GLOBAL ECONOMICS
Patrick Grady
The FTA/NAFTA After Two Decades: Notes for Remarks to the 25th TransAmerica Conference
August 12, 2009
The Canada-U.S. Free Trade Agreement/ North American Free Trade Agreement (FTA/NAFTA) has become the main force shaping Canada’s economy. As several participants have told us, Canada and the US don’t just trade, but make things together.
It was not easy to get where we are. Laurier was defeated in 1911 over reciprocity. King got cold feet on free trade after WWII.
It took a Royal Commission headed by a former Liberal Finance Minister and two leaders singing “When Irish Eyes are Smiling” in reasonable harmony to get it done.
The FTA insitutionalized Canada’s special relationship with the US.
It also was a comprehensive and pathbreaking agreement covering goods, services, investment, energy, trade facilitation, and dispute settlement, which served as a model for subsequent trading agreements including.
It was also much more than a free trade agreement as US duties on Candian exports were already low and averaged only 1 per cent in 1987.
NAFTA was entirely a defensive move on Canada’s part. Canada didn’t want hub and spokes system.
Canada has never been happy with NAFTA’s trilateral framework. And the dissatisfaction has been growing.
Canada and US have similar modern industrialized economies. Mexico is still an emerging market country. The big bilateral US-Mexico issues are illegal immigration and drugs.
The growing political power of Latinos in the US makes it more difficult for Canada to get concessions from the US that are not granted to Mexico. Indeed Canada even has trouble getting the US Government’s attention on important bilateral issues. It’s also perhaps why DHS Secretary Janet Napolitano wanted to take action on the Northern border as a first order of business so as not to only be tightening the southern border.
Some economists are disappointed that the FTA/NAFTA has not developed in the directions suggested by developments in Europe with deepening integration. But most politicians are glad it hasn’t. And certainly there were none that wanted to step up to the plate and provide the leadership necessary to make progress.
It’s also apparent that Canada can’t look to the WTO for much help on the trade front. The Doha Round is “suspended indefinitely.”
Canadians were worried when Candidate Obama threatened to use the hammer to reopen labour and environmental standards in NAFTA. But then relieved when it only turned out to be campaign rhetoric.
The recently released Canada's International Market Access Report - 2009 provides a good overview of the issues related to NAFTA from a Canadian point of view. This includes trade disputes like the country of-origen-labelling (COOL) on beef and swine before the WTO and NAFTA chapter 11 and 19 disputes like Glamis.
Canadian exports to the US soared under FTA/NAFTA tripling from 1987 to 2001. But after September 11 have stagnated. And in the first five months of this year following the financial crisis have collapsed by over 28 per cent.
Following September 11, the mantra became “security trumps trade.”
And now protectionism has reared its ugly head.
Thickening of the border has been a continuing problem. There have been many unilateral initiatives – more border agents, more inspections, higher fees. The result has been inevitable delays and the resulting higher costs of trade.
The next session will deal with this. Shirley Ann George of the Chamber of Commerce will elaborate on these problems and provide some concrete suggestions on what needs to be done to break the logjam at the border.
One issue that deserves mentioning is preclearance. This is clearly something Canada badly needs to reduce the bottlenecks at the border, but is also something that Canada can’t seem to agree to because of the difficulties of enforcing US laws in Canada resulting from the 1982 Charter of Rights and Freedoms.
It also needs to be said that US concerns about border security are not just irrational fears as suggested by many Canadian observers.
Yes, as official Canadian spokesman are quick to point out, the 911 terrorists did not come through Canada, but the 911 Commission mentioned two Al Qaeda operatives, Mohamedou Ould Slahi and Abderraouf Jdey, who may have had important roles and that had been in Canada.
Also it can’t be denied that there have been terrorists with Canadian residence or citizenship.
