The new NAFTA tried not to change too much — and then the pandemic changed everything

As negotiators shook hands on the revised North American free trade agreement, they couldn't have foreseen the fundamental upheaval their countries would soon be facing thanks to the COVID-19 pandemic.

If the Trudeau government is looking to celebrate something this Canada Day, it may be the relative security of the status quo that was more or less preserved in the talks.

"Bullet dodged" — that's how Brett House, Scotiabank's deputy chief economist, summed things up for CBC News last weekend.

"Sometimes," he said, "the biggest victories are the bad things prevented, rather than new things built."

Unlike Canada's original trade deals with the U.S. and the other major trade deals the Trudeau government has implemented with European and Pacific Rim partners, the new NAFTA doesn't substantially liberalize more trade. Most North American tariffs had been eliminated already.

The new automotive chapter, in contrast, adds more protectionism by requiring manufacturers to use more local components and higher labour standards to avoid tariffs.

When Global Affairs released its economic impact study for the new agreement last winter, it was criticized for basing its comparisons not on the terms of the original NAFTA but a hypothetically devastating scenario in which President Donald Trump completely pulled the plug on preferential trade with Canada.

WATCH | The new deal brings changes to the duties and taxes paid on items shipped from the U.S.

How likely was that? Opinions still vary as to whether the Trudeau government had any real alternative to going along with the renegotiation.

As last week's threat to reimpose aluminum tariffs suggests, this White House remains unpredictable and, sometimes, unthinkable, even in the face of strong economic arguments about the value of free trade with one's neighbours.

'Negative on balance'

In attempting to modernize NAFTA for the 21st century, did negotiators meet the standard of "first, do no harm"?

In a paper released Tuesday by the C.D. Howe Institute, consultant trade economist Dan Ciuriak revisited the economic modelling done by the International Monetary Fund, the U.S. International Trade Commission and Global Affairs Canada, as well as his own figures, and tried to make sense of how things look now — amid the chaos of a pandemic that's disrupted international supply chains, shut down all but essential cross-border travel and introduced a new public health rationale for constricting trade on national security grounds.

"There are many sources of uncertainty that at present do not lend themselves to a robust quantification," his summary concludes. "The known knowns promise to be negative on balance; as for the known unknowns, time will tell."

"Just as companies were starting to prepare and think about [NAFTA implementation], COVID came," said Brian Kingston, outgoing vice-president responsible for trade issues at the Business Council of Canada.

"Their focus is turned 100 per cent to survival and making sure that they can get through this pandemic intact."

Despite the pandemic (or perhaps to distract from it), Trump demanded a June 1 implementation date. When he couldn't get that, he insisted on a July 1 implementation, to make sure a done deal was ready to campaign on this fall.

Rather than risk more punishment and political grief by stalling, Canada and Mexico agreed, paving the way for the Canada Day starting line.

For Canada, starting in July instead of August is very expensive for its dairy sector — and perhaps for the taxpayers who ultimately will compensate farmers for it. The dairy fiscal year begins in August, and since NAFTA concessions ramp up at the start of each new dairy year, that ramp is steeper with this timing.

One innovation in the original NAFTA now begins to vanish from the corporate toolkit: the investor-state dispute system (ISDS), which let companies bypass regular courts and challenge the regulatory decisions of Canadian governments directly through NAFTA arbitration (ISDS is also referred to by its location in the original text: "Chapter 11").

The ability of multinationals to seek millions in damages in such lawsuits "was always something that critics of the original NAFTA deal hated," said cross-border trade lawyer Mark Warner. "So that's a pretty big change."

Other changes businesses need to adapt to, like the copyright changes in the intellectual property chapter, are "largely a wash," Warner said.

Bumpy road for carmakers

The new NAFTA's uniform regulations for automotive manufacturing have only been out for a couple of weeks — during a time when carmakers have been preoccupied with reviving their supply chains and factories from the relative coma of this spring's lockdown.

