U.S., Canadian, and Mexican negotiators failed to meet Paul Ryan’s informal deadline to complete the renegotiation of NAFTA so it could be approved by this Congress. Additionally, the Donald J. Trump administration’s imposition of tariffs on aluminum and steel for both Canada and Mexico dim the prospects of a quick resolution even further. Which issues are still outstanding? What are NAFTA 2.0’s prospects after the Mexican election and U.S. midterms this year? What does this failure imply in the short run for U.S. trade relations with North America and beyond?
CHON: All right, thank you. Welcome, everyone, and thank you for joining us on a Friday for this CFR Corporate Program conference call. I am Gina Chon. I’m the Washington columnist for Reuters Breakingviews. I’ll be moderating this discussion.
We’re very pleased to have Marney Cheek, a partner at Covington & Burling. We also have CFR Fellow Shannon K. O’Neil, and CIBC’s chief economist, Avery Shenfeld, with us to discuss the ongoing NAFTA renegotiations.
I would like to remind the audience that this call is on the record, and in addition to CFR members, invited members of the press may also be present.
So let’s kick off because there’s a lot of things that we want to get to, and also want to leave plenty of time for questions. And it has been a pretty dramatic week as we see some of the ratcheting up of rhetoric and trade actions in addition to all the talk.
So I wanted to start it off at sort of a high-level, big-picture look at what’s really at stake here for each of the NAFTA countries, both economically and politically. And if we could have each of the speakers address, from one of the countries’ perspectives—Avery, if you wanted to kick off with Canada; and then, Marney, if you wanted to talk from the U.S. perspective; and Shannon, if you could address Mexico, that would be great.
SHENFELD: Sure. From Canada’s perspective, you have a country where, if you strip out the import content in our exports, roughly 20 percent of GDP would be entailed with exports to the U.S., so obviously trade with the U.S. is a key issue for Canadian manufacturers, resource producers, and the export sector as a whole.
Now, of course, it’s not so much NAFTA or no NAFTA because Canada does export some goods to the U.S. that don’t actually qualify for NAFTA treatment and still face a most-favored nation tariff. And the typical most-favored nation tariff that Canada would face to the U.S. with no NAFTA would on average be only 4 percent.
But what we’ve seen is, even with NAFTA in place, the U.S. is getting much more aggressive in making accusations that other countries, including Canada, are subsidizing—or dumping—goods, or that the U.S. is also exercising its right to declare certain goods of importance to national security. And one by one we are seeing individual sectors being hit with much higher tariffs.
And the key to NAFTA is that it gives Canada a dispute resolution process— a way to actually hold hearings to judge whether or not those tariffs are fair or not—that works much better than the WTO process—much faster—and without it, Canada is—as the current prime minister’s father, Pierre Trudeau, said, it’s like sleeping next to an elephant. So when the elephant rolls over on you, it can hurt, and that’s why, for Canada, having a system like NAFTA that sets rules of the game and gives Canada an appeal process is very important.
CHON: And Marney, what about for the United States?
CHEEK: You know, from the U.S. perspective, NAFTA has really been a success story, and while there have always been contentious issues, our trading relationship with the U.S. and Mexico remains strong. We have integrated supply chains with those countries, and in total, our trade with Mexico and Canada is about 30 percent of total U.S. trade. Canada and Mexico are only behind China as the U.S.’s largest trading partner.
So I think if the countries fail at this exercise, and if failing means that there is no NAFTA at all—while Avery is quite right, they can fall back on WTO rules—I think it would be quite economically harmful for the U.S.
But I think that there is an economic and political consequence to the failure of NAFTA that really goes much beyond the relationship with Canada and Mexico, and that is the world is watching U.S. negotiating tactics, and if the U.S. can’t reach a deal here, then I think other countries are going to be quite reluctant to engage in a similar exercise.
So I think what’s at stake for the U.S. is really their reputation as a reliable trading partner and their ability to be able to do a deal and conclude a trade agreement.
CHON: OK, and Shannon for Mexico—what do you see is at stake for that country?
O'NEIL: Well, Mexico is probably the most dependent of the three countries on NAFTA. It has—it’s a huge part of their overall—(audio break)—so it’s a huge part of their economy.
And the trading part of the—(audio break)—been the most vibrant for the last 20-plus years, so it’s the most modern, it’s the companies where productivity is increasing the most, it’s the types of industries that are paying better wages and the like. So it’s quite important for the overall economy because this really has been the driver of growth in Mexico, for the growth that it has had.
