The Future of Free Trade between Canada and U.S.

by Valerie Kiefer

During this past United States presidential campaign, U.S. Presidential-Elect Donald Trump claimed the North American Free Trade Agreement (NAFTA) to be “the single worst trade deal ever approved in this country”, declaring it also to be “one of the worst things that ever happened to the manufacturing industry.”. A quick search on the United States Trade Representative website contradicts Trump’s allegations, stating that “Since its entry into force, U.S. manufacturing exports to NAFTA have increased 258% and the United States maintains a growing manufacturing trade surplus with Canada and Mexico.”

In terms of American jobs, the United States Trade Representative website also states that “U.S. exports to Canada and Mexico support more than three million American jobs and U.S. trade with NAFTA partners has unlocked opportunity for millions of Americans by supporting Made-in-America jobs and exports.”

Free trade with the U.S. has had many effects on the Canadian economy, dating back to 1989 when the Canada-U.S. Free Trade Agreement (CSUFTA) came into effect. Since the introduction of NAFTA in 1994, the U.S. has become Canada’s largest investor, with the U.S.’s Foreign Direct Investments (FDI) increasing from $69.9 billion in 1993 to $368.3 billion in 2013, making up approximately 51.5% of all FDI in Canada, increasing Canada’s dependence on the U.S. in the process. While NAFTA has brought great prosperity to Canada and Mexico, the impact has been less drastic in the U.S., where trade with these two countries makes up a smaller percentage of GDP for the U.S. and with China accounting for a growing percent of U.S. GDP. Despite uneven effects across companies, industries and geographical location within the U.S., the fact does still remain, that NAFTA has had a positive impact on all its members in terms of trade, FDI and jobs.

Since the introduction of NAFTA in 1994, the U.S. has become Canada’s largest investor, with the U.S.’s Foreign Direct Investments (FDI) increasing from $69.9 billion in 1993 to $368.3 billion in 2013, making up approximately 51.5% of all FDI in Canada

Despite what many Canadians may have predicted, Donald Trump was voted to be the next President of the United States. Will Trump keep the promises he made during his campaign, namely to renegotiate NAFTA and pull out of the Trans-Pacific Partnership (TPP) to pursue more bilateral agreements? What does a Trump presidency imply for Canada’s trading relationship with its largest trading partner?

According to Article 2205 of the NAFTA Text, “A Party may withdraw from this Agreement six months after it provides written notice of withdrawal to the other Parties. If a Party withdraws, the Agreement shall remain in force for the remaining Parties.” Therefore, based on the provisions outlined in NAFTA, Trump could legally withdraw from the agreement. If he were to do so, he would have to consider removing the U.S. from the economic integration and interdependence that it has been committed to since the inception of NAFTA. The financial commitment of negotiating new bilateral agreements and re-establishing the U.S. independently of Canada and Mexico would also require significant financial investments. Although Trump has expressed significant opposition to NAFTA, he does not completely disregard it, stating: “I’m going tell our NAFTA partners that I intend to immediately renegotiate the terms of that agreement to get a better deal for our workers. And I don’t mean just a little bit better, I mean a lot better. If they do not agree to a renegotiation, then I will submit notice under Article 2205 of the NAFTA agreement that America intends to withdraw from the deal.” Nearly 25 years of NAFTA has left the American, Canadian and Mexican governments, economies, and industries, significantly intertwined, as exemplified by the “Three Amigos Conference” in June of 2016. For the U.S. to withdraw or even renegotiate the terms of NAFTA, would alter not only the economic relations between the countries, but the entire relationship and context of North America.

The dissolution of the TPP would therefore not only be a missed opportunity for growth for both the U.S. and Canada, but would also have political consequences, as the U.S. played a significant role in convincing Canada to join the TPP to begin with.

What would U.S. withdrawal from NAFTA mean for Canada? Would trade relations between Canada and the U.S. return to the CUSFTA from 1989, as it was before the introduction of NAFTA? Or would Canada-U.S. trade relations evolve into the Trans-Pacific Partnership (TPP) which has recently been taking shape?

The TPP, a multilateral free trade agreement with twelve member countries, including the U.S., Canada and Mexico, would effectively take precedence over NAFTA if it were set into force, which is unlikely to be the case. Trump has already vowed that as President, he would withdraw his support of the TPP claiming “The Trans-Pacific Partnership is another disaster done and pushed by special interests who want to rape our country — just a continuing rape of our country. It’s a harsh word, but it’s true.”. For the TPP to come into force, at least six of the countries involved making up 85% of the groups economic output must ratify the agreement by February 2018. Of the twelve countries then, either Japan or the U.S. must ratify to meet this criterion. Despite predictions that the TPP would give the U.S. greater economic competitive advantage and would support middle class jobs in the U.S., Trump is adamant about his position.

Canada, on the other hand, has more to gain from the TPP, as it would benefit from “increased market access and greater regional economic integration with Asia-Pacific countries”, leading to an estimated increase of 0.127% of Canada’s GDP. The dissolution of the TPP would therefore not only be a missed opportunity for growth for both the U.S. and Canada, but would also have political consequences, as the U.S. played a significant role in convincing Canada to join the TPP to begin with.

It would seem then that Canada’s options in terms of maintaining trade relations with the U.S. are unlikely to include the TPP, and are more likely to be limited to strict negotiations within NAFTA or potentially a bilateral agreement between the U.S. and Canada alone, as was seen with the CUSFTA from 1989 to 1994. While foreign relations with Canada may not be a pressing matter on Trump’s agenda, Canada should certainly ensure that trade remains open along its only border, while trying to decrease its economic dependence on the U.S. through exploring trade avenues with other nations and with other multilateral trade agreements.

Canada is party to many free trade agreements and is in the process of negotiating many more, most of which relating to bilateral agreements. Additionally, the Canada – European Union Comprehensive Economic and Trade Agreement (CETA) was concluded on October 30th, 2016, further signaling Canada’s willingness and openness to further participate in international free trade and perhaps an indicator as well, of Canada expanding its economic partnership horizons.

 

Valerie Kiefer is a Masters candidate at the Norman Paterson School of International Affairs at Carleton University. During her undergraduate degree at McGill University, where she majored in Political Science and International Development Studies, her first peer-reviewed article was published in the 2016 edition of the Carleton Review of International Affairs, entitled The Influence of Institutional Interplay on the Development of the BRICS Bank.

Leave a Reply

Your email address will not be published. Required fields are marked *