NAFTA, Trump and Canada: A guide to the trade file and what it could mean for you
For more than 20 years, NAFTA has tied the continent's economy together. Now, Washington wants to give the trade deal a massive overhaul. Get caught up on The Globe's latest coverage of the trade talks and what's at stake
Trade: Where we are right now
- “NAFTA is a bad joke,” U.S. President Donald Trump declared on Twitter Thursday morning, and he threatened to link the trade agreement to his promised wall on the Mexican border.
- In response, the Mexican Foreign Ministry reiterated that Mexico would not pay for the border wall “under any circumstances,” and that it would not negotiate NAFTA via social media.
- Mr. Trump has recently repeated his threats to “terminate” the North American free-trade agreement if necessary, though in an interview with The Wall Street Journal last week, he said renegotiations are “moving along nicely.”
- Mr. Trump also suggested letting talks continue after Mexico’s July 1 election, which Canadian Foreign Affairs Minister Chrystia Freeland, speaking last week, called a “sensible suggestion.”
- The next round of NAFTA talks is coming to Montreal on Jan. 23-28. One of the worst points of contention is auto manufacturing, where the U.S. wants strict “Buy American” rules. Canada is crafting a compromise that would boost the amount of North American-made content in vehicles manufactured in the NAFTA zone, sources have told The Globe and Mail.
- Meanwhile, Canada is taking its fight against U.S. trade rules to the World Trade Organization, issuing a 32-page complaint that alleges Washington’s anti-dumping and anti-subsidy duties are flouting the rules of global commerce. The complaint was issued in December but made public on Jan. 10, after the U.S. slapped new countervailing duties on Canadian newsprint.
- U.S. Trade Representative Robert Lighthizer called Canada’s WTO complaint “an ill-advised attack” that might “reduce U.S. confidence that Canada is committed to mutually beneficial trade.”
What is NAFTA?
The 1994 agreement – an expanded version of a Canada-U.S. free-trade deal from 1988 – created what was then the biggest free-trade area in the world. It removed barriers to the flow of goods and labour between Canada, the United States and Mexico, under the oversight of an independent dispute-settlement process.
Canada – the world's largest purchaser of U.S. goods – saw its exports to U.S. markets soar. The Americans are less dependent on NAFTA than Canada is, The Globe's Steven Chase explains: Trevor Tombe, a University of Calgary economist, calculates that there are only two American states – Michigan and Vermont – where trade with Canada exceeds 10 per cent of their annual economic output.
What has NAFTA done for us? Four views from three countries:
Why change NAFTA?
The politics of free trade have undergone a remarkable U-turn since NAFTA, and the FTA before it, came into being.
In 1988, Canada had a Progressive Conservative prime minister, Brian Mulroney, who fought an election over the Canada-U.S. trade deal with the Liberals opposing it. He also had pro-free-trade Republican allies in the White House, with Ronald Reagan and later George H.W. Bush, backing him up.
Contrast that with 2016, when protectionism turned into a defining theme of the U.S. election. Both presidential candidates opposed the Trans-Pacific Partnership, a trade deal even bigger than NAFTA, but the Republican Mr. Trump also singled out NAFTA and promised to erect a wall along the U.S.-Mexico border. In his inauguration speech, Mr. Trump promised an "America first" attitude to trade, immigration and foreign affairs.
What does Trump want a new NAFTA to look like?
In its initial months, Mr. Trump's inner circle strongly disagreed about what demands to make in NAFTA renegotiations. There was a moderate camp, including Treasury Secretary Steve Mnuchin and Mr. Trump's son-in-law Jared Kushner, that wanted to enhance NAFTA and make cross-border business easier for corporations, and a protectionist camp, including former chief strategist Steven Bannon.
- Reducing the U.S. trade deficit within NAFTA, which could mean increasing U.S. exports or reducing Canadian and Mexican imports.
