TPP, NAFTA talks, and Why Canada Should Look Elsewhere

Carla Rizk Analysis, Canadian Policy, Economics

6 minute read

In early 2017, the U.S. pulled out of the Trans-Pacific Partnership (TPP) and began proceedings to re-negotiate the North American Free Trade Agreement (NAFTA). President Trump’s unpredictable approach has caused the markets to act erratically as stakeholders remain uncertain of where their businesses or investments are heading in the aftermath of an unsuccessful NAFTA negotiation. These events have caused a rocky year for Canadian free trade alliances (FTAs), but 2018 is taking an unexpectedly positive turn.

With Bombardier’s win over Boeing in their trade dispute, and in the recent exclusion of the U.S. from the revised version of the TPP, termed the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP), Canada is in a much better position to re-negotiate NAFTA. The tides have shifted for all three players involved, as Canada and Mexico become more competitive in international trade while the U.S. holds a weaker standing at home and in the Asia-Pacific region.

The Trump administration argues that the NAFTA provisions are unfair to the U.S. and have caused significant job loss. Trump’s more reasonable arguments are that labor-intensive and manufacturing industries suffered because of the benefits associated with moving production to Mexico, while other industries suffered because of the increased competition. But central to the concept of FTAs is the fact that it allows certain industries to strive by encouraging specialization and the opportunity to diversify the consumer base through other economies. So, while some industries might suffer, others will strive and become more competitive, not just at home, but also globally.

On the other hand, economists and trade specialists estimate a moderate but positive effect on all three economies and little overall effect on employment. As the agreement came into force in 1994, Canada and Mexico became the two largest trading partners of the United States. Intra-bloc trade, driven by lower tariffs and non-tariff barriers, increased by 118% for Mexico, 41% for the U.S., and 11% for Canada—resulting in the flow of over $1 trillion in total, and $580 billion crossing the U.S-Canada border both ways. 36% of U.S. exports go to Canada and Mexico, while both countries account for 26% of U.S. imports. Additionally, 75% of U.S. imports content from both countries are actually American made. To put this into perspective, the United States’ major source of imports, China, uses 4% U.S. content only.

NAFTA intertwined the economies of the three signatories for more than 20 years. Industries, supply chains, policies, and economies were likely influenced by its provisions. Businesses and investors calculated their moves and revolved their plans around the reduced tariff and non-tariff barriers. Reinstatement or a change in barrier restrictions may consequently cause many to take their investments or relocate their businesses elsewhere. So, economists worry that withdrawal would interrupt production, supply chains, and cause job losses in all three countries. The automotive sector supply chain is especially susceptible because the production area spans regions in each country.

As for what Canada might lose, economists are still uncertain about the effects of termination as these things are very hard to measure and quantify, but the general consensus is that some Canadian industries are bound to suffer. The predicted targets are the auto, pulp and paper, oil and gas, mining, and aerospace sectors. The economy as a whole could also possibly experience a setback as exports of goods and services account for 23.5% of Canada’s economy.

It is clear that NAFTA is a beneficial alliance for Canada, but at this point in the negotiation, the concessions that the U.S. is expecting from its partners are almost as damaging as termination itself.  For example, Canadian automotive businesses will probably consider moving south if most auto parts are to be American.

Fortunately, trade with the U.S. has been declining slowly since the early 2000s. This is not necessarily a bad thing, because it means that Canada is diversifying its economy and relying less on a single domineering neighbour. Canada is becoming an important player in global trade, with partners across the Americas, Asia, and Europe.

The first major step to liberalize and diversify Canadian trade was the signing of the Comprehensive Economic and Trade Agreement (CETA), an FTA with the European Union. CETA removed tariff and non-tariff barriers previously imposed on 98% of trade products and has given Canada the chance to penetrate the world’s largest market.

Second, Canada took the lead in a major global trade deal. Canada, Mexico, and nine other countries went ahead and sealed the deal for a revised version of the TPP to be signed in March, without the U.S. The CPTPP is an agreement between 11 nations consisting of Japan and other Asia-Pacific nations, that together make up 13.5% of global GDP (CAD $13.5 trillion). The Canadian government estimates a resulting profit of a $4.2 billion boost in GDP.

So, while NAFTA is currently Canada’s most important source of trade revenue, things are starting to change. Canada should take a very firm and aggressive stance—not unlike that of the U.S.—when negotiating. Canada should focus on the current weaknesses of the United States, and what it has lost by withdrawing from the TPP, and what it could further lose, politically and economically, by withdrawing from NAFTA.

The Trump Administration’s persistent threats to withdraw from the free trade agreement would have been more effective had Canada’s trade war looked bleaker. In any case, Canada now has access to the thriving EU and Asian markets, putting it in a much more competitive position to negotiate NAFTA and expand its standing globally. So, since it is only in Canada’s best interest to keep NAFTA alive as it is and without yielding to damaging U.S. propositions, it should diversify and focus overseas. Canadian businesses should focus on increasing investment in the markets of all the signatories of the multilateral trade agreements, especially Japan and the EU, and in turn work on becoming even more inviting to foreign investors.

Canada should also continue expanding its pool of markets by forming multilateral and bilateral agreements with other thriving economies, especially that of China and the Gulf Cooperation Council. Despite the inherent political difficulty, Canada should continue its attempts to penetrate the growing Chinese markets by at least freeing up some trade barriers. Finally, should NAFTA dissolve, Canada should, and probably will, work on bilateral trade relations with the U.S.