International trade is an important undertaking for any country, Canada included. Changing economic and political conditions could negatively affect trade. The decision by President Donald Trump to renegotiate NAFTA provides a step back to trade in North America. There is a need for Canada to negotiate the best policy options to drive the country to prosperity not only know but also in the future. The preferred policy option for enactment is a renegotiation of the rules of origin to be in line with the agreements on CETA. This will allow Canada to have only one set of rules that guide companies that seek to export to the US and European Union.
The first policy option is ensuring the renegotiated rules of origin are better than provided in the original NAFTA or are in line with the agreements negotiated under CETA (Gorges, 2017). This will allow Canadian companies to have an easier time while seeking to export to the United States and Europe. The policy goal should be to avoid the enactment of tough rules of origin in the NAFTA renegotiations as it would have detrimental effects on the country. The tightening of rules of origin as advocated by the United States would make it harder for Canadian and Mexican companies to meet the threshold for the goods to be considered North American (Wise, 2010). These goods that are produced in Canada but do not meet the North America threshold will have to be tasked to access the United States market. The US is a very important trading partner with Canada and many companies export. The previous duty-free will be charged on entry to the US hence Canadians will bear the cost of stricter regulations by paying taxes. This will increase the costs for businesses, which could result in some firms shutting down affecting the economy negatively and the people will have lost welfare. Stricter rules of origin could also make compliance harder for Canadian companies, which could decide to shift production to the United States to avoid paying tariffs causing unemployment in Canada and loss of economic gain growth from home productions. The stricter rules of origin could deter firms from producing and seeking to sell within the North American region as steep payments could affect profitability and with high measures to meet the firms might decide to impose materials from non-free trade area. The effect would be a shift of resources and profits from within the country. There has also been an erosion of NAFTA tariff preferences with the US making trade agreements with over 20 countries affecting the benefits to Canada as a preferential trade area hence the ineffectiveness of rules of origin (Gorges, 2009). There is less benefit to companies and the strict adherence affects commitment to meet them hence the need to avoid stricter controls in the renegotiations.
The second policy option that Canada should pursue is ensuring the Chapter 10 of the NAFTA agreement is not changed to reflect harder conditions for Canadian companies and favorable environment for US companies. Chapter ten of NAFTA provides that companies from NAFTA member nations that supply foreign services should be treated as fairly as possible. Trump seeks to change the chapter towards promoting the hiring of Americans, advocate for American policies and promote employment of US employees and utilization of American Resources. The effect of changing Chapter 10 of the NAFTA agreement would mean US companies have a much better chance of bidding and winning the government contracts at the expense of local firms. Canadian companies, on the other hand, would not have opportunities to compete for government contracts in the US. Costs for companies operating in Canada would also be higher since they would have to import US raw materials in an effort to comply with the changed rules. The effects of conditions that favor US companies that the expense of Canadian companies is structural disadvantage at for Canada affecting the balance of payments even further,
The third policy option that should be addressed by the Canadian policymakers is the reduction in security requirements enacted after the 9/11 bombing to improve security negatively affecting the trade between Canada and the US. Additional security post 9/11 made firms located in North America to shift production from Canada to the rest of the world (Georges, 2017). These changes could only be reversed by a policy change to reverse the additional security at the Canada US border under NAFTA renegotiations. Canadian firms also saw it cheaper to shift production in the US to avoid the hustles of exporting to the US. These firms will repatriate production while companies in other areas will see it less costly to produce in the region improving local production. The effect would be an increase in locally produced goods that are then imported owing to less strict cross-border transactions. Achievement of this policy option would require Canada and the United States to collaborate in forming a joint law enforcement, intelligence sharing, immigration, and export screening procedures.
The recommended policy option for enactment during the NAFTA negotiations is not increasing the strictness of rule of origin in favor of US companies. The focus should be either keep the current levels as they are or reducing their strictness to allow Canadian companies to have better freedom. The bullish nature of the US in NAFTA negotiations represent the high leverage they hold against Mexico and Canada (Wolfe, 2017). There is a need for Canada to make preparations with other trade partners to reduce the high dependence on the US for trade as a policy alternative in future through trade agreements with the EU and China (Ramnauth, 2017). The current position requiring either easing or maintaining the rule of origin has huge economic impacts that will allow Canada to benefit from trade with the US by improving local production and promoting exports.
Georges, P. (2009). Dispensing with NAFTA Rules of Origin?: Some Policy Options for Canada. Department of Economics, University of Ottawa= Dép. de science économique, Université d'Ottawa.
Georges, P. (2017). Seizing opportunity at the talks. NAFTA Special Dossier.
Georges, P. (2017). Canada's Trade Policy Options Under Donald Trump: Nafta's Rules of Origin, Canada-Us Security Perimeter, and Canada's Geographical Trade Diversification Opportunities. Department of Economics.
Ramnauth, S. (November 28, 2017). Trump, NAFTA and the Future of the Canadian Trade. The public policy and governance review. Accessed on https://ppgreview.ca/2017/11/28/trump-nafta-and-the-future-of-canadian-trade/
Wise, C. (Ed.). (2010). Post-NAFTA Political Economy: Mexico and the Western Hemisphere. Penn State Press.
Wolfe, R. (July 25, 2017). The US holds considerable leverage AFTA renegotiation, but to achieve an effective deal it must accommodate Canada’s and Mexico’s interests. Policy Options. Accessed on http://policyoptions.irpp.org/magazines/july-2017/who-has- leverage-in-the-nafta-renegotiation/