Would Canada be the big winner of the renegotiation of NAFTA?

Ever since the Trump administration came to power, North American commercial relations are tainted with uncertainty and stability is threatened. This uncertainty stems from the American president’s protectionism-focused positioning executed through an eagerness to “improve” NAFTA.

“Improving” NAFTA was a staple theme of Donald Trump’s campaign. In this context, two main arguments were brought up by the 2017 presidential candidate; loss of local jobs and the trade deficit, both failing the United States in favour of their trade partners (mainly Mexico).

TrumpTweet

Going into the negotiation rounds (starting in August 2017), the three NAFTA members committed themselves to a process of modifying the initial agreement of 1994. Assuming that the United States is pursuing a “winner take all” strategy and that both Canada and Mexico are not willing to give up any of their positions, going back to the status quo seems impossible. Faced with uncertainty, Canadian policy makers and politicians are, with reason, wondering how NAFTA 2.0 could impact the country’s economy.

 

What is Really Going On?

By calling NAFTA “the worst trade deal in history”, Donald Trump raises questions, particularly in regard to the impact on its three members. While one of the main conclusions is that, since 1994, the trade balance between the United States and Mexico favours the latter, the situation between Canada and its southern neighbor is different.

In fact, while the United States enjoyed a slight advantage in its trade of services with Mexico, exporting $31.1 billion and importing $23.5 billion in 2016, their trade balance remained negative in 2016 due to a $63.2 billion deficit from the trade of goods. In 1993, Americans had a $1.7 billion surplus (in 1993 USD, the 2016 deficit would be $36.1 billion).

In contrast, the trade balance between the United States and Canada is a completely different story; Canada had an advantage on goods exports in 2016 (a $9.1 billion positive gap) while it was at a $11.9 billion disadvantage when it came to trade of services. We can conclude from looking at this data that Canadian and Mexican negotiators have stepped into the negotiation sessions with divergent arguments.

Real data = USD 1993; Source: Census Bureau
Real data = USD 1993; Source: Census Bureau

It’s difficult to establish a link between  employment variation and the free trade agreement in the past few years and the free trade agreement. Analysis of the American employment market shows that the unemployment rate in the United States went from 6.5% in December 1993 to 4.8% in January 2017. Nonetheless, it remains difficult to quantify NAFTA’s impact by simply looking at employment figures over the same period as the free trade agreement was in effect. However, in a report published in 2015, the Congressional Research Service concluded that:  “In reality, NAFTA did not cause the huge job losses feared by its critics or the large economic gains predicted by its supporters. The net overall effect of NAFTA on the U.S. economy appears to have been relatively modest, primarily because trade with Canada and Mexico accounts for a small percentage of U.S. GDP. However, there were worker and firm adjustment costs as the three countries adjusted to more open trade and investment among their economies.”

 

Potential Compromises

Now that the first four rounds of negotiations between the representatives of the three member-countries are behind us, it is clear that the U.S. demands are focused on three principal subjects.

Canada’s softwood lumber industry unsurprisingly came up during the debates as it has been the subject of conflicts between the two northern neighbors since the 1980s. Representatives of the American industry claim that Canada unfairly subsidizes its softwood lumber industry by providing inexpensive access to public lands and requests a renegotiation of the current agreement to introduce new measures favouring the American softwood lumber industry.

The second major disrupt is Canada’s dairy industry, regulated by supply management. Canada may have to compromise on its current stance as it did in the preliminary TPP discussion.  The issue took on new proportions when Wisconsin dairy farmers challenged Mr. Trump in response to the introduction of a new Canadian restriction which limited imports of American ultrafiltered milk. The president’s response was clear: “Canada has made business for our dairy farmers in Wisconsin and other border states very difficult. We will not stand for this. Watch!” Indeed, Ontario producers’ decision to lower prices in response to an influx of American milk in their market still threatens many dairy farmers from Wisconsin and New York who risk indefinite shut downs. Not surprisingly, Americans have requested for an end to the supply management system for dairy, chicken, eggs and turkey in Canada within ten years.

