Canada-EU – Old Ties, New Trade Partners

AuthorMichael Woods and Gordon LaFortune
DateFebruary 19, 2018

For Canadian business, the threat of U.S. withdrawal from NAFTA is the biggest and most immediate challenge. Without progress that satisfies the U.S. Administration, the current NAFTA negotiations may end with the U.S. issuing a Notice of Withdrawal that starts the six month clock on formal U.S. withdrawal from the Agreement and the market uncertainty that will likely follow.

Canada can and will survive the U.S. withdrawal from NAFTA. Canada and the U.S. have deep economic ties and market integration that will result in trade between the countries continuing, but on different terms. To address the problem of dependence on the U.S. Market successive Canadian governments have looked to trade diversification, particularly since the economic downturn of 2008 and the sharp rise of U.S. protectionist measures like the “Buy America”. The result of these efforts have been substantive trade initiatives in Europe and Asia-Pacific, including the 2017 Comprehensive Economic and Trade Agreement agreed between Canada and the European Union and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership which was just agreed between the remaining eleven states.

However, Canadian government efforts to diversify trade through trade agreements cannot succeed on their own. To truly diversify trade, Canadian business has to take steps to sell to customers in these new markets. In light of the possible U.S. withdrawal from NAFTA and the uncertainty that will create, Canadian business should take the “America First” challenge as an invitation to lessen our dependence on the U.S. market and find new trading partners in Europe and Asia.

NAFTA

The underlying impetus for the U.S. threat to NAFTA is a growing economic nationalism that has fueled an unapologetic ‘‘America First’’ platform. At this stage, it is already creating uncertainty about NAFTA and the integrated market that the Canada economy relies upon. As the United States shifts it focus to creating more jobs at the cost of championing economic liberalization and free trade many more sectors of the Canadian economy will be attacked as fiercely as aircraft and lumber are now.

The United States has failed to meet its original objective of a “re-balanced” agreement by the end of 2017 as both Canada and Mexico deem key U.S. “asks” as unacceptable. Beyond some consensus on less challenging regulatory matters, little progress has been made and Canadian negotiators continue to categorially reject core U.S. demands including: raising the minimum threshold for autos to 85 per cent for NAFTA origin (from 62.5 per cent) with half the content from the United States; a five-year sunset clause that would result in automatic termination of the Agreement unless the parties agree otherwise; dismantling Canada’s supply management system for dairy products; eliminating binding dispute settlement; and unbalanced government procurement rules.

The sixth round of negotiations, scheduled for Montreal this January 23-27, were critical, but it is not clear that the parties are not any closer to agreement. While the parties will continue to negotiate, the Trump Administration may well act on its often repeated threat to serve a six month notice to withdraw. Or perhaps...

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