Jaffa Romain
Room 131
Mr.Woo
November 2, 2017
Canadian and International Law
CLN4U1
NAFTA Renegotiations:
Does a winner-takes-all mindset work?
NAFTA
The North American Free Trade Agreement is an agreement that was signed on October 7, 1992 by the President of the United States George H. W. Bush, Canadian Prime Minister Brian Mulroney, and Mexican President Carlos Salinas. The agreement was designed to create an effective free-trade bloc among Canada, the United States, and Mexico. It was thought that having a free-trade area in North America would mean increased trade and production, which would hopefully result in more jobs in Mexico, Canada, and the United States. After the agreement came into effect on January 1st, 1994, it gradually eliminated most tariffs and other trade barriers on products and services that passed between Mexico, Canada, and the U.S. NAFTA eventually created the largest free trade region in the world. After NAFTA was signed, Canada’s exports to the U.S markets soared (figure 1).
.Figure 1
Since the agreement was implemented, the North American economy has expanded; the combined GDP of Canada, Mexico and the U.S reached USD $20.7 trillion in 2015 (2017, Government of Canada). Regional trade increased from over the treaty’s two decades from roughly $290 billion in 1993 to more than $1.1 trillion in 2016 (2017, McBride and Sergie). Canada has also seen strong gains in cross-border investment since NAFTA was implemented.
The main provisions of the agreement include the gradual reduction of tariffs, customs duties, and other trade barriers between the 3 members of the agreement. Some tariffs were removed immediately, while some were removed over periods as long as fifteen years. Another provision is ensured eventual duty-free access to a large range of manufactured goods traded between the countries. Another provision is the “National Goods Status”. It is a status provided to products that are imported from other NAFTA countries. This bans any state, local, or provincial government from imposing taxes or tariffs on goods with this status. The agreement also contained provisions that aimed at securing intellectual-property rights. Canada, the U.S, and Mexico would have to adhere to rules protecting intellectual property and adopt strict measures against industrial theft. There are also provisions that are formal rules for resolving disputes between investors and the participating countries. These rules allowed corporations or investors to sue for compensation if a participating country violated the rules of the treaty.
Despite the agreement being overall successful in increasing imports and exports between the three countries, there has been criticism from the American government with current United States President, Donald Trump, threatening to pull out of the pact and even calling it “the worst trade deal in history”. Recently, on October 11, 2017, the fourth round of NAFTA talks ended in Arlington, Virginia. It was a long and heated round of negotiators from the U.S, Canada, and Mexico bringing proposals of new policies that could be added and what should be removed. The Trump administration’s main goal is to reduce the trade deficit ( making sure that the United States doesn’t import more than it exports. Before the NAFTA renegotiations, on July 17, 2017, The U.S Trade Representative’s Office released a list of 100 demands that were discussed by Trump’s inner circle. Some of the key demands include, reducing the U.S trade within NAFTA, scrapping NAFTA’s dispute-resolution panels, making it easier for U.S telecom companies and banks to operate in the other NAFTA countries, and making Mexican and Canadian intellectual-property rules more similar to rules found in U.S law. During the fourth round of renegotiations, The United states brought out protectionist policies such as “Buy American” policies in auto manufacturing, phasing out Canadian dairy supply management, scrapping NAFTA’s dispute-resolution system, and introducing a sunset clause (the new NAFTA would expire in 5 years unless the member countries agree to renew it) . The policies were later criticized by Canadian Foreign Affairs Minister Chrystia Freeland, who said the protectionist policies would “turn back the clock” on NAFTA, and that a “winner-take-all mindset” makes a deal impossible.
Canada’s main goal is to prevent the United States from adding on tariffs to goods that they’ve been trading though free trade for decades. Canada is also concerned about keeping NAFTA’s chapter 19 provision. This section of the agreement deals with the settlement process that allows all three countries to challenge any duties one country might add on certain imports. If a country imposes trade duties on another country that the other country thinks is unfair, the other country can appeal to an independent panel rather than seeking redress in the original country’s court. Another one of Canada’s goals is to overhaul chapter 11. In this provision, a country can sue another country if the country passes a law that would hurt the business of a corporation based in their country. If the country is sued, the case goes to arbitration by an ad-hoc panel of lawyers appointed by the NAFTA countries. Canada has faced more Chapter 11 lawsuits than any other country. Some critics say that this provision does risk conflict of interest with the lawyers appointed because of their business activities back home. Canada instead wants to set roster judges appointed by the NAFTA countries instead of ad hoc panels. Canada also seeks new additions to the agreement such as labour standards (Commitments with respect to labour standards should be brought into the core of the agreement, instead of being in a side agreement as is the case currently) , environmental standards( to include environmental standards within the core of the renegotiated NAFTA), chapters on gender and indigenous rights, and government procurement (freer trade and market access in relation to government procurement). With the fourth round of renegotiations, it is clear to see that the United States’ NAFTA demands are not reasonable or good from Canada’s perspective because of the negative economic effects it could have on Canada, trade dispute provisions demands that are in the United State’s favour, and the threat of privacy of Canadians.
