WHAT’S NEXT FOR
NAFTA?
THE
NORTH AMERICAN
FREE TRADE AGREEMENT
UNDER THE NEW
U.S. ADMINISTRATION
1
THE NORTH
AMERICAN FREE
TRADE AGREEMENT
(NAFTA) UNDER
THE NEW U.S
ADMINISTRATION
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TABLE OF CONTENTS
Introduction.......................................................................................................................................................................1
The Foundation of NAFTA.............................................................................................................................................2
Provisions of NAFTA......................................................................................................................................................3
NAFTA and the Automotive Sector............................................................................................................................4
Call for NAFTA Amendments........................................................................................................................................5
Withdrawing from NAFTA..............................................................................................................................................6
Factors to Consider.........................................................................................................................................................7
Conclusion.........................................................................................................................................................................9
Introduction
The North American Free Trade Agreement or NAFTA, a treaty between three countries — United States
of America (U.S.), Canada and Mexico — was a very controversial topic during the U.S. presidential
campaign in 2015-2016.
Comments made during the campaign alluded that the loss of jobs the U.S. automotive industry is currently
experiencing is due to the terms laid out in the NAFTA. The now-incoming U.S administration signalled
throughout the campaign that the NAFTA would be scrapped and/or amended, and also indicated their
intention to renegotiate the NAFTA to terms that are more favorable to the U.S.
While it is beyond doubt that NAFTA has created an integrated automotive industry amongst its three
signatories, the U.S. elections have raised many questions about the future of the NAFTA. There are a
number of high-level factors to consider before surmising the fate of NAFTA and this paper attempts to
provide a brief overview of them.
1
The Foundation of the North American Free
Trade Agreement (NAFTA)
The automotive industries in Mexico, the US and Canada were already highly integrated prior to the
NAFTA. The “Big Three” automotive producers - General Motors, Ford Motor Company, and Chrysler operated in each of the three countries. NAFTA and the agreements that preceded it can be viewed as a
result of the production and distribution initiatives of the “Big Three”1.
In 1965, the Canada-US Automotive Products Agreement (Auto Pact or APTA), an
important trade agreement between Canada and the United States was created. The Auto Pact linked the
auto industries of Canada and the US and created a tariff-free region for the automotive sector. It gave
Canada access to the world’s largest auto market and moved Canada away from its protectionist policies
traditionally applied to the automotive industry.
In 1977, the Mexico Automotive Decree was created. The Decree was protectionist in nature –
designed to protect Mexico’s domestic market2.
In 1989, the Canada-United States Free Trade Agreement (CUSFTA) came into effect. Many say
that the CUSFTA built the foundation for NAFTA. The CUSFTA, among other things, facilitated the grounds
for fair competition, removed barriers to trade in goods and services and liberalized conditions for
investment between Canada and the US3.
The North American Free Trade Agreement (NAFTA), which came into effect in January 1994,
deepened the integration of the North American automotive sector: “NAFTA institutionalized the existing
degree of integration and created a more stable and competitive environment for auto production and
trade. The more integrated North American market also attracted new investment from European and
Japanese automakers.4”
The NAFTA created one of the largest single markets in the world – opening the US market to
Mexican imports (the US and Canada already had very porous borders in place) and opening the
Mexican market to imports from the US and Canada5.
1
2
3
4
5
Democratic Policy Committee, https://www.dpc.senate.gov/hearings/hearing28/schott-chapter.pdf
Democratic Policy Committee, https://www.dpc.senate.gov/hearings/hearing28/schott-chapter.pdf
National Bureau of Economic Research, http://www.nber.org/papers/w11059.pdf
Democratic Policy Committee, https://www.dpc.senate.gov/hearings/hearing28/schott-chapter.pdf
Congressional Research Service, https://fas.org/sgp/crs/row/R42965.pdf
2
Provisions of NAFTA6
• Tariff and Non-Tariff Trade Liberalization: All tariffs will be eliminated on North American
industrial products traded between Canada, Mexico and the United States. In addition to elimination
of tariffs, Mexico will eliminate non-tariff barriers and other trade-distorting restrictions.
