INTRODUCTION

The House of Commons Standing Committee on Foreign Affairs and International Development (the Committee) travelled to Mexico City, New York City, and Washington, D.C. from 22–27 October 2017. The purpose of the trip was to speak with legislators, policy-makers, and other stakeholders about the North American Free Trade Agreement (NAFTA), and other areas of common interest. The mission was a continuation of the Committee’s ongoing study of the United States (U.S.), North American trilateral cooperation, and Canadian foreign policy. Prior to this trip, the Committee held six meetings with witnesses in Ottawa as part of this study.[1]

The Committee’s mission to Mexico and the United States took place shortly after the conclusion of the fourth round of negotiations on the modernization of NAFTA. While the trilateral statement issued by the negotiating parties indicated that progress had been made across several negotiating groups, it was clear that the parties remained far apart on certain fundamental issues. In a joint news conference, Foreign Affairs Minister Chrystia Freeland noted that several “unconventional” demands from the U.S. were making the work of negotiating the trilateral trade pact "much more challenging." Mexican Secretary of the Economy Ildefonso Guajardo urged all three countries to take a constructive approach to talks to avoid a "lose-lose-lose" scenario. For his part, United States Trade Representative (USTR) Robert Lighthizer expressed disappointment with “the resistance to change from our negotiating partners on both fronts.”

The timing of the Committee’s mission was both auspicious and important. Occurring in between the fourth and fifth rounds of negotiation, the timing allowed for frank dialogue between members of the Committee and legislators from the upper and lower chambers of both countries – the Mexican Senate and Chamber of Deputies, and the U.S. Senate and House of Representatives. It also allowed members to engage directly with several industry and business groups, as well as with public policy experts.

The following report summarizes the Committee’s main findings from its mission to Mexico City and Washington, D.C.[2] It also presents recommendations to the Government of Canada related to the NAFTA modernization talks and on opportunities to strengthen Canada-Mexico and Canada-U.S. bilateral cooperation.

CURRENT DYNAMICS AND CHALLENGES FOR NAFTA MODERNIZATION

1. Building Consensus for a Stronger NAFTA

The Committee believes that modernizing NAFTA is a timely and important undertaking. The world has changed significantly in the years since NAFTA was enacted. When NAFTA entered into force on 1 January 1994, it was the most comprehensive free trade agreement ever negotiated, containing several ground-breaking provisions on investment, intellectual property, and dispute resolution. Over the years, however, technological and scientific advances have fundamentally changed the modes of production in the agricultural, manufacturing, and natural resources sectors, among others. The Internet and e-commerce have become an everyday part of people’s lives and revolutionized the way countries engage in international trade. In addition to increased commercial integration in North America, profound changes have occurred to continental and bilateral security arrangements in the years since NAFTA was signed, while the cross-border movement of people has accelerated. The past 24 years has also revealed the existence of persistent trade irritants, which NAFTA either did not address, or resolve adequately under its dispute resolution mechanism.

Accordingly, there is a strong rationale for modernizing and improving the 24-year old NAFTA. In fact, the idea of updating NAFTA was one of the drivers behind the participation of Canada, Mexico, and the United States in negotiations on a Trans-Pacific Partnership (TPP). While the TPP, which was concluded in October 2015, was a partnership between 12 Asia-Pacific countries, many of the provisions in the agreement were comparatively more robust than those contained in NAFTA, including, for example, on intellectual property. Indeed, many observers saw the TPP as an opportunity to upgrade NAFTA indirectly, and to bring the agreement into the 21^st century.

Unfortunately, the decision by President Trump to withdraw from the TPP shortly after he assumed office effectively jettisoned the agreement in its original form.[3] The TPP was constructed to allow it to only come into force if six of the countries covering 85% of the gross domestic product (GDP) of the overall geographic space ratified the agreement, a structure that effectively gave the U.S. a veto over the agreement. While disappointing, U.S. withdrawal from the TPP has provided Canada, Mexico, and the United States with a new opportunity to work together to modernize NAFTA in a direct way that builds on the components of the original deal.