Potential Economic Impact of Trump’s Demands
Since the introduction of NAFTA the economies of Canada, the US, and Mexico have become somewhat interdependent. Canada is the largest export market for American goods. About 20% of Canada’s national income comes from supplying goods and services to the U.S. market, and the U.S. receives about 76% of Canada’s total annual exports(2017, ScotiaBank)(Figure 2). Foreign trade represents about 53% of Canada’s GDP (2017, Kubursi). Canada-US trade is worth roughly one-third of Canada’s GDP, and it approaches close to 50 percent for some provinces (2017, Tombe) (Figure 3). Canada has a high dependence on the United States for imports and exports, but the same is not the same for the United States. This means that there is a lot at stake with trade in Canada.
The proposals that Trump’s administration has brought to the table during the NAFTA renegotiations could be a potential threat to the Canadian economy. Trump’s proposals are all about putting the U.S first, but what the U.S has to gain from these demands comes at a cost to Canada. For example, one demand that the United States presented at the fourth round of renegotiations was reducing the trade deficit within NAFTA. This could mean increasing U.S exports, or decreasing Canadian and Mexican imports. Another demand was to end Canada’s supply management regime for dairy and poultry products. Canada’s dairy, egg, and poultry industries are governed by a supply-management that dates back to the 1970’s. The system has three parts: fixed prices, production quotas, and tariffs to protect Canadian producers from foreign companies. On April 18, in Kenosha, Wisconsin, Trump vowed to challenge Ottawa on it's dairy policy and called it a “one-sided deal against the United States. During the NAFTA renegotiations, one of the demands of the U.S was to phase out all the tariffs associated with dairy and poultry supply management over 10 years. The supply-management system is effective in making sure that companies have the incentive of buying domestically from Canada instead of the United States, and introducing this new demand would change that. The dairy system in Canada means that government bailouts are not required, allows farmers to maintain farming without boom-bust cycles, and creates stability in rural communities.
One of Trump’s most contentious demands is the demands on auto manufacturing. The United States reportedly want at least 85 per cent North American content and 50% U.S. content in vehicles that can travel duty-free between the NAFTA countries. They also want the United States to be exempt from this rule. Tony Faria, co-director of the Office of Automotive and Vehicle Research at the University of Windsor, explained that these requirements would have an adverse effect on the Canadian auto sector. There would be a lot less auto manufacturing exports from canada. Carleton University international affairs professor called these proposals “bordering on ridiculous”, and explained that the auto sector would suffer greatly if vehicle manufacturers were to attempt to meet those requirements (2017, Vomiero). Experts also believe that if these content requirements were to be implemented, employment in Canada’s auto sector would also suffer. This proposal could be damaging towards Canada’s manufacturing sector, as Ontario’s auto sector export accounts for about 25% of the province’s annual revenue (figure 2). Trump’s goal is to have changes to NAFTA that would help the U.S economically, but in return, these could actually hurt the industries in Canada. Another example is Trump administration’s demand of a sunset clause. With this proposal, the agreement would be automatically terminated after five years, unless the three member countries agree to extend it. Canadian and Mexican officials opposed it, believing that this clause would cause economic instability and scare off long-term investors. With a trade deal, many investors look at the long term payback ( for example, 20-25 years). Creating a deal that expires every five years would create a level of uncertainty.
Figure 2
Figure 3
Dispute Demands
Throughout the negotiations, Trump has made it clear that the administration is only looking out for the best interest of America. All the demands and proposals made by the U.S all seem to be demands that would benefit the U.S. Not only did the U.S propose demands that would harm Canada economically, they also proposed trade dispute demands that might not directly affect Canada economically, but still puts Canada at a disadvantage.
