Canada needs NAFTA and the U.S. knows it

As renegotiations begin today, the battle hinges on the all-important dispute resolution mechanism, says UAlberta trade expert.


North American Free Trade Agreement (NAFTA) renegotiations that started today will likely be a battle of political wills that come back to the thorny issue of dispute resolution, says a UAlberta trade policy expert.

“Canada is in a position to strive for some positive concessions on a few fronts, but if push comes to shove, we probably need to accept changes to Chapter 19 of NAFTA,” said Rolf Mirus, CN-Professor of Trade Policy (Emeritus).

“Modifying or losing Chapter 19 will expose us to major risks, but those risks may be less painful than losing NAFTA altogether, should Trump threaten to terminate the agreement,” he explained.

Chapter 19 is hailed as one of the most important achievements in NAFTA for Canada, as it provides a dispute settlement process for challenging antidumping (duties put on goods exported at prices below cost) and countervailing duty matters.

“It’s also on the top of Trump’s list of items to remove, and given he needs a victory on one of his election promises, this may well be a matter of political will,” said Mirus.

Chapter 19 is important to Canada because it protects businesses from a flawed and highly political U.S. apparatus that greatly favoured American companies in determinations of dumping and the importing of products with government subsidies, he said.

“Before Chapter 19, American companies that felt threatened could simply run to their government representatives and get a ruling they needed. Chapter 19 allowed us to challenge rulings, and made the U.S. more careful in their dealings. We also won a number of important disputes through it.”

Nevertheless, preserving Chapter 19 as it currently stands will not be as important as losing NAFTA should it come to that, said Mirus.

“We would be in a vulnerable trade position without NAFTA, especially on the global stage. It would also have a huge impact on countless businesses who rely on an integrated North American supply chain network.”

Mirus explained that while Trump insists Canada has a trade surplus, it’s limited to goods.

“In fact, our $11.3 billion deficit in services-trade—banking, tourism, entertainment, for example—offsets a considerable portion of the $32.5 billion surplus on goods-trade for 2016,” he said. “We’ve been sideswiped by these NAFTA renegotiations, considering we have only a minor surplus with the US if our negative trade balance in services is considered.”

Other areas Canada could stand to gain, or lose as the case may be, according to Mirus, include the following:

  • The investor-state dispute settlement mechanism contained in NAFTA’s chapter 11 that currently grants investors the right to sue foreign governments without first pursuing legal action in the country’s court systems, in order to protect foreign investors from discrimination. “It commonly used against Canada,” said Mirus, adding that it’s a chance for the prime minister to push for more transparency to how decisions are arrived at, and to establish an appeal process.
  • The value of goods American stores can send to Canada without having to pay taxes or duties currently sits at $20, but the U.S. wants that limit hiked to about US$800. “Canadian retailers object for obvious reasons, while consumers would be pleased. A compromise could be struck for $100 or so increase,” said Mirus.
  • One mutually agreeable deal could be struck around access to government procurement contracts. “Trump could hail access to Canadian government procurement contracts as a plus,” said Mirus. “The loss would not be terribly detrimental to us as we already made that concession to the European Union in the CETA-trade deal, whereas the payoff could be quite big given Trump’s big infrastructure program.”