What are the Stakes?
The history of the North American Free Trade Agreement (NAFTA) begins in the early 1980s, spanning the Republican Presidencies of Ronald Reagan and George H.W. Bush, before being signed into law by Democratic President Bill Clinton on December 8, 1993. The agreement entered into effect shortly after, on January 1, 1994.
The agreement created a free trade zone spanning Canada, the U.S. and Mexico, by eliminating barriers to trade and investment between the three countries. The aim was to, according to the official document, “facilitate the cross-border movement of goods and services,” “promote conditions of fair competition,” “increase substantially investment opportunities,” and “provide adequate and effective production and enforcement of intellectual property rights.”
In short, the idea was to increase economic prosperity for all three nations, by making it easier for goods to flow across their respective borders. And while trade has quadrupled among the three countries, as reported by Reuters, surpassing $1 trillion in 2015, job losses, particularly in the U.S. manufacturing industry, have tended to unleash hostility toward the agreement. The problem, however, is that it is difficult to attribute these job losses purely to NAFTA.
The economy has become increasingly globalized since the early nineties, while advances in technology have led to increased automation. As an August 2017 Al Jazeera article observes, “U.S. tariff cuts on Mexican trade under NAFTA were implemented at roughly the same time as tariff cuts with most other countries as the U.S. entered the World Trade Organization (WTO) in 1995.”
And yet, the prospect of renegotiating – or even backing out of – NAFTA has recently taken root in American politics on account of a campaign promise made by U.S. President Donald Trump, who called it the “worst trade deal the U.S. has ever signed.” The idea of renegotiating goes at least as far back as Barack Obama’s presidency, no doubt on account of the recession that hit in 2008, as George W. Bush’s term was coming to an end.
Of course, as we know, that discontentment in 2008 did not lead to a re-negotiation of NAFTA or even, as has started to happen now, talks between Canada, the U.S., and Mexico. In 2008, Andrea Ford, writing for Time Magazine, reported that the main issues with NAFTA, brought up by both then-Senator Hillary Clinton and Barack Obama, had largely to do with the loss of American manufacturing jobs and “suggested that terms might be renegotiated to include higher labour and environmental standards. At the time, the idea was to stem the ‘race to the bottom’ among companies seeking the cheapest costs of doing business, ultimately encouraging them to keep jobs in place in the U.S.”
The threat – whether real or perceived – of losing jobs, particularly to Mexico where wages are lower, remains, at least in the eyes of critics. What has changed, according to a September 2017 report published by Reuters, is that more specific issues have been put forward for renegotiation.
In the first place, in an effort to bring jobs – particularly manufacturing jobs – back to the U.S., the percentage of content belonging to a product is an issue on the table. These are the rules of origin requirements in Chapter 4 of NAFTA. Caroline Freund notes that these policies are generally intended to prevent the evasion of tariffs by countries outside of the member countries of the free trade agreement. Without them, a country outside of, for example, NAFTA, could import goods to the lowest-tariff country within NAFTA and then move them from there to the other member nations.
However, they can also be used for more protectionist aims. As Freund explains, the “World Trade Organization imposes few strict disciplines on rules of origin, and as a result, they have been used not only to legitimately protect against transshipment abuse, but as a form of trade protection.” From ‘Buy American’ policies instituted during the Obama Presidency, to Trump’s repeated calls to put ‘America first,’ the idea that the U.S. has a protectionist agenda is hardly an unreasonable one.
For the automobile industry, NAFTA’s rules of origin policies stipulate that at least 62.5 percent of a product must contain North American content to be eligible for duty-free trading within Canada, the U.S. and Mexico. The U.S. would like this threshold raised. Further to that, according to an August 2017 report by IBISWorld, titled “NAFTA: 5 Canadian Industries Affected by Potential Renegotiations,” chief U.S. Negotiator, Robert Lighthizer suggested that, “‘national origin’ laws should be established, requiring a higher portion of raw materials to come directly from the United States to gain free movement across its borders.”
While much of the discourse involving rules of origin provisions in NAFTA revolves around its effect on the automobile industry, it is important to also think of the toll it could take on supply chains in general. Since NAFTA was enacted, as Rich Weissman points out in his September 2017 report for Supply Chain Drive, sourcing and “operational decisions and financial relationships with trading partners outside the United States were ingrained into company processes that might not be given a second thought.” As such, “strengthening the rules of origin will create substantial changes and potential hardship.” The renegotiation of this provision is bound to affect any industry that depends on goods moving between borders to source materials.
Caroline Freund’s analysis of NAFTA’s rules of origin suggests that they are “strict and highly complex, as compared with rules in other free trade agreements. Tightening them could perversely lead to lower regional content in the final goods and disrupt regional supply chains, as more importers eschew NAFTA preferences because of costly rules of origin and instead trade under standard MFN [Most Favoured Nation] tariffs.” The key takeaway is that there is a balance to be struck here from the side of the U.S. and that taking measures to ensure a higher percentage of U.S. content on paper may not necessarily lead to that outcome in reality.
The construction industry may be particularly affected by renegotiation of Chapter 19 of the agreement, which establishes the ground rules for trade dispute resolution. Chapter 19 has been historically unpopular in the United States because it stipulates that trade disputes among industries must be resolved by a third-party tribunal that operates outside of the national court system of any of the three countries.
These rulings have tended to favour Canadian industries in particular. As the IBIS report continues, “Canada’s wood product manufacturing sector has been the foremost beneficiary of these rulings.” Scrapping Chapter 19 “would likely reduce exports to the United States, which are expected to reach $14.2 billion in 2017 and accounted for nearly 80.0 percent of total wood products exported from Canada.”
A July 2017 “Submission on Renegotiation of the North American Free Trade Agreement” by the Canadian Home Builder’s Association drives home the impact of Chapter 19 on the residential construction industry. The North American supply chain is highly integrated, such that, although “contractors may source a variety of materials from a single vendor,” those materials “come from both sides of the border.” This kind of reduction in exports would also, no doubt, affect not only the prices of construction materials but their availability.
Under the current system, “duties and tariffs are announced with immediate effect, which are highly disruptive to industries… that operate on price-guaranteed contracts months or years into the future.” These contracts ultimately rely on “material price and supply certainty.” The issue here, then, is whether or not the Chapter 19 renegotiations will do enough to ensure such certainty.
There remain many unanswered questions around the continued renegotiations of NAFTA. Since the discussion to date has largely revolved around manufacturing industries of various kinds, it is even harder to predict what kind of outcome there might be, specifically, for the construction industry in this renegotiation. However, it is possible that increasingly protectionist measures by the United States mean that the industries in Canada and Mexico may have more to lose than the U.S. Its economy has, after all, always been the strongest of the three.
Nevertheless, the renegotiation of NAFTA is also an opportunity. A lot has changed in the twenty-four years since the agreement was introduced: increased globalization, technological advances, a pronounced dependency on ‘big data’ and the storage and retrieval of digital information. It will allow Canada, the U.S. and Mexico to consider and adapt to these changing conditions. Globalization is a force that affects more than NAFTA, and as technology continues to advance and transportation costs continue to decrease, protectionist measures may become more difficult to enforce and ultimately do more harm than good.