Canada and Mexico say they are ready and willing to reopen NAFTA – if that's what Donald Trump wants.
Are they happy about it? Most definitely not.
The North American free-trade agreement has been the glue that has bound the economies of the three countries since 1994. And before that, there was the 1989 Canada-U.S. free-trade agreement. All three countries have gained in the arrangement by cutting tariffs and other barriers. The combined GDP of the three erstwhile amigos has tripled.
And now, the U.S. president-elect, who won the White House by promising to bring millions of jobs back to the United States, wants a new and better deal. So what's at stake for the three countries in a NAFTA 2.0?
The United States
Exactly what Mr. Trump wants is not clear, short of bringing "jobs and industry back on to American shores" – as he explained in a video manifesto released this week. The video, which outlines plans for his first 100 days in office, makes no mention of NAFTA.
And yet, dumping on the deal was a huge part of Mr. Trump's campaign. And reversing the large U.S. trade deficit (a combined $76-billion U.S. last year with Canada and Mexico) remains a key target of his team as it prepares to move into the White House in January. A memo, obtained recently by CNN, says Mr. Trump intends to propose changes to the treaty on issues such as currency manipulation, lumber, country-of-origin labelling for meat as well as environmental and safety standards.
Mr. Trump talked during the election of a 35-per-cent tariff on Mexican imports and punishing U.S. companies that move there.
Mr. Trump's team also wants to scrap a NAFTA provision that allows Mexican and Canadian companies to challenge U.S. regulations outside the court system, according to the Wall Street Journal. It is not clear whether this refers to the dispute mechanism system, which has been used successfully by Canada to fight off duties on lumber and steel products, or the more controversial Chapter 11 arbitration system that allows foreign investors to directly sue NAFTA governments for compensation. Doing away with the investor regime would be self-defeating: U.S. companies have launched – and won – more of these cases than Canada and Mexico combined.
Punishing Canada might not be a winner either. Yes, Canada enjoys a trade surplus, but it's been shrinking. It was $15.5-billion (U.S.) in 2015, down nearly 60 per cent from the year before, mainly because of tumbling oil and gas prices.
U.S. exporters love Canada. It is the single largest market for U.S. goods and services, accounting for 15 per cent of everything the United States sells to the world. There is a high degree of integration within industries such as autos, aerospace and food products. Nearly two-thirds of products and services that cross the Canada-U.S. border are inputs for final products. Car parts typically cross the border multiple times before a vehicle reaches the consumer. And roughly 13 per cent of imports from Canada go into U.S. products sold to third countries.
Mr. Trump apparently wants to target Canadian lumber and livestock exports. Open the deal and Canada's heavily protected dairy market could also be on the table. But making Canada pay may not repatriate U.S. jobs. The United States has already effectively removed lumber from NAFTA, forcing Canada into a managed trade deal. The last thing the U.S. lumber industry wants is for lumber to be put back in NAFTA. Perpetuating or increasing those restrictions will also make lumber – and U.S. homes – more expensive.
The same applies to livestock. Reinstating U.S. country-labelling rules, which Canada and Mexico successfully removed through previous trade action, would make meat at U.S. grocery stores pricier.
Perhaps no country has more to lose in all this than Mexico. It has been the focus of much of Mr. Trump's fiery rhetoric on trade and immigration.
If Canada is the outer ring of Mr. Trump's bull's eye, Mexico is dead-centre. The U.S. trade deficit with Mexico rose nearly 10 per cent in 2015 to $60.7-billion (U.S.). Canada's deficit was $15.5-billion (U.S.).
Mexico could fight any punitive tariff at the World Trade Organization. Mexico might respond with duties of its own, which could hit some of the top five U.S. exports to Mexico: machinery, electronic products, vehicles, oil and plastics.
And there is something else Mr. Trump might want to ponder. NAFTA has helped Mexico develop a middle class and a more diversified economy. Walling it off again would send it into a downward spiral of poverty and instability – precisely the conditions that triggered previous waves of illegal immigration.