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NAFTA Redux – Renegotiating Prosperity

For over a quarter century, a set of trade agreements with the United States and Mexico have underpinned the Canadian economy and become the primary focus of the economies of Ontario and of Toronto. The original Free Trade Agreement between the US and Canada was signed thirty years ago and expanded to include Mexico in the 1994 North American Free Trade Agreement. Before an agreement was in place, North American trade was subject to a patchwork of tariffs, quotas, and often arbitrary duties imposed on goods and services that crossed some of the longest borders in the world. Since the agreements were ratified, three of the world’s largest and most dynamic economies have virtually integrated with each other, forming the one of the largest and most prosperous trading blocs on Earth. Starting one week from today NAFTA is being reopened and renegotiated.

Though economists suggest the vast majority of North Americans have somehow benefited from freer trade between Canada, the US, and Mexico, there remains a deep misunderstanding about the effects of NAFTA. One misconception is that the agreement cost Canadian and American jobs. This idea is so pervasive that reforming NAFTA was used by now President Donald Trump as a political platform as he promised Americans he would negotiate a better deal for America. Though the trade agreement caused a severe degree of change in the economy, it also created the conditions for better employment for a larger number of people in a far more efficient structure. Those improvements were not visible to every part of society.

Unfortunately, NAFTA did not create jobs equally throughout all parts of North America. Here in Ontario and in the American rust belt, tremendous job losses and wage stagnation have been the reality as factories closed and workers competed with each other and with workers in far away states for the few remaining jobs. NAFTA prompted a fundamental shift in how products were made in North America, especially in heavy manufacturing. It also factored in the decline of the value of labour which has steadily decreased over the past thirty years as technology and transportation have allowed companies to replace workers with robots, move jobs to areas where workers are paid lower wages, or to import less expensive retail goods from overseas. Manufacturing provided the bedrock of many local economies around the Great Lakes. Many of those local economies have crashed because they weren’t diverse enough to withstand the sudden changes brought by globalization. Most have not yet recovered.

Beyond manufacturing, NAFTA has created an equal and open market for nearly every economic sector though the benefits show differently in different places. Areas with robust and dynamic economies like large urban areas or, specialized agricultural communities have thrived after many restrictions and barriers to the American market were removed. Canadian equities such as minerals, potash, and other commodities found easier access to American markets and there was a general and sustained uptick in jobs and entrepreneurialism. This is especially true in Canada’s technology and science sector. Free access to American markets have allowed our technology sector to act as an arm of the much larger and better financed American sector.

Canada’s economy is absolutely dependent on the United States and far more dependent on NAFTA than the US is. In a Globe and Mail series on the upcoming renegotiations, University of Calgary economist Trevor Tombe broke down cross-border trade as a percentage of provincial or state GDP. In provinces like Ontario and New Brunswick, half of all economic output is connected to cross-border trade. For other provinces such as BC, Alberta, and Quebec, cross-border trade accounts for a quarter to a third of economic output. By contrast, only two American states, Michigan and Vermont showed double digit percentages (15% and 14% respectively) of state GDP associated with NAFTA. If NAFTA were to be abrogated entirely, American business might suffer a downturn while Canadian business would suffer depression.

To enact the renegotiation process, the United States gave 90-days notice back on May 18. That means on August 16, all parties must be prepared to begin negotiations. Two months later, on July 17, the Trump administration published a detailed summary of its trade objectives.

Canadian businesses need to pay strict attention to what the Americans want from these negotiations and how changes might affect their ways of doing business. The summary covers a wide range of business and agricultural sectors and has implications covering social services, environmental law, copyright and other cultural protections, and labour. Some of the specific trade issues noted in the American summary include; telecommunications, financial services, energy, digital trade in goods and services, cross border data flow, investments, intellectual property, state owned and controlled enterprises, labor, and small to medium sized enterprises. Each of these trade issues will be open to negotiation, starting next week.

Canadian interests might have less cause to worry than our partners in Mexico do. Trump has repeatedly suggested his ire is not directed at Canada, which maintains a mostly equal trade balance with the United States, but with Mexico, which enjoyed a $63.2 billion trade surplus in goods with the US in 2016. Many of those goods, particularly in the automobile sector were, before NAFTA, made in the USA. Trump campaigned on bringing manufacturing jobs back to the US and won the support of Americans living in what’s become known as the Rusted-out Belt around the Great Lakes. He also campaigned on getting Mexico to pay for a physical border wall stretching along America’s southern boundary. There is a possibility Trump is using NAFTA to bully Mexico but it is hard to see how that will manifest, given the vast investments made in Mexican factories by American manufacturing business.

Nevertheless, Canadian business is advised to follow negotiations as closely as possible. The Telsec Business Blog will continue to cover NAFTA negotiations but a far deeper study is suggested. The outcome of NAFTA renegotiations will form the template through which 70% – 85% of Canadian trade is done in the foreseeable future.

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