Canadian exporters: Keep calm and carry on while NAFTA up in the air

As Canada prepares to renegotiate, or possibly see the death of the North American free-trade agreement with the United States and Mexico, the best advice to Canadian exporters seems to be: Keep calm and carry on … and strap in for what might be a bumpy ride.

“I don’t think we can anticipate anything. I think we have to plan for multiple scenarios, various different options,” says Danielle Goldfarb, director of the Conference Board of Canada’s Global Commerce Centre.

Like most leading think tanks, the Conference Board is deep into analyzing the often-conflicting signals on NAFTA emanating from U.S. President Donald Trump and his administration. In early June, the group is holding a webinar to discuss what Canada should call for in negotiations, and what to expect.

President Trump has alternated between calling NAFTA the “worst deal in history” during last year’s election campaign, to telling Prime Minister Justin Trudeau he was simply looking for a few “tweaks” to the 1994 deal, which has boosted cross-border trade and the integration of manufacturing in the area substantially.

Although the Trump administration has gone back and forth on the issue, just as recently as yesterday, U.S. Commerce Secretary Wilbur Ross warned that the United States may still pull out of the deal.

The most contentious issues include agriculture and lumber. Mr. Trump has tweeted that, “we will not stand for” Canadian marketing board supports for dairy farmers.

And on April 24, Mr. Ross slapped a 20-per-cent tariff on Canadian softwood exports into the United States. Mr. Ross called it “a bad week for U.S.-Canada trade relations,” and, referring to NAFTA, said pointedly that “this is not our idea of a properly functioning trade agreement.”

While most analysts are willing to chalk up some of the U.S. commentary as rhetoric and posturing, there is nevertheless unmistakable concern about where this aggressive talk might lead.

On May 2, John Manley, president and chief executive officer of the Business Council of Canada wrote Prime Minister Trudeau saying that his organization’s members are “deeply concerned about the future of Canada’s trade partnership with the United States and Mexico.”

The letter continued, “The prospect of a new round of NAFTA negotiations represents both a risk and an opportunity for Canada. …

“At a minimum … Canada’s objective must be to protect the framework of rights, benefits and privileges that our companies and citizens currently enjoy under NAFTA,” wrote Mr. Manley, a former Canadian deputy prime minister.

“Canada also should seek to modernize and improve the agreement in ways that will create new opportunities and enhanced prosperity for citizens across the continent.”

There is a consensus that these are sensible objectives; the challenge now is to try to achieve them with a bombastic, unpredictable negotiating partner.

Canada needs to play both offence and defence in the negotiations, says Andrea van Vugt, the Business Council’s vice-president of policy for North America.

“It’s important that in our negotiations, Canada ensures that existing access [to the North American market] isn’t eroded.”

There is a lot at stake. About three-quarters of our exports go south of the border, according to Export Development Canada; by comparison, about 10 per cent of our exports go to our second-largest trading partner, the European Union, according to the Canadian Trade Commissioner Service.

Perhaps even more important are the continental supply chains that have grown since NAFTA was ratified in 1994. For instance, goods such as auto parts go back and forth across both the Canadian and Mexican borders many times as cars and trucks are built.

The auto industry was worth $79.8-billion last year, according to Canadian customs data. Vehicle and auto-parts manufacturing provided nearly 127,000 Canadian jobs in 2016, and this does not take into account the thousands of indirect jobs that the sector contributes for services such as transport, retail and administration.

In addition to imposing the softwood tariff and seeking to dismember Canada’s agricultural supports, President Trump has also mused about imposing a border tax on Canadian exports to America. This is already being met with second thoughts in Congress and state governments, because it invites retaliation, and for 35 states, Canada is the top export market.

As Canada and Mexico wait for NAFTA negotiations to get under way, businesses cannot do much in anticipation of the possible negative U.S. demands, other than to keep doing business as usual, make their views clear through their umbrella organizations and count on Canadian negotiators to take strong positions to avoid any attempts by the United States to erect new trade barriers, experts say.

The softwood and agricultural issues are seen by most as perennial irritants that Canada will have to continue to negotiate regardless of the NAFTA negotiations. As for the President’s outrage over various aspects of NAFTA, “My advice would be, don’t extrapolate what’s in a tweet to the larger relationship between Canada and the U.S.,” said Lloyd Blankfein, chief executive officer of Goldman Sachs Group Inc. during a recent visit to Toronto.

Former prime minister Brian Mulroney, who successfully negotiated the Canada-U.S. free trade deal that preceded and formed the backbone of NAFTA, said last month that Canadian negotiators should be prepared for “more than a tweak” in the U.S. demands.

The United States might zero in on “rules of origin” that determine how much of a product is American-made, and the dispute-resolving mechanism in the agreement, he said.

Negotiations are not a bad thing for Canada, because the 1994 agreement is ready for an update, Ms. Goldfarb says. From Canada’s point of view, it could do with a refreshment of the rules for how Canadians, Americans and Mexicans move across borders to work.

Mr. Manley agrees. “Canada’s negotiators should take this opportunity to modernize our country’s trade and investment relationships with Mexico and the United States,” he said in his letter to the prime minister.

“Labour mobility and customs procedures are two areas in which NAFTA’s provisions are clearly outdated,” he said.

“Opportunities exist in areas such as intellectual property, e-commerce, the treatment of state-owned enterprises, competition rules, sanitary and phytosanitary measures [certifying that agricultural products are pest-free], labour, environment, procurement and regulatory co-operation.”

That is a tall list. Meanwhile, Canadian businesses can do little but wait until the procedural machinery cranks to let the negotiations begin.

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