FTA Negotiation Training Course Session 10: CUSFTA & NAFTA - - PowerPoint PPT Presentation

FTA Negotiation Training Course

Session 10: CUSFTA & NAFTA

Negotiations/Implementation & Renegotiations

Jakarta, Indonesia 5-7 September 2017

Prepared by Kristelle Audet Senior Economist, Industrial Economic Trends The Conference Board of Canada

▪

Political and Economic Context leading to CUSFTA/NAFTA

▪

Negotiation, Key Provisions, Implementation Challenges

▪

Impacts of CUSFTA/NAFTA

▪

NAFTA Renegotiation

▪

The Conference Board’s Recommendations

▪

Key Objectives of the Canadian Government

▪

Lessons for Indonesia

Outline of Presentation

• CUSFTA : Canada – U.S. Free Trade Agreement, signed

in 1987, entered into force in 1989

• NAFTA : North American Free Trade Agreement

(Canada, U.S., and Mexico), signed in 1992, entered into force in 1994, and replaced CUSFTA

Glossary

▪

Until the 1980s, Canada had a long history of protectionism, especially with regards to the U.S

▪

Canada used to have the highest tariffs in the OECD

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Protectionism left Canada with an industrial manufacturing base too small to compete globally

▪

Multinationals had to set-up small branches in Canada to serve the domestic market, and could thus not benefit from economies of scale and specialization

CUSFTA

Political and Economic Context

▪

CUSFTA was not the first agreement with the U.S

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Reciprocity Treaty of 1854, abrogated in 1866

▪

Attempt to reinitiate the Reciprocity Treaty in 1911 without success

▪

Reciprocal Trade Agreement of 1938 (suspended in 1948 as Canada and U.S. joined the GATT)

CUSFTA

Political and Economic Context

▪ 1970s policies aimed at reducing Canada’s reliance on the

U.S. and protecting Canadian manufacturing

▪ Canadians were not favorable to the negotiation of an FTA ▪ Brian Mulroney, former Primer Minister who led the

negotiation, during his leadership campaign in 1983: "The issue of free trade was decided in the election of

• 1911. It affects Canadian sovereignty and we'll have none
• f it. Not during leadership campaigns or any other time."

CUSFTA

Political and Economic Context

Factors leading to the negotiation of CUSFTA

▪

Struggling economy (recession, high unemployment)

▪

Former Prime Minister Pierre Trudeau ordered a Royal Commission on how to fix the economy

▪

#1 recommendation: Negotiate an FTA with the U.S

▪

Growing recognition of:

▪

the need to access large markets

▪

the benefits from the Auto Pact

CUSFTA

Political and Economic Context

1965 Canada–U.S Automotive Products Agreement known as the “Auto Pact”

▪

Pre-1965

▪

Canada imported very few vehicles

▪

Relied almost exclusively on domestic production

▪

Very few models available, no economies of scale

▪

Cars were 30-40% more expensive than in the U.S.

CUSFTA

Political and Economic Context

1965 Auto Pact

▪

A “managed” trade agreement

▪

Goal: creating a broader market for vehicles with the benefits of large-scale production and specialization

▪

Agreement removed all tariffs on cars, trucks, buses, tires, and automotive parts between Canada and the U.S

▪

Products had to have 50 per cent Canada/US content to qualify.

CUSFTA

Political and Economic Context

1965 Auto Pact

▪

Between 1965 and 1975 vehicle trade between Canada-U.S surged from $2.3 to over $20 billion

CUSFTA

Political and Economic Context

200 400 600 800 1,000

1965 1975 Canadian Exports U.S Exports

Results of the Auto Pact

(number of vehicles exported, 000s)

Advantages to negotiate an FTA with the U.S

▪

Securing long-term access to the U.S. market

▪

Improving access to areas protected by tariffs and non-tariffs barriers

▪

Allowing Canadian firms to leverage the benefits from economies of scale and specialization

▪

Key Goal: Improve innovation, productivity, employment and overall Canadian living standards

