After over a year of negotiations over the North American Free Trade Agreement (NAFTA), the United States, Canada, and Mexico finally reached an agreement about the future of trade within North America: enter, the United States-Mexico-Canada Agreement (USMCA). The three countries are expected to sign the renegotiated deal by the end of November 2018. But in the midsts of tariff wars, questions still remain about what the USMCA will mean for Canadians and how it’s different than its predecessor, NAFTA.
To understand the extent of the new trade deal, the Fulcrum sat down with Anthony VanDuzer, an international trade professor at the U of O.
The Fulcrum: Can you explain how the USMCA came to be?
VanDuzer: The USMCA is essentially a replacement for NAFTA, which Canada, the U.S., and Mexico negotiated in the early 1990s. It was the first comprehensive trade agreement in North America.
NAFTA was really about establishing free trade within North America. It wasn’t perfect, it didn’t eliminate all barriers to trade, but it substantially created free trade amongst the three countries. This facilitated business across international borders and encouraged businesses to come to North America.
President Trump was concerned that the interests of the United States were not well-served by NAFTA. In particular, I think he was concerned that it had encouraged U.S. businesses to invest in Mexico, meaning manufacturing capacity in the U.S. moved to Mexico which meant of course fewer jobs for American workers. When he arrived in the president’s office he talked about the possibility of just terminating NAFTA, which you can do with six months’ notice. What ultimately happened was an agreement between the three after party states renegotiated the treaty, which took a little more than a year. They started in summer of 2017 and came up with this agreement that was signed by the three governments on Sept. 30.
F: Which industries do you think will be most affected by it?
V: There’s been a lot of publicity related to the impact on the dairy industry in Canada, which is regulated through a supply management system that controls the domestic supply of dairy products. This tries to ensure that there is supply that is available. It also ensures that farmers have a market for their products and in order to make that work, you have to restrict dairy products coming into the country.
Trump was particularly concerned about supply management. At the same time, dairy farmers, particularly in Ontario and Quebec, want this system to be maintained because if we abandon it, they feel they would be very negatively affected by a flood of cheap U.S. dairy products coming into Canada.
We agreed to a very limited amount of U.S. dairy products coming into Canada, about 3.5 per cent of the market. It’s also only a half a percent or so more than the U.S. would have got if they’d stayed in the Trans-Pacific Partnership agreement, which they withdrew from when Trump was elected.
So overall it’s not a huge concession, but it is undoubtedly going to have an impact on dairy farmers. The federal government has indicated that they will provide compensation to the dairy farmers for any injury that they suffer as a result of increased competition because we’ve opened up the market.
Most of the other industries I think are not going to be affected in a very dramatic way, in large part because most of what’s in the USMCA was already in NAFTA.
One of the things we agreed to was to data protection for a type of pharmaceutical drugs called biologics (one of the most expensive type of drugs on the market, used to treat cancers and multiple sclerosis). Under the USMCA, the minimum data protection period in Canada went up from eight years to 10 and in the U.S. it’s 12. It would allow manufacturers to limit competition for those additional two years of time in a way they wouldn’t otherwise, and that could have an impact of increasing drug prices for Canadians. It’s a little hard to know exactly what that’s going to look like. Some estimates have said that it might be hundreds of millions of dollars.
F: Do you think that the situation in general is fair, or has the U.S. strong-armed Canada and Mexico into redoing NAFTA?
V: Neither Canada nor Mexico had a particular interest in renegotiating NAFTA, although there was some interest in updating it. It was clearly the Americans that had a concern.
I don’t think Canada overall is going to be significantly worse off and one of the challenges for Mexico I think in the agreement which could have an impact on them certainly is the rules that were agreed to with respect to the auto sector minimum wage. There is now a rule which says that between 40 to 45 per cent of auto production has to be in countries that have a wage for auto workers that is at least $16 U.S. an hour.
It’s possible that in order to conform to that requirement that the North American automakers will shift some production either to the U.S. or Canada and out of Mexico. But it’s hard to predict that really at this stage.
F: Canada insisted that keeping Chapter 19 (dispute resolution) was a big win. How vital do you think it was to keep that clause?
Well I think it’s a useful device for Canada, but it probably wasn’t essential. There are actually a whole lot of different dispute resolution procedures in the agreement and Chapter 19 actually has a fairly narrow focus. It’s only on domestic decisions related to what lawyers call trade remedies, which are decisions about whether goods are being dumped into the country by exporters from outside the country or whether exporters are benefiting from domestic subsidies in the countries in which they operate and then are selling those subsidized goods into the other country.
What Chapter 19 does is essentially it replaces domestic court review with review by a system of binational panels. Members of the panels are appointed from rosters which have been established by each country. It was designed to ensure that the system operates in each country in accordance with its own rules to avoid bias. But domestic court review is supposed to establish the same thing, so it’s redundant in this sense.
