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NAFTA, Trump and Canada: A guide to the trade file and what it could mean for you

For more than 20 years, NAFTA has tied the continent’s economy together. Now, Washington wants to give the trade deal a massive overhaul in talks starting this summer. Get caught up on The Globe’s latest coverage of what that means

Trade: Where we are right now

  • During a rally in Phoenix last night, President Donald Trump said the U.S. will “probably” terminate NAFTA because he doesn’t think a deal can be made. His comments come a week after renegotiation talks began.
  • Last week, the U.S. also formally demanded that the Chapter 19 dispute resolution panels favoured by Canada be scrapped from the North American free-trade agreement. Ottawa has vowed to walk away from the talks before it accepts a NAFTA without the panels.
  • The first round of NAFTA talks failed to bridge differences between the three countries and left little signs of any concrete actions. Take a look at what was on the table, and the people negotiating them since the initial renegotiations concluded on Aug. 20.
  • Next month, Mexico will play host to the second round of talks from Sept. 1 to 5. according to top trade officials from the three countries.
  • Talks will then move to Canada later in September, and return to the United States in October.

What is NAFTA?

The 1994 agreement – an expanded version of a Canada-U.S. free-trade deal from 1988 – created what was then the biggest free-trade area in the world. It removed barriers to the flow of goods and labour between Canada, the United States and Mexico, under the oversight of an independent dispute-settlement process.

Flashback: President Clinton’s original signing of NAFTA into law in 1993

Canada – the world’s largest purchaser of U.S. goods – saw its exports to U.S. markets soar. The Americans are less dependent on NAFTA than Canada is, The Globe’s Steven Chase explains: Trevor Tombe, a University of Calgary economist, calculates that there are only two American states – Michigan and Vermont – where trade with Canada exceeds 10 per cent of their annual economic output.

There are only two U.S. states – Michigan and Vermont – where trade with Canada exceeds 10 per cent of their annual economic output, according to University of Calgary economist Trevor Tombe.

For years, the Canadian government has repeated its claim that Canada is the most important foreign market for 35 U.S. states. This map is posted on a government website that promotes trade.

This map, using data retrieved from the U.S. Census Bureau, shows Canada’s share of total U.S. exports, by state. It shows that, for a majority of states, less than 30 per cent of total exports go to Canada.

What has NAFTA done for us? Four views from three countries:

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Why change NAFTA?

The politics of free trade have undergone a remarkable U-turn since NAFTA, and the FTA before it, came into being.

In 1988, Canada had a Progressive Conservative prime minister, Brian Mulroney, who fought an election over the Canada-U.S. trade deal with the Liberals opposing it. He also had pro-free-trade Republican allies in the White House, with Ronald Reagan and later George H.W. Bush, backing him up.

Contrast that with 2016, when protectionism turned into a defining theme of the U.S. election. Both presidential candidates opposed the Trans-Pacific Partnership, a trade deal even bigger than NAFTA, but the Republican Mr. Trump also singled out NAFTA and promised to erect a wall along the U.S.-Mexico border. In his inauguration speech, Mr. Trump promised an “America first” attitude to trade, immigration and foreign affairs.

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What does Trump want a new NAFTA to look like?

U.S. President Donald Trump warned on Tuesday that he might terminate the NAFTA trade treaty. “Personally, I don’t think we can make a deal,” he said to thousands of supporters in Phoenix. Although the first initial round of talks did not make much of a breakthrough for any of the three countries, Trump suggested a termination might jump-start the negotiations.

In reaction to Trump’s remarks, Mexican foreign minister Luis Videgaray tweeted he was not surprised, and that Mexico will remain at the negotiating table.

Prior to his comments at the rally, the Trump administration’s demands on NAFTA going into the negotiations were often unclear and ambiguous. U.S. Trade Representative, Robert Lighthizer said in his opening statement in Washington that NAFTA has “fundamentally failed many, many Americans.”

Last week, the U.S. formally demanded the end of Chapter 19 dispute resolution panels and seek a U.S.-content requirement in manufactured goods including cars and trucks. Both proposals have been rejected by Canada and Mexico.

