NAFTA 2.0: Key Issues and Next Steps

August 2017

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After months of speculation, top trade diplomats assembled August 16 in Washington to chart the future of the North American Free Trade Agreement. The talks bring together negotiators from Canada, the United States and Mexico in an effort to update a deal that shapes all three economies.

Changes to NAFTA could have far-reaching implications for business owners in all sectors of the Canadian economy. Canada's economic prosperity relies on international trade and investment. The U.S. in particular is a key trading partner: About three-quarters of our exports go to the U.S., and more than half of our imports originate there.

With talks just underway, though, it is too soon to draw conclusions. The results of the renegotiations are extremely uncertain and will ultimately rest on the details.

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NAFTA, then and now

When NAFTA took effect 23 years ago, it heralded a new age of trade policy. Building on previous agreements, the deal created the then-largest free-trade bloc in the world. Joining the three North American economies together, economists believed, would help businesses in the region compete with the European Common Market.

That steady march to a new global order — featuring low trade barriers and tariffs — has stalled in recent years. The United Kingdom’s exit from the EU via Brexit is one of several recent examples of increasing protectionism.

Here in North America, the Trump administration walked away from the 12-nation Trans-Pacific Partnership (TPP), although it has suggested the U.S. will pursue bilateral agreements with some of those nations.

Canada is taking a very different approach. As an advocate of free trade, the federal government has pursued the path of trade liberalization ushered in by former prime minister Brian Mulroney, whose Progressive Conservative government signed a precursor of NAFTA with the U.S. in 1988. In addition to supporting the TPP, it also signed the Canada-European Union Comprehensive Economic and Trade Agreement (CETA).

What is on the table?

The NAFTA renegotiation was triggered by the Trump administration, which has signaled its willingness to withdraw from the deal if negotiations don’t progress to its satisfaction.

While NAFTA has fostered growth in all three countries, the U.S. government wants to lower its trade deficit with Mexico — which ran to $63 billion last year. The U.S. has also blamed the pact for the shipping of thousands of manufacturing jobs across its southern border. As a result, it will seek to weave the “America First” principle into NAFTA 2.0.

At a certain level, a NAFTA update makes sense. When North American leaders first put pen to paper almost a quarter-century ago, issues like e-commerce and data transmission were not addressed. Tackling the digital economy and intellectual property, as the TPP and CETA did, would bring the agreement into the 21st century.

Both Canada and the U.S. have unveiled their negotiating objectives. Mexico’s goals have received less coverage in the Canadian and American media, but a document from the Mexican economy ministry did clarify some of its NAFTA 2.0 goals.

While negotiators will focus on a myriad of issues — the U.S. list included more than 100 objectives — here are some areas that business owners will be keeping an eye on:

  • Dispute settlement — NAFTA’s Chapter 19 provides for the resolution of disputes between countries using an independent, binational panel — not U.S. courts. This has helped Canada’s softwood lumber industry, and Canada wants to maintain the mechanism. The U.S. wants to eliminate it.
  • Rules of origin — The agreement offers preferential treatment for goods made in NAFTA countries. To define “made,” the pact uses “rules of origin” to set minimum NAFTA-country content levels. The U.S. wants to raise this baseline, to ward off competition from Asian companies, while Canada and Mexico want to maintain it. For industries such as auto manufacturing, changes to rules of origin could wreak havoc on supply chains.
  • Government procurement — NAFTA allows government in certain cases to favour their own countries, departing from NAFTA’s free trade spirit. The U.S. wants to tighten the exceptions. Canada would like to increase them.
  • Agriculture — Canada’s supply-management system allows high tariffs on certain agricultural imports to protect the Canadian sector. NAFTA currently allows for the supply-management system; the U.S. wants to eliminate it, to boost its exports to Canada.
  • Professional movement — NAFTA’s Chapter 16 provides for temporary entry of business professionals across borders. Canada wants to widen these provisions.
  • “Progressive” topics — Canada wants a focus on labour and environmental standards, and on gender and indigenous rights.
 

What happens next?

The first round of talks ends August 20, with negotiations scheduled to continue in Mexico in early September. Seven rounds of discussions with three-week intervals are reportedly being considered. This aggressive schedule is dictated in part by the Mexican presidential campaign for next July’s elections and midterm elections in the U.S. next November.

What will NAFTA 2.0 look like for business owners?

For Canadian businesses leaders, the air of instability around NAFTA follows a string of developments that have introduced a high level of unpredictability.

“Canadian businesses are living in a time of great change, which can lead to multiple opportunities but also challenges,” said Dean Elliott, Managing Partner, Central Group and Markets Strategic Lead.

“From cross-border trade — with the CETA, TPP and now NAFTA — to the federal government’s efforts to close loopholes for Canadian private corporations, business leaders need to keep their eye on the ball.”

The current trilateral negotiations could set the region’s trade agenda for the next generation. Changes to NAFTA could force Canadian businesses to adjust strategy and operations, but over-reacting at this juncture could prove just as damaging as would later inaction — when NAFTA 2.0’s outlines become clearer.

BDO is committed to helping inform and guide our clients through these monumental events. Throughout the negotiations, we will be providing regular updates on possible ramifications for your business.

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