- Scrapping NAFTA’s dispute-resolution panels, which have sometimes ruled in Canada’s favour on softwood lumber and other trade issues.
- Making it easier for U.S. telecom companies and banks to operate in the other NAFTA countries.
- Opening up more Canadian or Mexican government contracts to U.S. companies.
- Using “Buy American” provisions to bar Canadian or Mexican firms from seeking U.S. government contracts.
- Making Canadian and Mexican intellectual-property rules more “similar to that found in U.S. law.”
The Trump administration's most contentious NAFTA demands began to take shape at the fourth round of talks in Arlington, Va. Demands include:
- Auto manufacturing: The Americans reportedly want at least 85 per cent North American content and 50 per cent U.S. content in vehicles that can travel duty-free between the NAFTA countries – a rule they want U.S. manufacturers exempted from. Currently, vehicles have to have 62.5 per cent North American content to be duty-free, but it can come from any of the three countries.
- Dairy: The U.S. wants an end to Canada’s supply-management regime for dairy and poultry products.
- Sunset clause: The U.S. wants the new NAFTA to expire in five years unless the member countries agree to renew it.
But at the same time, players knowledgeable about the NAFTA talks told The Globe that the Canadian side has been unclear what the mercurial Mr. Trump actually wants, whether he will sign a deal or whether the U.S. demands are meant to provoke Canada or Mexico to abandon the deal first. Other officials said U.S. Trade Representative Robert Lighthizer and Commerce Secretary Wilbur Ross were jockeying for position and competing to please a constituency of one – Mr. Trump – and this was hindering actual negotiations.
Canada's contentious trade issues
Dairy supply management
Canada's dairy, egg and poultry industries are governed by a supply-management system that dates back to the 1970s. It has three parts, The Globe's Barrie McKenna explains: Fixed prices, production quotas and tariffs to protect Canadian producers from foreign competition. The dairy tariffs – which run up to 270 per cent, and which Canada tightened in 2016 to include unfiltered milk products used to make cheese and yogurt – have been a thorn in the side of other dairy-producing nations like the United States, Australia and New Zealand.
Mr. Trump's interest in the dairy file began with events in Wisconsin, a major dairy-producing state, The Globe's Joanna Slater explains. Local processor Grasslands Dairy Products Inc. wrote a letter to Wisconsin farmers recently saying it would stop buying the farmers' milk because of new Canadian classification rules for a product used in cheese making, which would give companies an incentive to buy domestically instead of from the United States. A letter-writing campaign to Mr. Trump – who narrowly won the state in the 2016 election – and congressional efforts by Wisconsinite House Speaker Paul Ryan made the dispute into a national issue, and at an April 18 event in Kenosha, Wisc., the President vowed to challenge Ottawa on its dairy policy:
In Canada, some very unfair things have happened to our dairy farmers, and others, and we're going to start working on that. It's another typical one-sided deal against the United States.
In the months that followed, the Trudeau administration spoke in strong defence of Canada's dairy and poultry sectors. Then, in the fourth round of NAFTA renegotiation talks, the Trump administration put its demands on the table: Phase out all tariffs associated with dairy and poultry supply management over 10 years. Canadian negotiators flatly rejected the demand, according to sources familiar with the talks.
Feuds over softwood lumber have been a recurring part of Canada-U.S. relations since the 1980s. Their root cause is U.S. industry's contention that Canada unfairly subsidizes its lumber by providing cheap access to public land. It's led to a cycle of American punitive action, followed by trade cases mostly won by Canada, and then a compromise settlement.
The fifth and most recent lumber war was set off on April 24, when U.S. Commerce Secretary Wilbur Ross said his agency would impose new anti-subsidy duties on Canadian softwood. The initial duties added up to about 20 per cent, but a second wave of anti-dumping duties in late June brought that total to about 27 per cent. The U.S. International Trade Commission upheld the duties in a unanimous final ruling on Dec. 7, arguing that Canadian shipments of softwood lumber were hurting American producers.
