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September 15, 2017

NAFTA: What it is, how it benefits Canada, part 1

As Canada, the U.S. and Mexico renegotiate the North American Free Trade Agreement (NAFTA), this background will help you understand why it matters.  

Canadians watching the 2016 presidential election campaign sat up and took notice when candidate Donald Trump vowed to tear up the North American Free Trade Agreement (NAFTA). Now Trump is president and the renegotiations are well underway. This series of articles will help you understand the background, the details and what it means for you.

What is NAFTA?

The North American Free Trade Agreement (NAFTA) is a treaty among Canada, the United States and Mexico that eliminated most of the barriers to free trade among the 3 countries. The agreement means purchasing certain items from NAFTA countries is often cheaper than buying similar goods from non-NAFTA countries. Thanks to NAFTA, enjoying Mexican avocados year-round is easy. Similarly, Canadians can save big by buying an American-manufactured car versus a model from Europe. Goods from NAFTA nations are imported tariff-free, based on NAFTA's rules of origin. These rules state the percentage of the product’s content that must originate in the member country.

When did NAFTA take effect?

NAFTA was the result of 14 months of intensive negotiations in 1991 and 1992. It was ratified by the Canadian, U.S. and Mexican legislatures in 1993, and took effect in January 1994. Before NAFTA, Canada and the U.S had a trade agreement called the Canada-U.S. Free Trade Agreement.

How does Canada benefit from NAFTA?

The U.S. is Canada’s largest trading partner, by far. In fact, in 2016, Canada-U.S. trade was worth a whopping $752 billion. Canada-U.S. trade is a major component of Canada's economy, so improving cross-border trade has benefited Canada immensely, says Chhad Aul, Vice-President of Portfolio Management at Sun Life Global Investments. “Since NAFTA has removed some of the barriers to trade, the overall volume of trade we are doing with the U.S. and Mexico has greatly improved and in turn improved our economy,” says Aul. “Beyond that, entire industries have been integrated across borders.”

Here are 5 key ways Canadians have benefited from NAFTA:

  1. A wider selection of goods
  2. Increased trade volume
  3. Increased foreign direct investment (Canada’s foreign direct investment from the States increased by 243% between 1993 and 2013).
  4. Freer movement of professionals and investors across the border
  5. The development of new jobs

What are trade surpluses and deficits?

A trade surplus happens when a nation sells or exports more goods (such as cars and oil) and services (such as tourism and software) to another nation than it buys or imports from that nation; a trade deficit happens when a nation sells or exports less. It’s important to note whether politicians are talking about goods or services (or both), as it’s possible to run a surplus in one at the same time as a deficit in the other. And while some point to a trade deficit as a bad thing, that isn’t necessarily true. A trade deficit could be the result of an economy that is importing more goods and services to fuel growth, for example.

NAFTA has greatly increased U.S.-Canada trade overall. In 2016, according to the Office of the U.S. Trade Representative, U.S. exports to Canada had increased by 165% since 1993, and imports from Canada were up 150%. The balance of trade between the U.S. and Canada has swung back and forth in the years since the agreement took effect. In 2015, Canada ran a combined goods and services trade deficit with the U.S. of about US$11.9 billion, rising to US$12.5 billion in 2016. Despite these numbers, some NAFTA critics in the U.S. say the agreement unfairly favours Canada as well as Mexico, because the U.S. has trade deficits with both countries. Another criticism is that the agreement has led to a loss of jobs in the U.S. and Canada due to lower Mexican labour costs.

Despite the rhetoric, many experts say it is unlikely that the U.S. will walk away from the process entirely. But a lot has changed since 1994, and it is clear that NAFTA needs to be modernized and improved. For insights on the renegotiations and what to expect with NAFTA 2.0, watch for the second part of our series.

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