NAFTA is finished: It’s time to move on to something new
Prime Minister Justin Trudeau’s government has ruled out replacing the North American Free Trade Agreement with a bilateral Canada-U.S. deal. It’s the right decision. It is being made for the wrong reasons.
The question comes up because Donald Trump is musing again. The U.S. president has long said he prefers bilateral trade pacts over multilateral ones. He was back at it last week when talking about NAFTA. Maybe he’s serious.
Trump says that since Mexico and Canada have vastly different economies, it doesn’t make sense for the U.S. to try fitting them into one template.
In fact, he’s got a point. Trade deals between countries at a similar stage of development are much easier than those that try to link rich and poor nations.
The pact between Canada and the European Union is uncontroversial precisely because both are, in the main, advanced economies. No one expects Canadian businesses to decamp en masse to Germany, for instance. The wage levels in both countries are too similar.
But when NAFTA came into effect in 1994, people did expect manufacturers to relocate from Canada and the U.S. to lowwage Mexico. And that’s exactly what happened. For multinationals like the big auto companies, it was the whole point of the exercise.
The decision to include Mexico in what had been, up to that point, a bilateral Canada-U.S. Free Trade Agreement also led to the decision to write into NAFTA a chapter giving foreign investors the right to challenge and override domestic laws.
Known as Chapter 11, it was designed to protect Canadian and U.S. businesses investing in Mexico from the whims of officialdom in a country where corruption is not unknown. Instead it has been used against Canadian governments trying to enforce environmental laws and regulations. So why not do as Trump suggests? Why not tear up NAFTA and replace it with simpler bilateral deals?
Canada already has an alternative trade arrangement with Mexico through the revamped 11-nation Trans-Pacific Partnership. And in theory it could easily dust off the original 1989 Canada-U.S. Free Trade Agreement, which has the virtue of not including Chapter 11-style corporate override powers.
But Ottawa, it seems, doesn’t want to go in that direction. Ministers say they are committed to three-nation talks and plan to continue in that vein. The only official reason I can glean is that Canada seems to think it can strike a better deal with Trump if it maintains a united front with Mexico.
But trade is a complicated business. As written, NAFTA already contains asymmetries. Under the pact, Canada is committed to sharing its energy proportionally with the U.S. in times of scarcity. Mexico does not face that requirement.
The real reason for rejecting Trump’s suggestion is simpler. Whether he’s operating bilaterally or trilaterally, he wants too much.
If he offered Canada a bilateral deal that met Ottawa’s minimal demands — such as inclusion of a dispute resolution system and government procurement rules that weren’t biased in favour of the U.S. — that would be one thing.
But Trump has shown he’s not willing to compromise unless forced to.
Instead, he uses what he calls maximum pressure to achieve his demands. In Canada’s case, this means applying punishing tariffs on steel and aluminum exports to the U.S. and threatening to do the same with autos and auto parts.
There is no point in negotiating anything with a man like this unless, like North Korean dictator Kim Jong Un, you do so with a pistol in your pocket.
The Trump-Kim talks over ending the nuclear standoff on the Korean Peninsula may get somewhere. The NAFTA negotiations, whether two-way or three-way, will not. It’s time to admit that this thing isn’t working and try something else.