The Trudeau cabinet discussed an aid package for the softwood industry in May, but waited for provincial input from a special working group before announcing $867-million in aid on June 1. Ottawa gave the industry loan guarantees, help finding new markets for its products, employment-insurance support for workers and money for new initiatives from Indigenous forestry producers.
Chapter 11 vs. Chapter 19
Two of NAFTA's dispute-resolution mechanisms are being targeted for major changes. How is Chapter 11 different from Chapter 19? Here are the basics.
Chapter 11: Government vs. businesses
Imagine a scenario where Country A passes a law that a corporation based in Country B feels would hurt its business. If Country B Inc. sues Country A's government, the case goes to arbitration by an ad-hoc panel of lawyers appointed by the NAFTA countries, in a process set out in NAFTA's Chapter 11. The idea is that these panels would be more independent than if the case were settled by Country A's courts. But critics say the lawyers appointed to these panels risk conflicts of interest because of their business activities back home.
Canada has faced more Chapter 11 lawsuits than any other country – about 40 so far – most of which challenge its environmental protections and natural-resource policies. A 2015 study by the Canadian Centre for Policy Alternatives found Canada was the target of more than 70 per cent of all NAFTA investor-state claims since 2005, and study author Scott Sinclair warned that the problem was getting worse:
Canada has now been sued more times through investor-state dispute settlement than any other developed country in the world.
One of Canada's goals in the NAFTA renegotiations is to overhaul Chapter 11 so that, instead of ad hoc panels, there would be set rosters of judges appointed by the NAFTA countries.
Chapter 19: Government vs. government
Whereas Chapter 11 lays out how companies can sue governments, Chapter 19 is for trade feuds between governments. If Country A imposes trade duties on Country B that B's government thinks are unfair, B can appeal to an independent panel rather than seeking redress in Country A's courts, which could presumably be biased in Country A's favour.
Canada likes this arrangement because it has used it to successfully challenge American duties on softwood lumber and other products. But the Trump administration thinks the independent panels are a violation of U.S. sovereignty, and it wants U.S. courts to handle trade disputes.
In July, a senior official told The Globe that scrapping the independent panels is a "red line" Canada will not cross, and the Trudeau government would walk away from NAFTA talks if the U.S. won't budge. Mr. Trudeau wouldn't confirm the part about potentially walking away, but said he considers the panels "essential" to a new deal.
While Canada and the United States have been at odds at the NAFTA table, two of their major plane manufacturers have been fighting a trade war of their own.
U.S. plane maker Boeing accused its Quebec-based rival Bombardier of benefiting from unfair Canadian and British government subsidies that let it sell its C Series planes at cut-rate prices. Boeing asked the Trump administration for help, and in September the U.S. Commerce Department obliged, imposing a series of tariffs much higher than Boeing had asked for: nearly 300 per cent on C Series imports. The Trudeau administration and Theresa May's government in the U.K. condemned the decision.
On Oct. 16, Bombardier took a dramatic step to try resolving the dispute: It announced a deal to sell the C Series division to Airbus, a European aerospace firm that has a manufacturing plant in Alabama. Bombardier's CEO hopes that assembling the planes in the United States would avoid the U.S. duties.
What about Mexico?
Building barriers (both physical and economic) with Mexico has been Mr. Trump's stated goal since he began running for president; in the 2015 speech announcing his campaign (the one where he said "rapists" and criminals were coming across the U.S.-Mexico border), he said Mexicans were "laughing at us" and "killing us economically." Now that Mr. Trump is president, Mexican President Enrique Pena Nieto is in a tight spot. He is facing domestic pressure to stand up to Washington about the wall that Mr. Trump wants Mexico to pay for, which Mexico refuses to do. But Mr. Pena Nieto also has to avoid alienating a major trading partner and being shut out of the new North American trade regime.
