New NAFTA woes: Why Canada and the U.S. are still at odds over trade

On November 18, Canadian Prime Minister Justin Trudeau sat cordially across from US President Joe Biden in the Oval Office during a fireside photo op. The two leaders were meeting for the North American Leaders’ Summit, where they lauded the importance of the Canada-U.S. partnership to the press while attempting to defuse an ongoing conflict over a proposed electric vehicle tax credit that has been a source of tension for months.

Trudeau and Biden have a relationship that stretches back years, to Biden’s time as Barack Obama’s vice president, when Trudeau was just entering office and Biden was preparing to leave. Despite the history, and the pleasantries, trade talks have become an inescapable sore spot for the U.S. and Canada since former U.S. president Donald Trump threw out the North American Free Trade Agreement and forced the creation of a new multilateral deal.

It’s been a little over a year since the Canada-United States-Mexico Agreement entered into force on July 1, 2020, but it’s nearly impossible to say what the true impact of the agreement has been on the economies of the three countries who signed it. The agreement—which doesn’t even have an agreed-upon name, colloquially referred to as everything from CUSMA and USMCA, to NAFTA 2.0 and the New NAFTA—was signed and ratified to great fanfare from officials, but negotiating and agreeing on the provisions was a brutal process that many experts on trade policy and economics agree had significant impact on the bilateral relationship between Canada and the United States.

With Trump now out of office and Joe Biden in the White House, the question of whether the agreement benefitted its signatories is still a subject to debate, as researchers wait patiently for enough time to pass to effectively analyze the statistical impact on trade and the economy. But in this intermediary stage, some critics argue the agreement is too restrictive on trade, disproportionately benefits the U.S. while harming Canada and Mexico, and is most likely to have a negative impact on the GDP of all three countries. On the other hand, supporters argue that the agreement made some significant improvements over an outdated NAFTA and should be considered a success because it exists at all.

From the very beginning, the prospect of a new trade agreement between Canada, Mexico and the United States left a sour taste in the mouths of officials, according to Dan Ciuriak, a fellow-in-residence at the C.D. Howe Institute in Canada and the director of Ciuriak Consulting Inc. The negotiations were instigated by Trump in 2017, after he repeatedly promised in his 2016 presidential campaign to pull the U.S. from NAFTA.

"I'm going tell our NAFTA partners that I intend to immediately renegotiate the terms of that agreement to get a better deal for our workers. And I don't mean just a little bit better, I mean a lot better,” Trump said on the campaign trail. "If they do not agree to a renegotiation, then I will submit notice under Article 2205 of the NAFTA agreement that America intends to withdraw from the deal."

Trump was not making empty promises. One of his first actions when he entered office in January 2017 was to pull out of the Trans-Pacific Partnership, another multilateral trade deal, through executive order.

For Canada and Mexico, it was proof that Trump was not playing coy.

“There was a sword hanging over Canada and Mexico,” Ciuriak said in a phone interview. “They had to do the math on what’s worse: losing NAFTA altogether or complying with the American requests.”

Ciuriak referred to the Trump administrations approach in the negotiation process as “mafia tactics.” Canada’s main goal, he said, was to maintain the status quo set out in NAFTA, without making too many concessions to the United States, which was striving for a more protectionist, “America First” agreement to onshore manufacturing and restrict imports from Canada and Mexico.

“It was an attempt by the Trump administration to quote-unquote ‘rebalance the benefits of NAFTA,’” Ciuriak said. “In the case of Canada and the United States, this was inappropriate, because in the preceding five-year period, we had an almost perfect balance of trade, in one of the deepest and most intensive trading relationships in the world.”

Politically, Ciuriak said, the final CUSMA agreement was a positive for Canada, which managed to hold on to several NAFTA provisions the Trump administration wanted to scrap, like the Chapter 19 dispute resolution mechanism. But while it’s too soon to tell, he and other researchers predict that the agreement could result in net negative impacts on the GDP of all three countries.

In an article comparing economic impact assessments of CUSMA from independent researchers and the Canadian and U.S. governments, Inu Manak, a research fellow at the Cato Institute’s Herbert A. Stiefel Center for Trade Policy Studies in Washington, D.C., wrote that the rushed approval process for the agreement prevented officials in Canada and the U.S. from understanding the potential economic impact of the new agreement before ratifying it.

“No matter how you cut this, it reduces GDP,” she said. “If you look at it holistically, and you have to look at a trade agreement that way, the overall economic benefit is negative.”

Manak calls the new agreement a “copy-paste” of NAFTA with only minor changes. While she said there are some positive improvements, she’s more concerned about those changes with potentially negative impacts.

For example, the agreement strengthens the rules of origin imposed on the automotive industry, increasing the percentage of a vehicle’s components that need to originate in North America to 75%. This could be a huge blow to Canadian car manufacturers, who currently rely heavily on imports from Asia for their vehicles.

“This was quite a departure from where we were going previous to the USMCA, because under the Trans-Pacific Partnership, we’d actually relaxed those rules quite a bit,” she said.

The agreement also has an expiry date, and one that Manak believes could soon be a source of trouble. The review and term extension provision, also known as the “sunset clause,” is meant to prevent the agreement from becoming outdated by requiring all parties to hold a joint review every six years. In 16 years, the agreement will terminate automatically, unless the parties agree to renew it.