And the Canadian Anti-Terrorism Act has been weakened as two key provisions for preventive detention and investigative hearings have been allowed to sunset. Even more troubling is that the ATA has not been effectively used to prosecute terrorists. Momin Khawaja, who made a detonator for a terrorist group in London, was earlier this year not convicted of terrorism, but only “five charges of financing and facilitating terrorism for training at a remote camp in Pakistan and providing cash to a group of British extremists, as well as offering them lodging and other assistance.” The prosecution could not prove that he knew the detonator found in his home which he made was to be used for a terrorist attack in London. The striking down of the definition of terrorism in the ATA also did not help the prosecution.
Because of the Charter of Rights and Freedoms, Canada is unable to deport people suspected of having links to terrorism. As evidence consider the lack of success of the seven post September 11 security certificate cases. Only a geriatric neo Nazi was actually removed. And one person Muhammed Issa Muhammed who was involved in the hijacking of an airplane and killing of passengers has been in the deportation process for almost 20 years.
And since 2001, over 300 immigrants have been admitted into Canada from countries with a terrorism problem with only a peremptory screening. This would be the same as 3 million into the US.
It’s in Canada’s interest that the US establish a border that keeps prospective terrorists out because if a major attack comes from Canada the additional border tightening could have a devastating effect on Canadian industry. We need to do more to make sure an attack never happens.
The other issue is protectionism. The worry is that “Buy American” in the American Recovery and Reinvestment Act (Obama’s $787 billion stimulus package) is only the beginning. And there are the Clean Energy and Security Act, Administration proposals to reduce tax breaks for U.S.-based multinationals, and state measures to discourage the purchase of so called “dirty oil” from the tar sands.
It's useful to recognize that“Buy American” is not as restrictive as other possible protectionist measures as it is part of a stimulus program, which will have some benefits for Canada. But it should also be pointed out that Canada also introduced a comparably-sized stimulus package, Canada’s Economic Action Plan, which had $62 billion in Federal measures and $18 billion in provincial/local measures, and that contained no protectionist measures.
Federation of Municipalities discussed a boycott of US exports. The Premiers want the Government to negotiate an exemption for Canada.
Prime Minister Harper recently asked the Premiers to put together a ddraft NAFTA chapter granting an exemption for subnational government procurement like there currently is for the national governments. As a digression, it is ironic that provinces resisted being included in the original procurement agreement. They also still need to get their own act in order with respect to internal trade although the BC-Alberta TILMA seems to be serving as something of a catalyst.
The problem with this strategy is that the stimulus bill only covers spending to September 30, 2010 and that it would take much longer to negotiate an amendment to NAFTA. But on the other hand, it might be useful in heading off future protectionist measures.
In addition, it would seem that a flexible interpretation of the “Buy American” section of the Act Sec. 1605 could avoid some of the problems that are cropping up, particularly for American firms with Canadian components i.e. GE and filter, and Duferco-Farrell Corp. shutting down.
Rick Bonnette, the Mayor from Halton Hills, Ontario, who spearheaded the Federation of Canadian Municipalities action on “Buy American” reportedly took comfort from President Obama’s statement after the Three Amigos Summitt “There may be mechanisms whereby states and local jurisdictions can work with the provinces to allow for cross border procurement practices that expand the trading relationship.” But this may just be because he like most Canadians have not yet come to understand “Obama-speak.”
Turning to institutions, I agree with Laura Macdonald that the Security and Prosperity Partnership has probably served its purpose. It needs to be replaced by something more transparent that is not a lightening rod for opposition to NAFTA.
Many teams and committees have done useful work in past to try to make NAFTA work better i.e. report of North American Competitiveness Council on the border. While I have no special insight into the SPP’s internal workings, an examination of its website does not show much going on currently other than website redesign.
The problem is that Canada is in the NAFTA canoe paddling up the river with its two Amigos and that the combination of current and poor paddling is resulting in the canoe drifting downstream to the falls. We can try hard to convince our partners to paddle together or we can jump in the water and try to swim. Since we’ve forgotten how, there’s really only one choice here.