The February 13, 2017 Washington meeting between President Trump and Prime Minister Trudeau was a success with respect to trade relations between the two countries. Rather than taking an aggressive anti-NAFTA stance, as some had feared, President Trump noted that the United States has an “outstanding trade relationship with Canada” and stated that his goal was to “tweak” the NAFTA with regard to Canadian trade. The apparent result of the meeting was an implicit agreement to change the NAFTA in a way that increases the benefits for Canada and the United States; the best result that could be expected at this time. While this was a positive outcome, any change to NAFTA will result in winners and losers and more so if the simple tweak is not that simple.
President Trump’s positive tone should not have come as a surprise. Although most Canadians tend to see Canada as the weak partner relative to the United States, available data shows that a healthy bilateral trade relationship has developed between Canada and the United States under NAFTA. Canadian officials point out that Canada – U.S. trade is worth approximately $2 billion per day and that Canada is the largest export market for 35 U.S. states. While this is impressive, it is more important to consider the U.S. perspective to gauge its view of the value of Canadian trade.
Canada’s value as a trade partner can be gleaned from U.S. – Canada Trade Facts published by the U.S. Trade Representative, which reported that in 2015:
- Trade in goods between Canada and the U.S. was worth approximately USD $575 billion with Canada enjoying a USD $15 billion trade surplus. Although Canada was the United States’ second largest trade partner, it was the largest export market for U.S. goods with total exports to Canada worth approximately USD $280 billion. Although this was down approximately 10% over 2014 figures, total U.S. exports to Canada since NAFTA have increased 179% and account for approximately 18.5% of total U.S. exports.
- Trade in services between Canada and the United States was worth approximately USD $87.5 billion with the U.S. enjoying a USD $27.1 billion surplus. The value of U.S. services exports to Canada also decreased over 2014 values (down 6.6%) but increased 237% overall from the pre-NAFTA period.
This data supports the conclusion that NAFTA has been a success that has benefited both Canada and the United States. Because of its success, it was unlikely that the Trump administration would walk away from NAFTA and the trade relationship and benefits that it brings. The only reasonable option available was for President Trump to propose “tweaking” the Agreement so Canadians would rightly interpret this as a positive outcome because it describes the U.S. as a reasonable trade partner that is also committed to improving the trade relationship for the benefit of all. However, Canadians should not expect an easy time in the negotiations.
The first difficulty that we will face is that the discussions leading to “tweaking” the NAFTA as it relates to Canada – U.S. trade will likely begin in the context of a three-way conversation that includes Mexico. President Trump has taken a much different approach to Mexico. Mexico has been painted as an unfair trader that has taken improper advantage of the United States. President Trump and officials in his Administration have pointed to U.S. jobs moving to Mexico and to a large Mexican trade surplus.
President Trump has indicated that he intends to take a hard line with Mexico to achieve fairer trade relations – something that he has referred to as NAFTA with an “Extra F” for “fair” to transform NAFTA into the North American Free and Fair Trade Agreement. Although fair trade may seem like a good idea based on the concept that all parties should benefit equally, it is unlikely that negotiations will result in NAFTA with an “Extra F” because none of the Parties are in a position to guarantee the equality of outcomes required to achieve “fair” trade.
Trade agreements, such as NAFTA, liberalize trade barriers to ensure greater access to national markets. Liberalization is generally achieved through reduced tariffs and is supported by restrictions on the ability of parties to introduce and maintain non-tariff barriers. The result is preferential access for goods, services and investments of the parties within the free trade area. Thus, companies and individuals are free to engage in trade if they believe that it is in their best interests. The role of government is to foster conditions that support and encourage private sector participation in trade. Thus, free trade agreements offer equality of opportunity, or at least greater opportunity to participate in international trade, but do not compel or prevent stakeholders from participating.
The NAFTA parties could guarantee equality of outcome, but this would require that they direct or prevent private sector stakeholders from participating in trade or that they introduce measures to restrict imports from time to time to ensure a fair balance of trade. This would be relatively easy for a command economy, but is likely not an option available for North American governments operating in free markets.
Even if NAFTA with an “Extra F” is a non-starter as described, the U.S. will likely still take a hard line approach with Mexico, which raises the difficult question: How do you “tweak” the NAFTA with respect to U.S. – Canada trade while taking a much harder line to substantially change U.S. – Mexico trade in the context of a trilateral negotiation affecting obligations that generally apply to all three parties? Unless the NAFTA is divided into three bilateral agreements, the Canada – U.S. “tweak” may be sideswiped by the U.S. – Mexico discussions.
Second, the U.S. will come to the negotiating table with a list of trade irritants to be addressed. We can see the basis of this list in the 2016 USTR National Trade Estimates Report which identifies: restrictions on U.S. seed exports; cheese compositional standards; supply management in dairy, poultry and eggs; restrictions on U.S. grain exports; measures affecting wine, beer and spirits; domestic support to the aerospace sector and Canadian Content requirements as some of the trade barriers restricting U.S. goods and services. No doubt the U.S. will bring more to the table.
Third, the U.S. may also introduce a range of new areas for discussion to update the NAFTA, such as new increased national security measures, such as how to speed up customs compliance and reduce the impact of border measures while enhancing security.
Canada will also come to the table with its own list of trade irritants and positions on how to update the NAFTA in a way that increases the benefits of trade.
The most likely outcome of the negotiations will be a renewed NAFTA or a new Canada – United States bilateral agreement that will increase the benefits for both parties. However, the inevitable “give and take” in these negotiations will likely result in benefit some sectors while hurting others and at this point before the negotiating positions have been fully developed, we cannot know for certain which sectors will be the winners and which will be the losers.
Importers, exporters and stakeholders should not assume that negotiators know and understand their interests or that those interests will be fully defended or expanded; officials operate on the basis of the information at hand and in no case do they know industry sectors as well as participants in that sector. Therefore, rather than take a “wait and see” attitude, importers, exporters and other stakeholders should become more active participants in the negotiations by following the process as closely as possible and by taking steps to ensure that officials and negotiators have information about their particular sector at their fingertips. This may not guarantee the best outcome from the participants’ perspective – government’s need to balance the interests of all sectors makes this very difficult – but simply assuming that government will automatically act in the participants’ best interests will likely guarantee a poorer or even negative outcome.
The lawyers at Woods, LaFortune LLP have in-depth experience in trade agreements and in trade negotiations and will follow and report on developments in the NAFTA renegotiation. We are also available to discuss the NAFTA renegotiation, the process and the implications for stakeholders and to provide assistance in presenting stakeholder positions to relevant government officials. Our contact information is set out below. We look forward to hearing from you at your convenience.