Manak says the clause makes the agreement a “ticking time bomb,” subjecting Canada and Mexico to unending negotiations.

“In any sort of negotiation, where it's the U.S., Canada, and Mexico, it's usually whatever the US wants that tends to happen,” she said. “So, we don't want to be in a situation again where Canada and Mexico get significantly bullied into agreeing to things that they maybe don't want or not in their economic interest.”

The negotiation process for the agreement was a significant blow for Canada, which wasn’t used to dealing with such a belligerent United States. Laura Macdonald, a professor of political science at Carleton University, said that Trump’s willingness to treat Canada as a national security threat and arbitrarily impose tariffs on steel imports caused a significant strain in the relationship.

“I think it really undermined the relationship between the two countries,” Macdonald said. “Not just at the level of leadership, but in at the level of the populations. Trump was so unpopular in Canada, and Canadians were so appalled by Trump's behaviour.”

While Biden taking office has made the relationship between Canada and the U.S. much more amicable, the tension on trade issues hasn’t gone away. At the North American Leaders' Summit late November, trade experts were watching to see what Trudeau had to say to Biden about the proposed electric vehicle tax credit in Biden’s Build Back Better bill. The tax credit would incentivise American consumers to purchase American-made electric vehicles, potentially harming Canada’s own electric vehicle industry.

Trudeau told reporters that he had raised his concerns about protectionist Buy American policies to Biden, then later praised the USMCA as a “world-class agreement.”

Despite her reservations, Macdonald said she sees the agreement as a fairly effective continuation of NAFTA, taking on several issues that the previous agreement never dealt with.

A new chapter on labour issues, she said, is a stand-out example.

The chapter introduces fully enforceable provisions that ensure the parties must prioritize labour conditions and wages, where NAFTA had only included a non-binding side agreement on labour. The Rapid Response Labor Mechanism, which allows the U.S. to take action against facilities that fail to comply, solidifies the chapter’s effectiveness.

Though there is no mention of climate change in the agreement, per Trump’s refusal, there is a chapter on environment that also introduces provisions that Macdonald said are a step in the right direction.

For Colin Robertson, a former Canadian diplomat, and the vice president of the Canadian Global Affairs Institute, the USMCA is a success because he said it makes significant strides over NAFTA, and because it exists at all.

“The alternative could have been no deal,” he said.

The uncertainty around the new agreement’s name is an apt reflection of Robertson’s view of the deal, which he said he does not consider to be a true free trade agreement.

“It's freer trade than we would have under normal circumstances, because this is a preferred trading relationship,” he said. “But it's more managed trade, particularly in the biggest traded commodity (like lumber). So, it's not true free trade.”

Robertson views many of the agreement’s key additions as “game changers.” On top of its labour and environment provisions, it also introduces sections on digital trade, eCommerce, and digital intellectual property rights, making it an agreement fit for the future.

“When we did the original NAFTA, we didn't have the internet. It wasn't used as this major tool. Of course, that's changed,” he said. “We've gotten an agreement, that is in trade terms, kind of state of the art.”

Lawrence Herman, a counsel at Cassidy Levy Kent, an international law firm focused on legal and policy issues related to trade, praised USMCA for being much broader and more progressive than NAFTA.

“At the end of the day, the agreement is, I think, an improvement over what we had in the NAFTA,” Herman said. “Now, it's not a quick agreement. There are some parts of it where Canada had to make some concessions. That's the nature of it; always concessions made, and gains achieved. But on the whole, it's an improvement.”

While Herman hailed CUSMA as a political and economic success, he remained concerned about its application, and skeptical of Biden’s ability fulfil the U.S.’s end of the deal.

“I think that the tone with the Biden administration . . . there's a much more cooperative spirit in in a very important way,” he said. “(But) improved tone doesn't necessarily deliver everything you want.”

While Biden’s tone has been more cordial than Trump’s, Herman said Biden has largely embraced and maintained Trump’s protectionist approach to trade policy, continuing to exercise an America First attitude. The “Buy American” measures in his Build Back Better bill, as well as auto industry subsidizes and electric vehicle tax credits, are examples, Herman said, of the U.S. failing to live up to its obligations under CUSMA.

“Some of those could very well be in direct conflict with U.S. obligations towards Canada, under CUSMA. Those are where there are significantly looming difficulties with the Americans.”

Jonathan Miller, director of the Indo-Pacific Program at the Macdonald-Laurier Institute, said the reactions in Ottawa towards the Biden administration so far have been of disappointment.

“I think they all fell into the trap,” he said of Canadian officials. “We were all frustrated with the Trump administration. I think there was a sense that maybe we might get back to Obama again, or Obama plus or different Obama and the horrors of the Trump years were gone. So, there was this sort of like delusions of grandeur.”

The Democratic Party, Miller said, has never been particularly strong when it comes to trade, and that can be seen in the Biden administration’s approach to trade since taking office. “Largely Biden said the right things. But I have to say that there's been a bit of disappointment.”

The full extent of CUSMA’s impact likely won’t be clear for years. The pandemic, which delayed the agreement’s implementation, was so disruptive that it may be nearly impossible to disentangle the impact of COVID-19 from that of the USMCA. But as experts continue to monitor ongoing policy debates between Canada and the U.S., there’s one thing that’s clear: the core of the new NAFTA’s success is in its mere existence.

This article was written for Carleton University's JOUR 4306 course in November 2021.