NAFTA Renegotiations and Canada

NAFTA is a 23 year old trade pact that is being recently explored for renegotiation, especially by the United States. There is even a possibility of termination of the treaty, which will affect the three countries differently and in varying degrees.

The US argument for renegotiation or even termination of NAFTA is that the treaty has led to the closure of US factories and the export of US jobs to Mexico. http://thehill.com/homenews/administration/348166-trump-mexico-and-canada-are-being-very-difficult-in-nafta. It is true that globalization coupled with other factors like automation has taken a toll on some industries particularly the manufacturing sector and employment in developed countries, including the US. https://www.brookings.edu/blog/up-front/2017/02/23/nafta-under-trump-the-myths-and-the-possibilities/ NAFTA, which allows free trade between the three countries, has benefited the three economies in varying degrees. However, the manufacturing sector and manufacturing employment decreased in both Canada and the US while the middle class has been under increasing strain in both countries. It must be mentioned that not all of this decrease can be attributed to the implementation of NAFTA as technological innovation, automation and trade with non-NAFTA countries contributed as well.

The US rhetoric of America First would make it a rule that government projects and large-scale enterprises would have to hire US workers and use US-made resources. The objective would be to maintain or increase US industrial activity and employment particularly in industries that have shrunk. The US had a combined goods and services trade deficit of US $55.6 billion with Mexico in 2016 (US$ 63.2 billion deficit in goods and US$ 7.6 billion surplus in services) and a US$ 12.5 billion combined goods and services surplus with Canada (US$ 12.1 billion deficit in goods and US$ 24.6 billion surplus in services). http://thehill.com/policy/finance/342432-us-trade-officials-outline-priorities-for-nafta  This shows that the US runs a relatively large trade deficit with Mexico. Combined with disappearing factory jobs, increasing economic constraint on the low-income and middle-class sections of the society, and rising income inequality https://www.cfr.org/backgrounder/naftas-economic-impact, it may have prompted the US to revisit NAFTA.

The auto industry is very important to the NAFTA countries. While the US auto sector lost a third of its jobs since 1994 (350,000), the Mexican auto sector gained more than four times, from 120,000 to 550,000 workers. https://www.cfr.org/backgrounder/naftas-economic-impact While not all US auto sector jobs were lost to Mexico, it shows the extent of losses in US auto sector employment. This has led some to blame trade deals for the job losses. https://www.nytimes.com/2016/03/20/business/economy/carrier-workers-see-costs-not-benefits-of-global-trade.html?_r=2 In the current NAFTA renegotiations, the US wants more US content in autos. https://www.reuters.com/article/us-trade-nafta/nafta-talks-intensify-u-s-seen-putting-off-key-demand-on-autos-idUSKCN1BY0MV  While the current rule of origin is 62.5 percent North American content for auto parts https://www.thestar.com/business/2017/08/16/auto-industry-might-drive-nafta-talks-early-indications-suggest.html, the US is suggesting at least 85 percent North American content and 50 percent US content for the vehicles to qualify for duty-free trade. https://beta.theglobeandmail.com/report-on-business/us-puts-contentious-nafta-auto-demands-on-the-table/article36583891/?ref=http://www.theglobeandmail.com& Also, in the current rule, the content can come from any of the member countries. Industry representatives like the Canadian Vehicle Manufacturers’ Association say that the proposed rule would reduce Canada’s and NAFTA’s competitiveness. Again, the proposed rule may force auto manufacturers to move their production facilities outside of NAFTA to remain competitive and pay tariff to sell in the US market. If auto makers become less competitive and move their production overseas, it will adversely affect the economies of the three countries, lead to increased unemployment in the auto industry and related industries. On the other hand, Canada’s suggestions of calculating value of vehicles that promote using North American steel http://business.financialpost.com/news/economy/chrystia-freeland-sees-hope-for-nafta-as-long-as-trump-remains-willing-to-negotiate and puts importance on driverless and electric cars, and research and development work is predicted to have positive effects on North American car manufacturing and employment creation. https://www.thestar.com/business/economy/2018/02/01/canada-pitches-more-credit-for-electric-driverless-car-production-in-nafta-talks.html

