NAFTA: FROM A CANADIAN PERSPECTIVE 61 st 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
Update on the North American Free Trade Agreement (NAFTA) Renegotiations Ministry of International Trade
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 6
View 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 7
Progress 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 8
Perspectives 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 9
Perspectives 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 10
Coming up Rounds scheduled for late-february (Mexico) and late-march (U.S.). Mexican election on July 1 st 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 61 st Annual EDCO Conference Toronto, February 7, 2018
Trump 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 NAFTA
NAFTA 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 APRC
Challenges 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: $62.87 billion Mexico 1% Rest of World 2% Rest of World 17% VEHICLE IMPORTS: $47.64 billion United States 97% Mexico 12% United States 71% Source: Industry Canada, Strategis Online Trade Database
NAFTA Vehicle Production and Trade Flows: 2016 (Units)
Percentage Shares (by value), Total Automotive Parts Trade, Canada: 2016 PARTS EXPORTS: $21.1 billion Mexico 6% Rest of World 4% PARTS IMPORTS: $47.8 billion Rest of World 22% United States 90% Mexico 13% United States 65% Source: Industry Canada, Strategis Online Trade Database
NAFTA Automotive Parts Trade Flows: 2016 ($US Billions)
Millions C$ (current) Canada Automotive Trade Balances Within NAFTA: 1992-2016 30,000.00 25,000.00 20,000.00 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 Data
Canada Automotive Parts Trade within NAFTA: 2016 South U.S. 8% U.S. Mid- South 10% Other U.S. 6% Mexico 6% Great Lakes 70% Parts Exports 2016 Other U.S. 6% South U.S. 9% US Mid- South 12% Mexico 17% Great Lakes 56% Parts Imports 2016
Not Just About Trade Balances. NAFTA countries interdependent in automotive production high levels of integration, specialization, and intraindustry 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 nonoriginating when vehicle RCV is calculated
Current 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 parts
US 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 US
Summary 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 PERIOD
QUESTION: 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