Renegotiating NAFTA: The Future of Trade Between Canada and the United States

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As the fourth round of NAFTA re-negotiations transition on, animosity between the sides and uncertainty regarding the future of trade in North America remain fully apparent and in focus. As some of the more minor stipulations of the deal get hashed out, the major points of discussion remain on the table without any sign of resolution. For Canada, a favourable outcome regarding trade negations are imperative, given the reality of being an export based commodity rich nation with a major reliance on consumption from US markets. The deterioration of NAFTA will not per say halt trade entirely, or foreseeably prevent the transport of goods to market. However, the outcome of the upcoming rounds of talks will have major ramifications on the accessibility, competitiveness and price of goods flowing between the Canada-US border. The retention of NAFTA in its current form is not necessary, but a favourable deal regarding Canadian exports and labour is. It is important that Canadian interests are protected while not receiving an unfavourable outcome from the protectionist Trump administration.

The current construct of trade parameters in North America are mainly dictated by the North American Free Trade Agreement. NAFTA was an agreement which was seen as controversial when it was first introduced – with modern reinvigorated criticism arising from the ascendency of Donald Trump to the presidency. NAFTA was branded as a new age trade deal which would cheapen the price of goods and allow for diverse and versatile market accessibility throughout North America. Given the multi-faceted reality of NAFTA and its impact on various sectors and levels of the North American economy and movement of goods and labour, it is difficult to ascribe general criticisms of the deal in its entirety. NAFTA was good for some and bad others. But in terms of labour (particularly manufacturing), the deal has historically accumulated a significant amount of controversy.

From and American point of view, NAFTA was first sold with the assumption that it would appeal to a growing consumption base in Mexico – the thought being that opening up to a broader market without tariffs would enhance American production and out-compete Asian competitors. This was supposed enhance production, and therefore enhance the amount of jobs available. The Clinton administration framed the benefits of the agreements in this way before it was voted upon in the House of Representatives. However, things did not occur as advertised, as a great deal of labour was sucked out of the United States and transferred to Mexico to be performed at cheaper wages. Mexico lacked (and still lacks) the purchasing power to fulfill the lofty consumption goals promised by the initial onset of the deal. Instead, a sizable bulk of US exports go to Mexico, where they are assembled in American owned factories and then imported back to America as finished goods. Capital goods sold to US factories are also a major source of US exports. As it stands now, a great deal of US exports to Mexico do not reflect Mexican purchasing power, but instead benefit outsourcing and the need to maintain cheap labour costs.

The nature of the NAFTA agreement, along with Mexico’s abysmal labour laws, allow US companies to pay their Mexican workers extremely low and barely livable wages. The existence of shanty towns and slums surrounding foreign factories in Mexico had been the norm up to that point, and NAFTA allowed this scenario to be further exacerbated. Despite being hailed as an emerging market with a plethora of growth and consumption potential, Mexico’s GDP per capita has grown substantially slower than the other NAFTA participants (24%, compared to 39.3% and 40.3% between 1993 and 2015). This lack of comparative growth from a percentage basis is astonishing considering Mexico’s low GDP per capita to begin with in the early nineties. The idea of NAFTA being a facilitator to an emerging Mexican market was an obfuscated selling point by the politicians who presented this idea. What instead occurred was an opportunity presented for US companies to continue to move production to Mexico and exploit weak labour laws and produce their goods for a fraction of the cost. Despite the lack of economic growth, today Mexico possesses a $60 billion positive trade imbalance with the Untied States.

Watch as Ross Perot debates Vice President Al Gore on NAFTA in 1993

Despite heavy criticism, in some ways NAFTA was a success. With the elimination of tariffs and barriers, goods are now able to flow across borders at much higher rates and quantities. Commerce across the continent increased, totalling roughly a trillion dollars in tri-lateral trade (an increase of 125% when adjusted for inflation).

The results of NAFTA on Canada were mixed, and did not meet the promises in which the deal was initially purported to represent. Despite some benefit, there were a number of areas in which Canada did not experience overall success – due primarily to aspects of the deal itself, as well existing economic conditions. In the first 9 years of the deal, Canadian employment grew 19% (2.7 million jobs) –  but over half of these jobs were not full time. Also, the dramatic increase in jobs during this period was weighted against the losses which were incurred earlier by the Canada United States Free Trade Agreement (CUSFTA) and the recession of the early nineties. During the time leading up to NAFTA, Canadian manufacturing dropped by 17 percent, and the unemployment rate was 11%. Realistically the job gains during NAFTA were more so relevant to gradual recovery occurring in a new concurrent operating framework, rather than being directly connected to the new trade agreement itself. This however does not discount the presence of the deal itself in fostering new economic realities. Many new jobs in Canada were in fact created, but as previously stated, a majority of the jobs were part- time and lacked sufficient benefits. There were sufficient gains in white collar jobs because of NAFTA, but it was disproportionate to the lack of full time employment available in blue collar manufacturing sectors.

From a macro-economical perspective, despite some downsides and an $11 billion negative trade deficit with the United States, NAFTA has not been devastating for Canada. But given the recent political realignment in the United States and its focus on trade, the future of commerce on the continent remains in limbo. Any change to the status quo will have unpredictable ramifications for the Canadian economy going forward. There have been three areas of trade which have brought both concern and potential opportunity for Canadian negotiators: dairy, auto and lumber.