The US Trade Representative, Robert Lighthizer, mentioned stricter monitoring of companies’ compliance with rules of origin and stringent labour standards. Some have said that better working conditions and higher pay for Mexican workers will be beneficial for Canada and the US as it will make their production more cost effective and maintain their production levels. https://www.thestar.com/business/2017/08/16/auto-industry-might-drive-nafta-talks-early-indications-suggest.html There have also been suggestions that the renegotiations should incorporate wages, corruption and human rights as these problems confront Mexico.  https://www.project-syndicate.org/commentary/renegotiate-nafta-wages-corruption-human-rights-by-jorge-g–casta-eda-and-carlos-heredia-2017-09 When workers in Mexico have improved working conditions and higher pay, it will improve their quality of life as well as provide them higher standard of living. This will make trade between the three countries more equitable as workers in Canada and the US enjoy both high working conditions and pay. There has always been the argument that lower wages in Mexico have incentivized Canadian and US companies to ship their production processes to Mexico. Higher pay and improved working conditions in Mexico will reduce the incentive to move production to Mexico and increase the incentive to keep production facilities in Canada and the US. This will be beneficial for both Canadian and US economies and workers as there will be lower chance of them losing their jobs to their Mexican counterparts. Canada’s Minister of International Trade, Francois-Philippe Champagne, has said that the renegotiations should include chapters on environment, labour and gender equality. http://www.huffingtonpost.ca/2017/08/29/nafta-negotiations-francois-philippe-champagne-urges-calm-in-response-to-trumps-threats_a_23189418/ All of these will lead to improved human welfare and protection of the environment. As Canada and the US already maintain high standards, these chapters will be beneficial for their workers, citizens and economies.

Another sector that is exposed to NAFTA renegotiations is the Canadian dairy industry. The US may try to get concessions for easier entry into the protected Canadian dairy industry. https://beta.theglobeandmail.com/report-on-business/us-puts-contentious-nafta-auto-demands-on-the-table/article36583891/?ref=http://www.theglobeandmail.com& Also, the US proposed a ‘sunset clause’ that would automatically terminate NAFTA in five years unless it is approved by all three countries. It will adversely affect investments as businesses will be weary of long-term investments due to the uncertainty created by the clause. This has been opposed by both Canada and Mexico, and it is expected to make renegotiations more difficult.

There is always a possibility that NAFTA may be cancelled. As supply chain is deeply integrated among the three countries http://knowledge.wharton.upenn.edu/article/naftas-impact-u-s-economy-facts/, cancellation of NAFTA will hamper that chain and adversely affect Canadian and US manufacturers and workers. Jobs in Canada and the US that are dependent on exports to Mexico and job creation due to the treaty will also be adversely affected. https://www.cfr.org/backgrounder/naftas-economic-impact It is possible that Canada and the US may sign a new bilateral trade agreement while the US may impose tariffs on Mexico according to its WTO standard. http://www.huffingtonpost.ca/2017/08/24/what-happens-if-trump-cancels-nafta_a_23163682/ Also, there are talks that Canada and Mexico may remain in NAFTA even if the US leaves it. http://thehill.com/latino/356045-mexico-and-canada-to-stay-in-nafta-if-us-leaves-mexican-president  However, better working conditions and higher pay in Mexico, chapters on environment and gender equality will be beneficial not only for Mexico but also for Canada and the US for their workers, citizens, environment and the economy. Again, Canada and the US should address the challenges of increasing income inequality, increasing income constraint on the low-income and middle-class sections of the society, and workers adversely affected by globalization, trade deals, automation, etc. Finally, irrespective of the outcome of NAFTA renegotiations, Canada should explore new trading partners and deepen its trade with existing non-NAFTA trading partners while striving to expand its trade with the US and Mexico. http://www.globeinvestor.com/servlet/ArticleNews/story/GAM/20171014/RBCDNAFTAFEATURE

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