At a Glance

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:
  1. Adopt an inclusive, transparent, and trilateral approach.
  2. Facilitate the cross-border mobility of business people to support trade in services.
  3. Maintain and enhance market access for traded goods.
  4. Encourage innovation and digital trade while protecting intellectual property and culture.
  5. 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.