• Rules of Origin: NAFTA reduces tariffs only for goods made in North America. Tough rules of
origin whether a good qualifies for preferential tariff treatment under NAFTA.
• Services Trade Liberalization: The agreement granted services providers certain rights
concerning non-discriminatory treatment, cross-border sales and entry, investment, and access to
information.
• Foreign Investment: NAFTA removed significant investment barriers, ensured basic protections for
NAFTA investors, and provided a mechanism for the settlement of disputes between investors and a
NAFTA country.
• Intellectual Property Rights Protection: The agreement set out specific enforceable
commitments by NAFTA parties regarding the protection of copyrights, patents, trademarks, and trade
secrets, among other provisions.
• Government Procurement: NAFTA opened up a significant portion of federal government
procurement in each country on a non-discriminatory basis to suppliers from other NAFTA countries for
goods and services.
• Dispute Settlement Procedures: NAFTA created a system of arbitration for resolving disputes
that included initial consultations, taking the issue to the NAFTA Trade Commission, or going through
arbitral panel proceedings.
6
Congressional Research Service, https://fas.org/sgp/crs/row/R42965.pdf
3
NAFTA and the Automotive Sector
NAFTA was instrumental to the integration of the North American auto industry7:
• NAFTA provisions phased out tariffs and gradually removed many non-tariff barriers to trade.
• Phased out U.S. tariffs imports from Mexico and Mexican tariffs on U.S. and Canadian products as
long as they met the rules of origin requirements of 62.5% North American content for
autos, light trucks, engines and transmissions; and 60% for other vehicles and automotive parts. Some
tariffs were eliminated immediately, while others were phased out in periods of 5 to 10 years.
• In 2014, U.S. imports in crude petroleum oil ranked first among the five leading import items from
NAFTA partners. The next leading import items were motor vehicles, motor vehicle parts,
motor vehicles for the transport of goods, and non-crude petroleum products.
• In 2014, the top five U.S. export items to NAFTA partners were motor vehicle parts, non-crude
petroleum oil products, motor vehicles, crude petroleum oil, and machinery parts.
• U.S. auto exports to Mexico increased 251% while imports increased 679% between 1993 and
2014.
• Mexico was the leading supplier of automotive goods for the United States in 2014, accounting for
30% ($86.5 billion) of total U.S. motor vehicle and auto parts imports. Canada ranked second,
accounting for 21% ($58.8 billion) of total U.S. imports in motor vehicles and auto parts in 2014.
7
Congressional Research Service, https://fas.org/sgp/crs/row/R42965.pdf
4
Calls for Amendments to NAFTA are
Nothing New
Calls for a review of NAFTA by U.S. have been made in the past by presidential candidates. Amendments
to the trade deal have been toyed with in Canadian politics as well.
In the 1992 presidential campaign, then-Governor Clinton pledged to renegotiate NAFTA. In Canada’s
1993 election, the opposition Liberals under Jean Chrétien campaigned against NAFTA. When both
leaders were ultimately elected to office, they embraced the agreement, accepted side agreements on
labour and the environment and, in the case of President Clinton, fought hard to gain congressional
approval. No wonder we need first to consider whether and how campaign rhetoric may be tempered by
the reality of government.
Unquestionably, NAFTA has become a convenient whipping boy for all that ails the US
manufacturing sector these days, even though the competitive pressures stem more from technology and
from emerging powers such as China and India than from trade with either of America’s
neighbours. But protectionist pandering is the lifeblood of American politics, especially during elections
and even more so when the economic prospects in the United States are as gloomy as they seem today8.
8
Policy Options, http://policyoptions.irpp.org/magazines/budget-2008/nafta-time-to-plan-not-panic/
5
Withdrawing from NAFTA
The rules of withdrawing from NAFTA are found in ‘Chapter 22: Final Provisions, Part 8, Article
2205, Withdrawal’:
“A Party may withdraw from this Agreement six months after it provides written notice of withdrawal to the
other Parties. If a Party withdraws, the Agreement shall remain in force for the remaining Parties.”
