the high cost of marine freight from the orient to the west coast. There is an adage that “parts ship cheaper than finished goods.” Marine shipping containers can by a factor of 2, 3 and 4 times hold more parts than finished goods. Moreover, the value per pound is less, therefore the marine freight charge is less.

There is one other advantage. The U.S. Customs Service Inspectors and Import Specialists plying their specialties at west coast ports of entry have long been wary of shipments from the orient. This same distrust existed along the U.S./Mexican Border until NAFTA. The reasoning behind this is NAFTA is duty free so commercial fraud is inconsequential. Besides there are more important issues such as drug trafficking, terrorism, etc.

Meanwhile, American, Canadian and Mexican workers continue to wonder when will they prosper from NAFTA? Answer - NEVER! The early neigh Sayers had it right. NAFTA was not crafted to benefit the many - only the few.