"Without COVID, this would have been the most important issue facing that most important industry, and now this is probably a distant second," said Warner.

"I don't think anyone in auto … has really had time to concentrate the mind on [the new NAFTA] coming into effect. I think we're going to see a delayed reaction that plays out over time."

Will the revised agreement eventually fulfil Trump's pledge of returning more automotive jobs and investment to the U.S. (and Canada)? Or will manufacturers opt to comply by paying Mexican workers more, as some Japanese facilities are already signalling? Could some skip NAFTA compliance altogether?

Trade law professor Elizabeth Trujillo from the University of Houston said that while the new labour provisions are consistent with the populist values of Mexico's current president, complete compliance with new labour standards on the Mexican side is "unlikely."

"Will that be enforced? If it is, what does that mean? More tariffs?" she said.

It's now possible for claims of labour violations to be pursued against Mexico under NAFTA's now-revised state-to-state dispute resolution process.

"The more likely scenario is that a lot of these manufacturers will just not use the new NAFTA … they'll work outside of it," Trujillo said. "Just pay what they have to pay [in tariffs] and not have to adjust their way of doing things to the new rules."

As it reworks its supply chain strategy, Mexico may collaborate with other countries — especially other Latin American countries that also have free trade agreements with the U.S., like Colombia, she said.

Trade professor Meredith Lilly of Carleton University, a former adviser to Stephen Harper's government, predicts "real bumps" ahead as this sector transitions to the new rules while trying to remain globally competitive.

"Over the long term, eventually the price of cars is going to go up," she said, pointing out that North American components and labour will be more expensive.

De minimis, dairy changes kick in

Not every sector faces as many new rules as the automotive industry. For regular consumers, changes attributable to NAFTA may be almost undetectable.

"The biggest win is that Canadians won't see a lot of change," Kingston said. "The less that we see is actually a sign that the agreement is working as planned."

There are a few small consumer gains.

With online shopping and shipping more popular than ever, goods shipped by courier into Canada from the U.S. or Mexico no longer face customs duties if they're valued under $150, and won't incur sales taxes if they're worth less than $40.

If purchases are shipped by mail, however, anything worth more than $20 will continue to face duties and taxes.

While the market access conceded to the U.S. for supply-managed agricultural products like dairy, eggs and poultry should, in theory, spur more competitive pricing and add more choice to store shelves, it's not a given that will happen.

The pandemic has dramatically disrupted food supplies and prices, which might make any concurrent NAFTA changes hard to spot.

The new licences to import American products will also be given mostly to Canadian processors, not retailers — something the Americans have threatened to fight because they don't trust Canada's domestic industry to deliver the market share promised to U.S. farmers.

Sour relations

While the implementation of the new NAFTA could have been an opportunity to relaunch Canada-U.S. trade relations with a more positive attitude, Lilly said she fears this opportunity has been lost. Instead, the pandemic has left Canadians with a bad taste in their mouths about their neighbours.

The Trump administration's attempt to prevent 3M from shipping N95 masks to Canada is an example of how there's "no loyalty and no love lost" between the partners in the North American trading bloc right now, she said.

"It's caused Canadians to reflect a great deal," she said, adding she worries the Trudeau government's ambitions for diversified trade aren't shared by the general public.

Hassan Yussuff, the president of the Canadian Labour Council who also served on Canada's NAFTA advisory council during the negotiations, said he hopes the deal brings positive changes to the lives of working people in Mexico. He said he also hopes the new NAFTA regulations, in turn, will make employers think twice about leaving Canada in the first place — easing the resentment workers felt about the original NAFTA deal.

COVID-19 is prompting countries to re-examine how far they have pushed the envelope on international trade, and to revisit the idea of making certain things at home, he said.

"We cannot be this vulnerable," Yussuff said. And even if there is a new president in the White House after November, he added, domestic political pressures will remain.

"Americans always act in their own self-interest. We should not think we're special. We have to be vigilant, and get used to this."