NAFTA has also been quite important for Mexico not just in the trade that has grown—which has grown four-fold—but in the support for investment. So part of NAFTA, for Mexico at least, was this was an investment treaty that really gave it the rules of the road for companies to come in and brought in billions of dollars in investment in plants, and services, and other companies that have been really important as well.
But overall, if NAFTA—it’s faltering, but if it actually in the end fails, this has more than just economic and financial repercussions. It has, really, political repercussions, and it is, as we know—(audio break)—between the two—(audio break)—leaving Canada out it, but between the United States and Mexico, in particular. And so we have seen public opinion in Mexico increasingly negative towards the United States over the last couple of years, and the death of NAFTA or a decline in NAFTA, I think, would just further that, which would make it much harder for the broader U.S.-Mexico relations in that country to work with us on issues of security, and the border, and other things that are quite important for the United States.
CHON: Great. Well, thanks for some of that high-level perspective. And if we could get into then some of the most contentious issues—I was at the opening of the NAFTA talks, and Ambassador Lighthizer of the U.S. came in very hard right from the beginning with a very tough speech, and we’ve seen them come in with demands that seemed to throw off Canada and Mexico in terms of how extreme they were, whether its rules of origin and auto content, changes in the dispute resolution mechanism, the five-year sunset clause.
If you guys could all address, you know, some of these issues, and Marney, if you wanted to kick it off to give an overview of, you know, what are the issues that are standing between them, and are there red lines that perhaps could stand in the way of getting a deal done.
CHEEK: All right, thanks, Gina.
You know, I certainly think that you actually ticked off some of the key issues that are the—have been the most contentious throughout the negotiations, and those are, you know, autos; rules of origin and content; dairy, as well, between the U.S. and Canada; the U.S. proposal that there be a sunset provision—in other words that this agreement would only be in place for five years and then would need to be renewed; and then also dispute settlement, and that takes a few forms. There is a dispute settlement mechanism called Chapter 19 that the U.S. wants to take off the table entirely. The U.S. also has floated a proposal that where there are state-to-state disputes that are resolved by a dispute settlement panel that those would only need to be advisory and not binding on the parties. And the U.S. also has signaled that it might want to take investor state dispute settlement off the table, which for U.S. investors has always been a cornerstone of any agreement that for them helps provide the legal stability they think is necessary to actually invest in Canada and Mexico.
So I think all of those issues remain unresolved, and we’re going to need to see parties move towards compromise. I think that both Canada and Mexico have signaled that they could compromise on some of these most contentious issues. Trudeau recently signaled that he, you know, might be willing to compromise on dairy. Mexico has put forward some compromise positions on autos, and I think all eyes are really on the U.S. to see if they are willing to compromise on this sunset clause.
From my perspective, the sunset provision really is a poison pill. I mean, it just runs counter to the whole reason you have a trade agreement, which is to provide stability and predictability in the trade and investment relationship, and to assume that corporations are—well, I think you cannot expect corporations to make these long-term strategic decisions about supply chains and significant investment based on rules that could evaporate in five years. So I think Mexico in particular has made it clear that they think that sunset provision is a poison pill, and I think the value of having a NAFTA 2.0 just significantly diminishes if there is such a sunset provision. So I see that really as one of the most contentious issues and probably a red line for some of the parties.
CHON: Shannon, did you want to go into that in more detail from the Mexican perspective? And then, Avery, if you want to address Canada after that?
O'NEIL: Sure, so we have seen the sunset clause has been one that Mexico is against. There’s been some divisions within the Mexican government about whether or not that would be something that they could work with, but overall they have come down and that is really a poison pill for them at this point.
Another issue that Mexico is quite worried about is the auto rules of origin, and there’s been a lot of back and forth on the negotiating table on different percentages and the like, and where things might or might not come from, and one of the challenges has been this proposal that a certain percentage needs to come from high-wage countries, so basically that a certain percentage of the overall auto would have to come from a country that—or from a factory that pays $16 or more, so obviously that eliminates Mexico as one of the contenders there. It would, frankly, eliminate some of the plants that are in the south of the United States, some of which don’t pay that high a wage, but it will be easier for them to get to that level.
And so there’s a real question here, and there’s a question not just in the overall content—is it 40 percent of the car, is it 20 percent of the car—but does it apply to specific parts of the car; i.e., does the engine have to have 40 percent content at—that pays $16 or more, or is just overall?
