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Analysis of the Canada-Chile Free Trade Agreement
A brief report on different trade agreements, focusing on one agreement in particular; describing its pros and cons and controversies if any. Deciding on a Canadian business to start operations in a country (from a list of given countries) and how the trade deal in focus would affect the company’s decision to operate in that country.
Table of Contents
International trade is important for the economic growth of a country. The economy of a country depends, in part, directly on the deficit between the imports and exports (if the country is spending more, by importing, than it is gaining by exporting; or vice versa). This report aims to study different trade agreements panning the Americas and their pros and cons to a Canadian company intending to expand its business in that region.
Canada-Chile free trade agreement– The Canada Chile Free Trade agreement (CCFTA) marked its 20th anniversary in 2017. The bilateral trade agreement has tripled the two- way trade between both countries since it has been in effect. The trade agreement is amongst Canada’s oldest trade agreements and a first with a South American nation. It was Chile’s first comprehensive trade agreement with another country. The quantum of the agreement? Bilateral trade reached $2.4 billion in 2016. Canadian Foreign Direct investment into Chile stood at $16.5 billion in 2016; Canada’s top investment destination in South America and 11th worldwide. (The Canadian Trade Comissioner Service, 2017). A modernised CCFTA has also been inked, focusing on gender equity and wage parity alongside environmental and ethical responsibilities due towards the businesses. (Global Affairs Canada, 2017)
Asia-Pacific Economic Cooperation– Set up in 1989, APEC has become an important consortium for economic trade and cooperation in the Asia-Pacific region. The primary purpose of this forum is to aid in the sustainable economic growth and prosperity in the Asia Pacific region. The forum consists of 21 members, accounting for 39% of world population and more than 60% of global GDP. APEC aims to strengthen regional economic cooperation by removing impediments to trade and investment “at the border”, enhancing supply chain connectivity “across the border” and improving the business environment “behind the border.” In 2016, the trade between Canada and APEC partners consisted of 84% of the total merchandise trade of Canada. APEC members cooperate in areas encompassing customs regulations and control, economic empowerment of women and business ethics and fair practices. (Canada and the Asia-Pacific Economic Cooperation, 2018)
North American Free Trade Agreement (now United States-Mexico-Canada Agreement)- United States, Canada and Mexico created the largest free trade region in the world by signing the NAFTA; which was created after the success of the United States Canada Free Trade agreement. NAFTA members, in 2016, represented 28% of world’s GDP and 7% of the world’s population. Since its inception, the NAFTA has led to the increase in the combined GDP of the region to a whopping $21.1 trillion. The agreement was renegotiated and named USMCA in Nov 2018. Under this agreement, the total merchandise trade doubled between US and Canada since 1993 and grew over 9 times, between Canada and Mexico. This agreement sets an example to the rest of the world for the benefits of liberalisation in trade and free trade regions. Other trilateral agreements such as North American Agreement on Environmental cooperation and North American Agreement on Labour Cooperation further aid the NAFTA. (CUSMA, 2019)
IN FOCUS-In this report I would like to focus on the NAFTA, and then shift focus to how the economy of Canada is dependent, increasingly if so ever, on the trade between US and Canada. Whereas, the trade between Canada and Mexico can be a missed opportunity maybe? It is imperative that Canada finds new business and trade opportunities to offset the huge imbalance caused by the over reliance for trade with US. The deals that have made trade easier with the US are in place for Mexico too and Canada should try to leverage this and the fact that US wants to build a wall at the US-Mexico border. Companies are increasingly relying on production by sourcing materials from the three countries and production facilities are spread out over the three countries. A Canadian transportation company, specialising in freight and logistics, could take advantage of this scenario and provide a seamless solution to a production company by joining the sources of raw material to the factories and then to the consumers. Transportation Companies from Canada do cater to the US, but a Trans Continental passage would help connecting the Canadian products to Mexico and vice versa. According to the Canadian Trade Commissioner Service sectors such as aerospace, food and beverages, automotive, mining, oil and gas offer a good opportunity for Canadian companies in Mexico. (The Canada Trade Commissioner Service, 2018) All these sectors require a robust transportation network and services.
