In a global economy reshaped by a virus, the new North American trade agreement takes effect

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As negotiators shook hands on the revised North American Free Trade Agreement, they could not foresee the fundamental upheaval that their countries would soon face as a result of the COVID-19 pandemic.If the Trudeau government wants to celebrate something on Canada Day, it may be the relative security of the status quo that was more or less preserved during the talks.

“Dodge Bullet” – that’s how Brett House, Scotiabank’s deputy chief economist, summed it up for CBC News last weekend.

“Sometimes,” he said, “the greatest victories are the bad things avoided, rather than new things built.”

Unlike Canada’s original trade agreements with the United States and other major trade agreements that the Trudeau government has implemented with European partners and Pacific Rim countries, the new NAFTA will not further liberalize trade. Most of the North American tariffs had already been eliminated.

The new automotive chapter, on the other hand, adds more protectionism by forcing manufacturers to use more local components and higher labor standards to avoid tariffs.

When Global Affairs released its economic impact study for the new deal last winter, he was criticized for not basing his comparisons on the terms of the original NAFTA, but on a hypothetical devastating scenario in which President Donald Trump completely cut off preferential trade with Canada.

What was the probability? Opinions still differ as to whether the Trudeau government had a real alternative to renegotiation.

As last week’s threat to reimpose aluminum tariffs suggests, this White House remains unpredictable and, at times, unthinkable, even in the face of strong economic arguments about the value of free trade with its neighbors.

“Negative on balance”

In trying to modernize NAFTA for the 21st century, have the negotiators met the “do no harm” standard?

In an article published Tuesday by the CD Howe Institute, trade economics consultant Dan Ciuriak reviewed the economic modeling done by the International Monetary Fund, the US International Trade Commission and Global Affairs Canada, as well as his own figures, and tried to making sense of the current situation – amidst the chaos of a pandemic that has disrupted international supply chains, closed all cross-border travel, except essential travel, and introduces a new public health rationale for restricting trade for reasons of national security.

“There are many sources of uncertainty which at present do not lend themselves to robust quantification,” concludes his summary. “Known people promise to be negative overall; as for the known unknowns, time will tell. ”

“Just as companies started to prepare and think [NAFTA implementation], COVID has come, “said Brian Kingston, outgoing vice president responsible for trade matters at the Business Council of Canada.

“Their goal is 100% focused on survival and ensuring that they can overcome this intact pandemic. “

Prime Minister Justin Trudeau and United States President Donald Trump arrive to participate in a plenary session at the NATO summit in Watford, Hertfordshire, England, December 4, 2019. (Sean Kilpatrick / The Canadian Press)

Despite the pandemic (or perhaps to distract from it), Trump demanded an implementation date of June 1. When he was unable to obtain it, he insisted on Implementation on July 1, to make sure an agreement was ready to campaign this fall.

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

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

An innovation from the original NAFTA is now starting to disappear from the corporate toolbox: the Investor-State Dispute Resolution System (ISDS), which allows companies to bypass ordinary courts and challenge government regulatory decisions directly by NAFTA arbitration (ISDS is also mentioned by its location in the original text: “Chapter 11”).

The ability of multinationals to claim millions of damages in such lawsuits “has always been hated by critics of the original NAFTA agreement,” said Mark Warner, a lawyer specializing in cross-border trade. “So it’s a pretty big change. ”

Other changes that companies need to adapt to, such as changes to copyright in the chapter on intellectual property, are “largely a wash,” said Warner.

Bumpy road for automakers

The new uniform NAFTA regulations for automotive manufacturing were only published for a few weeks – at a time when car manufacturers were concerned with the relaunch of their supply chains and factories from this spring’s relative locking coma.

“Without COVID, this would have been the biggest problem facing this most important industry, and now it’s probably a distant second,” said Warner.