And so I think there’s a challenge here. Mexico, one, doesn’t want to lose business, but also it just makes it incredibly hard to look at each part, and calculate, and document exactly which part was made where. And that is just the reality today of supply chains, and particularly in the auto industry, but in others as well. You have very complicated movement between factories and suppliers as up to 10,000 parts come together to make your car, and so putting too many regulations, too many requirements for documentation to meet these rules of origin will make it very difficult to make competitive cars in North America overall. And so that is today a real sticking point.
SHENFELD: So, from Canada’s perspective, there’s probably a little more room for Canada and the U.S. to ally on the—to become allies on the auto content. Canada has actually lost more market share on autos to Mexico than the U.S. has, interestingly enough, in terms of autos and parts collectively, since NAFTA was signed. And the original U.S. proposal was a U.S. content rule, which Canada obviously rejected because it would have meant free trade for cars assembled in the U.S. and nowhere else. I think Canada actually wouldn’t mind at least some version of the rule that only a certain amount can come from low-wage plants, so—because that’s going to have appeal to voters on the left in Canada. So a little bit more of three-way negotiations rather than a two-on-one here.
I think, for Canada, we know that the sunset clause is a no-go. Recently, Justin Trudeau had a call with Trump where he proposed flying down to see if they could get momentum going on this deal. And he got a call back from Mike Pence, who told him unless you’re prepared to sign the sunset clause don’t bother coming, so Prime Minister Trudeau decided not to come. So that’s a key thing because it does go, along with the dispute resolution process, I think as two key items that from a Canadian perspective are essential to attracting businesses to invest in Canada who serve the U.S. market, which is the bulk of our manufacturing industry.
The problem is, if you don’t have a dispute resolution process that works, then you’re at the whim of the next U.S. president if he decides that you’re subsidizing this or dumping some other good. And the U.S. is increasingly not appointing people to WTO panels, so they’re running out of the ability to raise a quorum and get these hearings done. So, when Canada signed its first bilateral deal with the U.S., a key item for Canada was we won’t sign unless there is a dispute resolution process in place for appeal of countervailing and anti-dumping duties, and I think that remains a key item.
I would agree that Canada is prepared to probably offer the U.S. a chunk of market share in things like dairy. I think we did that for Europe in the Canada-Europe free trade agreement. So there is some room to negotiate there.
I think Canada and the U.S. could find some common ground on autos. So there I think it’s the Mexico side of that that’s going to be more difficult.
But the problem is the U.S. position on dispute resolution panels and sunset clauses hasn’t changed. And without that, we can’t sign a deal.
CHON: Got it.
So we can’t avoid talking about politics—(laughs)—when it comes to these discussions, especially given various elections taking place in the three countries later this year. And, Shannon, I wanted to kick off with you, just given the presidential elections in Mexico, and the surge in Obrador’s candidacy, and the things he has already said about NAFTA, and how that could affect the talks going further. And then we can go into the U.S. midterms and Canada provincial elections as well.
O’NEIL: Sure. So Mexico is about to have an election on July 1, and by all the polls the front-runner is Andrés Manuel López Obrador, known as AMLO, who comes from a much more protectionist/nationalist economic point of view. So he really has a very different economic paradigm than the current administration, and frankly, every administration of Mexico since the late 1980s. So this would be a pretty significant shift economically.
He is not anti-NAFTA as such, but he doesn’t see NAFTA as the anchor for the economic paradigm of Mexico as a country. So I think he is much less vested in NAFTA. And so the compromise—it’ll be a bit harder to get to a compromise with a López Obrador administration than, I think, the current administration or others that Mexico has had.
So it doesn’t mean that he’s going to walk away from the table. I don’t think he will. And he has said, as has his advisors, several times that, you know, he’s for NAFTA. He wants these negotiations to happen. He wants to modernize NAFTA. But he also is less eager, I think, to get to a deal.
And then the other challenge will be, given that it looks like we won’t see any agreement any time soon, is the team that has been there, the team that has been working with Lighthizer and the others since the beginning, they’ll leave. So you’re going to have to bring a whole new team of negotiators from the Mexican side up to speed on where things have been so far. So that will—there’s a capacity issue there in order to get to a deal quickly because you’re going to have a whole new group of people that just have to get into the nitty gritty of all of it.
And then I think you will have a government, assuming that López Obrador is the—is who wins on July 1, you’ll have a government who does want this to go forward but doesn’t care as much about it as the current administration does.