Opposition-However, not everything has been a smooth sailing for NAFTA. It has seen its share of opposition and criticism and was brought into the global spotlight during its renaming and renegotiation in Nov 2018. Here are a few of the news clippings taken from Reuters regarding opposition to the NAFTA-
Jan. 1, 1994: NAFTA comes into effect, and a Mayan Indian guerrilla army in southern Mexico launches an armed rebellion against “neo-liberalism” and explicitly against the free trade deal. The declaration of war against the Mexican government leads to days of fighting and dozens of deaths before the rebels retreat into the jungle. (Opposed from the start, the rocky history of NAFTA, 2017)
Nov. 30, 1999: Tens of thousands of anti-globalization protesters converge on the U.S. city of Seattle, leading to widespread rioting coinciding with a ministerial conference of the World Trade Organization, which was seeking to launch new international trade talks. The protests underscore growing, if scattered, opposition to free trade deals like NAFTA. (Opposed from the start, the rocky history of NAFTA, 2017)
July 19, 2016: Billionaire businessman and political outsider Donald Trump formally clinches the Republican presidential nomination, winning the traditionally pro-free-trade party’s nod in part by denouncing NAFTA, calling it “the worst trade deal ever.” (Opposed from the start, the rocky history of NAFTA, 2017)
The most vocal opponents of the NAFTA would say that the deal has lead to loss of jobs in America and Canada as the production was shifted to Mexico where cheap labour was available. However, the farmers in Mexico suffered due to agricultural exports from US to Mexico and they started migrating to the US, in effect giving rise to illegal immigration across the border. (Hartman, 2011)
Who wins and loses– The Canadian auto industry is set to gain from the renegotiated USMCA or NAFTA, a significant number of auto parts are now eligible for tariff reductions. In addition, rules around intellectual property and copyrights will change, changing the window of protection from 50 to 70 years. Online shoppers from Canada will not have to pay duties on products bought from the US up to $150.
On the other side, Canadian milk producers are in for a loss; as the market will be opened to cheaper milk products from the US (this was a major cause of disagreement between the US President Trump and Canadian PM Trudeau). The steel and aluminium industry in Canada is also looking at losses after the USMCA; the steep US tariffs were not revised in the deal. Even the drug industry in Canada and Mexico will witness increased prescription prices, because the patent period has been increased from 8 to 10 years. (Huffington Post, 2018)
My earlier proposition that a Canadian Transportation Company (Canada Cartage) set up operations in Mexico faces a big hurdle in fact that Mexican Trucks are not allowed beyond a 20 mile limit across the US border (the part of the NAFTA which would have allowed this was never implemented). The goods have to be loaded onto US trucks after they cross the border, wasting significant time and resources. This, however, can be offset by the fact that Canadian trucks can go through the US border seamlessly. The said company can invest in operations in Mexico and operate in two parts, it already does operate the US-Canada part, the addition of the Mexican subsidiary would mean elimination of third part trade carriers that operate from US to Mexico ( even US trucks are not allowed into Mexico; quid pro quo). (The Balance, 2018)
A further detriment to this decision could be the high tariffs on Canadian Steel into the US, and the tariffs on the automotive parts and vehicles coming from Mexico into US, and subsequently into Canada. The new deal mandates that automakers use at least 75% parts in the vehicles sourced from within the NAFTA region. However, the tariff reductions to promote this did not take place.
- Canada and the Asia-Pacific Economic Cooperation. (2018, 10 10). Retrieved from Government of Canada: https://www.international.gc.ca/world-monde/international_relations-relations_internationales/apec/index.aspx?lang=eng
- CUSMA. (2019, 01 04). Retrieved from https://www.international.gc.ca/trade-commerce/trade-agreements-accords-commerciaux/agr-acc/cusma-aceum/index.aspx?lang=eng
- Global Affairs Canada. (2017, 06 05). Retrieved from https://www.canada.ca/en/global-affairs/news/2017/06/canada_breaks_newgroundasitsignsmodernizedfreetradeagreementwith.html
- Hartman, S. (2011). NAFTA, the controversy. The International Trade Journal, 12.
- Huffington Post. (2018, November 01). Retrieved from https://www.huffingtonpost.ca/2018/10/01/these-are-the-winners-and-losers-of-usmca-so-far_a_23547702/
- Opposed from the start, the rocky history of NAFTA. (2017, August 16). Retrieved from https://www.reuters.com/article/us-trade-nafta-timeline/opposed-from-the-start-the-rocky-history-of-nafta-idUSKCN1AW09M
- The Balance. (2018, November 15). Retrieved from https://www.thebalance.com/disadvantages-of-nafta-3306273
- The Canada Trade Commissioner Service. (2018, 10 01). Retrieved from The Canada Trade Commissioner Service: https://www.tradecommissioner.gc.ca/mexico-mexique/index.aspx?lang=eng
- The Canadian Trade Comissioner Service. (2017, 06 09). Retrieved from Trade Comissioner: https://www.tradecommissioner.gc.ca/canadexport/0001570.aspx?lang=eng
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