NAFTA at eleven

Despite growing pains, it’s still seen by some as a valuable tool for Canadian business

By John Cooper

Like most 11-year-olds, the North American Free Trade Agreement (NAFTA) is growing. And like any 11-year-old, it has amazing potential but can be troublesome — often posing more questions than it can answer — and with a report card that varies, depending upon who reviews its performance.

Described as a ‘living, breathing, evolving’ document by its proponents, NAFTA holds the promise of accruing major benefits for the business communities in Canada, the U.S. and Mexico. So how is it doing, and how does the future look? Well, despite recent and ongoing disputes, the message is mostly positive.

Pros and cons

NAFTA was created to ease the passage of goods and services between Canada, the U.S. and Mexico. Negotiations began in June 1991 and the agreement went into effect January 1, 1994, with the aim of creating a free trade area for a population of 360 million and a GDP of US$6 trillion.

Admittedly, it has its detractors — those who say it hasn’t lived up to its promise, either in easing the passage of goods or ensuring fairer labour practices; some issues, like softwood lumber, continue to linger. Consider, for instance, an August ruling by the NAFTA Extraordinary Challenge Committee (ECC). The ruling determined that there was insufficient evidence to support a U.S. claim of injury or threat by Canada’s softwood industry; when the U.S. refused to accept the ruling, it set off a maelstrom of anger and accusations that the Americans were just not following the rules.

But for the most part, observers say NAFTA works.  It has allowed the dissolution of major parts of the tariff wall; as well, it created an environment for active discussion and legal interpretation around trade issues.

Let’s take a quick look at the facts:

• NAFTA is the largest trade agreement in the world;
• 96% of Canada-U.S. trade is hassle-free;
• One in three Canadian jobs is linked to trade, and NAFTA supports 5.2 million U.S. jobs;
• A truck crosses the Canada-U.S. border every two seconds; more than 300,000 people cross the border every day;
• Every day, more than $1.9 billion exchanges hands between the US and Canada — that’s @Socket: million every 15 minutes;
• More than 39 U.S. states have Canada as their primary market; and
• Canada imports more goods from the U.S. than from any other country — more than all of the European Union members combined.

NAFTA serves as the basis for the Free Trade Agreement for the Americas (FTAA, linking the major trading partners in the Western Hemisphere) and other agreements and is the only international trade agreement with an environmental component. As the global market shrinks, it’s a model not only for North American but international business practices as well. It ensures that Canada and its trade partners have options, channels and resolution mechanisms in the event of disputes.

Indeed, it’s hard to argue with its success, given that it helps to mobilize annual three-way trade of US$621 billion, more than double the pre-NAFTA levels. In 1999, Canadian exports to the U.S. stood at $215.5 billion; the following year that grew to $229.6 billion. Despite a dip after 9/11, it stabilized at $218.4 billion the following year.

Issues like the decade-old softwood lumber dispute have posed a challenge to NAFTA’s efficiency; Canada exported $6.8 billion in softwood lumber to the U.S. in 2003, supplying a third of the U.S.’s softwood lumber demands. American softwood lumber producers accused the Canadian government of subsidizing its lumber industry by allowing the dumping of softwood lumber into the U.S. market, damaging the American industry. And protectionist policies in other areas continue to trip up the smooth operation of business.

Global competitors

Despite these issues, “the bottom line is that we really like the way NAFTA’s working,” said André Lemay, spokesperson for International Trade Canada. “On average over the last 10 years we’ve averaged about 6% growth in bilateral trade every year. That’s a very good number, especially in light of a 40% appreciation in the value of the Canadian dollar.”

According to Bob Keyes, senior vice-president, International, with the Canadian Chamber of Commerce, “overall our members are very happy with what NAFTA has done. We’ve certainly seen trade and linkages grow. We really have economies that are linked and it has been a success story in the way businesses have responded.”

“When one looks back, there were some rough adjustments in some sectors, like manufacturing, textiles and the ‘metal bashing’ or fabrication sectors,” added Keyes. “What NAFTA did was to force companies to look at themselves and how they compete, improving their ability to compete on a North American basis and, in turn, improving their ability to compete on a global basis. I’d hate to think where we’d be at the global level if we hadn’t had this experience at the North American level.”