SHENFELD: Oddly enough, in Canada, despite being a country where the month before the most recent month—so back in March we actually set a record trade deficit. The amazing thing is, is that free trade is a very apolitical issue in Canada. Virtually all the major parties are in favor of free trade. No one is really yet pointing a finger at the Trudeau government for somehow failing to manage this process. I think there’s a general understanding that they’re doing their best to try to reach a deal and dealing with a difficult counterparty across the table. So we’re not getting the political blame game.
There are—there’s federal elections next year in Canada. I do think that it would probably hurt the Liberal government a bit if NAFTA falls apart. But again, it might not be as much of a blame game here, given that they’re seen as up against a tough situation.
There are some provincial politics at play, too. The dairy industry has a little more weight in Quebec, so giving something away there to reach a deal does raise some issues.
But we have a new government in Ontario after elections this week, and I don’t really see a big difference in the view of that province on trade, which is that particularly for Ontario autos are extremely important. So the threat that America has now wielded that autos will be the next good they declare essential to national security and are threatening Canada with a 25 percent tariff, I think all political parties of all stripes, the new incoming Ontario government, the one that was defeated, would all agree that Canada has to do everything it can to avoid that. That would be a major blow to Canada’s auto sector.
CHEEK: And I think from the—
CHON: Yeah, go ahead.
CHEEK: I think from the U.S.—I think from the U.S. perspective we just have to remember that during the 2016 election cycle, you know, anti-trade rhetoric was really at an all-time high. And, you know, folks will remember that really politicians on both sides of the aisle, Republican and Democrat, embraced a lot of anti-trade rhetoric. So I think if a deal is going to be struck before the midterm elections, Republicans are going to need strong talking points as they head into those elections on why this new NAFTA deal is good for, you know, American workers and American farmers.
I think it’s—we should take note of the fact that when there was first noise coming out of the Trump administration that they might withdraw from NAFTA, it was really the agricultural community from the Midwest, from, you know, Republican red states that said NAFTA is critically, you know, important for us. And I think that that had influence and it changed the course a little bit of what the administration was going to seek in this NAFTA 2.0. So I think, given those strong agricultural interests, and of course the administration and Republican focus—although particularly administration focus—on manufacturing, you know, I think that if a deal’s going to get struck now, there’s going to need to be a strong argument that that’s a good deal for American workers and farmers.
CHON: Great. Well, there’s a lot more to get to, and we definitely want to leave room for people on the call to be able to answer—ask questions. So we’ll open the floor. As a reminder, this call is on the record. And, Operator, if you could please give the instructions for asking a question.
OPERATOR: Thank you. At this time we will open the floor for questions.
(Gives queuing instructions.)
CHON: Great. And so while the participants are queuing up, I can get us started with the first question, which—I’m curious to know what your thoughts are, from all your perspectives, on what you really see as the plan B here. Is there a potential for a NAFTA-lite if there is no NAFTA deal, no NAFTA 2.0? What are the sort of possibilities of contingent planning that could occur? Or are there really any, given the U.S. threat to withdraw and everyone saying no deal is better than a bad deal?
CHEEK: Yeah, this is Marney. I’ll just share a few—a few thoughts on that.
I think that there is, you know, a couple landing zones. When it comes to, you know, whether there can be a NAFTA-lite or a skinny NAFTA, something less ambitious, I think the remarks we just made about the political environment just make it seem like a less-ambitious NAFTA, at least a short-term less-ambitious NAFTA, might not make the most sense politically. I think Justin Trudeau floated the idea of a—of a NAFTA-lite as possibly a way to avoid having to send this deal to the U.S. Congress. I don’t think that works. Legally, this deal is a renegotiation, was notified under Trade Promotion Authority, and I think this deal absolutely has to go to Congress for approval.
You know, because of that, just there is—Trade Promotion Authority in the U.S. has a time schedule as to how this all works, and that is a deal has to be notified to Congress 90 days before it’s signed to allow for the mandated congressional consultations on that deal. So even if a deal—even if they reached a deal July 1, that mandatory 90-day notification period runs October 1. Once that’s over, there’s still a mandatory report on the impact of the trade deal on the U.S. economy that the ITC has to conclude supposedly in 105 days, although that might be able to be compressed. That would take you into January before it could be signed.