CUSFTA

Political and Economic Context

▪

Eliminate barriers to trade in goods and services

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Facilitate conditions of fair competition

▪

Liberalize conditions for investment

▪

Establish effective procedures for dispute resolutions

▪

Lay the foundation for further bilateral cooperation

CUSFTA

Purpose of the Agreement:

Canada

▪

Agriculture - Improve and secure market access for Canadian products in the U.S./ Preserve Canada’s agricultural policies (especially supply management)

▪

Culture - Exempting cultural industries United States

▪

Government procurement - Maintaining Buy America provisions (transportation contracts)

CUSFTA

Trade Sensitivities

▪ After 18 months of negotiation, Prime Minister Mulroney

walked away from the table on Oct 1st, 1987

▪ Essential condition: an impartial dispute-settlement

mechanism to allow trade conflicts to be resolved outside

• f U.S. courts (CUSFTA/NAFTA - Chapter 19)

▪ No trade agreement without this mechanism ▪ 2 days later, an agreement was reached

CUSFTA

Negotiation Challenges

▪ asd

CUSFTA

Agreement Signed on October 4th,1987

▪

Tariff elimination on most goods, starting in 1989

▪

3 categories of products based on readiness to compete

1.

Immediate tariff removal for ready to compete sectors (15% of goods)

2.

5 steps tariff reduction over 5 years (35% of goods, incl. pulp and paper, chemicals, machinery)

3.

10 steps tariff reduction over 10 years for sensitive sectors (eg. Most agricultural products, textile and apparel, etc)

CUSFTA

Key Provisions –Tariff Elimination

▪

Expanding coverage to service sectors

▪

National treatment for selected commercial services

▪

• Eg. mining services, wholesale, insurance and real

estate, advertising, engineering, accounting, etc. “Trade in services represents the frontier of international commercial policy in the 1980s.”

• Original CUSFTA Agreement

CUSFTA

Key Provisions –Trade in Services

▪ Business Visitors (research, marketing, sales distribution,

after-sales services)

▪ Professionals (only for professions specified listed in the

FTA, including accountants, scientists, engineers, etc.)

▪ Traders and Investors ▪ Intra-Company Transferee

CUSFTA

Key Provisions –Temporary Entry of Business Persons

▪ Provisions broadened and deepened the obligations of

both countries under the GATT

▪ Lowering the threshold for opened competition ▪ U.S. Department of Energy / Transportation not covered /

limited coverage for Department of Defense

CUSFTA

Key Provisions – Government Procurement

CUSFTA

Implementation – Political Challenges

▪ Significant fear of losing our sovereignty to the U.S ▪ Liberals and NDP were against the deal ▪ Canadian Senate blocked the ratification ▪ Election called in 1988, with CUSFTA being the main issue ▪ Opposition split between Liberals and NDP ▪ Progressive Conservatives won a second majority ▪ CUSFTA became law

▪ In 1989, almost immediately after the implementation of

CUSFTA, U.S. announced it was negotiating an FTA with Mexico

▪ Canada was reluctant to share its preferential access to

the U.S. with Mexico, so asked to be include in the talks

From CUSFTA to NAFTA

Political Context

NAFTA

Agreement Signed on December 17th,1992

▪ Strong opposition to the implementation of NAFTA in

Canada / similar as with CUSFTA

▪ A second consecutive election fought over a free trade

agreement with the U.S.

▪ Liberals campaigned on withdrawing from NAFTA ▪ However, after being elected, Liberals went ahead and

implemented the Agreement

From CUSFTA to NAFTA

Implementation – Political Challenges

▪ CUSFTA text was adopted almost in its entirety ▪ Canada’s cultural exception was maintained / no threat to

supply management in Canada

▪ U.S. maintained Buy America provisions

NAFTA

Few Changes to Existing Provisions

▪ New section on intellectual property (Chapter 17) ▪ Changes to content requirement in the auto sector ▪ Inclusion of an ISDS mechanism (Chapter 11) ▪ Labour and environmental side agreements

NAFTA

Key Additions

▪ Freer North American trade led to significant benefits for all

three member countries

▪ 2005 extensive study by the Peterson Institute of

International Economics from Washington concluded that :

“NAFTA was designed to promote economic growth by spurring competition in domestic markets and promoting investment from both domestic and foreign sources. It has worked. North American firms are now more efficient and productive. They have restructured to take advantage of economies of scale in production and intra-industry specialization.”