The Committee believes that negotiations on the modernization of NAFTA should do just that: build on and strengthen the agreement – not weaken it. However, the Committee is concerned that many of the proposals that have come out of the negotiations so far would, if realized, undermine both NAFTA and broader North American integration and cooperation. Moreover, it is the Committee’s view that some of the U.S. proposals either run counter to integration or, if enacted, would create an unstable environment for business, trade, and investment in all three countries.

For example, the USTR proposal to insert a sunset clause into NAFTA, that would see the agreement automatically terminate in five years unless re-approved, would result in significant uncertainty for industry. Indeed, businesses looking to make investments in one of the three countries would lose the assurance of market access continuity. The same can be said for the proposal to eliminate the dispute settlement mechanism, or Chapter 19, which deals with countervailing and anti-dumping duties. The absence of a dispute settlement mechanism in NAFTA would undermine business confidence in the fairness of North American trade, and the ability of businesses to resolve trade disputes in a timely and objective manner.

The Committee heard during its fact-finding mission that there are essentially two sets of NAFTA negotiations currently ongoing. One is focused on modernization and is occurring in the formal negotiating groups, where officials have made progress in the chapters on competition, customs and trade facilitation, digital trade, and regulation, among others. The other is taking place partially in the public sphere and is characterized by proposals such as the five-year sunset clause. Canada, Mexico, and the United States should work on and, where possible, close those thematic and sectoral chapters where broad agreement exists.

More specifically, the Committee believes that, to date, what has been lacking in the trade talks has been a larger vision for NAFTA and North American integration. NAFTA is not just about tariffs. At its core, it is fundamentally a framework that is intended to facilitate economic opportunities between people across North America. In this respect, the Committee believes that several progressive elements that Canada has introduced as part of the modernization negotiations could resonate with people in all three countries. In particular, the Committee believes that Canada’s proposal to strengthen labour protections and standards could find traction with the Mexican and U.S. administrations. The full integration of gender and Indigenous rights into NAFTA is another area that could find broad agreement and should be pursued.

Recommendation 1

NAFTA should be modernized to become better aligned with new economic and global realities, and do more to ensure that the benefits of trade are shared more equitably. The Government of Canada should continue to work with its Mexican and U.S. negotiating partners to promote the incorporation of progressive elements into a modernized NAFTA, including with respect to labour standards, the environment, gender, and Indigenous rights.

2. Achieving a Good Deal in a Reasonable Timeframe

It is the Committee’s view that negotiations on the modernization of NAFTA need to slow down. The initial timeline set for the completion of the trade talks – by the end of 2017 – was neither realistic nor reasonable. The Committee is pleased that the parties agreed to a longer inter-sessional period between the fourth and fifth rounds of negotiation, and scheduled additional negotiating rounds through the first quarter of 2018. Getting a deal done is important, but it must be the right deal for all three countries. Too much is at stake to rush the negotiations.

Extending the timeline for the modernization process is all the more crucial given that key elections are taking place in Mexico and the U.S. in 2018. Mexico will hold presidential, legislative and local elections in July, and the United States will hold congressional mid-term elections in November. At the outset of the talks, the Mexican and U.S. governments indicated that they wanted to conclude negotiations by the end of 2017 so as not to interfere with their respective campaign cycles. Now that negotiations have extended into 2018, it is highly unlikely that the NAFTA talks and the election campaigns can be kept compartmentalized.

The Committee heard in both Mexico City, and Washington, D.C. that as the elections draw closer, the negotiations will become more politicized. Several interlocutors told the Committee that as the NAFTA talks and the election cycles converge, there will be a greater likelihood of heightened political rhetoric and further threats of economic nationalism and protectionism. All of this will have the effect of further increasing business uncertainty.

It is important to remember that it took 14 months of intensive negotiations to come to agreeable terms on NAFTA in 1992. Since then, Canada has signed a number of bilateral free trade agreements, most of which have taken a longer amount of time to conclude. Free trade agreements are complex, particularly when they involve more than two countries. The Committee supports the objective, outlined by the negotiating partners, of reaching an agreement in a reasonable amount of time. However, it believes that the negotiation period must be sufficient to provide all parties with the time necessary to conclude the right agreement, one that provides a solid foundation for mutual economic benefit for many years to come.

