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Greater Niagara Chamber of Commerce

The Future of NAFTA

What’s happening with NAFTA, why, and what does it mean to you?

Just over a year ago, when Donald Trump was almost universally expected to lose the 2016 Presidential race, he made promises to renegotiate or break NAFTA, citing not just his trade concerns with Mexico but his feelings that the United States loses “big-league” in trade with Canada. He based this on a supposed $11-billion trade deficit with Canada, but that is for goods alone, and is largely because of U.S. energy exports to Canada. When you count goods and services, the U.S. runs a $12.5-billion trade surplus with Canada, and widening that gap should make Canadian businesses nervous.

After Trump’s unforeseen election, renegotiation is now on the cards, with NAFTA negotiations underway between the U.S. and Canadian governments. Seven to nine rounds of trilateral talks are expected, about three weeks apart, in each of the three countries. Some optimistic timelines see the negotiations completed by January, but that seems unlikely. Mexico would like them finished by early 2018 so that they do not hang over the July 1 elections, when Mexicans will elect a new president, 500 members of the Chamber of Deputies, and 128 Senators. The current President, Enrique Peña Nieto, is not eligible for a second term under the Constitution.

The United States, for its part, would probably like to see negotiations completed before the mid-term Congressional elections on November 6, 2018. 33 Senate seats and all 435 in Congress will be up for election. This may give Canada something of an advantage, as the Government of Canada does not face an election until October 21, 2019, and so it is much more politically able to drag the talks out for longer. Moreover, unlike the Trump administration, the Canadian government was not elected on a campaign promise to repeal or renegotiate NAFTA, and not doing so would not be viewed as a breach.

Here are some of the major components and where Canada and the United States stand on them.

Chapter 19 has been prominent in discussion of the agreement. It sets out mechanisms for binational panels to review and resolve challenges to anti-dumping and countervailing duties, rather than leaving them in the hands of the respective national courts. The U.S. was resistant to the measure during negotiations in 1987, causing Canada to walk away from the table at one point.

Removing Chapter 19 would be in the interests of the U.S., but not those of Canada or Mexico, to whom a binational dispute resolution process is important. Bypassing the lengthy and expensive U.S. court system is beneficial for businesses. Canada has won 15 out of 19 challenges to U.S. anti-dumping and countervailing duties under Chapter 19, while the U.S. has won 6 out of 13 against Canada.

Although dropping Chapter 19 would favour the Americans, it’s difficult to see how President Trump would explain the failure of talks over it to the American public. Threatening to walk away over Chapter 19 may give Canada and Mexico some leverage in the talks. It’s no secret that Canada wants to retain Chapter 19, given that it has repeatedly won in such important disputes as softwood lumber.

The original NAFTA was negotiated in the late 1980s, long before digital commerce was a reality. Canada is also looking for clear rules on digital commerce as a result, including tariff-free digital trade between the signatory countries, and privacy protections. More and more Canadian data is stored on U.S. servers (and vice versa), including a great deal of personal and sensitive information. The United States has stated that it wants free flow of data across borders, but both British Columbia and Nova Scotia have passed domestic data storage requirement laws, meaning that “personal information in the custody of a public body” (schools, hospitals, post-secondary educational institutions, government-owned utilities, etc.) cannot be stored outside Canada. These provincial laws would obviously conflict with a new NAFTA provision requiring complete and free flow of data.

Concerns are mounting over not just high-profile hacking but over blanket surveillance of law-abiding citizens by state security agencies. Particularly alarming is the news that those agencies are often aware of vulnerabilities in user software (such as those that enabled the WannaCry ransomware attack) but fail to report them to the programmers so that they can exploit the vulnerabilities themselves. Recognizing these issues and introducing better requirements for privacy and data protection is a priority not just for businesses, who can be virtually paralyzed by a malware attack, but by law-abiding citizens concerned over who is accessing their personal data and for what purpose.

Groups such as ACTRA, the Alliance of Canadian Cinema, Television and Radio Artists, have felt that a renegotiated NAFTA could threaten Canadian culture, which has been a legitimate concern for decades, as deep-pocketed American producers of television, music, and other performance art threaten to saturate the Canadian market. Fears of this are what drove Canadian content requirements. ACTRA seeks to maintain or strengthen the cultural exemptions currently in NAFTA, and to avoid the adoption of the cultural provisions of the Trans-Pacific Partnership (TPP), which give little to no protection to Canadian content and culture. Although the United States has withdrawn from the TPP, they could use the language from that agreement as a template from which to work.

The United States has made it clear that it seeks to maintain existing reciprocal duty-free market access for industrial and agricultural goods, which is unlikely to pose a problem. However, the U.S. is also seeking to eliminate non-tariff barriers to U.S. agricultural exports, and expand market opportunities for U.S. telecommunications and financial firms in Canada. This might be welcomed by many Canadians. Our telecommunications market is often accused of being uncompetitive, with Canadians paying more for worse services than U.S. customers. Introducing some U.S. competition to these markets could stimulate Canadian firms to be more competitive.

Of special interest to Niagara is wine, which the Americans have targeted in their NAFTA goals. They feel that provincial liquor control boards are unfair and uncompetitive, such as the decision in British Columbia to only allow B.C. wine to be sold in B.C. grocery stores. This decision shuts out not just American wine, of course, but Niagara wine. Ontario wineries, distilleries, and breweries have long felt that the LCBO is holding them back, and offers little benefit to the industry when measured against the costs it imposes.

