For Canadian business, the threat of U.S. withdrawal from NAFTA is the biggest and most immediate challenge. Without progress that satisfies the U.S. Administration, the current NAFTA negotiations may end with the U.S. issuing a Notice of Withdrawal that starts the six month clock on formal U.S. withdrawal from the Agreement and the market uncertainty that will likely follow.
Canada can and will survive the U.S. withdrawal from NAFTA. Canada and the U.S. have deep economic ties and market integration that will result in trade between the countries continuing, but on different terms. To address the problem of dependence on the U.S. Market successive Canadian governments have looked to trade diversification, particularly since the economic downturn of 2008 and the sharp rise of U.S. protectionist measures like the “Buy America”. The result of these efforts have been substantive trade initiatives in Europe and Asia-Pacific, including the 2017 Comprehensive Economic and Trade Agreement agreed between Canada and the European Union and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership which was just agreed between the remaining eleven states.
However, Canadian government efforts to diversify trade through trade agreements cannot succeed on their own. To truly diversify trade, Canadian business has to take steps to sell to customers in these new markets. In light of the possible U.S. withdrawal from NAFTA and the uncertainty that will create, Canadian business should take the “America First” challenge as an invitation to lessen our dependence on the U.S. market and find new trading partners in Europe and Asia.
The underlying impetus for the U.S. threat to NAFTA is a growing economic nationalism that has fueled an unapologetic ‘‘America First’’ platform. At this stage, it is already creating uncertainty about NAFTA and the integrated market that the Canada economy relies upon. As the United States shifts it focus to creating more jobs at the cost of championing economic liberalization and free trade many more sectors of the Canadian economy will be attacked as fiercely as aircraft and lumber are now.
The United States has failed to meet its original objective of a “re-balanced” agreement by the end of 2017 as both Canada and Mexico deem key U.S. “asks” as unacceptable. Beyond some consensus on less challenging regulatory matters, little progress has been made and Canadian negotiators continue to categorially reject core U.S. demands including: raising the minimum threshold for autos to 85 per cent for NAFTA origin (from 62.5 per cent) with half the content from the United States; a five-year sunset clause that would result in automatic termination of the Agreement unless the parties agree otherwise; dismantling Canada’s supply management system for dairy products; eliminating binding dispute settlement; and unbalanced government procurement rules.
The sixth round of negotiations, scheduled for Montreal this January 23-27, were critical, but it is not clear that the parties are not any closer to agreement. While the parties will continue to negotiate, the Trump Administration may well act on its often repeated threat to serve a six month notice to withdraw. Or perhaps not. Thanks in part to Canada’s strong lobbying campaign there is important American opposition to termination in Congress as well as in many state governments and the U.S. business establishment. Moreover, it is not clear that the President has the legal power to repeal the US. NAFTA Implementation Act that puts NAFTA provisions into force. If the U.S. Administration moves to withdraw from NAFTA, this would be the first time the U.S. has ever withdrawn from a Trade Agreement. As withdrawal from NAFTA is unprecedented and no clear path for the U.S. to follow, the matter could land in the U.S. Courts.
In the short term, even if President Trump can take the United States out of NAFTA the provisions of the original Canada-U.S. FTA would come back into effect. If the Canada – U.S. FTA was subsequently terminated, the provisions of the World Trade Organization would apply as both Canada and the United States are members.
Working with Canadian firms awake to the threat to NAFTA we have seen how the officials at Global Affairs Canada have been effective in working with Canadian business and bringing them into the Canadian outreach campaign to strategic allies in U.S. business and government circles. One of the first pieces of advice to the private sector was to check into the potential liability. Many companies will find that the technicalities of NAFTA withdrawal or the FTA or WTO provisions will mean that they will continue to enjoy duty free access to the U.S. market. But this “fall back” should be not seen as a solution, but as “breathing space” for businesses to build a transition plan.
Transition to the new reality of post-NAFTA Canada – U.S. trading relations should include looking at customers in new markets and the benefits of new trade partnerships. The Comprehensive Economic and Trade Agreement between Canada and the European Union is one of those new partnerships and should be seriously considered.
In the context of new partnerships, consider this question – in terms of further economic and beyond that, social/political integration, in future decades, which is the more promising target – the United States or the European Union? We share friendship, a common history and culture, common values and ideals with both. But the EU is bigger than the United States – with 28 members, most highly industrialized nations – and it is the world’s largest trader and largest foreign investor. The EU is Canada’s second-largest goods-trading partner and already Canada and the EU combined account for nearly one dollar in every five of global trade. Moreover, Canada is arguably more aligned with the EU’s current direction and policies.
The CETA, implemented last September, is the world’s most comprehensive trade agreement and covers a broader scope of issues than the NAFTA. This will grow. The CETA eliminated almost all tariffs on trade in goods traded with Europe and provides a strong incentive to Canadian business to expand its place in global value chains. The EU deal includes bigger trade quotas for agricultural products and extensions of IP protection. While trade with the EU and trade with the US is not an “either or” proposition, the CETA adds strategic advantages as well as an important counterpoint to the threat of rising U.S. protectionism. This is particularly so because the U.S. does not have a similar agreement with the EU and has no immediate prospect of being able to quickly negotiate one. Thus, the CETA gives Canadian business preferential access to the EU market that is not equally open to the U.S.
The CETA opens services markets and cutting the red tape that poses such a burden for small business. The EU estimates that half of the overall GDP gains it expects to receive from the deal will come from liberalizing the trade in services, including in the banking sector. Canada prides itself as a leader in financial services and the agreement will facilitate deeper links between the Canadian and European banking sectors opening markets for the vital financial services while ensuring the maintenance of strong government rules for the sector. For both Canada’s technology and services sector, the EU offers attractive growth opportunities in a similar regulatory climate, especially regarding important privacy and data-protection matters.
CETA will strengthen the investment between Canada and the EU which already supports over half a million jobs. Under CETA, the threshold for the net benefit” test will be increased to $1.5-billion, a change reflecting “the special relationship Canada has with the EU.” The CETA does not alter Canadian ownership restrictions in the airline, cultural and telecommunications sectors. For EU investors, Canada as the “other advanced North American state,” makes CETA a potential bridgehead for investment in North America. The CETA open public procurement opportunities will enable more efficient use of public resources. Unlike NAFTA, CETA covers “sub-national procurement,” the public contracts of Canadian provinces and cities, so European companies can bid on hydro or subway deals, and Canadians can do the same in Europe
One of the most significant elements of the CETA may be provisions that enhance labour mobility that permit professional organizations in Canada and Europe to work out their own deals to recognize credentials under “mutual recognition” agreements. Architects, engineers and accountants and other professionals will be able to work in each other’s jurisdictions. However, a closer look suggests there is still plenty of work to do on this front mean new opportunities for Canadians who want to work in Europe, and vice versa.
The agreement does all this without compromising on public services or protections like health or food safety. Europeans are just as committed to these as Canadians are; so nothing in this agreement will undermine them. Canada and the EU also agreed to strengthen their commitment to workers’ rights, to protecting the environment and to working towards sustainable development. The CETA has been called a template for “modern trade agreements” for partners pursing a progressive trade agenda. Many see the CETA as a statement that reinforces a Canada-EU lead in support of a rules-based, globalized trade and investment order – one that is being challenges.
For Canadian business, the current stormy environment calls for a coherent, connected, and informed strategy that relies on a strong, informed partnership between business and government – a strategy that focuses on best positioning Canadian business to leverage global opportunities and to evolve to meet new challenges in the face of U.S. protectionism. Working to leverage the CETA to develop new customers and new markets in Europe is a good place to start.