In its initial months, Mr. Trump’s inner circle strongly disagreed about what demands to make in NAFTA renegotiations. There was a moderate camp, including Treasury Secretary Steve Mnuchin and Mr. Trump’s son-in-law Jared Kushner, that wanted to enhance NAFTA and make cross-border business easier for corporations, and a protectionist camp, including former chief strategist Steven Bannon.

Out of that conversation came an initial list of 100 broad, sometimes vaguely worded demands that the U.S. Trade Representative’s Office released on July 17. Some highlights include:

  • Reducing the U.S. trade deficit within NAFTA, which could mean increasing U.S. exports or reducing Canadian and Mexican imports.
  • Scrapping NAFTA’s dispute-resolution panels, which have sometimes ruled in Canada’s favour on softwood lumber and other trade issues.
  • Making it easier for U.S. telecom companies and banks to operate in the other NAFTA countries.
  • Opening up more Canadian or Mexican government contracts to U.S. companies.
  • Using “Buy American” provisions to bar Canadian or Mexican firms from seeking U.S. government contracts.
  • Making Canadian and Mexican intellectual-property rules more “similar to that found in U.S. law.”

The list doesn’t specifically mention Canada’s dairy supply-management system (more on that below), but it asks to eliminate “non-tariff barriers to U.S. agricultural exports,” which could refer to dairy or to Mexico’s domestic sugar subsidies.

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Canada’s contentious trade issues

Chapter 19 and the ‘red line’

The independent panels created by NAFTA’s Chapter 19 are a key part of how the member countries settle trade disputes. If Country A imposes trade duties on Country B that B’s government thinks are unfair, it can appeal to an independent panel rather than seeking redress in Country A’s courts, which could presumably be biased in Country A’s favour.

Canada likes this arrangement because it has used it to successfully challenge American duties on softwood lumber (more on that below) and other products. But the Trump administration thinks the independent panels are a violation of U.S. sovereignty, and it wants U.S. courts to handle trade disputes.

In July, a senior official told The Globe that scrapping the independent panels is a “red line” Canada will not cross, and the Trudeau government would walk away from NAFTA talks if the U.S. won’t budge. Mr. Trudeau wouldn’t confirm the part about potentially walking away, but said he considers the panels “essential” to a new deal.

Dairy supply management

Canada’s dairy, egg and poultry industries are governed by a supply-management system that dates back to the 1970s. It has three parts, The Globe’s Barrie McKenna explains: Fixed prices, production quotas and tariffs to protect Canadian producers from foreign competition. The dairy tariffs – which run up to 270 per cent, and which Canada tightened last year to include unfiltered milk products used to make cheese and yogurt – have been a thorn in the side of other dairy-producing nations like the United States, Australia and New Zealand.

Mr. Trump’s interest in the dairy file began with events in Wisconsin, a major dairy-producing state, The Globe’s Joanna Slater explains. Local processor Grasslands Dairy Products Inc. wrote a letter to Wisconsin farmers recently saying it would stop buying the farmers’ milk because of new Canadian classification rules for a product used in cheese making, which would give companies an incentive to buy domestically instead of from the United States. A letter-writing campaign to Mr. Trump – who narrowly won the state in last year’s election – and congressional efforts by Wisconsinite House Speaker Paul Ryan made the dispute into a national issue, and at an April 18 event in Kenosha, Wisc., the President vowed to challenge Ottawa on its dairy policy:

In Canada, some very unfair things have happened to our dairy farmers, and others, and we're going to start working on that. It's another typical one-sided deal against the United States.

He followed that up with more criticism in Washington – which also took aim at Canada’s energy and lumber sectors – and a tweet on April 25:

Canadian Prime Minister Justin Trudeau objected to Mr. Trump’s assertions, saying Canada was not the cause of U.S. farmers’ misfortunes and that Canada would stand by supply management:

The U.S. has a $400-million dairy surplus with Canada so it's not Canada that's the challenge here. Let's not pretend we're in a global free market when it comes to agriculture.

Softwood lumber

Feuds over softwood lumber have been a recurring part of Canada-U.S. relations since the 1980s. Their root cause is U.S. industry’s contention that Canada unfairly subsidizes its lumber by providing cheap access to public land. It’s led to a cycle of American punitive action, followed by trade cases mostly won by Canada, and then a compromise settlement.

