The U.S. Trade Representative (USTR) published an 18-page "Summary of Objectives for the NAFTA Renegotiation" last Monday. It is not great summer reading but it outlines the general principles for the U.S. in the upcoming NAFTA renegotiations. It is sparse on details.
The existing free trade agreements are incredibly specific in some areas (e.g. the importation of rock Cornish game hens with wild rice stuffing) while being very vague in other areas (e.g. energy). The present summary doesn't speak to specific trade items but to generalities.
It lays down a framework with a very strong "America First" bias to it, as would be expected since it is an U.S. document. It does say things such as: "On May 18th, President Trump became the first American president to begin renegotiating a comprehensive free trade agreement like NAFTA."
But it fails, in my view, to provide the justification for such a renegotiation. Indeed, the only numbers provided in support of trade imbalances are not in the summary document. They are in the accompanying press release which states:
"In addition to President Trump being the first American president to begin renegotiating a comprehensive free trade agreement like NAFTA, for the first time USTR has included deficit reduction as a specific objective of the NAFTA negotiations. Since NAFTA was implemented in 1994, the U.S. bilateral goods trade balance with Mexico has gone from a $1.3 billion surplus to a $64 billion deficit in 2016. Market access issues have arising in Canada with respect to dairy, wine, grain and other products - barriers that the current agreement is unequipped to address."
Yes, the United States imports way more from Mexico than it exports to Mexico. Not too surprisingly this is a result of American companies shifting manufacturing from high wage American factories to low wage Mexican factories. After all, it keeps corporate costs to a minimum and maximizes the return on investment.
But the same cannot be said for the border with Canada. As I mentioned last week, the U.S./Canada trade relationship is $544 billion in goods and roughly $80 billion in services each year. For 2016, this breaks down to $278.1 billion in goods exported to the U.S. and $266 billion imported for a Canadian goods trade surplus of $12.1 billion.
However, on the service side of the ledger, the USTR provides an estimate of $83.7 billion in 2016 of which $54.2 billion was imported by Canada compared to only $26.9 billion by the United States. Canada ran a service trade deficit of $24.6 billion and a total deficit with the United States of $12.5 billion for 2016.
According to the USTR, "Canada was the United States' ... largest good export market in 2016," leading in categories such as vehicles, machinery, electrical machinery, mineral fuels, plastic and agricultural products.
Arguably, the NAFTA has been of mutual benefit to both countries - although I would still argue it has been of greater benefit to the United States.
There are a number of ways to demonstrate the latter statement, although as economies grow over time it is hard to compare one year with the next. That said, American exports to Canada have increased by 218 per cent since 1993 or prior to the implementation of NAFTA while Canadian exports to the United States have only increased by 150 per cent in the same time period. In constant dollars, it might not seem like a lot but there is no doubt both the American goods and services industry have benefited greatly from the liberalization of trade across the border.
Which begs the question of why Canada is involved in this renegotiation at all? After all, our trade relationship - for now - is of net benefit south of the border. Renegotiation runs a risk for Americans. They might not get as good of a deal next time around.
Except they know our economy is dependent upon export to their market and relies heavily upon import from their market. They know we can't survive - as presently structured - without them. And they are willing to use this knowledge to their advantage.
As a consequence, they want a "level playing field," which really means they want to get their way.
For example, under Investment, they want to "establish rules that reduce or eliminate barriers to U.S. investment in all sectors in the NAFTA countries." Put another way, they want to be able to buy Canadian companies freely.
Or under "Rules of Origin," they propose to "Ensure the rules of origin incentivize the sourcing of goods and materials from the United States and North America". Yes, let's all "Buy American."
And on energy, their position is to "preserve and strengthen investment, market access, and state-owned enterprise disciplines benefitting energy production and transmission and support North American energy security and independence..."
Which could explain why President Trump thinks Canadian oil is a domestic commodity.
