NAFTA: FROM A CANADIAN PERSPECTIVE - 61st Annual EDCO Conference Toronto February 7, 2018
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NAFTA:
FROM A CANADIAN
PERSPECTIVE
61st Annual EDCO Conference
Toronto February 7, 2018
AGENDA
• Welcome
• Session Introduction
• Speaker Introduction
• Hugo Cameron, Executive Lead for U.S. Trade Engagemnt
at the Ontario Ministry of International Trade
• John Holmes, Emeritus Professor of Geography and
Planning at Queen’s University and an Academic Partner
with the Automotive Policy Research Centre
• Question and Answer Period
• Closing Remarks
Ministry of International Trade Update on the North American Free Trade Agreement (NAFTA) Renegotiations
Ontario is the U.S.’ #1 Customer • 20 states rank Ontario as their #1 export destination and 8 states rank Ontario as #2. • Two-way trade between Ontario and the U.S. totaled US$299 billion. • In 2016, Ontario imported more than US$141 billion in U.S. goods. • Our economies are deeply integrated through our industries and people – nearly 9 million U.S. jobs depend on Canada. 02/02/2018 4
A Strong, Integrated Economic Relationship 02/02/2018 5
Ontario’s Trade in the NAFTA Region
Ontario is a critical economic force in the NAFTA region.
• Ontario accounts for 30% (or $426 billion) of the $1.4 trillion in trade in
goods that takes place within the NAFTA region.
• Total Ontario-U.S. trade in goods was $395.6 billion in 2016 – 59% of the
Canadian total, and nearly twice as much as the next three provinces
combined (Alberta: $84.5 billion, Quebec: $80.9 billion, B.C.: $40.9 billion).
Ontario is the largest exporter within the NAFTA region of any U.S. state or
province.
• In 2016, Ontario exported $206.5 billion in goods to the U.S. (52% of
Canada’s total exports). No other province had more than 17% of
Canada’s total exports to the U.S.
• No U.S. state, including Texas ($148 billion) and California ($55 billion),
surpassed Ontario’s goods exports to NAFTA Parties.
02/02/2018 6View from Ontario
After 24 years, NAFTA renegotiation presents an opportunity to
consider how the existing agreement could be modernized. For
example:
• Addressing new issues, such as digital trade.
• Updating chapters on government procurement, temporary entry
for business persons and regulatory and customs cooperation.
• Incorporating new chapters on labour and the environment.
Canada has jurisdiction over signing international treaties, including
free trade agreements.
Provinces and territories engage regularly – including during
negotiating rounds – with Global Affairs Canada to forward their
interests.
• Strong ‘Team Canada’ approach since the start of negotiations.
02/02/2018 7Progress in the Negotiations
Accelerated negotiating schedule: Six Rounds and one Intersessional have
been held since talks began in August 2017. Two chapters ‘parked’ thus far.
Approximately 28 negotiating tables.
Negotiations proceeding on two broad tracks:
Less contentious, more technical issues – i.e. SPS, TBT, Telecoms
U.S. unconventional proposals – i.e. Government Procurement, Autos,
Dairy, Dispute Settlement
Unlike more ‘traditional’ trade negotiation due to U.S. Administration seeking
rebalancing. Focus on trade deficits as key metric.
Context of threat of U.S. withdrawal.
U.S. Congress, Governors, business, agriculture stakeholders all supportive of
maintaining or improving NAFTA.
Highly uncertain outcome.
02/02/2018 8Perspectives on Canada’s Position
With market access to the U.S. already secured under the existing NAFTA, Canada
remains open to modernizing the Agreement where it makes sense.
Canada has been fully engaged across the 28 negotiating tables, and continues to
undertake broad consultations with key sectors and stakeholders.
Canada has publicly raised concerns with the unconventional proposals tabled by the
U.S.
Canada has stressed its commitment to remain at the table.
Key negotiating interests include:
• Modernizing the Agreement’s provisions.
• Incorporating progressive elements (e.g. chapters on labour, environment, gender).
• Regulatory cooperation.
• Securing a freer market for government procurement.
• Improving temporary entry for business persons.
• Upholding and preserving key existing elements of the Agreement, such as Chapter
19, the exception to preserve Canadian culture, and Canada’s system of supply
management.
02/02/2018 9Perspectives on U.S. and Mexican Positions
U.S.
• Looking to re-orient NAFTA towards domestic interests (e.g.
eliminating Chapter 19, reconfiguring autos rules of origin to favour
U.S. production).