The fifth and most recent lumber war was set off on April 24, when U.S. Commerce Secretary Wilbur Ross said his agency would impose new anti-subsidy duties on Canadian softwood. The initial duties added up to about 20 per cent, but a second wave of anti-dumping duties in late June brought that total to about 27 per cent.

The federal cabinet discussed an aid package for the softwood industry in May, but waited for provincial input from a special working group before announcing $867-million in aid on June 1. Ottawa is offering the industry loan guarantees, help finding new markets for its products, employment-insurance support for workers and money for new initiatives from Indigenous forestry producers.

What about Mexico?

Building barriers (both physical and economic) with Mexico has been Mr. Trump’s stated goal since he began running for president; in the 2015 speech announcing his campaign (the one where he said “rapists” and criminals were coming across the U.S.-Mexico border), he said Mexicans were “laughing at us” and “killing us economically.” Now that Mr. Trump is president, Mexican President Enrique Pena Nieto is in a tight spot. He is facing domestic pressure to stand up to Washington about the wall that Mr. Trump wants Mexico to pay for, which Mexico refuses to do. But Mr. Pena Nieto also has to avoid alienating a major trading partner and being shut out of the new North American trade regime.

Major trade issues for Mexico in the NAFTA talks include:

  • Energy: Mexico’s energy market has undergone major free-market reforms in recent years, making it a lucrative target for U.S. and Canadian energy companies. Ottawa and Washington would want to see that liberalization cemented in a new NAFTA, Globe energy reporter Shawn McCarthy explains.
  • Auto manufacturing: The spectre of U.S. auto makers moving assembly plants to Mexico was a frequent target of Mr. Trump’s election speeches last year. The Trump administration’s proposed changes to “rules of origin” would have a big impact on auto manufacturers by redefining which products can be shipped duty-free across borders, based on where their component parts come from.
  • Sugar: Under NAFTA, Mexico’s sugar producers have free access to the U.S. market, but U.S. refiners accuse Mexico of subsidizing its industry and hurting American business. The nations reportedly reached a deal on the issue in June, averting a messy escalation of duties on Mexican sugar and American high-fructose corn syrup.

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Who’s deciding NAFTA’s future?

Here’s some more reading on key people to watch on the trade file.

The Canadian side:

  • Chrystia Freeland, Foreign Affairs Minister
  • François-Philippe Champagne, International Trade Minister
  • Steve Verheul, chief NAFTA negotiator
  • David MacNaughton, Canadian ambassador to the U.S.
  • Bipartisan advisory panel that includes former Conservative and NDP politicians, the head of the Assembly of First Nations, business leaders and labour organizers

The American side:

The Mexican side:

  • Ildefonso Guajardo, Economy Minister
  • Luis Videgaray, Foreign Minister
  • Kenneth Smith, chief NAFTA negotiator

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How could this affect me?

Uncertainty over NAFTA’s future has already had far-reaching effects on the Canadian economy, from the dollar to the energy sector – and, ultimately, to your personal finances. Here’s some more reading on what might be coming.

More reading on the economy and personal finance:

More reading on oil and gas:

More reading on manufacturing and technology:

More reading on agriculture:

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What about the rest of the world?

A new North American trade regime would be only part of larger changes in America’s, and Canada’s, role in the world – and with NAFTA’s future in question, Canada is looking for other sources of trade revenue.

Europe: The European Union, Canada’s second-largest trading partner, finalized a trade deal with Canada even broader in scope than NAFTA: the Comprehensive Economic and Trade Agreement (CETA). That deal was supposed to go into effect in July, but has struggled to get ratification from all 28 EU member states.

Asia-Pacific: Mr. Trump’s decision to withdraw the United States from the Trans-Pacific Partnership effectively killed the 12-nation trade deal, but the signatories and other Pacific nations are trying to regroup, possibly with China’s help instead. At May’s Asia-Pacific Economic Conference in Hanoi, Canada and 10 other nations agreed to re-evaluate the trade deal.

Here’s some more commentary and analysis exploring the global questions.

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What’s next?

NAFTA talks: The first round of talk have concluded in Washington. Mexico says it will play host to the second round from Sept 1 to 5.

Talks will then move to Canada later in September, and return to the United States in October.

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With reports from Steven Chase, Robert Fife, Adrian Morrow, Barrie McKenna, Evan Annett, Reuters and The Canadian Press


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