NAFTA Revisited

Staying Legal

NAFTA Revisited

NAFTA, 9-11, and the European Union

By Stephen Prentice

July 2004

Stephen Prentice

Remember NAFTA? Some years back we took a look at NAFTA (the North American Free Trade Agreement) which was designed to open trade borders between Canada, United States, and Mexico. We were interested in what impact it would have on technicians’ work and aircraft maintenance in general. Well, as anyone who lives near our borders knows by now it is working big time for trucks and the trucks are rolling.

The agreement was signed in 1994, and it is almost 10 years old. Many, including aviation and related business activities, voiced their concern that Mexico and to a lesser extent Canada would attract more MRO (maintenance, repair, overhaul) business because of lower costs, taxes, and tariffs in general. Added to the huge general increase in outsourced work, U.S. repair activities would thus suffer loss of work and jobs. Did this happen?

Special rules
FAR 43.17 already existed and describes the amount of work that can be done in Canada. Canada always had special treatment in the FAR. Mexico does not. Canadian technicians (engineers) and inspectors have for many years been given specific authority to work on U.S. registered aircraft. They may conduct any inspection required by FAR 91.169 and perform preventive maintenance and alterations on U.S. aircraft in Canada. Annual inspections are not included however.

Canada has always enjoyed a lot of work for both Part 91 aircraft as well as 135 and 121 air carrier heavy maintenance. Lower costs and quality of work was and is the driving force. Just recently Jet Blue, for example, announced that all heavy checks on its Airbus A320 fleet would be completed in Canada rather than the United States. NAFTA has indeed contributed to the large outflow of work due to the cost savings.

Although Mexican technicians are trained in a similar manner as their U.S. counterparts, FAA has not adopted similar rules for their work. To a certain extent, this has changed in the last 10 years but not in all cases because of NAFTA. With European Union JAA certification (Joint Aviation Authority) our approval for foreign repair facilities becomes somewhat redundant anyway. If any worldwide shop is approved by the European Union (EU) JAA they can work on any EU or other approved aircraft. We are of course not a member of the EU.

Canadians also enjoy major air carrier work from such airlines as Continental, America West, Aloha, Jet Blue, and others because the U.S. carriers enjoy a windfall from the implementation of NAFTA in 1994. The windfall is the fact that the U.S. carrier is exempt from paying the Value Added Tax (a sales tax) when returning to the United States. If any aircraft parts used in Canada on U.S. aircraft are made in the United States there is no import tax at all. This all amounts to a huge dollar savings.

9-11 effects
Needless to say, the downturn in the economy after 9-11, the rush to outsource work, and bankruptcy filings by airlines, have contributed to a severe downturn in U.S. commercial aviation these past few years. The loss of jobs in our field of work has been substantial because of the hunt for cheaper inspections, overhaul work, and airframe repairs. Thus it now becomes statistically difficult to pinpoint the overall effects of NAFTA on aviation business in particular.

NAFTA provides for broad certification of most professions so that they will be recognized by the parties to the agreement. The European Union however, has a similar “harmonization” program, as they call it, for licensing and other work approvals. Many technical trades in both NAFTA and the EU, such as nurses, lawyers, CPAs, dentists, physicians, and teachers are now allowed to practice their trades across most European borders. Airframe and powerplant licensed mechanics from all the countries are included. In other areas, we have seen an increase in airline activities as the rules for deregulation of cross border inspection protocols have been relaxed and coordinated between NAFTA and EU countries. However, the concerns of 9-11 have tightened inspection requirements that were relaxed with NAFTA.

NAFTA, the EU’s JAA along with the new EASA (European Aviation Safety Agency) are all very much related when we talk about European aviation activities. The new safety organization set up by the European Union to govern safety is roughly the equivalent of our NTSB and it will be tasked with all of the same jobs that our NTSB does. If this sounds like a duplication of our system, it is.

