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CWA # 59, 23 September 2018

United States
To NAFTA or Not: Trump, Mexico and Canada

  Harini Madhusudhan

Will Trump really be able to scrap the NAFTA deal? What is Trump aiming to achieve through these re-negotiations and what is the issue with Canada? Who gets a better deal in these renegotiations?

Harini Madhusudan is a Project Associate at the ISSSP, NIAS.

 

In August 2018, President Donald Trump announced that the US and Mexico have reached a new bilateral deal-making way for a possible revision to NAFTA. Despite being in place from the year 1994, NAFTA has often been criticised regarding its effects on jobs and manufacturing. Trump has particularly called it, “one of the worst of trade deals ever made.”

Will Trump really be able to scrap the NAFTA deal? What is Trump aiming to achieve through these re-negotiations and what is the issue with Canada? Who gets a better deal in these renegotiations?

The Trump administration notified the Congress of its intent to sign a new deal with Mexico which, “Canada is welcome to join.” The team now has been given 30 days to prove to the lawmakers with written details of the deal. This is where the need for settlement of the involvement of Canada comes into the picture. The administration has shown the confidence of being able to go on sans Canada, but here is why they possibly cannot go on without them.

 

Will the US Congress Yield?

The US lawmakers insist that the Trump administration only had authority to negotiate a deal with both Mexico and Canada and never a bilateral one, which means they could reject this one if Canada is not part of the final agreement. Additionally, to kill NAFTA, the US must inform the other parties and give them a time period of 6 months.

After two weeks, the negotiations with Ottawa still continue. Legal challenges will follow any deal that does not involve Canada and the Trump government is hoping to get a better deal out of Canada. Trump tweeted, “We love Canada, but they have to treat us fairly..... They put a tariff on our dairy products going to Canada at 300 per cent. We can’t have that.”

 

Not so friendly neighbourhood: Canada and the US

Canada is the second largest trading partner to the United States after China. In the past year, USD 341 billion of US goods and services were sold to Canada, and about USD 332 billion of Canadian goods and services were sold to the US. Dairy is 0.1 per cent of the USD 680 billion in the US- Canada trade.

The existing Canadian policies on agriculture and dairy products that largely protect its domestic production could be the sticking point. Some farmers in the US have complained about Canada’s steep tariffs on dairy products and the tariffs average on 249 per cent; the American Farm Bureau has been lobbying to ensure NAFTA’s rewriting and to eliminate Canadian tariffs on poultry eggs, dairy, wine and barriers to imports of ultra-filtered milk. But there certainly are products that the US charges heavy tariffs on, too. These are what make politics. The US, for example, charges 350 per cent tariff on tobacco products and up to 164 per cent on peanut imports from Canada. 

 

NAFTA’s Chapter 19 & Justifiable Canada’s actions

This provision has its origins in the 1980s from the original US- Canada Free Trade Agreement; it establishes a mechanism for Canadian companies to appeal their complaints about unfair trade practices to an independent panel made up of representatives from each of the three countries, rather than relying on domestic courts. The US wants to do away with this provision but to Trudeau scrapping Chapter 19 is nonnegotiable.  Canada sees it as a way to balance its benefits and risks of the trade with the US.

Canada also wants NAFTA to retain “cultural exemptions” for Canadian media, arts and broadcasting; meaning these cultural products wouldn’t be treated the same as commercial goods traded through NAFTA, and Canada can protect these industries. Trump is crying foul for nothing. The internet was not really an issue when NAFTA was originally started, and Canada seems to be looking for some exemptions even on these grounds.

A study from 2015 which focused on the impact of NAFTA’s tariff waivers, found that the intra-bloc trade increased by 41 per cent for the US and 118 per cent for Mexico and increased by about 11 per cent for Canada. Moreover, the welfare increases from the waiver of tariffs were 0.08 per cent for the US and 1.3 per cent for Mexico and 0.06 per cent for Canada. 

Trudeau publically made a statement before the negotiations began in late August, “No NAFTA deal is better than a bad NAFTA deal.” He has time and again made it clear that he would not take unfair terms either. The US has largely been dominant in the case of NAFTA. Even in the case of Mexico, the agreement is still only a ‘preliminary agreement in principle,’ and Mexico too could easily choose to walk away.

On 27 August, Donald Trump and Enrique Pena Nieto announced a bilateral trade deal, mostly focused on the automobile industry (auto-rules of origin) and both of them seem to have stated that the deal is positive for US and Mexico.  Trump also wants to try and ink this deal while Enrique Pena Nieto is still in office (December)

However, threatening Canada may not be the most effective strategy. Trump, who is already not positively seen in Canada, may just be giving Trudeau a mileage to push back against Washington’s demands with popular support. The US and Canada have time till the end of September after which the US Congress, the Mexican legislature and the Canadian parliament have to approve these. Hence, the question of what will happen if Trump does not get his way will remain crucial. It might start with a new US-Mexico Tariff Agreement and with imposing hefty auto tariffs on Canada. And if it succeeds, there will be a NAFTA 2.0 which is hopefully better than the last one, promising positive welfare and trade gains.

 


COMMENTS

Aparupa Bhattacherjee

Harini's commentary looks at the impact on NAFTA if Canada leaves the deal. However, it will also be interesting to read that if such a thing happens and what will be its impact on the economy of larger South and Latin American region?

 

Sourina Bej

The US has struck a deal with Mexico and hinted at moving without Canada, how will it affect the Canadian economy? In addition how has the economic and trade representatives in US lobbying for NAFTA? More than a political message it is the economic subtext that would determine the fate of the deal how are the non-state actors viewing in all the three countries viewing the deal? 

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