Jayson Myers, senior vice-president and chief economist of Canadian Manufacturers & Exporters (CME), said his organization’s two current major concerns are “one, how NAFTA works to resolve trade disputes — that’s under challenge, and we have a concern around rising protectionist sentiment in the U.S. and how that affects Canadian business. The second issue is around the borders, the time delays in crossing the border. We’re in such an integrated marketplace that additional delays at the border are harming investment in Canada.”

Earlier this year, CME released Manufacturing 20/20: Building Our Vision for the Future. Among its recommendations, it says Canadian businesses “must develop the capacity to operate on a global scale (through) a more integrated market framework between Canada and the United States, and within NAFTA as a whole...the Canadian government must make it a strategic priority to maintain and improve access for Canadian businesses in the U.S. market.”

As of January 1, 2005, NAFTA partners announced measures to liberalize rules of origin in several areas, said Lemay. “We’re trying to make it easier to qualify for duty-free treatment. We need to respect the country of origin and set out in fine language the details of what constitutes the rules of origin. NAFTA is a living document and we want it to evolve with the new realities that are out there.”

Integration and collaboration

Research groups and business associations are taking NAFTA a step further. In May, the Canadian Senate on the North America Forum on Integration created a mock North American Parliament, focused on tackling the shared issues of the three partner countries.

This spring, at the Hemispheria 2005 trade summit, a three-day meeting of business leaders and officials from the three North American governments held in Nuevo Leon, Mexico, Canada’s Ambassador to Mexico, Gaetan Lavertu, emphasized the three countries’ increasing interdependencies: “What happens at the Laredo (Texas)-Nuevo Laredo crossing could have implications for what happens at the Windsor-Detroit border. It is important that we understand these interconnections.”

That sense of shared commitment extends to security. In keeping with its evolving nature, NAFTA dovetails into discussion of the Security and Prosperity Partnership (SPP) for North America; signed in March by the three national leaders, the agreement is a trilateral effort to increase security, prosperity and quality of life of the three partners, with a focus on perimeter and border security and economic challenges.

That agreement underscores intense discussion outside the aegis of government; for instance, the Independent Task Force on the Future of North America, comprised of representatives from Canada, the U.S. and Mexico, recently issued a report calling for a “safer North America (and a) powerhouse North American trading area that allows for the seamless movement of goods, increased labour mobility and energy security.” That would include a common security perimeter involving the use of a biometric border pass and increased customs facilities as well as a common external tariff, open labour mobility and a review of previously-excluded sections of NAFTA.

And the future? The Canadian Chamber of Commerce recognizes that there’s still some “unfinished business relating to dispute resolution and trade remedies,” said Keyes. A recent statement from the Chamber following the softwood ruling reaffirmed the Chamber’s endorsement of NAFTA and urged the US to reaffirm its commitment to NAFTA and the dispute settlement process.

In the short term, “we’re applying trade remedy solutions to a situation where we should be doing things in an integrated way,” added Keyes. “If legislators look at creating permanent NAFTA trade resolutions, you’d get much more predictability and speed in dealing with disputes.”

  “In the long term, we have to look at North America as a whole,” said Myers. “Industry is so integrated and the issues are common: skills, integrated manufacturing, the need to innovate, the need to grow infrastructure to handle the volume of products, security and cost-efficient energy systems. Moving forward, Canada should take the lead to address the common challenges in NAFTA and some of those outside of NAFTA, such as dealing with specific trading blocs.”

“I think the most recent developments (with softwood lumber) only confirm the need to ensure that NAFTA continues to work and that we strengthen the process in which trade disputes are settled,” added Myers. “While softwood lumber is an important issue, there is a lot of political rhetoric flying around right now. It’s important to resolve the lumber issue, but it's also important that we don't shoot ourselves in the foot in the meantime.”

Ultimately that will mean fine-tuning  an agreement that truly matures with the business community it serves, earning itself top marks as it sets the stage for successful trading for the long term.

John Cooper (tymelco@sympatico.ca) is a Whitby, Ont.-based freelance writer.

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