I was a little bit surprised that the Canadian government felt that this was the issue that they were going to go to the mat on as compared to all the other things that were concerns.
F: Trump has expressed distaste for Prime Minister Justin Trudeau on numerous occasions. Do you think the outcome of the negotiations would have been different if either party had different leadership?
V: I think the starting point probably is that if President Trump hadn’t been elected, we would never have had a renegotiation in the first place. Hillary Clinton did express some concerns about NAFTA but she might have initiated some kind of a broad-based renegotiation.
President Trump and some of his advisors were highly skeptical about free trade agreements and their value. Their initial concern was Mexico and then Canada was brought in, I think as a bit of an afterthought.
The Trump administration adopted a variety of tactics which are quite unusual and extraordinarily aggressive in the negotiations. The personal dislike that was expressed by the president, that kind of thing is not normally part of international discourse.
I think that had undoubtedly impaired the effectiveness of the negotiations because the two governments seem to have this mutual dislike. That was undoubtedly a complicating factor and it didn’t help in getting to a resolution. But the USMCA worked out I think in large part because the Canadian government and its representatives, including Prime Minister Trudeau and Foreign Affairs Minister Chrystia Freeland, didn’t stoop to that level in their own discourse and continue to work hard and in a responsible way to achieve an agreement. They’ve salvaged most of the benefits that were available under the original NAFTA.
One thing I would mention that is really quite extraordinary is Trump’s move to impose tariffs on steel and aluminum and his justification was national security.
That was important because under U.S. domestic law, the president does not have authority to just sort of change the tariff rules but he does have the authority under Section 232 to impose tariffs to ensure the protection of national security. Now there is no doubt in anyone’s mind that the real goal of the president was not to protect national security but rather to get leverage in the negotiation for the treaty. And in fact there are statements by the U.S. administration to that effect.
F: Do you think Canada negotiated a good, fair deal? If not, what could they have done differently and what should they have pushed for more?
I’m not sure that they could have done much differently given the position that the Americans had taken.
Not only were they very aggressive, but they lowered the level of discourse to this personal criticism of the leaders of the negotiations on the Canadian side. They also simply weren’t prepared to really negotiate. I mean I think that the position that the Americans tended to take was that this is what we want. And you either accept that or you go away. And of course it didn’t help that from the Canadian perspective that Mexico had agreed independently to a set of commitments which Trump was prepared to take forward to Congress either with or without Canada. There wasn’t a lot of room for Canada I don’t think to negotiate a better sort of a deal, and as I’ve said, (given) the circumstances I think the outcome is a pretty good one. Not much changed.
F: How will the Canadian public be impacted?
With respect to the dairy industry, the people who are going to experience the hit are the dairy farmers. While they are very well organized politically and they’re an important group of people, they’re relatively small in number. So it’s not going to be consumers that are going to be experiencing the hit. It’s important to bear in mind that I mean 90 per cent of the market is still protected so it’s not like it’s open season in dairy.
One other real concern for some members of the public and some NGOs is the new agreement essentially phases out investor state arbitration for disputes between Canada and the U.S.: that is, U.S. investors complaints against the Canadian government and vice-versa.
Under NAFTA, Americans were frequently bringing complaints against Canada and there were plus or minus 35 complaints that had been filed and some of them have led to damage awards or settlements totalling a little over $200 million. That’s no longer going to be possible. So that kind of flashpoint for public concern between Canada and the U.S. at least is going to disappear. I think that’s going to make this agreement easier for some constituencies to accept.
F: Trump has taken a nationalistic approach to politics, where it’s about putting America first. Do you think this type of negotiation is going to have an impact internationally? Are we going to start seeing more countries negotiating in similar ways with similar agreements?
I think part of the answer is that the U.S. is unique. They’re the biggest economy in the world so they have more flexibility/freedom to adopt these kinds of aggressive positions, whereas other countries don’t. Even if you had someone who wanted to adopt a similar approach to negotiations, they simply don’t have the economic clout to do that.
Now there are some exceptions to that. It’s possible I suppose, at least looking at economic power of the European Union (EU) or China, but I don’t see it happening in the EU as they’re firmly committed to the international system and they’ve repeatedly endorsed it.
China is a little bit unclear. I would say that China is now looking to develop the international system rather than trying to do what the U.S. is doing, which is essentially to try to not only focus on U.S. interests but to focus on developing the internal economy in isolation from the global economy. China’s not doing that.
Characterizing the American position as nationalism is a reasonable characterization and certainly we’re seeing the development of more stridently nationalist governments and a lot of other places including some European countries especially in Eastern Europe. It’s possible that we may see more aggressive negotiations in that way where negotiations are dominated by countries’ strong perceptions of their own selfish national interests.
There could be some sort of overall transformative effect, but I think that you can’t disregard the fact that the U.S. is the most powerful country in the world and the flexibility they have to engage in this kind of negotiating behavior is simply not available to other countries in those contexts.