At a Glance
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The election of Donald Trump has pushed renegotiation of the North
American Free Trade Agreement to the top of the list of Canada’s trade
priorities. Canada will face a balancing act between defending
existing market access outlined in NAFTA as it exists now and updating
the agreement to meet the requirements of a 21st-century economy.
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Freer trade in North America led to significant benefits for Canada in
the form of increased trade, significant output and productivity gains
in the manufacturing sector, and a greater variety of products
available to Canadians.
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The impacts of NAFTA were also positive for the United States, as
increased trade across the region led to twice as many jobs being
created than were lost in import-competing segments. Moreover, U.S.
exports to Canada and Mexico support nearly 3 million jobs in the
United States.
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This report recommends five broad objectives for Canada as it sets out
to renegotiate NAFTA.
Until just a few months ago, renegotiating the North American Free Trade
Agreement (NAFTA) was not high on the list of Canada’s trade
priorities—if it was on the list at all. However, the election of
Donald Trump to the U.S. presidency on a protectionist platform has made
the preservation and modernization of NAFTA a top priority for the
Canadian government.
Since the 1980s, Canada has negotiated three major trade agreements that
involved the United States—the Canada–U.S. Free Trade Agreement
(CUSFTA), NAFTA, and the Trans-Pacific Partnership (TPP). The U.S. has
consistently been a tough negotiating partner, but the various
administrations, whether Republican or Democrat, all sought to reach
bilateral and multilateral agreements. That default position in the
United States has been turned upside-down. The Trump administration has
officially pulled the U.S. out of the TPP and has threatened to withdraw
from NAFTA in spite of the disruption that such a decision would cause
in the North American economy. This shift in the negotiating tone coming
from Washington creates a new level of uncertainty compared with
previous bargaining rounds.
Canada should, however, still come to the table with the objective of
expanding, improving, and strengthening NAFTA.
Extensive research on the impact of freer North American trade confirms
that NAFTA led to benefits for Canada, the U.S., and Mexico. For
example, an extensive review by the Washington-based Peterson Institute
for International Economics of the impacts of NAFTA concluded that:
NAFTA was designed to promote economic growth by spurring competition in
domestic markets and promoting investment from both domestic and foreign
sources. It has worked. North American firms are now more efficient and
productive. They have restructured to take advantage of economies of
scale in production and intra-industry specialization.
\cite{Feinberg_2006,2006}
In Canada, freer trade with the U.S. following the signature of CUSFTA
had a net positive impact on employment; led to significant gains in
bilateral trade, output, and productivity in the manufacturing sector;
and made a greater variety of products available to Canadians.
In the United States, freer trade across North America allowed the
creation of an additional 1 million jobs in the decade after NAFTA
entered into force, more than compensating for the 525,000 jobs that
were displaced in import-competing industries.22Ibid. And
today, U.S. exports to Canada and Mexico combined support nearly 3
million U.S. jobs.33Schaefer and Rasmussen, Jobs Supported
by Export Destination 2014 .
NAFTA is of key importance to the functioning of North American supply
chains. However, most of the gains in merchandise trade made possible by
CUSFTA and NAFTA have already materialized. So, what should be the key
focus of the NAFTA renegotiation? The Conference Board of Canada’s
proposed actions (see Table 1 for details) for the upcoming NAFTA
renegotiation can be grouped into five broad recommendations:
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Adopt an inclusive, transparent, and trilateral approach.
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Facilitate the cross-border mobility of business people to support
trade in services.
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Maintain and enhance market access for traded goods.
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Encourage innovation and digital trade while protecting intellectual
property and culture.
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Modernize NAFTA to reflect new business realities and standards.
First, NAFTA is a trilateral agreement, and Mexico is an important
partner within the continental economy. Efforts should thus be made to
ensure the agreement is renegotiated with all three member countries.
Also, the federal government should commit to a comprehensive
consultation and engagement strategy to keep Canadians regularly
informed about the progress of NAFTA renegotiations, the changes being
considered, and their implications. Also, provincial government input
and feedback throughout the negotiations will be crucial to maintaining
public engagement. In turn, an open, transparent negotiation process
could bolster Canada’s deal-making strength if the positions being
presented at the bargaining table are shown to have broad public
support.
Second, a key goal of NAFTA 2.0 should be to facilitate the cross-border
mobility of business people. Free trade agreements have liberalized the
flow of goods for several decades. However, extensive barriers to the
mobility of people remain, hampering trade in services, given that
services often require face-to-face encounters to be delivered. In this
regard, we recommend that NAFTA 2.0 clarifies the rules on the temporary
entry of business visitors and extends the list of professional
occupations to include new professions, particularly in the technology
sector, that have emerged since the original deal was signed,. Examples
of occupations that should be added to the NAFTA list include software
developers, data scientists, and supply chain and logistics
professionals.
Third, there are several sensitive sectors for which Canada should seek
to maintain and enhance market access in the United States. These
include government procurement, softwood lumber, and the auto sector.
However, maintaining and enhancing Canada’s market access on these
fronts will likely require us to make some concessions in the dairy
industry and other supply-managed sectors. The report proposes specific
recommendations for each of these sensitive sectors.
Fourth, a revised NAFTA should encourage digital trade and innovation,
while protecting intellectual property and Canadian culture. As such,
NAFTA 2.0 should have a chapter dedicated to e-commerce, as found in the
TPP and CETA. However, with digital trade rapidly evolving and often
leading to a “winner takes all” dynamic, Canada will have to be
careful with the provisions related to e-commerce, making sure that we
keep some flexibility with regards to future digital policies at home.
This will be especially true in the cultural sector, where content is
increasingly created, delivered, and consumed via digital channels. For
this reason, the cultural exceptions included in NAFTA should be
maintained in a renegotiated agreement.
Fifth, we should take this opportunity to modernize the agreement to new
business realities and standards. In particular, the NAFTA rules of
origin should be reviewed to make it as easy as possible for small and
medium-sized businesses to comply with them. Also, we should seek to
restore the public’s trust in investor–state dispute settlement (ISDS)
mechanisms, notably by reviewing the composition of ISDS tribunals and
opting for publicly appointed tribunal members who will serve longer
terms (as under CETA). The NAFTA renegotiation also provides an
opportunity to incorporate the labour and environmental side agreements
into the main text of NAFTA and to update them based on recent trade
deals. Lastly, in the energy sector, the proportionality clause
currently found in NAFTA should be removed, as there is little evidence
of its use or positive impact on North American energy trade and
investments.