John Weekes is senior business adviser at Bennett Jones LLP and former Canadian chief negotiator for the NAFTA.
The election of Donald Trump as president of the United States has prompted a flurry of speculation about what his campaign pledge to renegotiate or withdraw from the North American free-trade agreement might actually mean. A number of commentators have been quick to suggest that if Mr. Trump tore up NAFTA it would be no big deal, because we could just fall back on the Canada-U.S. free-trade agreement (FTA). Part of this narrative then becomes that our relationship with Mexico doesn't really matter much. I strongly disagree on both counts.
Here are two points of advice for Canada: One, let's wait to see what Mr. Trump as president actually decides to do about NAFTA, rather than react publicly to his campaign rhetoric; and two, given the seriousness of the situation, the government should urgently, but quietly, begin preparations for a possible renegotiation of NAFTA.
Given the primordial importance of our trade relationship with the United States, some Canadians might be forgiven for occasionally forgetting about the importance for Canada of our other NAFTA partner. Mexico is one of the world's pre-eminent emerging economies. It has the 15th-largest GDP in the world; Canada ranks 10th. Furthermore, we have a first-class trade agreement with the country – something we have been trying to strike with other emerging economies. Under the influence of NAFTA Mexico has become our fifth-largest export market and our third-largest supplier. Trade between Mexico and Canada has grown by more than 800 per cent since NAFTA came into force. Much of the trade with Mexico is inputs to North American supply chains, inputs that help make North American companies more competitive on a global basis.
As we prepare for a possible renegotiation of NAFTA we should use the current situation as an opportunity to strengthen our long-term strategic partnership with Mexico. Let's make certain we don't undermine this opportunity by accidentally giving the Mexicans the impression that we are a fickle partner.
Canada's objectives should be straightforward: Exchange intelligence and compare analyses, and reduce the prospects for the United States to play one of us off against the other. Of course, we need to recognize that our objectives may diverge in some areas. That is normal in any international relationship.
Some seem to think that we can improve our credentials in Washington by stiffing the Mexicans. In fact, many of our friends and allies in the United States are very supportive of NAFTA and free trade with Mexico. We should also remember that Americans of Mexican origin and their descendants make up an ever more important part of the U.S. electorate. By working with Mexico we might actually achieve more in the United States than we could do alone.
Now let's turn to the second point. How would Canada fare if we fell back on the FTA? What would happen to North American supply chains? What would be the actual effect on Canada-U.S. trade of replacing NAFTA provisions, now in force for nearly a quarter of a century, with the less comprehensive language in the FTA? And if the United States wanted to pursue an agenda with Canada, might it also threaten to invoke the six-month termination clause in the FTA?
Here are a few of the specific problems Canada would encounter in returning to the FTA:
- The binational-panel system for addressing anti-dumping and countervailing disputes – a major accomplishment – expired under the FTA after seven years, but was made permanent under NAFTA. It would not be replaced, as the United States never liked it;
- Going back to the less-precise FTA rules of origin would risk returning to FTA-era disputes (Honda, GM-Cami) about whether certain Canadian-made products qualified for FTA treatment;
- Losing the strong NAFTA framework of rules for trade in services and investment under which companies have expanded and invested for over 20 years would pose serious uncertainties for established business relationships;
- Some have questioned the utility of keeping the investor-state dispute settlement provisions of NAFTA. They may be about to become more useful to Canadian business in a more protectionist U.S. trade environment where deal making may trump a framework of laws and regulations;
- Unlike the FTA, NAFTA has an effective provision to protect Canadian exporters from being sideswiped in a general U.S. safeguard action against injurious imports from all countries when Canadian products are not part of the problem;
- The general intergovernmental dispute settlement procedures in the FTA were strengthened in NAFTA.
Clearly, as part of its policy preparations, the Canadian government should take a serious look at just what would be involved in going back to the FTA, a move that would create an environment of enormous uncertainty for Canadian business.