 

However, the Canadian wine industry also benefits from protectionist concessions obtained in the Canada-U.S. Free Trade Agreement (CUSFTA), which were grandfathered into NAFTA to protect the then-young sector. The Wine Institute, an advocacy group for California wine, has argued that the Canadian wine industry has matured to the point that it no longer needs trade protectionism, and is asking for these concessions to be abandoned. This might be bad news for Niagara’s wine industry. The U.S. already has a $450-million wine trade surplus with Canada, and while the U.S. has a 67 per cent share of its home market, Canadian wine only has a 32 per cent share of the Canadian market. U.S. wines represent 14.2 per cent of wine sold in Canada, but Canada has virtually no market penetration south of the border. As with the de minimis threshold, what looks fair on paper can be quite one-sided in application.

That threshold is another target for the U.S., which has asked for a de minimis shipment value “comparable to the U.S. de minimis shipment value of $800.” The current Canadian value is $20, meaning that any goods imported to Canada over $20 in value are subject to taxes, duties and fees. This has protected Canadian retailers somewhat from online American retail giants, but if raised, even harder times could be ahead for the Canadian retail industry, already facing many challenges. It is for this reason that the GNCC has helped spearhead an initiative to freeze the threshold at $20.

The Trump administration will likely try to deliver on its “Buy American” campaign promises. The U.S. government contracts out work totalling close to half a trillion dollars every year, and except for some specific, security-related work like defence contracts, U.S. and foreign firms can bid for these contracts. The “Buy American” pledge requires that the federal government’s departments offer these contracts exclusively to American firms, and works alongside the “Hire American” pledge, which involves policies such as restricting H-1B visas for skilled foreign workers. Even the threat of this policy could already be having a chilling effect, with many Canadian firms unwilling to submit bids on projects when they may be about to be disqualified.

This has raised concerns among American economists and taxpayer advocates, who predict that this policy will result in higher-priced contracts and a less competitive procurement market, meaning that the American taxpayer will pay more for less. From the Canadian perspective, the concern is that the U.S. wants to have its cake and eat it, too – while effectively closing their procurement market to Canadian firms, they want the Canadian and Mexican procurement markets to be wide-open to American firms. The unfairness of this proposal may make it relatively easy for Canada and Mexico to get the “Buy American” policy scrapped altogether, opening all three procurement markets to firms from all three signatory countries.

Another protectionist measure the U.S. is likely to seek is an end to exemptions for NAFTA partners when the U.S. acts to protect their industries against dumping and unfair subsidies. This practice can be invoked against non-NAFTA trading partners, but Canadian and Mexican suppliers are exempt, which has helped fuel the bitter debate over Canadian softwood lumber which, the U.S. alleges, is being dumped on the U.S. market (i.e. sold at effectively below-market rates thanks to subsidies), but about which the U.S. has been able to do little since the source is a NAFTA partner.

Dairy is also expected to be a hot topic. The Canadian dairy industry has come under fire from President Trump specifically, despite the fact that the U.S. had a $400 million dairy surplus with Canada in 2016, and the fact that U.S. dairy is heavily subsidized and supported by their government.

The United States is also expected to seek equivalent labour and environmental standards between all three countries. This would have little effect on Canada, but has been seen as a veiled attack on Mexico, aiming at discouraging manufacturers from relocating there by raising the cost of doing business in that country.

Mexico, for its part, is likely to seek more labour mobility and better access for its agricultural products, and improved border infrastructure. President Trump’s demands that the country pay for a U.S.-Mexican border wall are likely to continue to fall on deaf ears. The Mexicans are also likely to seek better integration of telecommunicationd markets, the intersection of which with the American desire to see American telecoms firms accessing new markets in Canada and Mexico will be interesting. Like the other NAFTA signatories, Mexico is also interested in better digital economy and e-commerce provisions, although the unified desire for such provisions may break down on the specifics.

The message from Canadian businesses has been “first, do no harm.” This extends not only to the agreement between the United States and Canada, but also to Mexico’s involvement. Canadian businesses have no interest in economically isolating Mexico, as the Trump administration seems keen on, which would strand assets and break up existing trade relationships. Manufacturing chains, like auto parts, must be preserved.

Organized labour is generally opposed to NAFTA, with a joint submission by Unifor and the United Auto Workers blaming the free trade agreement for the devastation of Canadian and American manufacturing. However, 85 per cent of manufacturing job losses between 2000 and 2010 were not due to offshoring, but simply due to automation. With better and more sophisticated manufacturing technology, it simply takes fewer workers to build a product. Despite job losses, U.S. manufacturing is today producing over two-and-a-half times its output in 1980. Manufacturers are simply doing more with less, and while 40 per cent of Canadian jobs could be lost to automation, it’s worth remembering the lessons of computers, the internet, and even the dawn of the industrial age – technology usually creates more new opportunities than it destroys.

While there is certainly good reason to be cautious and a temptation to be pessimistic about the outcome of these negotiations, there is also a genuine opportunity for Canadian business in the renegotiation of NAFTA. The U.S. objectives were not nearly as radical as was widely feared after Trump’s election, and it may be possible to obtain measures which would help businesses, such as lessened administrative overheads, better labour mobility for recruiting talent, and an end to “Buy American” restrictions.

What’s your opinion on NAFTA? Take our survey – it’s four questions, and takes an average of three minutes to complete.