Recommendation 2

The Government of Canada should urge its Mexican and U.S. counterparts to not set arbitrary deadlines for the conclusion of NAFTA modernization talks, and instead to support the work of their respective negotiators in finalizing the best possible deal in a reasonable period of time.

3. Building Partnerships and Communicating Accurate Information about NAFTA

Listening to some of the political rhetoric on NAFTA, an outside observer could be left with the impression that the agreement is universally detested and has been a terrible deal for North America. The evidence, however, does not bear this out. According to a recent Pew Research Centre poll, NAFTA is supported by a majority of people in each of the three countries.[4] While support for NAFTA among the three countries is lowest in the U.S., even there, support has increased over the last decade. Indeed, the Committee was referred to a recent study by the Chicago Council on Global Affairs, which shows that 53% of Americans think that NAFTA is good for the economy, up from 42% in 2008.[5]

These numbers are significant because they point to a problem identified by interlocutors in Mexico and the U.S. As the Committee heard during its fact finding mission, it is often more difficult to illustrate the benefits of trade – for example, related to increased competitiveness and more integrated supply chains – than it is to show the unintended consequences that can result from trade. For those who have lost jobs, or who feel left behind by the digital economy and globalization, this is perfectly understandable. Yet, ensuring that the benefits of trade are shared more equitably is exactly why NAFTA is in need of modernization.

Moreover, it is the Committee’s view that political and business leaders in all three countries need to do a better job of communicating accurate information about NAFTA, and about how the collapse of the agreement may affect working people. There continues to be significant misinformation about the effect of NAFTA over the past 24 years, especially in the U.S. where it has been blamed for millions of job losses. It also cannot be repeated enough that the U.S. has a trade surplus with Canada when goods and services are counted, despite claims that suggest otherwise. The truth is that, overall, NAFTA has generated significant new opportunities for U.S. companies across a variety of sectors. According to the U.S. Chamber of Commerce, trade with Canada and Mexico supports 14 million American jobs, 5 million of which are sustained by the increase in trade generated by NAFTA. Furthermore, NAFTA has also contributed to other positive changes that do not appear in trade statistics, including helping to facilitate Mexico’s democratic development and transition to a more market-oriented economy.

Business leaders and industry groups in the U.S. and Mexico can be useful allies for Canada in communicating accurate information about NAFTA. While in Washington D.C., the Committee was made aware of a recent letter signed by more than 310 state and local chambers of commerce from across the U.S. that underscored how beneficial NAFTA has been for American farmers, ranchers, manufacturers and business people in other industries. The letter notes that, since 1993, U.S. agricultural exports to Canada and Mexico have quadrupled, and that Canada and Mexico are the top two markets in the world for U.S. manufactured goods. The Government of Canada should ensure that it builds relationships with likeminded industry groups and unions in the U.S. and Mexico as it makes its case in support of NAFTA.

Recommendation 3

The Government of Canada should work with business groups, unions, and other stakeholders in Mexico and the United States to ensure that accurate information about NAFTA is disseminated, including by promoting information about how the collapse of NAFTA would negatively affect the Mexican, U.S. and Canadian economies.

DEEPENING CANADA’S PARTNERSHIP WITH MEXICO

During its mission to Mexico City, the Committee was encouraged by the degree of genuine interest and enthusiasm that local interlocutors had for Canada and its relationship with Mexico. Among the legislators, academics and private sector representatives with whom the Committee met, there was broad recognition about the importance and potential of Canada-Mexico bilateral relations. Rooted to a large extent in trade, relations between the two countries have expanded significantly across other domains, including people-to-people cooperation in areas such as education and tourism. The Committee heard how the ties being forged at the highest political levels, including reciprocal visits between Canada’s Prime Minister and Mexico’s President, as well as numerous ministerial trips in both directions, have facilitated a more structured and stronger relationship.