“I don’t think anyone in the car … really had the time to focus on [the new NAFTA] Coming into force. I think we will see a delayed reaction that plays out over time. ”

Will the revised agreement ultimately fulfill Trump’s commitment to return more jobs and investment in the auto sector to the United States (and Canada)? Or will manufacturers choose to comply with pay mexican workers more, as some Japanese installations already point out? Could some people completely ignore NAFTA compliance?

Commercial Law Professor Elizabeth Trujillo of the University of Houston said that while the new labor provisions are in keeping with the populist values ​​of the current President of Mexico, full compliance with the new labor standards on the Mexican side is ” unlikely “.

“Will it be applied? If so, what does this mean? More rates? ” she says.

It is now possible to file a complaint against Mexico as part of the now revised NAFTA dispute settlement process.

“The most likely scenario is that many of these manufacturers will simply not use the new NAFTA … they will work outside of it,” said Trujillo. “Just pay what they have to pay [in tariffs] and not have to adapt their way of doing things to the new rules. ”

As it redefines its supply chain strategy, Mexico could collaborate with other countries – particularly other Latin American countries that also have free trade agreements with the United States, such as the Colombia, she said.

Carleton University business professor Meredith Lilly, former government advisor to Stephen Harper, predicts “real bumps” to come as the industry moves to the new rules while trying to stay competitive globally.

“In the long run, the price of cars will eventually go up,” she said, stressing that North American components and labor would cost more.

De minimis, dairy changes come into play

Not all sectors face as many new rules as the automotive industry. For regular consumers, changes due to NAFTA can be almost undetectable.

“The biggest win is that the Canadians will not see much change,” said Kingston. “The least we see is actually a sign that the deal is working as intended. ”

There are some small gains for consumers.

With online shopping and shipping more popular than ever, merchandise shipped by courier services to the United States is no longer subject to customs duty if it is valued at less than $ 150 and does not incur sales taxes if they are worth less than $ 40. However, if purchases are shipped by mail, the previous threshold of $ 20 still applies.

Dairy cows walk through a pasture at Nicomekl Farms in Surrey, British Columbia on Thursday, August 30, 2018. (Darryl Dyck / LA PRESSE CANADIENNE)

Although market access in the United States for supply-managed agricultural products such as dairy, eggs and poultry should, in theory, stimulate more competitive prices and add more choice to the shelves stores, this is not something that will happen.

The pandemic has dramatically disrupted food supplies and prices, which could make it difficult to detect any simultaneous changes to NAFTA.

The new import licenses for US products will also be issued primarily to Canadian processors, not retailers – which the Americans have threatened to fight because they don’t trust Canada’s domestic industry to deliver the promised market share to American farmers.

Bitter relationships

Although the implementation of the new NAFTA could have been an opportunity to revive trade relations between Canada and the United States with a more positive attitude, Lilly expressed concern that this opportunity would be lost. Instead, the pandemic left Canadians with bad taste in the mouth about their neighbors.

The Trump administration’s attempt to prevent 3M from shipping N95 masks to Canada is an example of how there is “no loyalty and no lost love” between partners in the North American trading block right now, she said.

“This has caused Canadians to think a lot,” she said, adding that she is concerned that the ambitions of the Trudeau government in the area of ​​diversified trade may not be shared by the general public.

Hassan Yussuff, President of the Canada Labor Council, who also served on Canada’s NAFTA advisory council during the negotiations, said he hopes the agreement will bring positive changes to the lives of workers in Mexico. He added that he also hoped that the new NAFTA regulations, in turn, would encourage employers to think twice before leaving Canada, soothing workers’ resentment over the original agreement. of NAFTA.

COVID-19 urges countries to reconsider the extent to which they have pushed the boundaries of international trade and to reconsider the idea of ​​doing certain things at home, he said.

“We cannot be as vulnerable,” said Yussuff. And even if there is a new president in the White House after November, he added, internal political pressures will remain.

“The Americans always act in their own interest. We should not think that we are special. We have to be vigilant and get used to it. “

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