FTA Negotiation Training Course Session 10: CUSFTA & NAFTA Negotiations/Implementation & Renegotiations Prepared by Kristelle Audet Senior Economist, Industrial Economic Trends The Conference Board of Canada Jakarta, Indonesia 5-7 September 2017
Outline of Presentation Political and Economic Context leading to ▪ CUSFTA/NAFTA Negotiation, Key Provisions, Implementation Challenges ▪ Impacts of CUSFTA/NAFTA ▪ NAFTA Renegotiation ▪ The Conference Board’s Recommendations ▪ Key Objectives of the Canadian Government ▪ Lessons for Indonesia ▪
Glossary CUSFTA : Canada – U.S. Free Trade Agreement, signed • in 1987, entered into force in 1989 NAFTA : North American Free Trade Agreement • (Canada, U.S., and Mexico), signed in 1992, entered into force in 1994, and replaced CUSFTA
CUSFTA Political and Economic Context Until the 1980s, Canada had a long history of protectionism, especially with ▪ regards to the U.S Canada used to have the highest tariffs in the OECD ▪ Protectionism left Canada with an industrial manufacturing base too small to ▪ compete globally Multinationals had to set-up small branches in Canada to serve the domestic ▪ market, and could thus not benefit from economies of scale and specialization
CUSFTA Political and Economic Context CUSFTA was not the first agreement with the U.S ▪ Reciprocity Treaty of 1854, abrogated in 1866 ▪ Attempt to reinitiate the Reciprocity Treaty in 1911 ▪ without success Reciprocal Trade Agreement of 1938 (suspended ▪ in 1948 as Canada and U.S. joined the GATT)
CUSFTA Political and Economic Context ▪ 1970s policies aimed at reducing Canada’s reliance on the U.S. and protecting Canadian manufacturing ▪ Canadians were not favorable to the negotiation of an FTA ▪ Brian Mulroney, former Primer Minister who led the negotiation, during his leadership campaign in 1983: "The issue of free trade was decided in the election of 1911. It affects Canadian sovereignty and we'll have none of it. Not during leadership campaigns or any other time."
CUSFTA Political and Economic Context Factors leading to the negotiation of CUSFTA Struggling economy (recession, high unemployment) ▪ Former Prime Minister Pierre Trudeau ordered a Royal Commission on how to fix ▪ the economy #1 recommendation: Negotiate an FTA with the U.S ▪ Growing recognition of: ▪ the need to access large markets ▪ the benefits from the Auto Pact ▪
CUSFTA Political and Economic Context 1965 Canada – U.S Automotive Products Agreement known as the “Auto Pact” Pre-1965 ▪ Canada imported very few vehicles ▪ Relied almost exclusively on domestic production ▪ Very few models available, no economies of scale ▪ Cars were 30-40% more expensive than in the U.S. ▪
CUSFTA Political and Economic Context 1965 Auto Pact A “managed” trade agreement ▪ Goal: creating a broader market for vehicles with the benefits of ▪ large-scale production and specialization Agreement removed all tariffs on cars, trucks, buses, tires, and ▪ automotive parts between Canada and the U.S Products had to have 50 per cent Canada/US content to qualify. ▪
CUSFTA Political and Economic Context Results of the Auto Pact (number of vehicles exported, 000s) 1965 Auto Pact 1,000 Between 1965 and 1975 ▪ 800 vehicle trade between 600 Canada-U.S surged from 400 $2.3 to over $20 billion 200 0 1965 1975 Canadian Exports U.S Exports
CUSFTA Political and Economic Context Advantages to negotiate an FTA with the U.S Securing long-term access to the U.S. market ▪ Improving access to areas protected by tariffs and non-tariffs barriers ▪ Allowing Canadian firms to leverage the benefits from economies of ▪ scale and specialization Key Goal: Improve innovation, productivity, employment and overall ▪ Canadian living standards
CUSFTA Purpose of the Agreement: Eliminate barriers to trade in goods and services ▪ Facilitate conditions of fair competition ▪ Liberalize conditions for investment ▪ Establish effective procedures for dispute resolutions ▪ Lay the foundation for further bilateral cooperation ▪
CUSFTA Trade Sensitivities Canada Agriculture - Improve and secure market access for Canadian products in the U.S./ Preserve ▪ Canada’s agricultural policies (especially supply management) Culture - Exempting cultural industries ▪ United States Government procurement - Maintaining Buy America provisions (transportation contracts) ▪