So, you know, the—so, because of that reality of the timetable, I think there’s really a question as to whether it makes sense to have a rushed, low-ambition deal at this point. It might have made sense two months ago. I’m not positive that it makes sense now.
So the other kind of plan Bs that I see is, first, this could just blow up. If it’s clear there’s not going to be a NAFTA 2.0 and everyone needs to walk away, I think there’s a risk that if everyone walks away from NAFTA 2.0 you’re not left with NAFTA 1.0; you’re left with no NAFTA at all, because I think the Trump administration has stated that they’re willing to withdraw. And while there will be tremendous pressure for them not to withdraw, the Trump administration has criticized NAFTA 1.0 so much it’s difficult politically to see them just retreating and falling back on the existing NAFTA that we have now.
And the other, final option would be to just put this on a slower simmer. Like, this deal is not going to get done now, the parties need more time, and you know, this is something where they’re just going to need to continue to negotiate on the hard issues and you’re just not going to see—not going to see a deal in the next four weeks.
SHENFELD: I think, from Canada’s perspective, that’s the best Canada can hope for, is that we show the White House a few wins behind closed doors and we extend the talks into 2019. The hazard of that is that the U.S. is going to still proceed with this decision on autos, and more generally the uncertainty facing Canadian business drags on until 2019 and has a negative impact on business confidence and investment decisions. But best we can hope for at this point is that we’re still at the negotiating table in 2019.
CHON: Great. Well, I think we have some questions in the queue. So, Operator, if you want to get to those, that would be great.
OPERATOR: Absolutely. Our first question comes from Ariane Ortiz-Bollin with Moody’s.
Q: Hi. Thank you for the call.
I wanted to know what was your opinion on the recent tariffs to steel and aluminum to Canada and Mexico, and how do you think this impact the course of the negotiations.
SHENFELD: So, for Canada, it’s very odd here because for aluminum Canada is a very cost-effective supplier of aluminum. So, in effect, we expect the market price of aluminum to rise and Americans will just end up paying that tariff. The U.S. is going to need Canadian aluminum, so that tariff will fall on U.S. manufacturers who will have to spend more on buying aluminum from Canada. We’re not really expecting to see a huge negative there.
On steel it’s going to be problematic because Canada’s also retaliated with a tariff beginning next month on U.S. steel. And the problem is we don’t make every grade of steel, every type of steel on either side of the border. The industry is quite integrated. And you’ve got auto manufacturers on each side of the border. Again, steel prices are rising in the U.S. It’s going to hurt the U.S. energy industry, which uses a lot of steel in drilling activity. And it will probably have a bit of a bite on a Canada. But I’d say overall the one we’re really worried about is this issue on the threat to do the same in autos. That would be a horrendous problem for the auto industry, including the big three U.S. manufacturers.
O’NEIL: Yeah, I would just add on the Mexico side—sorry—that Mexico’s actually a net importer of steel from the United States. So they buy more from us than we buy from them. And they’re finding ways to work around that. When they put on retaliatory tariffs, there were a couple of steel products, but it was really agricultural products and others that were very targeted to particular congressional districts that they matched up with. But what they are very concerned about, again, is that same, hitting the auto supply chain. Because if it’s inputs, they can deal with that. It’s only about $3 billion that will be hit. But if it is products that incorporate steel, like cars, it will be much more difficult for their economy.
CHEEK: Just—and this is Marney Cheek—you know, when I was at USTR, the conventional wisdom was that we shouldn’t be launching trade disputes against negotiating partners that we’re trying to reach a deal with on a free trade agreement. And obviously that conventional wisdom, I think, is out the window. The fact that Canada and Mexico immediately launched the WTO cases against the United States, you know, for imposing these tariffs I think says that, if anything, the political dynamic, having decided to impose these tariffs on Canada and Mexico, I think really complicates the NAFTA negotiating dynamic.
CHON: Operator, if we could go to the next question.
(Gives queuing instructions.)
And our next question comes from Oliver Staple of Ernst and Young.
Q: Hi. Thank you for your time today.
My question revolves around the standard notion of free trade and how it’s largely been beneficial for the, you know, larger cities. But we’ve really seen a new dynamic in the sense that smaller towns in the United States, that used to have steel mills and other types of manufacturing facilities really started to vacate after NAFTA. And I’m curious to, you know, listen to your insights as to, you know, how the U.S. economy can respond, because it seems as if, you know, it’s manifested itself that not everyone can work in New York City or Silicon Valley and that we need some of the blue-collar jobs. So is there a way for NAFTA or some sort of free trade alliance, as well as a blue-collar base of manufacturing to exist in the United States?
