NAFTA: A Look at 2 Scenarios for Canada

The North American Free Trade Agreement (NAFTA) is facing an overhaul as Canada, the United States and Mexico renegotiate the comprehensive trade deal that's been in place since 1994. The third round of talks recently wrapped in Ottawa and negotiators are reportedly aiming to reach a deal by the end of the year.

So, just what's at stake for Canada as the negotiations play out? RBC Economist-Policy Lead Mathias Hartpence, in a report titled NAFTA: Renewal or Rejection? What Canada is up against, laid out a best case vs. worst case scenario just as renegotiations kicked off late this summer.

Overall, he doesn't think it'll be a "one-sided boxing match." There will be "jabs on offensive priorities, parrying on mutual sensitivities—and handshakes on areas of shared interest."

As for the two scenarios, here's some of what he had to say:

Best Case

"A best-case outcome for Canada would play up those shared interests: for the U.S. and Canada, preserving reciprocal market access for goods across heavily integrated industries; reducing "red tape" at the border; expanding services and government procurement access; and bringing digital trade, labour and the environment into the core of the agreement."

Specifically, he notes that the U.S.'s overall goal is to "improve the U.S. trade balance and reduce the trade deficit with the NAFTA countries." On this front, he thinks Canada is in a good position, pointing out that imports and exports between the two countries are close to balance.

Canadian sectors hit in the past by non-tariff barriers (or restrictions not involving a tax or duty), such as those affected by the U.S. Country of Origin Labeling (COOL) law, could benefit from an easing of those barriers, he said. "Ensured access could allow exporters to specialize further, reap advantages from economies of scale and potentially improve their productivity," he noted.

On rules of origin (ROO), which determine whether goods qualify for NAFTA's duty-free trade, Mr. Hartpence said, "Given the U.S. intends to make ROOs more restrictive, a best case scenario for Canada would be a minor increase."

Worst Case

"A worst-case, however unlikely, would see a U.S. withdrawal from NAFTA, which would have a long-run negative impact on the Canadian economy and could chip a percentage point off (gross domestic product) over the next five to 10 years as tariffs rise. And a bad new deal would raise rules of origin thresholds for "local" content to a level that diminishes Canadian producers' global competitiveness; impose (intellectual property) rules that stymie rather than support innovation; and possibly remove the impartial trade arbitration afforded by NAFTA's Chapter 19."

Among its objectives for NAFTA renegotiation, the U.S. has stated it wants to eliminate the Chapter 19 dispute-settlement mechanism. That's the part of the agreement that allows each of the three countries to refer anti-dumping or countervailing duty challenges to a binding panel for resolution.

"Doing away with Chapter 19 could expose Canadian exporters to fighting trade disputes in U.S. courts, notwithstanding (World Trade Organization) disciplines that would provide some mitigation," Mr. Hartpence wrote.