Washington and Ottawa pulled back Friday from a standoff that threatened to end in Canada’s exclusion from the North American Free Trade Agreement (NAFTA), a trilateral arrangement that includes Mexico. The Trump administration informed Congress that the President intended to “sign a (revised) trade agreement with Mexico — and Canada, if it is willing — 90 days from now”.
NAFTA came into effect in 1994, a successor to the Canada-United States Free Trade Agreement. It led to lower tariffs on most goods and services traded among the countries, helped mesh their economies closer together, and nudged big business to reorganise supply chains around the North American continent, making industries such as automobiles globally more competitive. Overall, regional trade has expanded more than three times to $1 trillion annually since NAFTA came into effect, even though economists don’t always agree on the specific benefits it has brought to the US. The agreement has also led to a range of rules on food safety, intellectual property rights and the settlement of disputes, and generally deepened the political relationship among the three signatories.
Attacks on the US’s “killer”, “disastrous” trade deals played a key role in Donald Trump’s campaign rhetoric, and their repeal or renegotiation was part of his declared agenda to “Make America Great Again”. While he seemed to temper his position in April, agreeing on discussions to “modernise” NAFTA, he continued to blame it for the trade deficit with Mexico, and link it to the loss of American jobs. On August 15, the three countries began talks in Washington on overhauling the agreement, seeking to address, apart from Trump’s demand for a “better deal” for the US, issues around labour, environment, and changes necessitated by the expansion of new online businesses. On August 27, Trump announced that a deal had been reached with Mexico that would make NAFTA “much more fair”, but Canada was not on board — and that “we will see whether or not we decide to put up Canada or just do a separate deal with Canada”.
The updated deal between Mexico and the US includes new clauses on intellectual property, digital trade and investor disputes. The countries have agreed that for a product to be tax-free, 75% of it — a higher floor than in the existing agreement — must be manufactured in the two countries. The deal also says that 40-45% of every vehicle must be built by workers who earn at least $16 per hour, so that firms don’t find it as profitable to move production to Mexico, where wages are lower than in the US.
The sticking point
The US and Canada have been unable to agree on several issues, including barriers that Ottawa places on the import of dairy, Canadian rules on movies, books and other media, and on the mechanism to settle trade disputes, The New York Times has reported, quoting sources. Canada wants to ensure its publishing and broadcasting industries are not overrun by bigger US rivals, and that dairy imports don’t pull down prices for its own farmers.
Another area of disagreement is the so-called Chapter 19 of NAFTA, a mechanism for dispute resolution that allows the signatory countries to challenge one another’s anti-dumping and countervailing duty decisions before a committee that has members from each country that is part of the dispute. The best known Chapter 19 cases involving Canada have had to do with softwood lumber, and in the mid-2000s, the dispute resolution panels ruled repeatedly against the US, strengthening Ottawa’s negotiating position. The US has reportedly eliminated the Chapter 19 provision in the agreement with Mexico, but Canada has insisted on its retention. While it has been argued that anti-dumping or countervailing duties can be challenged at the WTO as well, the fact is countries sometimes ignore WTO decisions.
What happens now
Despite Trump’s tough talk, that US negotiators have decided to keep negotiating is due primarily to the fact that Congress has underlined that any revised deal must include both Canada and Mexico, The NYT noted. Canada is the major export destination for 36 US states, and many of Trump’s political supporters have asked that he “do no harm” to the deal, to begin with. Without Canada, Republican lawmakers would be likely to scuttle any new NAFTA pact, The NYT report said.