What Happens to Canada if NAFTA Fails?
Team Leader: Brandon Robinson
Author: Lucas Tersigni
Canadian Prime Minister Trudeau has made it clear that he wants to get the North American Free Trade Agreement (NAFTA) negotiations right with provisions that are mutually beneficial to all members involved in NAFTA, opposed to the “America First” rhetoric espoused by American President Donald Trump. However, if in fact, NAFTA negotiations fail, then Canada can look elsewhere for new trade partners. This is a scenario that Canada’s major auto parts manufacturers have already planned for. Linamar, Canada’s second-largest auto parts manufacturer, is comfortable in a post-NAFTA Canada, noting that 80 percent of the world’s auto market lies outside of the US, making it easier for Canadian companies to diversify their markets. Diversification is a safe bet for Canada in any event, and Canada has already taken a step towards diversifying its trade with Europe through the Comprehensive Economic and Trade Agreement (CETA) and is also looking to sign a revised version of the Trans-Pacific Partnership (TPP) deal, without American participation, in the coming months.
Prior to the implementation of NAFTA, trade relations between Canada and the United States were based upon the Canada-US Free Trade Agreement (CUSFTA) of 1989. When NAFTA was implemented in 1994 it superseded CUSFTA; however, if NAFTA does indeed fall apart, CUSFTA will still allow for trade relations between the US and Canada, although similar concerns pertaining to NAFTA may still exist. For example, the dispute mechanisms that are currently under debate in NAFTA would still need to be addressed with CUSFTA. Despite Trump’s existing concerns, Canada will be in a much better negotiating position in bilateral talks with the United States since Canada will not have to incorporate Mexican issues. While some experts argue that CUSFTA may not still be on the table, the Trump administration will be under pressure to pen a deal with its largest trading partner. A bilateral scenario makes Canada’s position much more flexible. While this may not be the only scenario open to Canada, it remains the best second option should the NAFTA renegotiation fail.
In all cases, President Trump’s rhetoric on the NAFTA negotiations is dangerous. He faces a major backlash from American automakers and agricultural firms. While this rhetoric may not seem to be good for Canada, it has a secondary option to renegotiate CUSFTA which could give Canada a better position without having to worry about Mexico. A failure of NAFTA negotiations is likely going to impact Mexico the greatest, with Canada and the US likely to hash out a bilateral agreement if the NAFTA renegotiations fail. This will restore some level of normalcy to Canada-US trade relations.
