The new NAFTA tried not to change too much — and then the pandemic changed everything

As negotiators shook hands on the revised North American free trade agreement, they couldn't have foreseen the fundamental upheaval their countries would soon be facing thanks to the COVID-19 pandemic.

If the Trudeau government is looking to celebrate something this Canada Day, it may be the relative security of the status quo that was more or less preserved in the talks.

"Bullet dodged" — that's how Brett House, Scotiabank's deputy chief economist, summed things up for CBC News last weekend.

"Sometimes," he said, "the biggest victories are the bad things prevented, rather than new things built."

Unlike Canada's original trade deals with the U.S. and the other major trade deals the Trudeau government has implemented with European and Pacific Rim partners, the new NAFTA doesn't substantially liberalize more trade. Most North American tariffs had been eliminated already.

The new automotive chapter, in contrast, adds more protectionism by requiring manufacturers to use more local components and higher labour standards to avoid tariffs.

When Global Affairs released its economic impact study for the new agreement last winter, it was criticized for basing its comparisons not on the terms of the original NAFTA but a hypothetically devastating scenario in which President Donald Trump completely pulled the plug on preferential trade with Canada.

How likely was that? Opinions still vary as to whether the Trudeau government had any real alternative to going along with the renegotiation.

As last week's threat to reimpose aluminum tariffs suggests, this White House remains unpredictable and, sometimes, unthinkable, even in the face of strong economic arguments about the value of free trade with one's neighbours.

'Negative on balance'

In attempting to modernize NAFTA for the 21st century, did negotiators meet the standard of "first, do no harm"?

In a paper released Tuesday by the C.D. Howe Institute, consultant trade economist Dan Ciuriak revisited the economic modelling done by the International Monetary Fund, the U.S. International Trade Commission and Global Affairs Canada, as well as his own figures, and tried to make sense of how things look now — amid the chaos of a pandemic that's disrupted international supply chains, shut down all but essential cross-border travel and introduced a new public health rationale for constricting trade on national security grounds.

"There are many sources of uncertainty that at present do not lend themselves to a robust quantification," his summary concludes. "The known knowns promise to be negative on balance; as for the known unknowns, time will tell."

"Just as companies were starting to prepare and think about [NAFTA implementation], COVID came," said Brian Kingston, outgoing vice-president responsible for trade issues at the Business Council of Canada.

"Their focus is turned 100 per cent to survival and making sure that they can get through this pandemic intact."

Despite the pandemic (or perhaps to distract from it), Trump demanded a June 1 implementation date. When he couldn't get that, he insisted on a July 1 implementation, to make sure a done deal was ready to campaign on this fall.

Rather than risk more punishment and political grief by stalling, Canada and Mexico agreed, paving the way for the Canada Day starting line.

For Canada, starting in July instead of August is very expensive for its dairy sector — and perhaps for the taxpayers who ultimately will compensate farmers for it. The dairy fiscal year begins in August, and since NAFTA concessions ramp up at the start of each new dairy year, that ramp is steeper with this timing.

One innovation in the original NAFTA now begins to vanish from the corporate toolkit: the investor-state dispute system (ISDS), which let companies bypass regular courts and challenge the regulatory decisions of Canadian governments directly through NAFTA arbitration (ISDS is also referred to by its location in the original text: "Chapter 11").

The ability of multinationals to seek millions in damages in such lawsuits "was always something that critics of the original NAFTA deal hated," said cross-border trade lawyer Mark Warner. "So that's a pretty big change."

Other changes businesses need to adapt to, like the copyright changes in the intellectual property chapter, are "largely a wash," Warner said.

Bumpy road for carmakers

The new NAFTA's uniform regulations for automotive manufacturing have only been out for a couple of weeks — during a time when carmakers have been preoccupied with reviving their supply chains and factories from the relative coma of this spring's lockdown.

"Without COVID, this would have been the most important issue facing that most important industry, and now this is probably a distant second," said Warner.

"I don't think anyone in auto … has really had time to concentrate the mind on [the new NAFTA] coming into effect. I think we're going to see a delayed reaction that plays out over time."

Will the revised agreement eventually fulfil Trump's pledge of returning more automotive jobs and investment to the U.S. (and Canada)? Or will manufacturers opt to comply by paying Mexican workers more, as some Japanese facilities are already signalling? Could some skip NAFTA compliance altogether?

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