NAFTA NEGOTIATIONS AND THE IMPACT ON CANADA-TEXAS TRADE

NAFTA NEGOTIATIONS AND THE IMPACT ON CANADA-TEXAS TRADE

Trade representatives from the United States, Canada, and Mexico are scheduled to meet in Montreal, Quebec on January 23, 2018 for the sixth round of negotiations in an effort to modernize and preserve the North American Free Trade Agreement (NAFTA). The trilateral trade pact has been in effect since January 1, 1994.*  The United States currently has 14 free trade agreements in place and NAFTA is the largest.  Despite the age of the agreement it continues to provide a framework for strong economic growth for all parties.

The NAFTA eliminated tariffs, reduced trade barriers, and established certain rules for resolving disputes. Beyond trading in goods and services, the U.S.  is “Canada’s largest foreign investor, and Canada is the third-largest foreign investor in the United States,” according to the U.S. Department of State. The dismantling of the prior trade restrictions opened new market opportunities for Texas companies and trade between Texas and Canada has grown ever since.

A North American Common Market. The idea of a North American free trade zone dates back to 1979 in Ronald Reagan’s presidential campaign.  Before NAFTA was enacted, the United States and Canada entered into the Canada-United States Free Trade Agreement of 1987 (FTA).  After 31 years of free trade with Canada under the FTA then NAFTA, spanning five U.S. presidencies, the Trump administration is indicating it may unilaterally withdraw from NAFTA.

Re-Negotiations. On May 18, 2017, U.S. Trade Representative Robert Lighthizer informed Congress that the President intends to commence negotiations with Canada and Mexico with respect to the NAFTA. U.S. President Donald J. Trump has been a vocal critic of NAFTA, and has threatened to unilaterally withdraw from the pact if Canada and Mexico do not agree to major concessions. Under NAFTA, a minimum of 62.5% of materials in a car or light truck manufactured in the NAFTA region must be from North America to avoid tariffs. The U.S. administration has proposed raising the amount of NAFTA content to 85% with a minimum of 50% originating in the United States in order to avoid tariffs. Both Mexico and Canada have objected to this and other U.S. proposals. For its part, Canada has countered with proposals addressing environmental concerns and worker rights.

Return of Tariffs. In the absence of NAFTA (and FTA), tariffs would be imposed. President Trump has threatened to impose a 35% tariff on Mexican goods. The U.S. administration has recently imposed a 24% tariff on Canadian lumber, and a 292% tariff on the Canadian Bombardier C-Series aircraft. Earlier this month, Canada filed a complaint with the World Trade Organization that the United States imposed a 6.53% tariff on newsprint.  While officials engage in brinkmanship, consumers and businesses throughout the United States, Canada and Mexico are facing a potential end to North American free trade. If tariffs are imposed, consumers will face higher prices and have fewer choices, North American manufacturers will be less competitive globally due to the higher cost of inputs (e.g., component parts incorporated into products), and Texas farmers, ranchers and energy producers will be less competitive exporting their products across the Canada or Mexico border.

Support for NAFTA. As the nation’s top exporter, Texas would have much to lose if the U.S. withdraws from NAFTA.  Preserving free trade under NAFTA is critical for the prosperity of the residents, farmers, ranchers, energy producers and other businesses of Texas.  According to the U.S. Department of Commerce, from 2006 to 2016 exports from Texas to free-trade-agreement markets grew by 60%. In 2016 62% of all Texas exports were to free-trade-agreement markets, with our largest export markets connected through NAFTA. Texas has a trade surplus with Canada, making changes to our existing agreements particularly impactful.

Doug McCullough and Charles Gillis

Canada-Texas Chamber of Commerce

A look at what’s at stake from Texas-Canada trade:

Texas–Canada trade

• Texas exports to Canada: $19.9 billion
• Texas imports from Canada: $15.2 billion
• Bilateral trade: $35.1 billion
• Texas services exports to Canada: $4.2 billion

Texas’s top goods exports to Canada

• Fuel oil: $2.1 billion
• Plastics & plastic articles: $1.9 billion
• Crude petroleum: $1.3 billion
• Organic chemicals: $1.0 billion
• Optical, medical & precision instruments: $888 million

Texas’s top goods imports from Canada

• Crude petroleum: $3.9 billion
• Aircraft: $1.0 billion
• Plastics & plastic articles: $852 million
• Fuel oil: $478 million
• Engines & turbines: $450 million

Texas exports to Canada by industry

• Equipment & machinery (35%)
• Energy (19%)
• Transportation (11%)
• Plastics & rubbers (10%)
• Chemicals (9%)
• Minerals & metals (5%)
• Other (10%)

Texas imports from Canada by industry

• Energy (30%)
• Equipment & machinery (16%)
• Transportation (12%)
• Plastics & rubbers (7%)
• Minerals & metals (7%)
• Chemicals (7%)
• Other (22%)

Texas Jobs

• 459,700 Texas jobs depend on trade and investment with Canada

Texas top services exports to Canada

• Business, professional & technical services: $1.0 billion
• Royalties: $468 million
• Financial services: $198 million
• Insurance: $64 million
• Telecommunications: $45 million

*The first trade treaty between the United States and Canada (British North American colonies) was the 1854 Elgin-Marcy Reciprocity Treaty which eliminated tariffs on list of natural resource and agricultural products.

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