The biggest question when it comes to the US withdrawing from the NAFTA is who has the power to make
the decision to withdraw? Unfortunately, there is no definitive answer to this. Some analysts say that the
president can unilaterally make the decision; others say that terminating the NAFTA would involve other
parties, mainly Congress.
The following information highlights just some of the questions that surround who has the power to
terminate the NAFTA9:
• The U.S. Constitution is silent on this question. The Constitution covers treaties – not agreements – and
NAFTA is not technically a treaty.
• Even if the NAFTA were a treaty, there would still be the question of who can terminate a treaty
“because the Constitution says nothing about who has the power to terminate a treaty. The question
also has not been answered by American jurisprudence.”
• Two cases involving US Presidents have gone to the courts: President Jimmy Carter’s executive
termination of the Sino-American Mutual Defense Treaty with Taiwan in 1979 and President George
W. Bush’s withdrawal in 2001 from the Anti-Ballistic Missile Treaty.
• Both of the cases listed above did not result in “clear guidance on whether a president must consult the
Senate in order to terminate a treaty. Secondary sources are split on the matter, but many
well-respected juristic sources consider treaty termination to be the prerogative of the president.”
• “The passage of NAFTA involved a 169-page piece of legislation, H.R. 3450… H.R. 3450 does not
require that the president get authorization from Congress should the president decide to withdraw the
U.S. from NAFTA.”
9
Geopolitical Future’s, The American President’s Power Over NAFTA, https://geopoliticalfutures.com/the-american-presidents-power-over-nafta/
6
Factors to Consider
There are a number of key factors to consider when discussing the future of NAFTA:
1. The automotive industry does not seem to be the main target of calls for
amending/scrapping the NAFTA:
Based on the newly-elected President’s transition team memo obtained from CNN, the US would like to
see changes to the NAFTA in regards to Canadian software lumber and livestock.
Livestock: “The country-of-origin dispute centres on U.S. meat labelling rules that require foreign beef
and pork to be sold with stickers detailing its origin. U.S. feedlots and packing plants are also required to
keep Canadian livestock and meat separate10.”
Lumber: “…hefty U.S. duties could be slapped on Canadian timber exports to the United States by
early 2017 after a one-year standstill period expired in October in the long-running dispute. U.S. forestry
companies want to limit Canadian timber shipments to the United States and allege provinces subsidize
companies through below-market rates for harvesting from Crown land. Adding softwood to NAFTA would
presumably mean setting a quota or limit for Canadian timber shipments11.”
In Government of Canada reports, the trade of Canadian softwood lumber is cited as one of the biggest
trade irritants between the countries – dating back to the early 1980s12. Many suggest that should NAFTA
be renegotiated, Canada’s priority would be to negotiate softwood lumber.
2. The ramifications that would result from the demise of, or amendments to, the
NAFTA are not easy to identify in a highly integrated global economy:
Canada is part of a globally integrated economy, with or without the NAFTA. In the current global
economy, there are a number of factors that have impacted the Canadian economy, and the
aftermarket – be it the loss of jobs to lower wage countries, the rise of manufacturing in Asia, the role of
automation in the workplace, the proliferation of the race to the bottom by companies, etc.
This same argument applies to the U.S. Research suggests that the biggest loss of jobs to America has not
resulted from the NAFTA, but from trade with China. Justin Pierce at Federal Reserves and Peter Schott from
Yale University suggest that over one million jobs have been lost or relocated due to trade with China.
10
The Globe and Mail, http://www.theglobeandmail.com/news/politics/canadian-businesses-seek-clarity-on-trumps-trade-policies/article32869000/
11
The Globe and Mail, http://www.theglobeandmail.com/news/politics/canadian-businesses-seek-clarity-on-trumps-trade-policies/article32869000/
12
Parliament of Canada, http://www.lop.parl.gc.ca/content/lop/ResearchPublications/tips/tip98-e.htm
7
In the memo from the transition team, the following was cited - “New trade agreements will be negotiated
that provide for the interests of US workers and companies first.” Many argue that should the US pull out
of NAFTA and place 35% tariffs on Mexican imports (what the newly-elected President has called for), US
workers, consumers and companies would all be hurt because it would result in an increase on the cost of
many goods.
