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It appears that the United States, Mexico, and Canada now have, in principle, a new trade agreement. This new trade agreement will no longer be known as the North American Free Trade Agreement, but will instead be called the United States-Mexico-Canada Agreement. 

While the media has portrayed USMCA as the “new NAFTA” or “NAFTA 2.0”, the reality is that the current iteration of USMCA is forked away from NAFTA.  While there are many parts of NAFTA in USMCA, the two key words missing from the new title is “Free Trade”.  This means that the whole premise of the agreement has changed from a free trade agreement to simply a trade agreement.   

For Canada, this is a clear change as Section 232 tariffs on aluminum and steel remain in place, in spite of the newly negotiated USMCA.  According to the technical summary, the United States will exempt Canada for a further 60 days from future Section 232 tariffs to negotiate “an appropriate way forward”.  Based on the press conference by President Trump and the way the automobile tariff issue was resolved, a quota system for steel and aluminum appears to be the most likely outcome.  We will have to wait a while before we know whether the quota negotiated is favourable for Canada.   

There was shock in Canada when President Trump mused of imposing a 25% tariff on automobiles.  With USMCA, the auto industry can rest easy in the knowledge that the prospect of tariffs has been removed as Canada now has a quota for exporting up to 2.6 million vehicles tariff-free.  The quota is a generous one as Canada currently exports around 2 million vehicles.  If Canada can meet the maximum quota or at the very least exceed current production levels, then USMCA will be a win for Canadian-based auto makers.   

During Canada’s press conference, Minister Freeland mentioned that the proportionality clause for oil in NAFTA is now gone.  This is great news for Canada as Canada will no longer have to worry about exporting a proportional amount of oil (and at what price) to the United States.  Canada’s plan is clear: it is time to diversify away from the United States and access world markets.  To that end, the LNG Canada project was announced soon after the USMCA announcement and, upon completion, will make Canada a player in the world LNG market.  The goal to replace inefficient coal energy with LNG globally is admirable and burnishes Canada’s reputation as an energy player on the world stage.  Over time, we will also see if Canada makes structural changes (hopefully now without any interference from the United States) to lower energy costs for everyday Canadians.     

With a trade agreement of this magnitude, not every industry can win.  Such is the case for Canada’s dairy industry as it is forced to provide a 3.6% market share to the United States.  The federal government has promised compensation for dairy farmers, which should help.  For myself, I enjoy eating salted Canadian butter with my toast and will continue to buy it regardless of American alternatives in the marketplace.  Other industries who did not do as well as the auto industry include the pharmaceutical industry with respect to general drugs and B.C. wine.     

At first glance, is USMCA better than NAFTA or the absence of a trade agreement?  USMCA is certainly better than the absence of a trade agreement as Canada retains normalized access to the US market without the threat of further tariffs.

With respect to NAFTA, steel and aluminum tariffs remain in place with a possible negotiated settlement on the horizon with USMCA.  Currently, however, we have tariffs with NAFTA and tariffs with USMCA.  USMCA is better than NAFTA when we look at Canada’s two largest exports:  oil and automobiles.  According to the OEC, crude petroleum and cars accounted for 24% of Canada’s exports in 2016.  In these two areas, Canada has won with USMCA as the proportionality clause is removed for oil exports and the quota level has increased for the export of cars.

But don’t celebrate yet as USMCA still needs to be approved by Congress and no one knows whether President Trump will have the required number of votes to pass USMCA.   

 

I am hopeful that this will be my last post on why Canada’s NAFTA negotiations are not working as I would very much like to see our great country move beyond North American trade discussions.  Recently, Raymond Bachand, Quebec’s NAFTA negotiator, spoke to CBC about NAFTA negotiations and said he was not worried that the United States and Mexico are engaging in bilateral talks without Canada.  In his opinion, the United States and Mexico are discussing automobiles and one or two issues which are of interest only to the United States and Mexico.  With respect to automobiles, Mr. Bachand feels that Canada should not be worried because Canada’s position is the same as the United States and the United States would negotiate much harder against Mexico than Canada.  Furthermore, Mr. Bachand stated that once the automobile issues are sorted out, the talks would once again become trilateral and the remaining major issues would be sorted out.

I want to believe Mr. Bachand, but with all due respect, it is difficult to believe him when President Trump is expressly stating that the United States is not currently negotiating with Canada and that Canada has to wait.  Furthermore, while the United States and Mexico are discussing automobiles, the United States is threatening Canada with an auto tariff!  So, in a supposed trilateral agreement involving automobiles, Canada is not at the table and is also threatened with an auto tariff if Canada doesn’t come to an agreement NAFTA.  How did negotiations go so wrong?

Robert Lighthizer, the United States trade representative, is on record stating that he is “hopeful that in the next several days we’ll have a breakthrough” and that there “are still some difficult issues to work through, as there always are at the end.”  In other words, Robert Lighthizer feels that negotiations are almost at an end.  Mexican Economy Minister Ildefonso Guajardo is also of the same mind and feels that a deal may be reached at the end of this month.  In conclusion, both the United States and Mexican representatives feel like they are close to a NAFTA deal and a Canadian representative feels like discussions will be approaching the endgame after the United States and Mexico complete their talks without Canada.  It makes sense that Canada has no idea what is going on as it is not at the negotiating table.  To rub some extra salt into the NAFTA wound, Lighthizer said “I hope once we get [a deal] with Mexico then Canada will come along. I feel reasonably good about that.”

It now appears that in trade matters, Canada is the third wheel.  Lighthizer’s comments clearly indicate that Canada’s interests will not be heard initially and that the United States hopes that Canada will simply accept most of the provisions discussed.  I do not read all the news so I do not know if Mexico is objecting to this arrangement.  Certainly, this is a marked change from the initial positioning where it was Canada and Mexico together negotiating with the United States.  It now appears to be the United States and Mexico negotiating with Canada.  Shocking.

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.