During the inaugural bilateral meeting between Prime Minister Trudeau and President Trump February 13, the U.S. President said his intention is to “tweak” NAFTA, as far as Canada is concerned.
“We’ll be tweaking it. We’ll be doing certain things that are going to benefit both of our countries. Our relationship with Canada is outstanding,” Trump said during the press conference.
But what does that mean exactly? And how will changes impact the auto sector, the most integrated industry in North America?
EDC asked one of Canada’s foremost trade experts, international trade lawyer, Lawrence Herman of Herman Associates, what changes to NAFTA would mean for the Canadian auto industry – an industry that accounted for $77 billion in exports in 2015, which translates into 12 per cent of Canada’s total trade.
Q: President Donald Trump said that he wants to “tweak” NAFTA as far as Canada is concerned. What does that mean exactly?
We don’t know. We will have to wait. It means really that he doesn’t see any (major) problems with the Canada-U.S. side of NAFTA as the U.S. sees with Mexico.
Q: NAFTA a bad deal or is it time to update the agreement? Why or why not?
It’s definitely not a bad deal. It’s a very good deal — a good deal for Canada and a good deal for the United States. Does it need some updating? Yes, and that can be done with some tweaks between Canada and the U.S. to modernize the agreement.
Q: Is it possible to tweak specific elements of the agreement with Canada and doing a more in-depth overhaul with Mexico? Why or why not? How could this possibly impact integrated industries like auto?
It’s very complicated to try and do a Canada-U.S. adjustment and a Mexico-U.S. adjustment within the current confines of the NAFTA. Technically, it’s very complicated. The problems the Americans have with Mexico are very different than the problems, if there are problems, that the Americans appear to have with Canada. There’s much less concern with Canada and more concern with Mexico. Makes it very complicated to try and arrange this within the confines of a common trilateral agreement.
(In terms of the possible impact on auto) We don’t know, but it will depend very much on the kinds of issues the Americans present in so far as their relations with Mexico are concerned.
Q: Are there any specific provisions in NAFTA currently that deal with auto specifically?
Yes there are. There are many parts that deal specifically with the automotive sector. For example, rules of origin. Automobiles and parts have to meet certain standards of production; certain levels of NAFTA origination i.e., to get duty-free access to the U.S. market, cars and vehicles have to be made of parts and components approximately two-thirds made in Canada the U.S. or Mexico. So there are specific provisions on the automotive side. In fact, it was a major part of the original Canada-U.S. Free Trade Agreement.
Q: Historically, how have Auto Pact and the FTA and NAFTA shaped the Canadian auto industry? Which one has had best/worst impact on the industry?
The Canada-U.S. FTA was based on the 1965 Auto Pact arrangement, so it grew out of the Auto Pact. We first had free trade in automotive products and then we built that into a broader free trade agreement. At the root of the FTA and NAFTA, were these automotive provisions and it resulted in a highly integrated industry among the three countries. Changes to disrupt that integration could be very serious indeed.
Q: What would be the impact of a 35 per cent tariff on the NA auto industry? Meaning, what would be the impact on all three countries?
I don’t think anyone is seriously thinking about a 35 per cent tariff. It was mentioned by President Trump during the election campaign (in the U.S.). But, it would be a disaster there’s no question about that. In fact, any change in the free trade elements of NAFTA could be very serious particularly for the U.S., but for Canada as well. But I don’t think anyone is seriously talking about a 35 per cent border tax.
Q: The U.S. doesn’t have a free trade agreement with E.U. Does the recent ratification of CETA and special provisions for the Canadian auto sector give Canada a bargaining chip? Could the U.S. in theory take advantage of this agreement and how?
I don’t know if it (CETA) can be seen as a bargaining chip. We have an administration in office now in Washington that is highly protectionist. Their whole tenor has been protectionist; they are not interested in free trade. I don’t think they are looking at the possibility of an agreement with the Europeans. I think that any issues that Canada has with the U.S. will have to be resolved bilaterally. And I’m not sure that the Canada-Europe agreement figures into the picture — at least not as far as the Americans are concerned.
Q: What’s the best-case scenario of a new NAFTA for the Canadian auto industry in your opinion?
The best solution would be to leave NAFTA alone when it comes to automotive trade. I don’t know how the Americans are going to address the problems they have with the Mexicans, but as far as Canada is concerned, leave it alone. It works well. Both countries benefit from it. But there could be important improvements in terms of border crossings, border entries and making the border work more effectively and more efficiently. We don’t like to see trucks lined up that are carrying automotive parts through the U.S. or vice versa. So border crossings are important, trade facilitation is important. There are a lot of efficiencies that could be built into a tweaking of the NAFTA.
Q: What is the worst-case scenario?
The worst-case scenario would be if the Americans withdrew from the NAFTA. I don’t think that’s going to happen. To even suggest radical changes that would upset commercial relationships would be a bad-case scenario. A worst-case scenario would be to jeopardize what we have in the NAFTA. For Canada I think we can build on the NAFTA — we could have a new bilateral agreement with the Americans, a type of NAFTA Plus. I’m very worried about how the Americans are going to approach the Mexican issue. And we will have to wait and see as events unfold how they handle the problems they have with the Mexican side.
Q: What advice would you give Canadian companies in the auto industry in terms of investment south of the border and/or Mexico in the short term? In the long term?
I think it’s important to wait and see where we go over the next number of months. The American trade team is not yet in place, the Secretary of Commerce has not been confirmed, nor has the U.S. trade representative. They have to get their staff together and they have to develop a clear policy. My advice to companies in the automotive sector would be to think about the worst-case scenario, but to wait. I don’t think it’s timely to make decisions presently, until we know in a more precise fashion what the Americans have in mind. We have some tweets, but we don’t really know what their policy is.