Canada utilizes supply management polices for its milk, cheese, eggs, chickens and turkeys. The prices of these goods are regulated, with tariffs being placed on competing imported products. The tariffs range from 168% for eggs, 285% for chicken, 246% for cheese and 300% for butter. A small foreign import quota exists for cheese and yogurt. The purpose of this policy is to protect Canadian farmers in certain sectors from fluctuations in prices, avoid over production and waste, and prevent undercutting from foreign competition. The Trump administration wants to effectively end this supply management system by demanding an end to tariffs on dairy products in particular. Doing so will impact Canadian dairy famers by subjecting them to free market exposure. The consumer will benefit from this because of the potential for lower prices among many staple food products. The end of supply management would be a fair imposition of competition on Canadian farming, however sudden competition from American dairy products creates serious problems for stability. Ending supply management, despite creating more flexibility and more choice for consumers, could hinder Canadian dairy farmers by causing them to over produce and hurt their bottom line – something which could have negative ripples throughout the entire sector.

The auto sector may also receive a major overhaul in the aftermath NAFTA renegotiations. The automobile industry is one area which has been the source of many criticisms towards NAFTA, particularly because of job losses in both America and Canada. As it currently stands, Mexico possesses 50% of auto production with only 8% of the buying market. Canada has not gained from the deal, as it has lost four plants since the enactment of NAFTA, while not gaining anything from an increase in production of automobiles on the continent as a whole. Going forward, the Trump administration has proposed a new issuance on quotas for North American produced cars – an 85% North American content requirement, with a 50% United States requirement. The problem with altering these rules is that it could create a scenario where an increase in the cost of production would entice automakers to forgo producing in North America all together. If the rules are not proposed in the right way, auto companies may just pay whatever tariffs are imposed on non-North American produced parts, so long as they can produce them for cheaper somewhere else. If done properly, the Canadian auto part sector could gain from higher quotas. But an incorrect approach could lead to more outsourcing and further job loss. From a consumption perspective, the quotas could mean higher purchasing costs for North American vehicles, and possibly tariffs on imported cars to make up for the difference.

Softwood lumber has always been a contentious issue between Canada and the United States. Canada has exported lumber to the Untied States dating back to the 1800’s, and trade of this commodity has led to a number of historical disputes – with the first tariffs dating back to the nineteen thirties. Lumber is one area which NAFTA does not mandate. Despite this, negotiations regarding the industry are occurring parallel to NAFTA talks, given the absence of a current US-Canada lumber agreement (the latest one expiring in 2015). Although the Untied States has always utilized its own lumber, constant growth and development have forced them to buy substantial amounts from Canada to meet growing demands. Currently the two government seem content on a 30 percent supply of Canadian lumber exports, a number that falls nicely within historical precedent. However, the main issue facing Canadian exporters is the ability to gain increased market access beyond the cap during a boom economy and an increase in demand for lumber. Constructing a hot market provision for substantial future increases in demand would avoid gap filling from other export markets such as Germany, Sweden, Chile, Brazil and Russia. Increasing quotas during boom time means an increase in exports and a rise in prices to American buyers, so securing this provision remains an important priority for Canadian negotiators to attain on behalf of the softwood lumber industry.

Criticism has weighed heavy on Canadian negotiators in their ability to strike out an appropriate agreement during this arduous process. The Conservative official opposition has made their concerns clear on the Trudeau government’s ability to foster success throughout the negotiations. In a recent memo, former Prime Minister Steven Harper expressed his concern with the way the government was handling the negotiations. He didn’t like the way negotiators were too quick to turn down US proposals, how they have asserted negotiating alongside Mexico, and how they have pushed forward the cause of promoting progressive policies during the negotiations – concerning labour, gender, aboriginal and environmental issues. The government responded to this by claiming Harper’s memo gives major negotiating leverage to US negotiators, and that his major argument merely consists of making unfettered concessions to the Americans.

As NAFTA and general trade negotiations continue, questions regarding the future of trade in North American remain unanswered. A large task remains in place to ensure that Canadian exports do not become compromised by the Trump administrations nationalist trade agenda. Any decisions made need to be carefully considered and undergo serious cost assessment. Realistically, Canada and the US have always been major trading partners and will continue to be going forward, as a consistent reliance on one another will remain a constant reality. However, this does not discount the need to construct deals which not only protect Canadian industries, but also capitalize upon the opportunities created by a new North American trade environment going forward. The death of NAFTA in its current form may open the door to new age trade connections which foster realistic benefits to the North American economy and continental commerce as a whole.

This interview of  US Secretary of Commerce Wilbur Ross by former Canadian Minister of Industry James Moore highlights many of the positions the US is taking during negotiations.

 

Sources and References: 

http://www.investopedia.com/articles/economics/08/north-american-free-trade-agreement.asp

http://www.macleans.ca/general/the-25000-cow/

http://kitchener.ctvnews.ca/nafta-talks-u-s-seeks-end-to-canada-s-supply-management-system-1.3634649

https://www.thestar.com/business/2017/08/16/auto-industry-might-drive-nafta-talks-early-indications-suggest.html

https://www.thestar.com/opinion/commentary/2017/09/28/the-truth-is-nafta-has-damaged-canadas-auto-industry.html

https://www.thestar.com/business/economy/2017/09/22/canada-nervous-about-us-nafta-proposal-on-auto-content.html

http://www.cbc.ca/news/canada/windsor/u-s-nafta-demands-could-hurt-windsor-essex-auto-industry-says-weedc-ceo-1.4356426

https://globalnews.ca/news/3640579/canada-u-s-closing-in-on-softwood-lumber-deal-but-foreign-wood-a-sticking-point/

https://beta.theglobeandmail.com/news/british-columbia/tension-over-timber-a-primer-on-canada-us-softwood-lumber-trade/article34942091/?ref=http://www.theglobeandmail.com&

http://policyalternatives.ca/sites/default/files/uploads/publications/National_Office_Pubs/lessons_from_nafta.pdf

http://nationalpost.com/news/politics/napping-on-nafta-harper-blasts-trudeau-government-handling-of-negotiations

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