CUSFTA Negotiation Challenges ▪ After 18 months of negotiation, Prime Minister Mulroney walked away from the table on Oct 1 st , 1987 ▪ Essential condition: an impartial dispute-settlement mechanism to allow trade conflicts to be resolved outside of U.S. courts (CUSFTA/NAFTA - Chapter 19) ▪ No trade agreement without this mechanism ▪ 2 days later, an agreement was reached
CUSFTA Agreement Signed on October 4 th ,1987 ▪ asd
CUSFTA Key Provisions – Tariff Elimination Tariff elimination on most goods, starting in 1989 ▪ 3 categories of products based on readiness to compete ▪ Immediate tariff removal for ready to compete sectors 1. (15% of goods) 5 steps tariff reduction over 5 years (35% of goods, incl. 2. pulp and paper, chemicals, machinery) 10 steps tariff reduction over 10 years for sensitive 3. sectors (eg. Most agricultural products, textile and apparel, etc)
CUSFTA Key Provisions – Trade in Services Expanding coverage to service sectors ▪ National treatment for selected commercial services ▪ Eg. mining services, wholesale, insurance and real ▪ estate, advertising, engineering, accounting, etc. “ Trade in services represents the frontier of international commercial policy in the 1980s.” - Original CUSFTA Agreement
CUSFTA Key Provisions – Temporary Entry of Business Persons ▪ Business Visitors (research, marketing, sales distribution, after-sales services) ▪ Professionals (only for professions specified listed in the FTA, including accountants, scientists, engineers, etc.) ▪ Traders and Investors ▪ Intra-Company Transferee
CUSFTA Key Provisions – Government Procurement ▪ Provisions broadened and deepened the obligations of both countries under the GATT ▪ Lowering the threshold for opened competition ▪ U.S. Department of Energy / Transportation not covered / limited coverage for Department of Defense
CUSFTA Implementation – Political Challenges ▪ Significant fear of losing our sovereignty to the U.S ▪ Liberals and NDP were against the deal ▪ Canadian Senate blocked the ratification ▪ Election called in 1988, with CUSFTA being the main issue ▪ Opposition split between Liberals and NDP ▪ Progressive Conservatives won a second majority ▪ CUSFTA became law
From CUSFTA to NAFTA Political Context ▪ In 1989, almost immediately after the implementation of CUSFTA, U.S. announced it was negotiating an FTA with Mexico ▪ Canada was reluctant to share its preferential access to the U.S. with Mexico, so asked to be include in the talks
NAFTA Agreement Signed on December 17 th ,1992
From CUSFTA to NAFTA Implementation – Political Challenges ▪ Strong opposition to the implementation of NAFTA in Canada / similar as with CUSFTA ▪ A second consecutive election fought over a free trade agreement with the U.S. ▪ Liberals campaigned on withdrawing from NAFTA ▪ However, after being elected, Liberals went ahead and implemented the Agreement
NAFTA Few Changes to Existing Provisions ▪ CUSFTA text was adopted almost in its entirety ▪ Canada’s cultural exception was maintained / no threat to supply management in Canada ▪ U.S. maintained Buy America provisions
NAFTA Key Additions ▪ New section on intellectual property (Chapter 17) ▪ Changes to content requirement in the auto sector ▪ Inclusion of an ISDS mechanism (Chapter 11) ▪ Labour and environmental side agreements
Impacts of CUSFTA & NAFTA Economic impacts ▪ Freer North American trade led to significant benefits for all three member countries ▪ 2005 extensive study by the Peterson Institute of International Economics from Washington concluded that : “NAFTA was designed to promote economic growth by spurring competition in domestic markets and promoting investment from both domestic and foreign sources. It has worked. North American firms are now more efficient and productive. They have restructured to take advantage of economies of scale in production and intra-industry specialization.”
Impacts of CUSFTA & NAFTA Trade with NAFTA Partners More than Tripled $ billion 500 Exports Imports 400 300 200 100 0 90 92 94 96 98 00 02 04 06 08 10 12 14 16 Source: Statistics Canada; The Conference Board of Canada.
Impacts of CUSFTA & NAFTA Economic impacts in Canada Extensive integration of North American supply chains ▪ Increased bilateral trade with partners ▪ Output and productivity gains in the manufacturing sector ▪ Greater variety of products available to Canadians ▪ Net positive impact on employment ▪ However, low-wage manufacturing jobs were negatively impacted ▪
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