A ‘New NAFTA’ could lead to angry Canadian neighbors

To most Americans, Canadians are perceived to be chronically polite and kind. But recently, a decision by the U.S. International Trade Commission defeating the Trump administration’s attempt to impose duties of almost 300 percent on imported jets made by a Canadian manufacturer may be the cause for some uncharacteristic celebratory behavior. The decision may have been a significant blow to Boeing, but may also set the tone for trade negotiations currently underway for altering the North American Free Trade Agreement (NAFTA). The results of these talks could negatively affect trade and transportation with the historically amicable relations between the United States and its northern neighbor.

Boeing had accused Bombardier of breaching American trade laws by receiving unfair Canadian subsidies for its products, thus undermining the sales of Boeing’s new “Max 7” Aircraft. The U.S. Department of Commerce responded by imposing heavy duties on Bombardier’s new C-Series plane – an action that threatened thousands of jobs in Canada, Great Britain and other countries.

Since taking office last year, the Trump administration announced that it was going to modernize NAFTA to protect American jobs. With public opinion divided over whether the agreement is good or bad for the United States, experts agree that the pact, signed in 1993, should indeed be reviewed and possibly changed to reflect the realities of automation and digitalization not yet envisioned when ratified. For instance, a “new NAFTA” must include enforceable provisions that liberalize e-commerce-related transactions, telecommunications and data flows across North American borders.

While several areas of disagreement exist, few can argue that the United States has not benefited under NAFTA since 1993. Since it began, trade between the U.S., Canada and Mexico has tripled, with billions of dollars added to each economy. At the same time, however, countries outside North America developed technological innovations through automation that made them highly competitive in global markets. The trick now is to maintain North America’s international manufacturing competitiveness while ensuring that workers in all three member countries receive fair treatment and their products reap the benefit of having no import duties imposed between them.

President Trump has repeatedly threatened to abandon NAFTA unless significant changes occur. While it is unclear if such rhetoric is genuine, the proclamation certainly gives negotiators an absolute sense of purpose in the current round of negotiations. Since its inception, trade between the U.S. and Canada has been balanced, although the U.S. now has a US$60 billion trade deficit with Mexico. Of course, regardless of Trump’s opinion, the U.S. Congress may not share his willingness, thus making it more difficult to leave the agreement. Still, the prospect of potential damage to the integrated economies of North American nations causes worries, not only within their industrial base and stock markets but also in freight transportation circles as well.

For example, General Motors, with 14 factories near the southern U.S. border, routinely ships and assembles its automotive-related parts between the U.S. and Mexico, using forwarders, trucking companies and air carriers each day. If NAFTA is discontinued, some of those vehicles assembled in Mexico could be subject to a 25 percent tariff. The extra cost would undoubtedly erase the agreement’s cost advantage in making cars there, while removing the need for the related expedited freight transportation now provided by the shipping industry.

If the Trump administration wants to renegotiate NAFTA, a new deal is sure to come at a price that American workers and transportation providers may have to pay. In addition to Mexican workers having more unfettered access to U.S. manufacturers, Mexican trucking companies could also establish further routes into the United States, thus competing with existing U.S.-based truckers serving Mexico and Canada. Such increased competition could hurt the balance sheets of these companies but also provide American forwarders and shippers with an increasing number of choices in selecting freight transporters.

Regardless, U.S. manufacturing firms are bound to be affected, as well as the supply chains on whom they depend. The current U.S. president believes that bilateral agreements are more efficient than participating in larger group-trade pacts, a position that only time will verify. Still, faced with the threat of a significantly altered or discontinued NAFTA, and the imposition of punitive Bombardier-style tariffs on selected manufactured goods, Canada is taking the defensive step to diversify its trade by recently joining ten other nations in a revamped Trans-Pacific Partnership, an agreement rejected two years ago by the United States. Because Canada sends 75 percent of its exports to the U.S., such action indicates an uncharacteristically unapologetic and aggressive willingness to seek alternatives to trade with its southern neighbor, even at the expense of a unified North American trade market.

NAFTA provides an essential tool, allowing Mexico, the U.S. and Canada to compete efficiently in an otherwise tight global market. The U.S. should continue to pursue a reworked and mutually beneficial agreement that allows for fair competition between participating nations while benefiting their manufacturers and transportation providers. Cool heads will be needed to work through the intricate details of a revamped NAFTA agreement that can live up to its potential.