In the last few days, a number of Canadians have asked me what the renegotiation of the North American Free Trade Agreement might mean for Canada.
Donald Trump has been very critical of the more than two-decade old trade deal involving the US, Mexico and Canada, and has proposed to renegotiate its terms. We know that Trump is obviously not happy with America’s trade relations with Mexico, but less often, if at all, discussed is what this could mean for future relations with Canada. Part of the reason for this is that by and large the trade across the long border between the U.S. and Canada is untroubled, moving at a pace of about $2 billion a day in both directions, in about equal amounts. Canada is America's second largest trading partner; Mexico is third with about 10% less trade volume than US-Canada trade. One difference is that U.S.-Canada trade is closer to being in balance. The U.S. deficit with Canada is about $15 billion, and with Mexico is about $50 billion.
In the years leading up to last year’s US presidential election, NAFTA was accused of being a major reason for the erosion of the middle class American jobs and downward pressure on U.S. wages. In 1992, presidential candidate Ross Perot referred to U.S. job losses as a “giant sucking sound going south.” This made a strong sound bite, but most of those jobs would have disappeared or gone elsewhere, anyway, either being lost due to automation (a much greater cause of job loss) or to other lower-wage countries.
These concerns had little or nothing to do with Canada, but our northern neighbor has nevertheless been caught in the call for renegotiating NAFTA since it’s part of the three-country trade deal. The question now is what is in store for U.S.-Canada trade under a Trump administration?
One likely target is auto parts from other countries, particularly China. A likely demand will be to make sure they do not get incorporated into cars that get duty free entry under NAFTA. The charge is that the rules for inclusion of non-NAFTA content in North American trade are too loose. So expect them to be tightened. Since the tougher foreign content rules would apply both to imports from Mexico and Canada, this could affect Canadian production to some extent because sourcing has become global in the auto industry. Each auto company will have to figure out how limiting sourcing of components from outside North America affects its production.
The Trump Administration has also accused foreign countries of taking away American jobs by manipulating the value of their currencies to gain a competitive advantage. A renegotiation of NAFTA could very well address this issue, but it likely won’t impact Canada because Canada is not being accused of manipulating the value of its currency, the Canadian Dollar.
While most trade is open between Canada and the United States, there are exceptions, and U.S. and Canadian businesses will want to see some adjustments made. As renegotiation of NAFTA gets under way, the following are some of the issues that will undoubtedly arise:
The U.S. will likely ask for a reduction of Canadian protection against dairy, poultry and egg imports. This is a longstanding issue. U.S. farmers believe that they could sell a lot more of these products in Canada if Canadian import restrictions were eased. Another burden on American business is that Canadian courts have been invalidating patents years after they were issued, although the products covered by the patents have been marketed in Canada for a long time and proved their value to Canadian consumers. This is particularly true of pharmaceuticals, but affects other products as well. Canada could be asked to legislate a solution to this problem to be fairer in determining that a patent holder has proved the usefulness of its product and should retain protection of its intellectual property.
Another longstanding issue is the restrictiveness of provincial authorities in allowing beer, wine and spirits from outside the province to be marketed in provincial liquor stores.
A new issue is Canada's considering a requirement that storage facilities for cloud data be located within Canada. A number of countries are considering requiring localization of data storage in the name of national security or privacy, but it is simply impractical for any international business to store company data in each place where it operates. This is a new and growing issue.
Most obvious to everyone as a barrier to U.S. trade is the imbalance in the amount that of goods that Canada allows its citizens coming back from visiting the U.S. to bring in duty-free compared with the duty-free allowance for Americans returning to the U.S. from Canada. This measure would be popular among Canadian tourists and be good for U.S. retailers. For the same reason, parity in the amount that can be shipped in small parcels going north as well as south is a likely as a U.S. ask.
The list of Canadian negotiating objectives will grow as Canadian officials hear from their domestic industries and agriculture about what America can do to be more open to Canadian goods and services. For instance, as the US takes steps to invest heavily on American infrastructure, Canadian companies will want to be able to bid without being subject to discrimination on contracts. There may be additional requests for free access to the U.S. market for energy, although the largest ask seems to have already been met by the Trump Administration beginning to approve pipeline construction that had been held up during the Obama years.
Besides lists of specific private sector matters, there will also be recognition on the part of the two governments that the needs of international trade have evolved substantially since NAFTA went into force 23 years ago. High on that list will be addressing the needs of the digital economy that did not exist when NAFTA was written. There will be other areas in which both countries will want to put into place provisions, such as rules governing commercial competition from state-owned enterprises, that are not as relevant to North American trade as they are to setting a standard for future trade agreements with other countries. Since both U.S. and Canadian trade negotiators just finished extensive negotiations in the stillborn Trans Pacific Partnership (TPP) agreement, they have some thirty chapters of rules and trade commitments to draw on as models with which to modernize NAFTA..
Lastly, there may be large trade issues – such as the current investigation of Canadian provincial subsidies for softwood lumber and complaints about restrictions on the export of logs, the settlement of which could get folded into a NAFTA negotiation.
Although just two months ago, renegotiation of NAFTA was not on either country’s agenda, it is now at the top of the list of bilateral trade negotiations priorities. Chances are that the negotiations will be long and very detailed. A once in a generation trade negotiation is an opportunity to address the full range of remaining barriers and trade and investment concerns that each of our two countries has with the other.
The U.S. Canadian relationship is strong and positive. There is always room for improvement, and the results can be very good for the economies of both countries.
Alan Wm. Wolff is a Senior Counsel at Dentons and Chairman of the Board of the National Foreign Trade Council (NFTC). He was a senior trade negotiator in both Republican and Democratic administrations.