Impacts of CUSFTA & NAFTA

Economic impacts

Source: Statistics Canada; The Conference Board of Canada.

Impacts of CUSFTA & NAFTA

Trade with NAFTA Partners More than Tripled

$ billion

100 200 300 400 500 90 92 94 96 98 00 02 04 06 08 10 12 14 16 Exports Imports

▪

Extensive integration of North American supply chains

▪

Increased bilateral trade with partners

▪

Output and productivity gains in the manufacturing sector

▪

Greater variety of products available to Canadians

▪

Net positive impact on employment

▪

However, low-wage manufacturing jobs were negatively impacted

Impacts of CUSFTA & NAFTA

Economic impacts in Canada

▪ Significant change in attitudes and beliefs in Canada

towards free trade

▪ Canadians among the largest supporters of NAFTA ▪ 76% of Canadians support the agreement,

compared with 51% of Americans, and 60% of Mexicans

▪ Gave governments, businesses, and population the

confidence they can compete in foreign markets without having to overly protect their domestic markets

Impacts of CUSFTA & NAFTA

Political impacts in Canada

Impacts of CUSFTA & NAFTA

Political impacts in Canada

CUSFTA/NAFTA opened the door to the negotiation of numerous FTA (bilateral and regional

In effect or recently signed In Negotiation Exploratory discussions Chile, Colombia, Costa Rica, EFTA, Honduras, Israel, Jordan, Korea, Panama, Peru, Ukraine, EU (CETA) India, Japan, Morocco, Singapore, China, El Salvador, Guatemala, Nicaragua, Caribbean Community China, MERCOSUR, Pacific Alliance, Philippines, Thailand, Turkey,

▪ Increased trade led to twice as many jobs created than

lost in import-competing segments in the decade after NAFTA entered into force

▪ American exports to Canada and Mexico support nearly 3

million jobs in the U.S

Impacts of CUSFTA & NAFTA

Impact in the U.S.

NAFTA Renegotiation

Why Are We Here?

Greater Canada-U.S Economic Integration Pressure for increased protectionism

1840s-1860s Reciprocity Treaty of 1954 1870s-1900s Adoption of the National Policy (Imposition of import tariffs, lasting over a century) 1900s-1910s Attempt at renegotiating Reciprocity Treaty 1920s-early 1930s U.S imposes new tariffs/rising protectionism/Great depression Late 1930s-1970s Trade negotiations taking place mostly in a multilateral context (GATT) 1980s-2000s CUSFTA/NAFTA 2010s NAFTA Renegotiation (following the election of Donald Trump on a protectionist platform)

▪ Attitudes towards trade have switched in Canada/U.S.

compared with 30 years ago

▪ U.S now leaning on the protectionism side ▪ President Trump threatening to withdraw from the

agreement

▪ Willingness to make significant changes to protect

U.S. manufacturing from Mexican competition

▪ Canada actively engaged in saving NAFTA

NAFTA Renegotiation

A Different Political Context

▪ Sectors under supply management ▪ Cultural industries ▪ Dispute settlement mechanisms in anti dumping/

countervailing duties cases

▪ The U.S’ goal is to eliminate it ▪ Could be a deal-breaker during the negotiation,

as in 1987

NAFTA Renegotiation

Key Sensitivities for Canada

NAFTA Renegotiation

The Conference Board’s recommendations

• 1. Adopt a

Transparent and trilateral approach

• 2. Facilitate the

mobility of business people

• 3. Enhance goods

market access

• 4. Encourage

innovation while protecting IP and culture

• 5. Modernize to

new business realities and standards

• 1. Adopt a transparent and trilateral approach
• Ensure the agreement is renegotiated with all three

member countries

• Involve the provinces throughout the process
• Keep Canadians regularly informed about renegotiation

progress, changes being considered, and their implications

NAFTA Renegotiation

The Conference Board’s recommendations

1

• 2. Facilitate the mobility of business persons to support trade

in services

• Clarify the requirements for business visitors
• Expand the list of occupations covered by NAFTA