• Open to modernizing new provisions into the Agreement, such as a
chapter on digital trade.
• Congress will need to approve the final Agreement, and will have
significant influence on U.S. positions.
Mexico
• Focused on ensuring there is no roll-back of trade liberalization.
• Concerns around economic uncertainty associated with the
renegotiation impacting on new investment.
• Canada and Mexico have common views on a number of key
negotiating areas, including opposing unconventional U.S.
proposals.
02/02/2018 10Coming up… Rounds scheduled for late-February (Mexico) and late-March (U.S.). Mexican election on July 1st 2018. U.S. midterm elections in November 2018 (full House, 1/3 Senate, 34/50 Governorships). 02/02/2018 11
NAFTA and the Automotive Industry
John Holmes
Queen’s University
Academic Partner, APRC
holmesj@queensu.ca
61st Annual EDCO Conference
Toronto, February 7, 2018Trump’s 100-day Action Plan to “Make America
Great Again”
★ FIRST, I will announce my intention to renegotiate
NAFTA or withdraw from the deal under Article
2205.
★ SECOND, I will announce our withdrawal from the
Trans-Pacific Partnership.
★ THIRD, I will direct the Secretary of the Treasury
to label China a currency manipulator.
★ FOURTH, I will direct the Secretary of Commerce
and U.S. Trade Representative to identify all foreign
trading abuses that unfairly impact American
workers and direct them to use every tool under
American and international law to end those abuses
immediately.Trump and the Auto Industry
Campaign tweets and speeches
o singled out the auto industry
o threatened to impose a 35% tariff on vehicle imports
o primary target Mexico - but sent a chill throughout the
North American auto industry
Populist appeal but woeful lack of understanding of
the auto industry under NAFTANAFTA 2.0: Sticking Points
Auto Industry Rules of Origin (complicated by CPTPP)
BUT, it’s about more than the auto industry!
o Dispute Resolution – Chapters 11,19 & 20
oSunset Clause
o Procurement
o IP
o Agricultural sectors
o Etc.Rules of Origin Rules of origin (ROOs) and regional content-value (RCV) rules o shape what, where and how products are produced o really important for auto significant changes to NAFTA automotive rules could: o disrupt supply chains o change the structure of the auto industry o increase vehicle prices o reduce competitiveness of North American built vehicles
Outline Canadian Auto Industry: Overview Current NAFTA Automotive Trade US NAFTA Automotive Demands Potential Impact on Automakers and Suppliers in Canada
Canada’s Automotive Industry • 126,000 direct jobs • $9.6 billion in wages • $18.2 billion in GDP • $86.5 billion in exports • Importance to Ontario
Canada’s Automotive Industry
5 OEMs (Toyota, FCA, GM, Honda, Ford)
• 2.3 million vehicles; Toyota + Honda = 43% of total
• ~ 2.0 million exported to US
700+ suppliers
• Canadian-owned global suppliers
• Subsidiaries of Japanese, US, European global suppliers
• Large number of smaller Canadian-owned firms
• Tooling industry
Heavily concentrated in Windsor to Oshawa corridor
Integral part of Great Lakes Auto Region (MI,OH,IN)Canadian Automotive Industry Employment: 2014
Source: Sweeney APRCChallenges
Technological Change
o New engine/drive train technologies
o Vehicle lightweighting
o Vehicle electrification
Supplier Logistics
o Southern US
o Mexico
Trade Agreements
o CKFTA, CETA
o CPTPP
o NAFTA 2.0?Percentage Shares (by value), Total Vehicle Trade,
Canada: 2016
VEHICLE EXPORTS: VEHICLE IMPORTS:
$62.87 billion $47.64 billion
Mexico Rest of Rest of
1% World World
2% 17%
United United
States States
97% Mexico 71%
12%
Source: Industry Canada, Strategis Online Trade DatabaseNAFTA Vehicle Production and Trade Flows: 2016
(Units)Percentage Shares (by value), Total Automotive
Parts Trade, Canada: 2016
PARTS EXPORTS: PARTS IMPORTS:
$21.1 billion $47.8 billion
Mexico Rest of
Rest of
6% World
World
4%
22%
United
United
States
States
65%
90% Mexico
13%
Source: Industry Canada, Strategis Online Trade DatabaseNAFTA Automotive Parts Trade Flows: 2016
($US Billions)Canada Automotive Trade Balances
Within NAFTA: 1992-2016
30,000.00
25,000.00
20,000.00
Millions C$ (current)
15,000.00
10,000.00
5,000.00
0.00
-5,000.00
-10,000.00
-15,000.00
1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
United States Mexico NAFTA
Source: Industry Canada, Strategis Online Trade DataCanada Automotive Parts Trade within
NAFTA: 2016
Other Mexico Mexico
U.S. 6% Other 17%
South 6% U.S.