3. The value of the integrated North American economy may be too risky to play with:
U.S. trade with its NAFTA partners has more than tripled since the agreement took effect. It has increased
more rapidly than trade with the rest of the world. In 2011, trilateral trade among NAFTA partners
reached the $1 trillion threshold. Since 1993, total U.S. trade with Mexico increased more rapidly than
total trade with Canada and trade with non-NAFTA countries. In 2014, Canada was the leading market
for U.S. exports, while Mexico ranked second. The two countries accounted for 34% of total U.S. exports
in 2014. In imports, Canada and Mexico ranked second and third, respectively, as suppliers of U.S.
imports in 2014. The two countries accounted for 27% of U.S. imports13.
The argument that vehicle manufacturing has been lost to Mexico – has to be viewed from a holistic
perspective. While vehicles may be manufactured in Mexico, there are no doubt parts in that vehicle that
were manufactured in the US. The fact that Mexico has cheaper labour than the US or Canada, attracts
investment into the North American automotive industry from outside players, including Japan, which|
benefits all the NAFTA signatories.
U.S. geopolitics consultant George Friedman states: “…Mexico is one of the top exporters of automobiles
to the United States. These cars are not sold under a Mexican label, since Mexico manufactures them
for foreign companies. But unlike Japanese or Chinese exports to the United States, cars manufactured
in Mexico contain about 40% of their parts purchased from the U.S. This means that U.S. manufacturers
contribute to the total value of Mexican exports14.”
A US Chamber of Commerce article on the effects of the proposed economic policies cites, “What
results, in the model, is a downward spiral of reduced economic activity. Prices rise on imported goods
from China and Mexico, which has the effect of reducing spending power for American consumers. If
China and Mexico retaliate, U.S. exports fall, forcing layoffs at American companies that sell to those
foreign customers. The ensuring growth slowdowns spread to other trading partners, particularly in Europe,
and cause stock markets to plunge, which in turn slows growth even more15.”
4. There may be the option of falling back on the CUSFTA:
There are questions on whether the Canada – US Free Trade Agreement, which was never repealed,
would hold should the NAFTA be terminated.
Some say the 1988 Canada-U.S. Free Trade Agreement, which the three-partner NAFTA deal superseded
in 1994, would take hold once again. Others say the Canada-U.S. deal is now defunct, and that
Canada, bereft of any special access to the U.S. market, would have only the multinational General
Agreement on Tariffs and Trade, the 1990s deal that formed the World Trade Organization, as a shield
against protectionism16.
13
Congressional Research Service, “The North American Free Trade Agreement (NAFTA)”, https://fas.org/sgp/crs/
row/R42965.pdf
14
http://www.newsmax.com/Finance/GeorgeFriedman/mexico-power-economy-invest/2016/03/29/id/721358/
15
https://www.uschamber.com/above-the-fold/trump-s-trade-policies-would-make-america-recession-bound-again
16
Globe and Mail, August 8, 2016
8
Conclusion
While it is difficult to arrive at definitive answers about the NAFTA when the new administration officially
takes over the White House on January 20, 2017, there are a number of key factors one can take into
consideration to facilitate their own analysis of the issue. The objective of this brief overview is to facilitate
a prudent yet proactive discussion of some of those factors that will shape the coming new year.
9
THE
NORTH AMERICAN
FREE TRADE AGREEMENT
UNDER THE NEW
U.S. ADMINISTRATION
Automotive Industries Association of Canada
180 Elgin Street, Suite 1400, Ottawa, ON K2P 2K3 | [email protected]
www.aiacanada.com
/AIAofCanada
@AIAofCanada
10