Major trade issues for Mexico in the NAFTA talks include:
- Energy: Mexico’s energy market has undergone major free-market reforms in recent years, making it a lucrative target for U.S. and Canadian energy companies. Ottawa and Washington would want to see that liberalization cemented in a new NAFTA, Globe energy reporter Shawn McCarthy explains.
- Auto manufacturing: The spectre of U.S. auto makers moving assembly plants to Mexico was a frequent target of Mr. Trump’s election speeches in 2016. The Trump administration’s proposed changes to “rules of origin” would have a big impact on auto manufacturers by redefining which products can be shipped duty-free across borders, based on where their component parts come from.
- Sugar: Under NAFTA, Mexico’s sugar producers have free access to the U.S. market, but U.S. refiners accuse Mexico of subsidizing its industry and hurting American business. The nations reportedly reached a deal on the issue in June, averting a messy escalation of duties on Mexican sugar and American high-fructose corn syrup.
Who's deciding NAFTA's future?
Here's some more reading on key people to watch on the trade file.
The Canadian side:
- Chrystia Freeland, Foreign Affairs Minister
- François-Philippe Champagne, International Trade Minister
- Steve Verheul, chief NAFTA negotiator
- David MacNaughton, Canadian ambassador to the U.S.
- Bipartisan advisory panel that includes former Conservative and NDP politicians, the head of the Assembly of First Nations, business leaders and labour organizers
The American side:
- Robert Lighthizer, U.S. Trade Representative
- Wilbur Ross, Commerce Secretary
- Kelly Craft, newly confirmed as U.S. ambassador to Canada
The Mexican side:
- Ildefonso Guajardo, Economy Minister
- Luis Videgaray, Foreign Minister
- Kenneth Smith Ramos, chief NAFTA negotiator
How could this affect me?
Uncertainty over NAFTA's future has already had far-reaching effects on the Canadian economy, from the dollar to the energy sector – and, ultimately, to your personal finances. Here's some more reading on what might be coming.
More reading on the economy and personal finance:
More reading on oil and gas:
More reading on manufacturing and technology:
More reading on agriculture:
What about the rest of the world?
A new North American trade regime would be only part of larger changes in America's, and Canada's, role in the world – and with NAFTA's future in question, Canada is looking for other sources of trade revenue.
Europe: The European Union, Canada's second-largest trading partner, finalized a trade deal with Canada even broader in scope than NAFTA: the Comprehensive Economic and Trade Agreement, which provisionally took effect on Sept. 21. On Sept. 18, British Prime Minister Theresa May said her administration and Mr. Trudeau's had agreed that Canada and Britain should strike a new bilateral trade deal once Britain's exit from the EU is complete, and CETA should be used as the template for it.
Asia-Pacific: Mr. Trump's decision to withdraw the United States from the Trans-Pacific Partnership effectively killed the trade deal, but 11 countries are trying to regroup with China's help instead. At May's Asia-Pacific Economic Conference in Hanoi, Canada and 10 other nations agreed to re-evaluate the trade deal. At November's APEC conference in Vietnam, the countries said they had agreed to the broad strokes of a new agreement, though some accused Mr. Trudeau of stalling the deal by not showing up to a crucial meeting. (His International Trade Minister said the absence was because of a "misunderstanding" about the schedule.)
Here's some more commentary and analysis exploring the global questions.
NAFTA talks are continuing to alternate between the United States, Mexico and Canada until a resolution is reached. The Trump administration originally wanted a deal by the end of 2017, but after the fourth round of talks they said they could wait until at least the end of March, 2018.
If Canada and Mexico don't give in to the Trump administration's demands, Mr. Trump may pull the plug on NAFTA to force their hand. Under Article 2205 of NAFTA, which allows any country to withdraw after giving six months' notice; the process may not lead to a definite pull-out, but it gives the U.S. the option to leave.
With reports from Adrian Morrow, Bill Curry, Steven Chase, Robert Fife, Greg Keenan, Barrie McKenna, Evan Annett, Reuters and The Canadian Press
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