August 2017

NAFTA 

This quarter’s Q & A is centered on NAFTA and the implications of trade talks that will begin this month.   Mr. Trump’s “America first” approach has prompted for him to find ways to better the trade deficit between other countries.   In January, an Executive Order on NAFTA re negotiations was brought forth to further Mr. Trump’s stance on protectionism.   With the negotiations upon us, we felt it was important to devote this quarter’s Q & A to NAFTA and the potential ramifications to our markets. 

Q: What is NAFTA?
A: The North American Free Trade Agreement (NAFTA), which came into effect in 1994, is a formal agreement that sets the rules on trades between Canada, the US, and Mexico.  Since the beginning of NAFTA, most tariffs and barriers of free trade between the countries have been eliminated.  Prior to NAFTA, Canada and the US signed a free trade agreement (FTA) in January 1988.  This came into effect in January 1989 and did not include Mexico.

Q: Who oversees NAFTA?
A: NAFTA is composed of several departments that include, but is not limited to, working groups, secretariats, as well as the Commission of Labor and Environmental cooperation.  Each department includes keys members from each country.

Q: How are trade disputes resolved?
A:  Trade disputes are resolved through provisions outlined in NAFTA.  The NAFTA Secretariat is the organization that administers the mechanisms specified in the agreement to resolve trade disputes.  Each country has their own ‘sections’ that make up the Secretariat.  They’re mirror images of each other and each country is responsible for their own costs.

Q: What are the Provincial imports / exports as a percentage of GDP?
A: The percentage amounts vary from province-to-province with the highest percentages at 49% and 50% (Ontario and Nova Scotia, respectively).  The Prairies follow suit with Alberta at 31%, Saskatchewan at 33%, and Manitoba at 39%.  Newfoundland and Labrador falls slightly lower at 29%, and Quebec at 23%.  All other provinces fall below 20%, including B.C at 16%.

Q: Historically, what are the largest exports of each above mentioned province?
A: Nova Scotia – Crab & Tires
Ontario – Autos
Alberta – Energy Commodities & Agriculture products 
Saskatchewan – Agricultural products
Manitoba – Agricultural products 
Newfoundland and Labrador – Energy & Seafood 
Quebec – Aircraft and parts
B.C – Softwood Lumber and other wood products 

Q: When will NAFTA negotiations begin?
A: NAFTA negotiations are expected to begin in Washington during the week of August 16 – 20th.  This will be the first round of talks between the governments.  Due to Mexican elections on July 1st 2018, both the US and Mexico hope to wrap up negotiations by early 2018 – a deadline many see as highly unlikely.  After July 1st 2018, negotiations will need to be put on hold until the New Mexican government takes place in December 2018.

Q: Which parts of NAFTA does the Trump administration wish to renegotiate?
A: Some of the main topics that will be brought forward by the Trump administration include the following:
Dairy – The dairy trade is one of the most contentious issues for Mr. Trump.  Canadian producers are currently protected by supply management measures.   Supply management in Canada is essentially a quota system for farmers.  It also imposes heavy tariffs on imports – something that Mr. Trump claims has caused for hardships on mid-west farmers, at the onset of his Presidency.  
Dispute resolution mechanism - Although the Trudeau government is open to modernizing the current NAFTA agreement, Mr. Trudeau has implied that they will walk away from all talks if the Trump Administration suggests getting rid of the dispute settlement process.   In the past, this process has greatly fallen in Canada’s favor on past issues such as the export of softwood lumber.   Although the softwood lumber industry is not formally part of the NAFTA negotiations, the dispute settlement process was used to determine the outcome of this debate.  
Wine - The U.S. government felt, prior to Mr. Trump taking office, that American wine producers were excluded from selling wine on British Columbia grocery store shelves.  The dispute escalated to the point where Washington launched a trade enforcement action based on its allegations that the province breached laws enforced by the World Trade Organization.

Q: What is the current dispute regarding softwood lumber?
A: The Canadian and US governments have come to an agreement regarding softwood lumber at roughly a 70/30 split – meaning that American mills will supply the US with 70% of their demand and Canadian mills will supply the remaining 30%.  The current negotiations are regarding the 30% cap put on the Canadian mills, and the ability to surpass the cap during times of increased demand, when American mills are not capable of meeting their 70%.  Simply speaking, Canada wants the ability to go over their 30% cap prior to the U.S Government opening their borders to imports from countries such as Germany, Sweden, Chili, Brazil, and Russia.

Q: What would happen if Canada withdraws from the negotiations?                                            A: If Canada or Mexico were to choose to withdraw from negotiations, NAFTA would remain status quo and President Trump could therefore could choose to terminate the NAFTA agreement.  

Q: How would possible outcomes affect the Canadian financial markets?                                    A: To some degree, one would argue that the markets have “priced in” the negotiations, given the minimum outcome would be that the agreement is modified to President Trump’s liking.  However, if negotiations stall or agreements are not met, then the markets will not react positively to this.   
Granted, most contentious issues listed above will undoubtedly be left for debate later in the negotiations, markets will be focused on the initial discussions given the magnitude of influence NAFTA has on the Canadian economy.

The information contained in this newsletter was obtained from sources which we believe to be reliable. However, this information is not guaranteed by the National Bank Financial Inc., and may be incomplete.