Much like in Canada, the evolving political dynamics in the U.S., and the uncertainty it has created, have people in Mexico re-evaluating their relationship with their larger neighbour and looking with renewed interest to engagement with other partners. The Committee heard how Canada and Mexico should consider new opportunities for bilateral engagement with each other. Critically, the Committee believes that this enthusiasm for deeper ties between Canada and Mexico should extend beyond legislators and government officials to include broad sections of civil society, including human rights and labour organizations, and the private sector. Given this, the Committee is convinced that the time is right to strengthen and expand Canada’s engagement with Mexico, both in terms of economic cooperation, and in other areas of mutual interest.

1. Economic Cooperation

Discussions in Mexico focused primarily on NAFTA negotiations. The Committee heard repeatedly that there is broad support for NAFTA and North American integration in Mexico. Canada’s reaffirmation of the trilateral nature of NAFTA at the outset of negotiations was warmly welcomed by Mexican legislators and others, many of whom expressed the belief that Canada and Mexico hold a similar vision for a modernized NAFTA agreement. Continued cooperation between the two negotiating teams was frequently highlighted as the best means of achieving a common interest in greater economic partnership.

Despite these reasons for optimism, there was significant pessimism in Mexico regarding the status of NAFTA negotiations. Many are expecting, and preparing for, an American withdrawal from NAFTA and wondering what that would mean for the Mexican economy. The Committee heard that Mexico is actively seeking to diversify its trading relationships in an effort to reduce its economic dependence on the U.S. This includes pursuing trade agreements outside of North America, for example through the Pacific Alliance or the Comprehensive and Progressive Agreement for Trans-Pacific Partnership. In the event of a U.S. withdrawal, several Mexican interlocutors expressed the hope that NAFTA would continue as a basis for a bilateral agreement between Canada and Mexico. The Committee believes that Mexico’s strategy, both in relation to NAFTA negotiations and its broader trade policy, aligns with Canadian interests and presents an opportunity for greater cooperation.

Recommendation 4

The Government of Canada should cooperate with the Government of Mexico in the pursuit of common objectives in NAFTA negotiations, while also promoting progressive economic partnerships with Mexico outside of NAFTA, including through regional multilateral trade agreements such as the Pacific Alliance and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership.

2. Foreign Policy and People-to-People Engagement

While trade dominated much of the Committee’s discussions in Mexico City, members also heard about a number of other areas where Canada-Mexico cooperation could be further strengthened. The removal in 2016 of the visa requirement for Mexican visitors to Canada, and Mexico’s cooperation to address Canada’s concerns regarding asylum seekers, were credited with being important factors in improved bilateral relations. Similarly, Canada’s Seasonal Agricultural Worker Program was highlighted as a mutually beneficial policy. Some interlocutors in Mexico City suggested that this program should be expanded to address potential labour shortages in other sectors, such as tourism and construction, which also employ a large number of seasonal workers in Canada. This kind of expansion would be one way for Canada to leverage Mexico’s large supply of well-trained workers.

Education was another area where the Committee heard of both growing ties and opportunities for deeper engagement. More Mexican students are choosing to study in Canada, and academic links between Canadian and Mexican universities have been growing. The Committee was told that many young people in Mexico are looking for international study alternatives to American schools, which could be an opportunity for Canada.

Finally, the Committee heard how Canada and Mexico can build on their shared values and common position on a range of foreign policy areas. Mexico has demonstrated leadership on climate change and the implementation of the Paris Climate Accord, which is a priority that Canada shares. The Committee learned that Mexico is also seeking to play a larger role in international peace and security efforts, including with respect to peacekeeping. The Committee believes that these areas present important opportunities for dialogue and partnership, upon which Canada should build.

Recommendation 5

The Government of Canada should continue to strengthen its foreign policy cooperation with Mexico, and foster the growing people-to-people ties that exist between the two countries, including through mutually beneficial employment and educational exchanges.

BRIDGING THE POLARIZATION

NAFTA negotiations are taking place at a time when many people across the globe are questioning the benefits of free trade, and the value of deeper commercial and people-to-people integration. Scepticism about NAFTA is a symptom of this larger global phenomenon. In Canada, however, the debate on the value of free trade has largely been settled. Almost three decades after Canada had an election fought mainly on the subject of free trade, today, all three official political parties support NAFTA and its modernization. This is not to suggest that Canada’s political parties agree on all aspects of free trade agreements, or about the Government of Canada’s priorities for the NAFTA modernization negotiations. They do not. Yet, overall, Canada’s main political parties support free trade, and recognize the importance of trade to the Canadian economy.