One of the Trump Administration’s demands is removing the Chapter 19 provisions of the NAFTA agreement. This chapter focuses on trade feuds between governments. If a country imposes trade duties on another country that the other country thinks is unfair, the other country thinks is unfair, the other country can appeal to an independent panel rather than seeking redress in the original country’s courts. While Canada likes this chapter because it has used it to successfully challenge American duties on softwood lumber and other product, the Trump Administration opposes this chapter. They think that the independent panels are a violation of U.S sovereignty, and it wants the U.S courts to handle disputes. These goes against the whole point of the panels, as they are a part of this provision in order to prevent bias towards the original country. Having United States courts handle trade disputes would put Canada at an unfair advantage. Instead of having a neutral panel, there would be a panel all working for their sovereign state.
If Chapter 19 were to be removed from NAFTA, It would make it easier for the Trump administration to impose unwarranted antidumping (imposed protectionist tariff) and countervailing duties (anti-subsidy duties/trade import duties used to neutralize negative effects of subsidies) until the dispute is settled by the U.S court. This could mean losses and even shutting down businesses in some cases for Canadians. By 2016, only 1.3% of imports from Canada and Mexico were covered by U.S antidumping and countervailing duties. According to Chad Bown, senior fellow at the Washington-based Peterson Institute for International Economics, he predicts that “Trump’s barriers could more than quintuple the level of Canadian imports covered by the trade duties to 6.6%)”. He also states that Trump’s administration “could make U.S trade with Canada and Mexico much less free” (2017, Fournier). This could also mean the start of a trade war. With duties being imposed, there would be higher prices for products that come from Canada. Canada could possibly retaliate by imposing its own duties on U.S products imports. Overall, Canada would have more to lose than gain if this proposal was to be implemented.
Privacy of Canadians
With Canada being a resource-rich country, it relies heavily on trade for the country’s economy. More than a quarter of Canadian jobs are dependant on trade (4.7 million out of 17.8 million in 2014). Including indirect, trade-dependent employment, that number goes up to eight million, nearly half of Canadian jobs. With that being said, NAFTA is an agreement that leaves the lives of many Canadians either dependent on it, or heavily influenced.
One of the U.S demands is to end measures that would restrict cross-border data flows or require the use or installation of local computing facilities. This would cause issues for Canada when trying to shield private information such as health or financial data from foreign agencies. This would cause concern for many Canadians, as there could be a risk of their information being shared with the U.S. The U.S want there to be few restrictions on cross-border data transfers and want to ban data localization. Data localization allows the government to protect the sensitive information of Canadians by storing it in Canada. Compared to Canada, the U.S has less protections for data that people to non-U.S citizens and residents. This means that if data of a Canadian were to be stored in the U.S, it might be accessible to U.S authorities without suitable privacy protection. Also with the American Patriot Act, the FBI is able to access information on the country they see fit.
Conclusion
In conclusion, NAFTA is an agreement that still remains a political target. The current situation leaves the future of the treaty uncertain, with Trump constantly threatening to dismantle the treaty. The upcoming months of renegotiations of the agreement will show possible changes of the agreements that could either be positive or negative. In the past, the agreement had many successes and failures. It was successful in the significant increase of cross-border investment. The agreement also positive impact in the GDP’s of all the participating countries. 14 million jobs in the U.S now rely on trade with Canada and Mexico. In Canada, U.S and Mexican investments have tripled. Canada-U.S trade has also grown rapidly. (2017, McBride).
With the successes came some failures. For example, NAFTA increased the U.S trade deficit. There is a$181 billion trade deficit between the U.S and Canada and Mexico. U.S trade deficit has been 45% higher than with countries that do not have a free trade agreement with the U.S (2017, Wallach) It also never fulfilled its promise of fighting poverty. According the Economic Commission for Latin America, In Mexico, poverty stood at 52.4% in 1994, the poverty rate dropped to as low as 42.7% in 2006; but by 2012, it had risen again to 51.3%(2013, USA Today)(figure 4). NAFTA is also blamed by many for the decline in U.S manufacturing jobs. The auto sector in the U.S lost about 350 000 jobs since 1994.
The current renegotiation round happening has brought to light the policies that each country wants to change or remove. The Trump administration approached the renegotiation rounds with protectionist policies and “Buy American policies such as proposals for auto-manufacturing, phasing out Canadian dairy supply management, and getting rid of NAFTA’s dispute resolution system. The main focus for the U.S was the U.S trade deficit. On the other hand, Canada was concerned about keeping the chapter 19 provision, overhauling chapter 11, and having environmental standards, having chapters on gender and indigenous rights, and preventing the U.S from adding on tariffs to goods that they’ve been trading through free trade. After the negotiation rounds, the demands from the Trump administration were shown to be unreasonable towards Canada, as they could possibly negatively impact Canada’s economy, threaten the privacy of Canadians, and remove a provision that sometimes ruled in Canada’s favour.