U.S. 6%
8%
Great
Great
Lakes
Lakes
70%
56%
U.S. South
Mid- U.S.
South 9% US Mid-
10% Parts Exports 2016 South
12%
Parts Imports 2016Not Just About Trade Balances…. NAFTA countries interdependent in automotive production high levels of integration, specialization, and intra- industry trade US imported vehicles from Canada and Mexico contain significant US parts content keeps the North American auto industry globally competitive (cf. Japan; Europe) benefited automakers, consumers, and attracted investment
USTR NAFTA 2.0 Objectives (July 2017)
Trade in Goods:
Improve the U.S. trade balance and reduce the trade
deficit with the NAFTA countries.
Rules of Origin:
Update and strengthen the rules of origin, as necessary, to
ensure that the benefits of NAFTA go to products genuinely
made in the United States and North America.
Ensure the rules of origin incentivize the sourcing of goods
and materials from the United States and North America.Current NAFTA Automotive ROO and RCV
To qualify for preferential tariff treatment
o Vehicle or part must “originate” in the NAFTA region
o To “originate” must contain a specified minimum RCV
• 62.5% for vehicles, engines and transmissions
• 60% for automotive parts on “tracing list”
• 50% for some other parts
Tracing list (29 categories of parts)
o for listed components, non-originating value must be tracked
through all stages of assembly and included as non-
originating when vehicle RCV is calculatedCurrent Non-Preferential Import Tariffs
Canada
o 6.1% on vehicles
o 0% on parts destined for OEM assembly
United States
o 2.5% on cars
o 25.0% on pickup trucks
o 3.1% (avg.) on automotive partsUS NAFTA 2.0 Automotive Demands Increase NAFTA RCV ofrom 62.5% to 85% for vehicles, engines and transmissions ofrom 60% to 85% for parts on current tracing list ofrom 50% to 72.5% for certain other parts Require 50% US content-value for vehicles built in Canada/Mexico imported to US (i.e. “85/50” ROO) Tracing list: include all parts and materials incl. steel, aluminum and textiles
Possible Outcomes
Scenario A: NAFTA 2.0
Higher NAFTA RCV and expanded tracing list
• could benefit Canadian parts suppliers
50% US content rule
• would disadvantage smaller Canadian suppliers
• how much rejigging of supply chains needed?
Increase cost of North American-built vehicles
Expanded tracing list: more cost effective to just pay
the MFN tariff?Possible Outcomes
Scenario B: US Withdraws from NAFTA;
CUSFTA remains suspended
Canadian-built cars face 2.5% tariff entering US – offset by
depreciated C$??
GM Oshawa hit by 25% US tariff on pickup trucks
US-built vehicles face 6.1% tariff entering Canada (cf. Japanese
and European vehicle imports 0% under CETA and CPTPP)
No longer need to meet NAFTA RCV – OEMs could substitute
lower-cost parts and negatively impact parts production in
Canada and USSummary High levels of integration, specialization, and intra-industry trade keeps the North American auto industry globally competitive Allows automakers to take advantage of best cost production and manage supply chain risk US-demanded changes to automotive rules would disrupt existing supply chains, undermine competitiveness of the North American auto industry, and create unintended consequences for the US
Thank you John Holmes holmesj@queensu.ca Presentation from ongoing research by John Holmes and Brendan Sweeney supported by the APRC
QUESTION AND ANSWER
PERIODQUESTION: What do you see as some of the biggest stumbling blocks to getting to a final deal?
QUESTION: What role do sub-national governments, particularly provinces and territories, play in this negotiation?
QUESTION: Besides the ongoing NAFTA renegotiations, Canada has recently concluded trade agreements with Korea and the EU and there is still the possibility of an 11-country Trans Pacific Partnership deal that will include Canada but not the USA. What will be the impact of these other trade agreements have on Canada’s automotive industry?
QUESTION: In addition to the uncertainties around the future NAFTA, what other challenges currently face Ontario automotive suppliers?
Thank You Reminders: • Complete the session evaluation form on your mobile app • Up Next: Lunch in the Osgoode Ballroom • Next sessions: Breakout sessions commencing at 1:45pm Check for your room locations
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