News about NAFTA is hard to avoid these days. Below is a primer on the trade agreement and an update on what is next for Canada.

What is NAFTA?

The North American Free Trade Agreement, which has been in place for over 20 years, was signed by Canada, Mexico and the United States to create a trilateral trade bloc in North America. NAFTA's purpose is to increase economic prosperity by promoting economic integration and facilitating business across borders. The agreement has allowed Canadians to benefit from a wider selection of goods, increased direct foreign investment, a greater consumer base, freer movement of professionals across borders and new job opportunities. Most economists are in agreement NAFTA is beneficial to the North American economies and the trade agreement has accomplished its major goals. Please click here for key facts on NAFTA's influence on prosperity and investment in Canada from the Government of Canada's website.

Although there have been plenty of benefits, there remain a few criticisms of NAFTA, including the loss of jobs in the U.S. due to companies moving factories to Mexico for cheaper labour. This topic is controversial as there have been just as many if not more U.S. based jobs dependent on the agreement. Another counterpoint are the studies that have emerged indicating the U.S. has actually lost more jobs to automation than to Mexico. We touched on technical disruption on the workplaces of the future in our April Blog (click here to read more).  Jobs are connected to another critique, that NAFTA must be modernized in order to be relevant over the next decade. For example, the existing list of professions for work visas to easily work cross-border does not contain computer programmers. As the world is evolving, so must our trade agreements.

What has happened over the last year?

Trump officially set in motion talks between the three countries when he signed an executive order to renegotiate the terms of NAFTA. It has been months of tenuous discussions between the three countries with Canada staying strong to its key agenda, the U.S. decided to continue negotiations one on one with Mexico. Fast forward a few months to August 27th 2018, Mexico and the US have reached a tentative bilateral agreement. One of the terms of the agreement is a higher minimum percentage of North American auto parts in North American manufactured vehicles. Trump would also like to change the name of the agreement and is submitting a formal letter to congress. If there are no changes to the proposed plan it provides a potential timeline of a signed U.S./ Mexico trade agreement by November of this year.

Where does this leave Canada?

The headlines over the next few days will be centered around whether or not Canada will join in the agreement the U.S. and Mexico have outlined. Trump is using the deal with Mexico as a pressure tactic to get Canada to quickly sign on or risk being excluded. It seems unrealistic that Canada could have a new deal in such a short time especially as the U.S. and Mexico spent many weeks in negotiations. The U.S. has also applied added pressure by threatening an auto tariff on Canada. Canadian Foreign Affairs Minister, Chrystia Freeland is working hard to get Canada a deal by Friday. Should we fail to reach an agreement Trump has threatened to go forward with a U.S. Mexico bilateral agreement. However, U.S. Congress will need to approve any new deal and early indications are that they may not be partial to an agreement excluding one of the North American trading partners.

We must keep in mind the different scenarios which could emerge over the next few days or weeks. Following Monday's news, RBC's Global Asset Management updated their model and now have the chances of a new NAFTA deal set at 60%, termination of the agreement at 15% and a 25% chance that there are no changes to the existing NAFTA. Please Click Here for RBC Global Asset Management's Chief Economist Eric Lascelles thoughts on NAFTA renegotiation scenarios.

Canada views the concessions Mexico has made in the auto sector favorably. There will be some concessions made to Canada's list of demands in order to join the agreement and ratify a deal.  Ultimately, we believe the re-negotiation of the NAFTA agreement is beneficial to all three countries.

For a more detailed overview on what issues remain outstanding during the U.S. / Canada negotiations please read this article entitled NAFTA: A genuine breakthrough? by Patrick McAllister, RBC Wealth Management.