The spirit of NAFTA is not dead yet, though Trump continues to boast about renegotiating the terms of the 25-year-old trade deal ahead of the midterm elections slated for next month.
After months of uncertainty, the United States and Canada finally reached a deal late Sunday night to save a three-country trade pact that over the years divided opinions over the pros and cons of free trade.
US President Donald Trump threatened to pull out of the North American Free Trade Agreement (NAFTA) unless its terms were redrawn. Fearful of the US withdrawing from the trade pact, Canada and Mexico — the other two signatories — agreed to negotiate NAFTA in April 2017 but hashing out the actual terms dragged on.
At more than one point, there were doubts the three sides could agree to a mutually-accepted framework on time, especially the US and Canada.
The Trump administration had set a deadline of Sunday to sort out its differences with Canada, saying it would go ahead with a two-way pact with Mexico that was agreed in August if a deal wasn’t reached with the Trudeau administration.
NAFTA took effect in 1994 and was one of the first major multinational trade pacts between the US, Canada and Mexico. The almost zero-tariff zone was aimed at integrating the three neighbouring economies by lowering tariffs and allowing manufacturers ease of movement between borders.
The renegotiated deal, renamed the US Mexico Canada Agreement (USMCA), largely keeps the spirit of the original pact alive by allowing businesses to source parts, and products from across the borders.
A joint statement issued by US Trade Representative Robert Lighthizer and Canada's Foreign Minister Chrystia Freeland said: "USMCA will give our workers, farmers, ranchers and businesses a high standard trade agreement that will result in free market, fairer trade and robust economic growth in the region."
Congratulations to Mexico and Canada!— Donald J. Trump (@realDonaldTrump) October 1, 2018
Trump’s trade war
Trump has taken a hard line against US trading partners in recent months, raising tariffs on the aluminium and steel products from the European Union and imposing import taxes on $250 billion of Chinese goods.
In addition to sharing an 8,890-kilometre border — the longest international crossing in the world — Canada is one of America’s strategic allies; or it used to be.
Washington cited Canada as a national security threat to justify tariffs on Canadian steel and aluminum, something that shocked diplomats.
Canada’s Prime Minister Justin Trudeau called it “insulting and unacceptable.”
Sunday’s agreement gives the Trump administration a better chance of getting the USMCA approved by Congress where lawmakers insisted on the trilateral nature of the pact.
It is expected to be signed in late November by Trump, Trudeau and outgoing Mexican President Enrique Pena Nieto.
Relief for the auto industry
Since 1994, US, Canadian and Mexican firms invested billions of dollars across the region to strengthen supply chains and to source components wherever they could be manufactured at the lowest price within the trade zone.
By 2015, US foreign direct investment in Canada was $353 billion while Canadian FDI in the US was $269 billion, according to the not-for-profit Center for Automotive Research.
Trump, who made the loss of American jobs to outsourced production a central theme of his election campaign, threatened to impose tariffs on auto parts imported from Canada.
That would have devastated the economy of Ontario where many of the Canadian auto manufacturers are located.
After signing the USMCA, Canada’s automotive industry will once again be afforded the safety of tariff-free entry into the US market.
Trump has taken a particular issue with the Canadian tariffs on import of dairy products.
"Canada charges the US a 270% tariff on dairy products! They didn't tell you that, did they? Not fair to our farmers!" Trump tweeted on June 7, ahead of a Group of Seven meeting.
Canadian dairy exports to its neighbouring country had become a major thorn in the USMCA negotiations, with Trump saying that Ottawa gives protection to its farmers in via higher tariffs on American producers. US officials had been lobbying for a cut in tariffs on US milk, cheese, butter, ice cream and other products.
But a series of reports point out that contrary to US claims, Canada’s system works differently.
It's actually a issue of quotas — the limit that Canadian authorities impose on the quantity of dairy products that could be imported to protect its farmers. Contrary to Trump’s tweet, tariffs on the products imported within the quota comes to around 7.5 percent. The tariffs shoot up to over 200 percent when the quantities exceed the quota.
Canada was already on the path to remove the quotas under the Trans-Pacific Partnership, which was scuttled by Trump after he withdrew the US from 12-nation pact.
With all of Trump’s talk of Canadian tariffs on dairy, the US actually runs a trade surplus in the sector. The US sold $792 million in dairy products to Canada while it imported only $149 million in dairy products from its neighbour.
US officials say their Canadian counterparts have agreed to give the American dairy business greater access to the market, according to the Financial Times.
Under the new pact, Canada will be also able to keep a dispute settlement mechanism which allows its lumber industry to challenge US anti-dumping duties.
Leverage across the Pacific
The deal also gives more leverage to the US to negotiate issues with another trading partner — Japan.
Japan has long resisted a free trade agreement with the US but a threat of looming tariffs on its car exports seem to have influenced Japanese Prime Minister Shinzo Abe's stance.
Abe and Trump agreed last week to begin talks that will protect Japanese car makers from a 25 percent tariff, threatened by Trump.
In return, Japan is being asked to open up its market to US agricultural and forestry exports.
Trump has made no secret of his dislike for Japan's trade surplus of $69 billion over the US, most of which is a result of Japanese cars which remain in favor of the Americans.
Under pressure from the Trump administration, South Korea recently revised its trade pact with US. Seoul agreed to open up its market to American agriculture products in return for the removal of 25 percent tariffs on its steel exports to the US.
With his USMCA success, Trump has demonstrated that he can bully a major ally and trading partner into accepting his terms affording him leverage when he does business with other countries.