U.S. Government’s NAFTA Wish List: What it Means for Canadian Exporters

The American Government’s NAFTA demands are receiving different reactions from experts familiar with the Canadian market. Here we offer three opinions.

When the Office of the United States Trade Representative released its objectives for NAFTA’s renegotiation, many were cautiously optimistic that it didn’t strike the protectionist tone of U.S. President Donald Trump’s election campaign would have suggested. They pointed to the elimination of Chapter 19 as a concern, as well as changes to procurement, which ask for more access to government contracts in Canada and Mexico, but want to tighten reciprocal access to U.S. procurement. They also noted the increase to the dollar amount Canadian and Mexican consumers can bring across the border through e-commerce.

We offer three views from Canadian experts who know a thing or two about NAFTA as it currently stands, and what Canada’s exporters want from NAFTA 2.0.

Dennis Darby, president and CEO of canadian manufacturers & exporters

Dennis Darby was pleasantly surprised, for the most part, when he saw the list of U.S. demands on July 17.

“It’s pretty comprehensive and covers a lot of stuff,” Darby said, speaking for his members in the manufacturing sector. “It’s clear a lot of things are on the table. We think NAFTA is okay as it is, but we also think the agreement can be strengthened—so that’s the good news.”

Specifically, he said the whole deal could be modernized as it was struck “before GPS and the internet.” His hope for modernization is that the deal incorporates electronic and digital technology considerations that could, for example, get rid of red tape at the border; possibly borrowing from more up-to-date agreements such as those Canada has struck with Europe or Korea.

Darby also liked the section about currency manipulation and dealing with countries outside of NAFTA, saying it thinks Canada, the U.S. and Mexico can leverage NAFTA to deal with unfair trade practices from countries outside of the bloc, such as those in Asia.

“Canada trying to take on some of the large economies, and dealing with unfair trading practices with the WTO is hard, but doing so with the support of the continent, that could work,” he said.

The bad news, from a manufacturing point of view, was the continued discussion of Buy America, which Darby said is counter to free trade.

“We’d prefer if we eliminated or minimized those protectionist provisions,” he said and added that while they would prefer a reduction, Canadians could likely live with the status quo.

“Maybe we’d want them to at least not introduce any new ones,” he said.

Not surprisingly, he’s concerned about the elimination of Chapter 19, the dispute-settlement mechanism.

“It’s really important for Canada that there is a third party and we’ve tried to make this point,” he said. “Our U.S. counterparts have asked us why we care, saying we can always rely on a U.S. civil court. But when you’re a small country dealing with a really big country, having an independent third-party arbitrator is important.”

His third area of concern is with the U.S. wanting to change rules of origin.

“That would be extremely difficult because it’s sector specific and there are thousands of pages of rules. The idea of changing that is inconsistent with what we’ve heard from the U.S. administration, which is that they want these negotiations to happen quickly,” he said. “My question is what problem are they trying to solve? We’re concerned about what that could lead to and how complicated it would be.”

Birgit Matthiesen, director, Canada-U.S. cross border business affairs at Arent Fox LLP

Birgit Matthiesen said it was clear to her that the U.S. administration meant business when it chose Aug. 16 as the start date for the negotiations—the first possible date the U.S. could legally start.

Asked how she would respond as a Canadian exporter, she said she’d first study her company’s exposure to the current NAFTA rules.

“For example, what’s the percentage of my production line that is destined to the United States and what is the percentage of those exports for which I am benefiting from NAFTA?” she asked. “I’d be looking at what is my risk. How has my company used the rules to gain NAFTA tariff free access to the U.S. and the broader NAFTA region? Are the rules that apply to me going to be changed? If there is a change, could it adversely affect my access to the U.S. market and production lines? What will the revenue impact be? If company leaders cannot answer these questions they need to be worried.”

She also advised Canadian exporters to talk to the federal government, which has indefinitely extended the period under which it’s inviting interested party to offer their views on renegotiation. “You want to make sure they know about you and your concerns,” she said.

From her perspective, the companies most affected may be those in the automotive sector—parts and manufacturing. She would also put North American steel and heavy manufacturing in general in that category.

“You need to ask what’s at risk if the NAFTA rules of origin are tightened or made more restrictive to favour either U.S. content or more restricted North American content. You should also ask whether a renegotiated NAFTA offers any opportunity for you.”

Overall, she said, the U.S. administration has made it clear it wants to preserve and create U.S. jobs and U.S. production and eliminate trade deficits.

“They want manufacturing production preferably in the U.S. or at least in North America,” she said. “That’s what they’re gunning for. Wilbur Ross has made that quite clear.”

She said it’s also worth checking to see if your product is in a sector where Canada is currently running a trade surplus with the U.S.

Other stated U.S. renegotiation objectives are also noteworthy. Because of Canada’s supply chains with U.S., modifications in the NAFTA procurement provisions are also a worry as a U.S. objective is keeping Canadian and Mexican markets open while strengthening restrictions to American procurement opportunities.

She said the caveats in that clause, which include “national security, measures necessary to protect public morals, order and safety, protecting human, animal or plant life or health, and protecting intellectual property” are “expansive.”

And, she added, Canada has “huge amounts of money involved in procurement” in the U.S.

Her parting piece of advice to Canadian exporters? “Eyes wide open. The language sounds broaKristelle Audet, senior economist for the Conference Board of Canadad and most of it sounds benign. But if you look at the current NAFTA agreement, the current mood in the U.S. and the summary document, it sends very clear signals—in very soft language.”

Kristelle Audet, senior economist for the conference board of Canada

For her part, Kristelle Audet said she’s relieved by what she saw in the U.S. objectives document. As an author of a report on the Conference Board’s five key recommendations for Canada on NAFTA 2.0, she said she sees the U.S. objectives as being all about enhancing and modernizing the agreement.

For example, the American administration seems to want to increase the coverage of goods, services and investments that are included in the agreement rather than reducing their scope, she said.

“A few months ago, there was a more protectionist agenda, but we’re seeing this won’t necessarily be the case,” she said. “It may actually, in fact, be more beneficial.”

One section she particularly liked was the U.S. commitment to consider SMEs. This group often finds the rules of NAFTA overwhelming and simply default to the most-favoured nation tariffs outlined by the World Trade Organization.

“The U.S. is making a commitment to watch out for SMEs,” she said. “This is good for Canada’s SMEs, too.”

Indeed, she said there aren’t many things that are concerning in the objectives, from the standpoint of what her report focused on. The Conference Board had been particularly concerned about the automotive sector, which she noted isn’t specifically mentioned in the objectives.

“There’s potentially a review of rules of origin in general,” she said, “but the auto sector, where the rules are more complicated and supply chains are well integrated, isn’t mentioned specifically.”

On procurement, she acknowledged that the U.S. wants to keep its Buy America requirements that exclude foreign companies from bidding on the procurement for transportation funded by the federal department.

“This is limiting Canadians in bidding on these projects, however, it might be difficult to negotiate further agreements on procurement within NAFTA,” she said, noting the agreement the WTO already has with many nations.

“It would probably be best for Canada to revisit the [separate] U.S.-Canada government procurement agreement that was negotiated in 2010,” she said. “When the bilateral agreement came into place, both nations said they’d further negotiate that and strengthen it.”

Audet wouldn’t comment on Chapter 19 as it’s not an area her report covered, but overall, she said the objectives were “great news” for Canada, the U.S. and Mexico.

“All three countries have the potential to be better off,” she said. “A few months ago, it was all about a protectionist trade agenda.”