NAFTA negotiation: get ready to rumble

It’s game on as the US, Mexico and Canada sit down to hash out a new and improved North American Free Trade Agreement (NAFTA). Much is at stake for Canadian manufacturers, who have been major beneficiaries of freer trade with the US and Mexico.

With NAFTA, Canadian exports to the US have grown from $70 billion in 1993 to $355 billion last year, while regional trade has grown from $290 billion to $1.1 trillion. The US has also benefited although economists cite a modest impact on GDP of less than 0.5% and several billion dollars of added growth per year. But Canada and Mexico are also America’s top destinations for exports and some 14 million jobs rely on trade with the two countries.

Many of those jobs are in states that supported Donald Trump’s ascendancy to the White House. Wrapping himself in protectionist rhetoric, he has convinced his “base” that lost manufacturing jobs are the result of bad free trade deals, NAFTA being the worst.

So now he has to deliver a trade win in an otherwise win-deprived presidency.

If this were a wrestling spectacle, Prime Minister Justin Trudeau and Mexican president Enrique Pena Nieto would be the symbolically handsome, but lightweight tag team locked in a cage and improbably matched against the orange-masked gigantic villain, Donald Trump.

Of course, the heads of state won’t be the ones launching awesome wrestling moves such as the flying squirrel to force concessions and compromises. Experienced and sane trade negotiators will handle all the trash talk and grappling. But Canada is going into this renegotiation with limited moves. More than 82% of the goods we sell abroad go mostly to the US, and to a much lesser extent, Mexico.

The US has delivered its NAFTA wish list, which is more than tweaking but something the three countries can work with; however, there are a couple of clangers that could force Canada to exit the ring.

The US wants to maintain and expand its Buy-America-type protections that restrict government procurement to domestic firms using homemade materials. It also wants open access to Canadian federal, provincial and municipal procurement. Both Canada and the US intend to spend bazillions of dollars on infrastructure over the next few years so there is much at stake.

Of greater concern is the Chapter 19 dispute settlement mechanism. The US didn’t want it during the Free Trade Ageement negotiations and the Trumpites are anxious to do away with it now. The American side would rather see disputes disappear into the fog of the US court system.

However, Chapter 19 has helped to keep the trade partners honest. For example, when the US imposes trade-remedy tariffs on softwood lumber as it is wont to do, and the binational panel rules against the gouging, Canadian companies get some of that money back.

Canadian Manufacturers & Exporters, which has released a 58-page document detailing priorities and recommendations for the negotiations, has declared doing away with Chapter 19 a deal-breaker for manufacturers.

This will surely be a major challenge for Canadian negotiators, especially with a US administration that has a very lopsided view of trade.

NAFTA has demonstrated two things: fair free trade agreements, despite their faults, lead to growth for all. That should be the cornerstone of the negotiations. But it also demonstrates the risk attached to Canada focusing so much on one, conveniently placed market. Manufacturers need to diversify their customer and supplier bases. Trade agreements such as CETA and a potentially renewed Trans-Pacific Partnership will help them do that. It’s just a matter of embracing the opportunities.