NAFTA Renegotiation

The Conference Board’s recommendations

1 2

• 3. Maintain and enhance goods market access.

Government procurement

▪ Secure access to U.S. transportation projects and increase

coverage at the state level

▪ How? By updating the Canada–U.S. Agreement on

Government Procurement and obtaining a permanent waiver on Buy America requirements

NAFTA Renegotiation

The Conference Board’s recommendations

1 2 3

• 3. Maintain and enhance goods market access.

Supply management sectors

▪ Canada should be prepared to offer increased market

access to U.S. dairy products

▪ Use a phase-in period to undertake a reform of the supply

management system

NAFTA Renegotiation

The Conference Board’s recommendations

1 2 3

• 4. Encourage innovation while protecting IP and culture.

Digital trade

▪

Add an e-commerce chapter as in CETA and the TPP to remove barriers to digital trade while maintaining our ability to support industries disrupted by the digital economy Culture

▪

Maintain the cultural exception to ensure that Canadian culture can thrive in the digital age

NAFTA Renegotiation

The Conference Board’s recommendations

1 2 3 4

• 5. Modernize NAFTA to reflect new business realities

Rules of origin

▪ Streamline NAFTA’s rules of origin to reduce the burden on

SMEs Investor-state dispute settlement

▪ Clarify the scope and meaning of key investment principles

and concepts

▪ Review the constitution of ISDS tribunals based on CETA

NAFTA Renegotiation

The Conference Board’s recommendations

1 2 3 4 5

• 5. Modernize NAFTA to reflect new business realities

Labour and environmental standards

▪ Update the labour and environmental side agreements

based on progress made in recent trade deals

▪ Incorporate these side agreements into the main text of the

agreement

NAFTA Renegotiation

The Conference Board’s recommendations

1 2 3 4 5

CBoC’s NAFTA 2.0 Report & Infographic

NAFTA Renegotiation

The Governments’ Key Objectives

Similar to CBoC?

• 1. Modernize NAFTA to the new realities of the digital economy

✓

• 2. NAFTA should be made more progressive

Stronger labour safeguards ✓ Improved environmental provisions ✓ New chapter on gender rights New chapter on Indigeneous population Reforming ISDS Process ✓

NAFTA Renegotiation

The Governments’ Key Objectives

Similar to CBoC?

• 3. Harmonizing regulations, reduce bureaucracy

✓

• 4. Freer market for government procurement

✓

• 5. Make the movement of professionals easier/ Review Chapter

16 ✓

• 6. Preserving key elements to protect Canadian interests

Maintaining chapter 19 Maintaining the cultural exception ✓ Preserve Canada’s supply management system

• Key opportunity to modernize the 23-year old agreement to today’s

economic realities

• The outcome of the NAFTA renegotiation will affect the prosperity of all

Canadians for decades to come

• The negotiation could be unlike any other that we have undertaken in

recent decades

• Previous administrations had a goal of achieving an agreement. Unclear

whether this is the preferred outcome for the current administration

NAFTA Renegotiation

Looking Ahead

▪

Strengthening economic ties with the U.S. through a FTA was highly beneficial for Canada

▪

Canadians’ initial fears did not materialize

▪

It is possible to build consensus in the population and with stakeholders around the benefits of FTAs

▪

Before CUSFTA, Canada used to be among the most protectionist countries of the OECD

▪

Canadians are now among the most supportive of free trade in North America

Lessons for Indonesia

Q&A and Discussion Thank you!