SHENFELD: Well, I find it interesting that—it’s true that the U.S. has been losing manufacturing jobs as a share of total U.S. employment. But that long predated NAFTA. And in fact, it’s a combination of manufacturing not requiring so many workers—so manufacturing output in the U.S. has never been higher than it is now, the volume of output. It doesn’t take as many workers to do it. But we also don’t need people as elevator operators. We don’t need people in typing pools. We don’t need people as switchboard operators either. There’s actually nothing new about an economy that loses jobs and creates jobs at the same time. Let’s not forget that the U.S. employment rate, 3.8 percent, is about as low as we’ve ever seen. So there are—you don’t want to just count heads in manufacturing.
It is true there’s an adjustment process. And maybe U.S. public policy hasn’t worked as well as it should to help people through that adjustment process. But if you compare Canada, Canada’s actually lost a lot of market share in manufacturing. Its manufacturing output is not as high as it was pre-recession. So it hasn’t fully recovered the way the U.S. has. And yet, you have broad support in Canada for free trade. So I think it’s about the right adjustment policies, not necessarily trying to hang onto jobs that technology or trade is replacing. You could make all the t-shirts you need in the United States, but t-shirts would be very expensive at your local Walmart. And that would hurt the American consumer more than it would help the American worker.
CHEEK: I think there’s also an investment—there’s also an investment component to this. These are trade and investment agreements. And I think, you know, you have seen a significant amount of inbound foreign investment to the United States in, you know, updating manufacturing facilities, really, that are much more at the higher tech end of manufacturing. And so I think you have seen both job creation and a very dynamic economy in the United States in high-tech manufacturing. And that’s, I think, consistent with what Avery is saying, a direction that our economy is obviously going in. And having an agreement like NAFTA that continues to set important baselines to attract that kind of foreign investment into high technology industries is quite important.
O’NEIL: Let me just add on that point, because I think this is actually an incredibly important point, and one that is playing into our politics. And when you look at particularly the car industry—which has become this iconic industry to talk about, you know, jobs lost and the like. We actually in the United States make the same number of cars in the United States as we did 20 years ago. But where the plants are is very different, right? (Audio break)—that used to be very heavily weighted towards Michigan and Ohio. And I grew up in Ohio, so I remember these plants. You know, they’re not there anymore. And you’re right, they’re gone from there. But they are in Alabama, and they are in Tennessee, and they are in the Carolinas and other places.
So, one, there’s been a lot of movement between states. So you’ve seen a shift there within the United States. It’s not just going to foreign countries. But, two, there have been jobs that have left the United States. But it hasn’t been to Mexico and Canada, proportionally. It has been to China. And there have been very careful studies done, which I highly recommend reading, by Gordon Hanson and some other, you know, professors, of where you saw jobs leave. And it really has been China. And we can talk a little bit about fair, and about whether they have a level playing field and the like in terms of steel, in terms of other products, that has hit these communities. And these communities, as the caller was saying, you know, they haven’t bounced back as quickly as people had hoped or economists had thought they would.
So I do think this is a very serious issue. But what those studies also show is that it was not Mexico or Canada. And I would say, arguably, in part, because of NAFTA. You know, what NAFTA does—the United States is one of the more open nations in the world, at least in parts of—in different sectors, or in some sectors. And so the real challenge for free trade agreements that we go out and sign is how do we level the playing field in other countries? So NAFTA brought down tariffs in Mexico. They didn’t bring down as many tariffs here in the United States because our tariffs just weren’t that high under WTO rules. But they did bring down tariffs in Mexico that let us compete in Mexican markets for various products, and similar with—to a lesser extent—but with Canada.
So I think actually when we think about NAFTAs and the like, can we improve these agreements? Definitely. But what these agreements often do is help the U.S. be able to compete in other markets for consumers in those markets. And there, if we set back from those, we lose access to what are the growing markets around the world when you look at demographics and consumer purchasing and power and the like. These are the places where we are going to be able to sell our products, but only if we can get in. And I think the only way we can get in is if we have some sort of preferential trade agreement going forward.
Q: Great. Thank you.
