By shredding NAFTA, Trump could spark fallback to past deals
Potential scenario could cause pain in the short term for Canada: experts
U.S. President Donald OTTAWA Trump’s threat to eventually scrap the North American Free Trade Agreement would force Canada to fall back on earlier trade deals with its largest trading partner, breeding new uncertainties for businesses around trade tariffs and rules of origin, according to experts.
At a rally in Phoenix on Tuesday night, Trump said he doesn’t think the United States can successfully modernize NAFTA because “we have been so badly taken advantage of,” adding to past comments in which he baldly criticized the deal.
“So I think we’ll end up probably terminating NAFTA at some point,” he told supporters.
Observers have largely dismissed the comments as an empty threat, part of the president’s sharply antitrade rhetoric that began during his campaign.
Moreover, an attempt by the Trump administration to terminate NAFTA would likely face intense pushback from U.S. Congress, forcing policy-makers to legally revoke the deal. Dismantling NAFTA would take years, experts say.
Even so, trade lawyers and policy analysts are dusting off old files in the event that so-called “snap back” provisions are put in place, reverting Canada to earlier trade deals like the Canada-U.S. free trade agreement (FTA), signed in 1989, or terms under the World Trade Organization (WTO), established in 1995.
A fallback on earlier deals is ultimately not viewed as an economic catastrophe for Canada, but would cause some pain in the short term. More importantly, neither existing trade deal is likely to satisfy U.S. negotiators.
“No doubt if the United States were to successfully withdraw from NAFTA, this could impact the manufacturing supply lines for a number of industries and would harm interests in the U.S. as well as Canada and Mexico,” said Riyaz Dattu, a partner at Osler, Hoskin & Harcourt LLP in Toronto.
Manufacturers in the most integrated sectors would be hit hardest, particularly the automotive, aerospace and defence spaces.
In auto parts manufacturing in particular, a fallback to either the FTA or WTO rules would significantly raise tariffs on the movement of products between the countries, due to highly integrated supply chains. Auto parts might be manufactured in Canada, assembled in Mexico and sold in the U.S., experts say.
The details of how a NAFTA termination would unfold are clear, but it seems Canada and the U.S. would initially revert to the FTA, followed by the WTO, if the FTA is also scrapped. The two countries never formally ended the FTA, while the WTO terms remain in place.
However, analysts believe a long-term fallback to the FTA is unlikely because it fails to address U.S. concerns. It also shares many of the same qualities as NAFTA, including the freer movement of people, the removal of most border tariffs and the inclusion of several dispute settlement provisions that purportedly favour Canada — one of the main sticking points for the U.S. heading into negotiations.
When the FTA was first signed, for example, many Americans criticized it for sending manufacturing jobs to Canada.
“Our view is that if the U.S. cannot resolve its grievances with Canada through a renegotiation of NAFTA, it is unrealistic to believe that the U.S. government would be happy with a return to the original FTA regime,” analysts at the Fraser Institute said in a report earlier this month.
The study assessed various scenarios in the event that the Trump administration does away with NAFTA. It said that a reversion to WTO terms would be likely.
Dismantling NAFTA would undo years of painstaking negotiation over rules of origin and other provisions, in which the three countries established very detailed, though imperfect, rules around the degree to which various products need to be manufactured in any given country to avoid tariffs.
A snapback to WTO rules would effectively loosen those rules, raising tariffs on some industries and overturning some dispute resolution systems established under NAFTA.
Even so, the Fraser Institute report suggests a reversion to WTO terms “would have only modest impacts on the Canadian economy, especially if Mexico did not conclude a successful bilateral agreement with the U.S.”
Canada’s foreign affairs department has downplayed Trump’s NAFTA threat, saying such language was expected from the U.S.
“As we said last week, trade negotiations often have moments of heated rhetoric,” the department said in an emailed statement. “Our priorities remain the same, and we will continue to work hard to modernize NAFTA, supporting millions of middle-class jobs.”