Andrei Sulzenko was a negotiator for the Canada-U.S. free-trade agreement and is currently executive fellow at the School of Public Policy, University of Calgary.
There is much hand-wringing in Canada about the Trump administration's call to renegotiate the North American free-trade agreement. Indeed, the prospect itself is disruptive, as business abhors uncertainty about as much as misguided policy.
It is also true that NAFTA, like any trade agreement, can always be modernized and improved. Ironically, the Trans-Pacific Partnership (TPP), involving all three NAFTA partners, and from which President Donald Trump has just excluded the United States, had numerous upgrades over NAFTA that would have benefited U.S. commercial interests. Too bad we never found out why it was so horrible.
That was then, and Canada now needs to decide how to respond to the U.S. demand for NAFTA renegotiation. It is too early to set out areas of potential give-and-take, but Canadians should understand what ultimately is at stake. It is less than meets the eye, and our negotiators can and should be resolute when sitting across the table from the Americans.
Let's fast-forward to a highly improbable, worst-case scenario under which the talks do not go well, and the United States threatens to withdraw from NAFTA.
Following through on that threat would likely involve the U.S. Congress, since the question of authority to abrogate treaties is not definitively settled under the U.S. Constitution. Given the dependence of more than half the states on trade with Canada and the less than enthusiastic embrace of protectionism by the President's own titular party, congressional agreement with abrogation is unlikely – unless the real U.S. objective was to jettison Mexico.
As Lawrence Herman pointed out, in those circumstances the original Canada-U.S. free-trade agreement (FTA) would still stand as a separate treaty, thereby allowing for specific bilateral improvements rather than more complicated trilateral negotiations.
Carrying the improbable worst-case scenario further, let's say bilateral negotiations go poorly as well, and no outcome that is a win for both countries is possible. Where would U.S. abrogation of the FTA leave Canada? To be sure, it would be highly disruptive and damaging to both countries – but not cataclysmic.
Here's why. Backstopping all bilateral and plural-lateral trade agreements are the multilateral undertakings under the World Trade Organization (WTO). With respect to tariffs, duty-free access under NAFTA or the FTA would be replaced with most-favoured-nation (MFN) tariffs "bound" under WTO agreements. In the case of the United States, its trade-weighted average MFN tariff is 2.2 per cent, while Canada's is 3.2 per cent. On the surface then, Canadian industry would become relatively more protected than U.S. industry.
Certain sectors would, of course, be more affected than others. Take autos. Here the U.S. MFN tariff for cars and parts is between 2.5 per cent and 5 per cent, while Canada's is about 6 per cent. The United States has, however, had a punitive 25-per-cent tariff on light trucks since the Johnson administration (in retaliation at the time for European measures against U.S. chicken imports).
With respect to non-tariff measures, most WTO undertakings are equivalent to or better than those of the FTA or NAFTA. This includes undertakings in controversial areas such as export subsidies, government procurement and dispute settlement. For example, on dispute settlement, Canada chose to launch a complaint under the WTO rather than NAFTA against U.S. food labelling requirements; Canada won, and Congress rescinded the offending legislation.
The bottom line is that Canada should be fearless in pursuing its negotiating objectives and not cave-in to "America First" demands.
The old saying, "no agreement is better than a bad agreement" applies. Failure to reach agreement will not result in the end of the world as we know it. Even consequent abrogation of NAFTA and the FTA by the United States would have everyone fall back on multilateral undertakings under the WTO – not ideal but survivable.
There is, though, one possible black-swan outcome, albeit currently unforeseen. That is for the United States to turn its back on the WTO as well. In fact, the threat of high tariffs bandied about during and after the recent election campaign would be illegal under long-standing WTO rules as well as accompanying U.S. legislation.
The President's authority here is broad but at the same time limited to specific circumstances such as national or sectoral emergencies, responses to unfair dumping or subsidies, and national security.
Ignoring those legal constraints and imposing duties in response to perceived slights would invite retaliation from U.S. trading partners pending due-process resolution through domestic and international channels. If a trade war ensues, and as part of that escalation the WTO is ignored, all bets are off, and the preceding more sanguine analysis is beside the point.