Canada / Industry Insights
5 Canadian Industries Affected by Potential NAFTA Renegotiations

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by Kelsey O'Hollaren
Aug 25 2017

The first of three rounds of renegotiations focused on modernizing the North American Free Trade Agreement (NAFTA) concluded in ambiguity on Sunday in Washington, D.C., amid a cool reception from Canada and Mexico for key changes proposed by the Trump administration. While this initial meeting was simply expected to set the tone and time frame for the talks, which are ambitiously scheduled to wrap up in early 2018, strong disagreements among the three negotiating countries and a lack of detailed policy offerings from the United States further complicated the process.

Canada’s heavily export-reliant economy is deeply invested in these talks, as substantial changes to the current regime could spell trouble for key swaths of its economy, including the automotive, lumber and dairy sectors. Here is a quick rundown of how the specific policy proposals would likely affect these industries:

National origin proposals and the automotive industry

Perhaps the largest disagreement among the three countries stems from changes to the “rules of origin” requirements already in place in the current version of the trade deal. Such requirements dictate what portion of total materials used in the manufacturing of a good by any of the three countries must come from the bloc to qualify for duty-free trade. While the current treaty requires 62.5% of materials used in the manufacturing of automobiles and parts to stem from one of the three countries to qualify as duty-free, the United States has expressed a keen interest in raising this percentage. Further, Robert Lighthizer, the talks’ chief US negotiator, has 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. These policies are deeply unpopular among Canada’s Car and Automobile Manufacturing and SUV and Light Truck Manufacturing industries, which would likely experience a steep increase in operating costs if these national origin laws were included in the new iteration of NAFTA. Together, these two industries are expected to generate $60.0 billion in 2017, according to IBISWorld estimates. Further, roughly 80.0% of both industries’ total revenue is expected to be consumed by direct purchase costs, which would likely skyrocket if they were forced to purchase more raw materials from within the trade area. The United States did not provide detailed policies on this matter in the first round of talks but is expected to do so in late September, when the talks move to Canada.

Supply management and the Dairy Farms industry

Canada’s dairy farmers are also paying close attention to the NAFTA re­negotiation process. The nation’s well-established supply management system has come under fire from the Trump administration and will likely be a point of contention as the trade talks grow more specific moving forward. The production system ensures that the Dairy Farm industry does not suffer drastic changes in revenue, despite the notorious volatility of milk prices. The system works on two fronts: first, quotas dictated by Ottawa ensure that enough milk and animal products are produced to meet overall domestic demand (in 2017, IBISWorld expects 98.9% of total domestic demand to be satisfied by Canadian dairy farms). Additionally, according to The Globe and Mail, dairy farms account for 80.0% of total agriculture cash receipts paid out in the supply management programme nationwide. Second, sky-high tariffs (sometimes as much as 300.0%) are levied against foreign milk imports, thus protecting the industry from competition from more-efficient producers in the United States and Europe. Again, while this topic was not discussed at length in Washington in the first round of negotiations, political rhetoric in the United States concerning this issue ensures that the Trump administration will push hard on this front. If current agreements are altered, the $6.3 billion industry would likely experience substantial and volatile revenue declines in the short run as the country is flooded with cheaper, foreign-produced dairy products.

Trade tribunals and the Wood Product Manufacturing sector

The final major aspect of NAFTA that came under fire in these renegotiations is likely the United States’ least favorite provision: the trade dispute tribunals established under Chapter 19 of the agreement. While the provision’s origins stem from the Canada-United States Free Trade Agreement, which NAFTA replaced, it has historically been the least popular aspect of the agreement in the United States, on both the left and right. The principle is simple: when trade disputes arise among industries (whether they concern excessing tariffs or anti-dumping laws) in the three different countries, a third-party tribunal is set up to deliberate on the issue outside of any national courts system. Given that the court has routinely voted in favour of Canadian industries (and against their US counterparts), the Trump administration has picked an easy target in declaring the provision a breach of US sovereignty. Canada’s Wood Product Manufacturing sector has been the foremost beneficiary of these rulings, as the courts have routinely ruled in favour of these industries in disputes involving their southern neighbours. 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% of total wood products exported from Canada.