Another subject that is up for debate is Chapter 19 which the United States would like to get rid of all together It includes clauses enabling governments to resolve trade conflicts by appointing an independent panel of arbiters.  While it’s true that Canada has used it to clear away American anti-dumping or countervailing duties on softwood lumber and other products, getting rid of it is unacceptable by both Canada and Mexico. The application of Chapter 19 implies the following: if country A enforces trade laws on country B and the government of B deems them unfair, country B can call upon a special independent group (agreed upon by both parties) rather than go to the country A’s tribunals. However, Trump’s administration sees these independent groups as a violation of American sovereignty and wants American tribunals to unilaterally be in charge trade disputes.

 

Potential Progress

In response to the various demands coming from the American side, Canadian negotiators have stayed cool and continued to hold their positions and present their own demands to modernize the act. Among these, they would like Chapter 11, which allows companies within NAFTA to sue NAFTA member country, to be reconsidered. The idea behind chapter 11 was that lawyers should be more independent than if the issue was to be solved in a given country’s tribunals. Some critics say that the appointed lawyers are subject to conflicts of interest due to the fact that they conduct business in their country of origin. Canada has faced more prosecutions in regard to Chapter 11 than any other country – about 40 to this date – most of them contesting its environmental protection and politics on natural resources. It has lost about 50% of its cases through rulings or settlements when in contrast, the U.S. has not lost any case under Chapter 11. Reconsidering Chapter 11, which the American administration does not seem to be completely opposed to, would be a step forward for Canada.

Another demand by Canadian negotiators is to level the playing field in terms of labour laws. This includes terminating laws such as the right-to-work state legislated law, which eliminates the obligation of workers to adhere to union fees and join the union if their place of work is unionized.  According to the Canadian Minister of Foreign Affairs, Chrystia Freeland, this demand is meant specifically to favour Canada’s interest. Ottawa’s objective with this demand is to encourage its partners to adopt higher labour standards, which may have interfered with the law of supply and demand that dictates salary levels and that may have brought on an artificial compensation of workers in states that adopted it. According to Area Development’s 31st Annual Corporate Survey (2016), 42.1% of investors consider the right-to-work legislation to be very important in their decision-making process. Terminating it would allow for Canada to better position itself in attracting potential investors.

Source: 31st Annual Corporate Survey (2016) Area Development
Source: 31st Annual Corporate Survey (2016) Area Development

According to the minister, increasing environmental restrictions could be taken into consideration as Canadian norms are stricter, mainly due to the recent signing of the Canada-European Union (EU) Comprehensive Economic and Trade Agreement (CETA). The introduction of a standardisation of carbon prices in North America plead by Justin Trudeau could prevent harm to Canadian businesses’ competitiveness.

More progress is in the cards for Canada, including a potential decrease of the quantity of oil and gas that has to be sold to the United States (respectively 70% and 61% of domestic production) and potentially more efficient processing of visas for workers, which are currently deemed obsolete by David McNaughton, Ambassador of Canada in Washington.

 

So… Uncertainty?

The uncertainty surrounding the NAFTA renegotiation will continue in North America for the next few months and, unsurprisingly, the former soft deadline of completing the agreement before 2018 has been pushed to beyond 2018.

Overall, it looks like Canada is not without arguments at the negotiation table and, despite the numerous demands coming from the Trump administration, Canada is in a good position to get concessions that would contribute to reinforcing its economic positioning on a continental scale.

In sum, although it is difficult to predict which direction the renegotiation will take, Canada can still hope to come out as the winner of NAFTA 2.0.


 

Khalil Driss Khalil Driss, Consultant, The CAI Global Group Inc.

Khalil Driss has master’s degree in strategic management which he has used to assist private sector clients by providing location decision support. He has also specialized in economic development strategic plans aimed at attracting investments.

 

 

NEWSLETTER

Receive our insights first