CHON: Yeah, thanks for that question. So, building upon that, in terms of the global outlook for trade agreements and whether it’s China or elsewhere, how have these contentious NAFTA talks affected alliances or shifting alliances, and where other countries are turning to if they feel like they can’t deal with the U.S., or can’t get an agreement? We’ve seen Canada and the EU make their own trade agreement. We’ve seen Mexico already buying more from South American countries for corn and other products, just so they have some sort of hedge against what—if the NAFTA talks don’t go well or collapse. We’ve seen obviously the U.S. make various trade moves with these steel tariffs. And we’ll see where the auto investigation goes. Where do you see sort of the shifting alliances and who people came up with, given that some of the partners that they had depended on may not be there as they once were?
SHENFELD: Well, in Canada’s case, as you mentioned, we’ve signed a free trade agreement with Europe. We also are a member of the Trans-Pacific Trade Agreement. We’re even talking to China, although that’s going to be very complex. But we pretty much have free trade agreement with just about everybody we could have a free trade agreement with. But the problem is, to some extent in trade geography is destiny. So if Michigan were a country, and you asked what percentage Michigan exports go to this other country called rest of the United States, it would be most of them. And the same is true for Canada. We, you know, at best, at the margin, we might drift gradually towards a lower export component to the United States.
But the difficulty here is that much of what Canada sells to the rest of the world, we sell bundled into the United States. So, you know, Canadian steel could end up in a third country, having first been assembled into a car in the United States. So the integrated nature of manufacturing across the border means that a lot of what Canada sells to the rest of the world they sell via supply and input to the U.S. And it’s going to be very hard for Canada to really make a lot of headway in replacing anything lost in the U.S. You know, for example, I can’t imagine automotive plants in Ontario facing a 25 percent U.S. tariff having a lot of success suddenly shipping, you know, Canadian-made cars to Germany. It’s just not going to happen.
CHEEK: Yeah, and from a U.S. perspective—from a U.S. perspective, I think just taking a step back and looking at this at a more strategic level, you know, I think particularly—the United States is currently, you know, putting significant tariffs on goods that are with our most important allies and trading partners. And so the success of NAFTA in part is the success of the United States showing that they can get a deal done. And I think the failure of NAFTA, which—and combined with some of these other U.S. actions—shows that the U.S. is willing to jeopardize important trading relationships for kind of short-term domestic political reasons. So I think there is also—there’s the economic realities, which are quite important. I think there’s also a political reality for the U.S., you know, being able to strengthen ties with others if they—if they decide that they can’t get a deal done here.
O’NEIL: You know, I would add another cost is, right, if we can’t make a deal with our neighbors and our partners, it’s hard for, I think, any other country to in earnest invest the resources and time and political capital to try to make a trade deal with us, because of sort of the unreliability of the United States. But the one place where the United States I do think will lose out if we step away from these international trade agreements and negotiations in the next several years is in setting of standards around the world. And so in all sorts of industries, there are questions of what are the standards? There are safety standards. There’s just size standards. There’s technological standards. There’s privacy standards. There’s all sorts of standards that the United States has particular views on this. Europe has other ones. China and other countries. And there are a lot of people trying to set these levels.
And one way to do this, to make yours the one that goes over the tipping point and becomes the universal standard, is through these trade agreements. So TPP and others were ways—are ways to do that, to set particular standards. And if we take ourselves out of the game, then if we want to return in the next decade or so many of those standards will be set and our industries will have to adapt to these other international standards that have been set without us, and perhaps aren’t the ones that we use today.
CHEEK: And if I could just echo what Shannon’s saying, because I think it is really important. The U.S. economy and the U.S. export market is not just about, you know, autos and dairy products—although, obviously, those are the most contentious issues. Some of those standards are intellectual property protections, the rule for digital trade, the rules that affect, you know, investment and trade in financial services. There are really important sectors to the U.S. economy that rely on these global trade agreements to ensure a level playing field for thriving sectors of the U.S. market. And so, frankly, some of those issues are contentious with Mexico and Canada, some of the IP issues with Canada for example. But some of these issues, actually, the three parties are largely aligned because of NAFTA. And that’s an incredibly important baseline for huge swaths of the U.S. export-focused economy.
CHON: Great. And, Operator, are there any other questions from the queue?
OPERATOR: We have no further questions in queue.
CHON: OK, great. Well, thank you so much to participants for having this very timely discussion. We’ll see what happens in the next few weeks. (Laughs.) Even one day seems to produce a lot of changes these days. So a lot to see what happens in the future. And thank you to everyone who dialed in. We really appreciate it. And have a great weekend. Thank you so much.