The Committee believes that this consensus is an advantage on which Canada can build. During its meetings in Washington, D.C., the Committee heard about the intense polarization that characterizes the United States at this time. The Committee heard that Canada should continue to pursue a pragmatic, constructive, and fact-based strategy during the NAFTA negotiations, and should engage widely with members of Congress and with stakeholders across the U.S.

Engaging with members of Congress is key to this strategy. The Committee heard time and again during its mission that Congress is where the power lies when it comes to U.S. trade policy. While Congress has delegated trade promotion authority (TPA) to the executive branch – which allows the USTR to re-negotiate NAFTA – ultimately Congress will be responsible for implementing a new agreement by passing legislation. The Committee believes that engaging with members of Congress is therefore critical to ensuring that Canada’s interests are promoted and protected.

With this in mind, the Committee is of the view that Canadian parliamentarians should continue to engage with their counterparts in the U.S. and encourage congressional delegations (CODELS) to visit Canada. Canadian parliamentarians and government officials should also engage with U.S. officials at the state level – outside of Washington, D.C. – and, likewise, encourage CODELS to travel outside of Ottawa to gain a better sense of Canada.

For its part, the Committee intends to pursue regular dialogue with its counterpart committees on foreign affairs in the United States Congress. It will also do the same with the foreign affairs committees of the Mexican Congress. The Committee considers that more frequent contact between members of these committees would serve not only as a tool for discussing shared solutions to global problems, but also as a means of promoting stronger North American trilateral cooperation. It is the Committee’s view that nothing can replace personal contact as a way of developing an understanding of mutual challenges.

In this regard, during its visit to Washington, D.C., the Committee heard about an interesting program for legislative and youth exchange that the U.S. has with Germany. Officials at the U.S. State Department highlighted the Congress-Bundestag Youth Exchange Program, which sees American high school students study in Germany and participate in cultural excursions to the Bundestag and select German cities. The Committee believes that these kinds of youth exchanges are an excellent way to promote mutual learning between countries, and can pay huge economic, political, and cultural dividends for years to come.

Recommendation 6

The Government of Canada should work with officials in Mexico and the United States, along with stakeholders in the educational community and the private sector, to develop new mechanisms for dialogue and exchange within North America, including in the areas of youth exchanges.

CONCLUSION

The Committee believes that NAFTA has been the cornerstone for mutually beneficial economic cooperation between Canada, Mexico, and the United States for over 24 years, helping to foster relations between the three countries on a wide range of bilateral issues. This does not mean that NAFTA has been perfect or that it cannot be improved upon. It can and it should be modernized to become better aligned with new economic and global realities, and do more to ensure that the benefits of trade are shared more equitably.

While the Committee strongly supports the principle of trade modernization, it is concerned by a number of the proposals that have come out of the negotiating rounds. In particular, the Committee holds the opinion that several proposals made by the USTR during the fourth round of negotiation are not in the best interests of any of the three countries, or of broader North American trilateral cooperation. The Committee also believes that the talks should not be constrained by arbitrary deadlines. It is the Committee’s view that negotiators should work toward those areas where consensus can be reached, with the goal of achieving a mutually beneficial agreement that will move the North American partnership forward.

In the context of stronger North American relations, the Committee is convinced that Canada should look for areas where it can deepen its partnership with Mexico. This would include promoting economic partnerships with Mexico in addition to NAFTA, as well as cooperation on foreign policy matters, such as climate change and international peace and security. Promoting people-to-people exchanges, including with youth, between Canada, the United States, and Mexico is another strategic avenue to build deeper relations.

In the time since the Committee returned from its mission, the fifth and sixth rounds of negotiations have taken place. It is the Committee’s hope that all parties make use of the upcoming rounds as an opportunity to strengthen the North American partnership, and to work toward the renewal of a continental trade pact that is truly “win, win, win.”