5 Things You Should Know about NAFTA and Trump

Donald Trump’s antics have kept the world glued to their screens since he took office in January (that’s right, it hasn’t even been a full year yet).  

An item that should be of particular interest to Canadians is his opinion regarding NAFTA and the resulting renegotiations that have taken place over the last year. To get a sense of how it’s been going, see this casual tweet Trump sent out one Sunday morning in August nonchalantly threatening to end it all:

Would the end of NAFTA really be that bad for Canadians? Here is a quick rundown on what’s been happening and how the outcome might affect you.

Quick History Lesson
The North American Free Trade Agreement (NAFTA) is the largest free trade agreement in the world and includes Mexico, Canada, and The USA. It was created to remove barriers to the flow of goods between all three North American countries and to promote trade. Members enjoy perks such zero tariffs on imports and exports as well as most favoured nation status – creating favourable conditions for Canadian investors in the US or Mexico and vice versa over other countries that are not part of the agreement. As a result, the economies of all NAFTA members are now intimately intertwined.

Recap: How did we get here?
NAFTA has been in place for over 25 years and while it’s impossible to point out exactly how it has impacted North America’s economy, the absolution of tariffs has made goods less expensive which has increased trade amongst the three nations. Enter Trump. His staunchly protectionist policies serve to fulfill one of the biggest promises on his campaign trail: to create more jobs within the USA. He has called NAFTA “the worst trade deal in the history of [the USA]” and believes it’s hurting the US economy by favouring imports from the US’s neighbours instead of producing goods on US soil: why allow imported car parts from Canada when you can create more jobs in the USA for manufacturers? On January 23, 2017, Trump signed an executive order to renegotiate NAFTA’s rules. Changes to the agreement posed by the Trump administration were so outlandish that both Canada and Mexico basically responded, “Yeah, this doesn’t work for us try again”. Since then officials have been through five rounds of talks, the most recent in Mexico City. Each has ended in stalemate and increasing tension, however these massively intricate deals can take months or event years to work out – the current agreement took two years to sign.

How could the end of NAFTA affect Canada’s economy?
20% of Canada’s exports go to the USA; in 2016, that amounted to approximately $454 billion.  If the agreement was terminated, it would stand to hurt key Canadian industries such as the automotive industry, dairy farms, and the wood manufacturing industry (which has always been a sore spot between Canada and the US). Protectionist measures that have helped stabilize these industries would be removed, meaning Canadian products would face competition from other countries. For example, under NAFTA, high tariffs have been put on dairy products that are produced in Countries that are not Canada or Mexico. This serves to make Canadian dairy products the least expensive. But all that could come to an end with the end of NAFTA. Furthermore, tens of thousands of jobs could be at risk due to the new volatility of supply and demand for products, and stock prices could plummet, which would have a negative effect on the loonie. As for goods we import into Canada, things could get a lot more expensive. Prices on many things from groceries to cars would probably increase with a reintroduction of tariffs on goods we import from the USA.

NAFTA-Tariff-Canada-Donald Trump-Free Trade

Does Trump Have the power to kill NAFTA?
Even the pros are undecided on this one. Under article 2205 it states that a party can withdraw 6 months after it provides written notice to other parties – so upfront is does appear that Trump has the ability to pull the trigger. Luckily, it wasn’t a President that negotiated NAFTA, but rather Congress. The US political system was designed in a way to ensure checks and balances so Presidents have no power on their own to repeal laws passed by Congress. That being said it is a legal grey area, with lawyers disagreeing over what is and isn’t legally possible. Even in the event he is able to legally withdraw The US from NAFTA, experts deliberate that Congress would pull out all the stops in order to basically “neuter” Trump and maintain the current level of free trade. 

What happens next?
The three countries have given themselves until March 31, 2018 to reach a deal. The US is now largely waiting for Canada and Mexico to state counter proposals to the changes they’ve previously laid out in order to move the conversation forward, which we could see happen at the next rounds of negotiations. There are two more rounds scheduled, the next taking place in Montreal, Quebec January 23-27th. 

Here’s to hoping we make it until then without Trump tweeting at Justin Trudeau to inform him NAFTA is kaput.