NAFTA, JAA, and jobs
During a past political campaign one of the candidates mentioned what he described as a “giant sucking sound,” which he called the loss of jobs due to lower labor costs. Ross Perot predicted dire results from the passage of NAFTA. For this and other reasons since the advent of 9-11, he was, for the most part correct.

Exports to Mexico increased as a result of NAFTA. But these exports are mostly raw materials shipped to factories with lower paid workers which turn them into finished products that are then imported back into the United States. Have you noticed that nowadays you have to look high and low for the place of manufacture of most goods. There is a great effort to obscure where they are made for obvious reasons. Talk about globalization!
Many of our defense contractors have established operations just across the border in Mexico to tap into the large low-cost labor source in that country. Unfinished raw product is exported to the border facility and it is imported back into the United States at a minimum or no tax. Many have said that this process is faulty because it allows the border operations to exploit the local workers and does not permit them to bargain collectively (no union) with their employers. In fact the mere mention of union at these facilities results in termination.

As we all should know by now the well-paying U.S. factory job or airline job is getting to be a thing of the past, if it is not already history. Sure there are still some good ones left like the auto industry, but they are rapidly going away also. NAFTA and global merchandising have brought the U.S. wage down while being forced to compete with workers in other countries who work for less, with no benefits, no unions for protection, and no health, safety, and environmental concerns. NAFTA unfortunately did not provide for labor equality in Mexico. One of the biggest single defects is its failure to address workers’ rights including the right to strike and the right to organize and freely associate. It only provides for protection of profits for the manufacturers.

Even our own auto industry has to suffer during this difficult time. The press recently reported that GM will close two plants and sell off its locomotive division. Ford will close four plants. Daimler-Chrysler will close or sell five of its plants deemed noncompetitive. A total of 12,000 employees are affected. We have already seen the large layoffs in our airlines. They may not be finished yet. Delta and American among the so-called legacy airlines are on very shaky ground and still are threatened with bankrupcy. Who says things are getting better?

Many say however, that even if the jobs are disappearing, others will replace them. Have you seen this yet? They say that things should cost less. Have you seen refrigerators come down in price? Maybe ice boxes cost less, but then the ice to put in them has gone up in price. Even if certain items come down in price, the unemployment checks U.S. workers are forced to live on when their jobs go South don’t go as far as their former paycheck. Look at the recent increase in oil and gas prices. Lower prices on goods are little consolation to those who have lost their jobs as a consequence of the lower prices! Of course the story on big oil is now the driving force for higher prices in all areas.

NAFTA expansion plan
Like the European Union, additions to NAFTA are in the works right now. Chile is a most desirable addition. Chile has a large export capacity that is already finding its way into U.S. markets. The United States recently wrapped up a free-trade agreement with Chile and is currently negotiating other agreements with several Central American countries. Chile’s aviation maintenance and MRO capabilities at the moment are excellent and will provide additional competition in that area.

The Caribbean will be next in order. It is a fertile area for NAFTA expansion and planning is under way to include these island areas in the trading group. It does not appear that any aviation activities will be affected however.

Bottom line
So long as the wage status at foreign locations is below that of our own there will continue to be an outflow of jobs. We don’t have to be too concerned about our jobs going to EU JAA aviation facilities. The wages and benefits there remain high and in some cases are usually better than ours.

The real threat according to many is in China. China enjoys most favored nation status and is now part of the World Trade Organization. Aircraft and engine construction in China is progressing at a fast pace. Boeing, Lockheed-Martin, and others are outsourcing work to China and soon the floodgates will open. Send your comments to [email protected].

Stephen P. Prentice is an attorney whose practice involves FAA-NTSB issues. He has an Airframe and Powerplant certificate and is an ATP rated pilot. E-mail: [email protected]

About the Author

Stephen P. Prentice

Stephen P. Prentice is an attorney with an Airframe and Powerplant certificate, is an ATP rated pilot, and is a USAF veteran. E-mail: [email protected].