The NAFTA issues your business should know about: An update on the negotiations

Posted by: Alycia Lowdon on November 30, 2017

Since Confederation in 1867, the North American Free Trade Agreement (NAFTA) may be the most important economic document that Canadian policymakers have ever signed. Since NAFTA came into effect in 1994, the North American economy has more than doubled, cross-border investments have significantly increased, and trade between Canada, Mexico, and the U.S. has nearly quadrupled. Alberta businesses have especially benefitted, sending 88% of exports to either the United States or Mexico.

While there remains a large degree of uncertainty, here are some of the issues – both concerning, and positive – that have arisen throughout the negotiations that your business should know about.

Areas of Concern

The fifth round of negotiations concluded on November 21, 2017 with many of the more controversial issues yet to be resolved. Below are some of the issues your business should be aware of:

Rules of origin – The United States has proposed changes to country of origin content, specifically for the automobile sector. For example, there is a proposal to increase the minimum amount of parts made in the USA (referred to as regional content) needed in auto manufacturing to 85% from 62.5%. This could significantly increase costs and disrupt supply chains.

Government Procurement – Proposals have been made to limit businesses in other countries from accessing government contracts. Specifically, a United States stated negotiating objective is to limit Canadian and Mexican businesses to one dollar in public contracts for every dollar American businesses receive in those countries.

Eliminating NAFTA’s dispute settlement mechanism Included within the United States Trade Representative’s (USTR) most recently published objectives is the goal to “eliminate (the) Chapter 19 dispute settlement mechanism.” This mechanism has allowed Canada to be successful in many trade disputes, including the disagreements over softwood lumber. Any reforms could have serious implications for the North American trading relationship going forward.

Addressing trade imbalances or trade deficits – Trade deficits, where the value of imports exceeds the value of exports, have fuelled much of the U.S. protectionist rhetoric. While the word “deficit” insinuates a negative outcome, there is little evidence to suggest trade deficits are inherently damaging, as they tend to lead to greater investment into the domestic economy. The measures proposed to address trade deficits such as quotas or tariffs would, however, harm businesses in North America.

Positive Developments

While the controversial issues tend to receive the most coverage, there appears to be progress being made. Although negotiations remain closed to the public, sources have reported progress in areas of digital trade, agriculture, livestock and food safety measures, telecommunications trade, and customs enforcement. Below are other positive developments that your business should be aware of.

American pro-NAFTA sentiments – Particularly helpful to the free-trade cause is that many states that support President Trump have industries and workers that greatly benefit from trade with Canada and Mexico. According to the United States Chamber of Commerce’s recent projections, the 12 States that would suffer the most from a U.S. withdrawal voted for President Trump. Groups such as the Alliance of Automobile Manufacturers, the Driving American Jobs Campaign, along with Democratic and Republican members of the House of Representatives have all increased their pro-NAFTA advocacy as of late.

Reductions in regulatory barriers to trade – Particularly positive for Canadian businesses is the USTR’s objectives to reduce regulatory barriers to trade. According to the most recent USTR negotiating objectives, the U.S. seeks to “obtain commitments that can facilitate market access and promote greater compatibility among U.S., Canadian, and Mexican regulations.” Specifically, the U.S. is looking to improve regulatory cooperation in sectors including pharmaceuticals, medical devices, cosmetics, information and communication technology, processed foods and beverages, and chemicals, along with areas such as energy efficiency. The Chamber urges Canadian policymakers to continue to work with our NAFTA partners to promote further regulatory harmonization.

U.S. willingness to step back from original Sunset (termination) clause – The U.S. originally suggested NAFTA should expire every five years unless all three countries agree to an extension, referred to as the “sunset clause.” They have since stepped back from this proposal, and are asking for NAFTA to undergo assessments at regular intervals. While a review mechanism would still be bad for businesses and investors by increasing uncertainty, it does illustrate some willingness from the U.S. to step back from controversial proposals.

End to Canadian Supply Management – Certain demands being made by the U.S. could actually benefit the Canadian economy. For example, the most recent publication of the USTR’s objectives calls for the elimination of Canadian tariffs on imports of dairy, poultry, and egg products. Conceding, even partially, to this U.S. request could benefit Canadians by lowering domestic prices, increasing product variety, and reducing input costs.

Terminating NAFTA is unlikely without support in Congress – While President Trump has threatened to withdraw the U.S from NAFTA, there is evidence to suggest that the President would need support from Congress.

Technically, the President can sign an executive order giving six months notice to Canada and Mexico of withdrawal. After six months, the Agreement may no longer be in effect in terms of international law, but NAFTA would remain within the underlying American domestic framework. This is because the United States Constitution grants Congress the power to regulate trade with foreign nations, and impose duties. Congress may push back on any presidential decision to withdraw from NAFTA as Congressmen will be sensitive to job and business losses in their districts. While uncertainty remains, if President Trump tries to withdraw unilaterally, litigation in U.S. courts could ensue.

For more information, you can watch a short video, or read this in-depth discussion-paper.

Going Forward

There has been a lot of negative coverage coming from the NAFTA negotiations as the U.S. Administration continues to promote protectionist rhetoric, and make proposals that would negatively impact the Canadian economy.

But there is still reason to believe a positive outcome can materialize. Moving forward, Canadian policymakers must continue to work with strategic groups in the United States illustrating the economic benefits of NAFTA.