4 business issues to watch in the upcoming NAFTA renegotiations

Posted by: Kaitlyn Mason on July 27, 2017

In this blog, our Economic Policy Analyst, Franco Terrazzano, unpackS what a renegotiated NAFTA may mean for business. When you’re done the blog, complete our five minute survey to let us know how a modernized NAFTA may impact your company.

Since Confederation in 1867, the North American Free Trade Agreement (NAFTA) may be the most important document that Canadian policymakers have ever signed. Since it came into effect in 1994, the North American economy has more than doubled, cross-border investments have skyrocketed, and trade between Canada, Mexico, and the U.S. has nearly quadrupled.

Businesses in Alberta have especially benefited from the Agreement. Alberta has become the second most-dependent province on the Agreement, sending 88% of our exports to either the United States or Mexico in 2015. 

But NAFTA has been much more than just an engine for economic growth. It has become the model for liberalized trade and peaceful cooperation for the rest of the world. 

All this could change come August 16, 2017 when the United States has declared the NAFTA negotiation period can officially begin. 

While the Trump administration announced its negotiating objectives, it is still largely unclear what a renegotiated NAFTA may mean for Canadians. Although cause for concern may be legitimate, a modernized and more liberalized NAFTA could provide benefits to our provincial economy.

Let’s look at some potential issues and where some improvements can be made.  

Issues to watch for 

Alberta has become the second most-dependent province on the Agreement, sending 88% of our exports to either the United States or Mexico in 2015.

While a softwood lumber agreement may be kept separate from NAFTA negotiations, how the U.S. has handled Canadian softwood lumber could foreshadow a new protectionist measure that may be introduced into the Agreement. The inclusion of “tariff snapback” provisions would allow a country to impose duties on imports that can be proven to seriously hurt their domestic businesses.  

Chapter 19 of NAFTA, which contains the dispute settlement mechanism may also be a target for the U.S. administration. This is the section that has allowed Canada to be successful in many softwood lumber disputes as well as other trade disagreements. If chapter 19 does end up on the negotiating table, any reforms could have serious implications for the North American trading relationship going forward. 

Negotiations will likely include country of origin rules. Specifically, how much North American, or strictly American, content is required to avoid tariffs on manufacturing goods. “Buy American” provisions may also limit Canadian businesses’ access to U.S. public projects. 

Rules around e-commerce may also be amended that could have a large impact on Canadian retailers. Canada currently has one of the most punitive duty systems in the world, taxing online purchases over $20. Compare this low limit with America’s $800 tax-free limit, and it’s easy to see why the U.S. may push to increase the value of tax-free foreign goods that Canadians can buy online.  

Is a renegotiated NAFTA all bad for Canadian businesses? 

Liberalizing trade in the mid-90s greatly benefited all three countries. But, of the two thousand pages of NAFTA, nearly half (~900 pages), are geared towards restricting trade.  

While there are certainly additions to NAFTA that may harm Canadian businesses, an updated, modernized, and liberalized NAFTA may not be all bad. With the Agreement being more than two decades old, and many aspects of commerce and international trade having changed since the mid-90s, modernization may be warranted.  

Many Canadian businesses may significantly benefit if changes are made that increase the ease of attaining visas. Currently, the number of jobs that are eligible for easy access to visas do not come close to covering the entire modern economy. Rather, the list of jobs eligible for easy access to visas reflects the types of jobs common in the early 90s. In fact, businesses have complained about the onerous paperwork associated with transferring workers between branches located across national borders.  

While the U.S. may not be looking (or able) to dismantle all Canadian dairy protections, a number of these barriers will likely be re-examined. Canada currently imposes a 270% tax on some foreign dairy products that enter Canada over our low quota allowance. Reducing these protections would not only benefit our trading partners, but many Albertans would benefit from lower prices, cheaper input costs, and perhaps greater access to foreign markets.  

Moving forward

NAFTA negotiations can begin as early as August 16, 2017. This two thousand page document has undoubtedly contributed to Canada’s prosperity over the last two decades.

As Agriculture and Agri-Foods Minister Lawrence MacAulay put it in his Chamber keynote address on July 13, 2017, where the Agreement isn’t broken, we shouldn’t try to fix it. However, expanding NAFTA to cover the entire modern economy could significantly benefit business in Alberta. 

Concerns have stemmed from the protectionist rhetoric from the U.S. presidential campaign. While it is true that President Trump has openly touted the benefits of certain protectionist policies – that would no doubt harm Canadians – President Trump’s number one priority is increasing

American jobs and competitiveness. No other agreement has done this better than NAFTA. Roughly 14 million American jobs are dependent on trade with Canada and Mexico.  

This is a message our policy leaders and negotiators must continue to echo. Trade is not a zero-sum game. Let’s not go into negotiations looking to leave as “winners.” Instead, by identifying and addressing current restrictions on trade and labour mobility, we can all be made better off.

How may a modernized NAFTA impact your business?

Take our five minute survey to let us know.

NAFTA survey

Franco Terrazzano is an Economic Policy Analyst at the Calgary Chamber.