Month: July 2018

In the first part of this series, I discussed whether Canada would be better off with a bilateral or trilateral trade agreement.  I would like to now examine the five-year sunset clause demanded by the United States for inclusion in NAFTA.  At the 2018 G7 in Quebec, President Trump stated again that he would be willing to have a trilateral trade agreement or separate bilateral trade agreements with Canada and Mexico so long as the trade agreement could be renegotiated every five years.

Prime Minister Trudeau swiftly stated that the five-year sunset clause is untenable as it creates uncertainty for long term investments.  Instead, he raised the possibility of a “check in and a renewal” clause, where member nations would come together and review NAFTA every five years.  Prime Minister Trudeau is doing the right thing as he is trying to ameliorate the possibility of a member nation unilaterally exiting the trade agreement.  We can push for more, though.

We must remember that Trump was able to threaten to leave NAFTA with six-month’s notice under Article 2205, so eliminating the six-month’s notice provision and replacing it with a five-year sunset clause may actually be better for all parties involved.  How NAFTA has for over 20 years been able to promote long term investments with a six-month notice provision conclusively demonstrates that a five-year sunset clause is not detrimental in and of itself to Canada’s long-term interests.

The news coverage in Canada has outlined Canada’s opposition to steel and aluminum tariffs.  There is also coverage of Canada’s opposition to any changes to supply management in Canada’s dairy industry.  But there is one industry that has not chimed in during these NAFTA negotiations and that is the energy industry.

NAFTA, through Article 605, dictates to Canada how it must distribute its’ own energy or basic petrochemical goods.  Specifically, Canada can not reduce the proportion of exports compared to the most recent 36-month period, can not impose a higher price for exports than charged domestically, and can not disrupt normal channels of supply.  This is outrageous as Canada does not have full sovereign control over its’ own natural resources and one wonders why Canada did not try to exit NAFTA when oil prices were over $100 a barrel.  NAFTA is the reason why Canada sold oil at a deep discount to the United States and why Canadians paid and continue to pay such high gas prices in Canada.

Canada’s major exports to the United States are natural gas, crude oil, and petroleum products and we sell these products at a deep discount because of NAFTA.  If we redirect even a portion of these goods onto the world market and upgrade our energy products at home before exporting, Canada can make many times what we currently get from the United States.  Any talk of a trade surplus with the United States would be moot as our exports would go way down while our imports would stay the same.

The success of NAFTA negotiations, will not rest on a sunset clause.  It will rest on provisions that help Canadians and Canadian corporations.  If the terms and conditions of NAFTA are not favourable, Canada should want to renegotiate as quickly as possible.  President Trump has given Canada a golden opportunity to right the wrongs of NAFTA.  It remains to be seen whether the federal government will grasp this chance to improve trade and remove handicaps to full participation on the world stage.

When Donald Trump became the President of the United States and decided to open NAFTA trade talks, Canada was understandably concerned.  President Trump’s talk of trade deficits and threats of tariffs on countries all around the world made headlines and informed Canada that the United States would be looking after its’ own interests.  It was clear that NAFTA talks were being opened to address President Trump’s assertion that the United States was being unfairly taken advantage of.

While it is clear that the United States has a trade deficit with Mexico, it is not clear that the United States has a trade deficit with Canada.  From Canada’s perspective, the United States has a trade surplus with Canada and from the United States perspective, there is a trade deficit.  Depending on your accounting methodology, it seems that both countries may be correct in their claims.  Following the trade surplus/deficit banter which is still ongoing, President Trump made clear his preference for bilateral trade deals with Canada and Mexico.

Canada and Mexico, however, firmly believed that any renegotiation of NAFTA should be a trilateral agreement.  The rationale may have very well been that there is strength in numbers when negotiating against a country with much larger markets and that the combined markets of Canada and Mexico would help to balance the negotiating positions of the United States and a combined Canada and Mexico.  A trilateral agreement would also reaffirm a North American trade zone comprising of the United States, Canada, and Mexico.  In addition, Canada would benefit by not having to negotiate a separate free trade agreement with Mexico and perhaps most important, both Canada and Mexico would be more likely to get the same best deal with the United States in a trilateral agreement.

The reality is that the benefits of a trilateral agreement are overstated.  I believe that Canada’s negotiating position is actually strengthened when it negotiates one on one with the United States.  There is an enduring US-Canadian friendship that can be leaned on when negotiating one on one.  There are specific aspects of the US-Canadian relationship that are unique to the two countries.  By pushing for a trilateral agreement, it is difficult for Canada to say, “Our relationship is different from any other,” as Mexico would be a party to the trade relationship being re-established.

With respect to the benefit of not negotiating a separate deal with Mexico, the final NAFTA draft will very likely look like three bilateral agreements put into one.  This is similar to the three for one deals you get when ordering pizza.  You only need one pizza, but for a little bit more, you now have leftovers and some additional choice on that second and third pizza.  A North American trade zone is an “additional choice” as the relative percentage of trading Canada does as an intermediary is likely to be small compared to the percentage of direct trade, but that choice also comes at an additional cost.  Also, it is the wording in the agreement that establishes a viable trade zone, and not the structure of the agreement.

A trilateral trade agreement optically looks better than two bilateral trade agreements, but at what cost.  Canada will not have a first mover advantage in free trade with the United States, has expended goodwill, and really cannot utilize their friendship with the United States in NAFTA negotiations because Canada has thrown its’ lot in with Mexico, where President Trump wants to put up a border wall and make Mexico pay for it.  I would not be surprised to see the border wall payment provisions show up in the new NAFTA and wonder what if Canada did not have to deal with these types of issues when negotiating trade with the United States.