Is NAFTA better for Canada or USA?

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I read Canadian media mocking Donald Trump for saying North American Free Trade Agreement (NAFTA) was bad for USA. The writer argued that if anyone has reason to renegotiate or withdraw from NAFTA, it's Canada. The case was made for Canada withdrawing first thus forcing the issue onto Trump.

Is there merit in this argument?

BigDataLouie

Posted 2017-05-02T14:51:34.183

Reputation: 2 676

3Unless a person has taken the time to study the entire agreement, and has the necessary skill to understand it, his or her answer is unlikely to provide much value. It may be best to go to the source: the professional negotiators of the agreement (unless you are primarily interested in generalities or politicized opining). – George Cummins – 2017-05-02T17:46:18.007

3I don't think it makes sense to review it on per-country basis unless you clearly objectively and measurably specify what does "better" mean. It's improving conditions for some groups of interests one side and on the other side, as well as worsening them for some on each side. As every international-treaty. And there are many ways to measure it, so are the outcomes. – luk32 – 2017-05-02T18:05:35.330

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@GeorgeCummins is more-or-less right: It would be virtually impossible to pin down exactly who benefits and how much. It's worth noting, most of the attacks on NAFTA are with regard to Mexico; and indeed, some quick research reveals there's apparently a VAT on US companies (products?) on the Mexican side. All that said, one could easily make a case that NAFTA is bad/corrupt simply based on its length... A much-better (and more transparent) agreement would be thus: "We hereby agree to trade without barriers."

– Chris W. – 2017-05-02T19:46:56.250

1@ChrisW. There's VAT on every product sold in Mexico. Trump's problem with the Mexican VAT is manufactures get a refund on the VAT they paid on the materials used to make the goods they export. However they also get same refund when they sell their goods in Mexico. That's because that's how a Value-Added Tax works. The end user ends up paying the entire tax. When the good is exported the end user isn't in Mexico, so no one pays the VAT. This puts Mexican manufactures on the equal footing as US manufactures whose customers in the US don't have to pay the Mexican VAT while those in Mexico do. – Ross Ridge – 2017-05-03T03:54:45.410

@RossRidge Not exactly equal, as US companies have to pay corporate income taxes in lieu of VAT. That's why Ryan wanted to remove the tax on products exported to Mexico, which then have VAT added when sold to the end user. And add a tax on products imported from Mexico, which don't pay the US taxes. Then both countries would be on an even basis, charging tax on goods sold in their own countries and not charging tax on goods exported. As is, US exports are taxed twice, once by the US and once by Mexico while Mexican exports aren't taxed (deductible against income tax as an expense). – Brythan – 2017-05-17T18:57:23.240

@Brythan It's no different for US and Mexican companies, they're both "taxed twice". US manufactures have to pay US income tax, Mexican manufactures have to pay Mexican income tax. Both countries' goods sold in Mexico are subject to Mexican VAT. Both countries' goods sold in the US are subject to state sales taxes. – Ross Ridge – 2017-05-17T23:34:44.790

@RossRidge But VAT taxes are much larger than state sales taxes and the US has a higher federal corporate income tax than Mexico does (not to mention state taxes). It's not the same by any means. In any case, this is all off-topic on a question about Canada. If you're still confused about how the Mexican/US taxes interact unfairly towards the US, you should ask a separate question. – Brythan – 2017-05-18T01:16:45.643

1@Brythan I'm not at all confused. Mexican/US taxes aren't unfair to the US. You haven't shown otherwise. And the situation is no different with Canada, which like Mexico also has VAT and corporate income taxes. – Ross Ridge – 2017-05-18T05:57:26.367

@ChrisW. "A much-better (and more transparent) agreement would be thus: "We hereby agree to trade without barriers."" - Beautiful statement, but shows your ignorance on the matter if you think NAFTA is simply a free trade agreement. – Twelfth – 2017-10-12T22:02:09.610

Rewrote an answer and removed some comments. Canada and the US have several free trade agreements and Nafta repeal would just defer to previous agreements. Nafta is a framework in which disputes can be resolved, that gives a significant amount of power to the US. Repealing Nafta is heavily in Canada's favor as it regains much leverage...redirecting oil to China and forcing the texas light crude discount market to international pricing would be a 10% increase in gasoline price across the US...Nafta is the barrier that prevents that and repealing it returns that leverage to Canada – Twelfth – 2017-10-13T04:05:49.347

2General remark about the wording (whether NAFTA is “better for Canada or the US”): Trade is not a zero-sum game where one party wins and the other loses. It’s possible that both benefit equally. It’s also possible that both parties benefit, but one has an advantage of 15 and the other of just 3 (in arbitrary units). – chirlu – 2017-10-13T06:46:49.140

@Twelfth, I do not assume "NAFTA is simply a free trade agreement"; that was the point of my comment. :) (I wouldn't claim to be an expert on it either -- or even have a substantial grasp on what's in it -- but based on what trustworthy sources have said and the way 'government' tends to operate, I would be beyond surprise if I learned the thing is not full of crony-ist loopholes, perks, privileges, etc.) – Chris W. – 2017-10-23T16:39:58.163

Answers

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In general, free trade is hoped to make everyone richer, on average, over the long run, but to do that it makes some people richer at other's expense in the short term. 'Better' for one side over another is not the expected way to look at it; what matters is whether the good outweighs the bad for a single side.

It is argued that NAFTA is very slightly bad for Canadians on average (-0.06% general welfare). Obviously it is good for some Canadians in particular.

The same analysis for the US is +0.08% general welfare, but pretty clearly at least some Americans suffer some losses.

Do the losers in either country have enough clout to overturn the winners? Only time can tell.

user9389

Posted 2017-05-02T14:51:34.183

Reputation:

2Many people are starting to come around to the notion that Free Trade is good in theory, but Fair Trade is good in practice. – SnakeDoc – 2017-05-02T18:06:07.680

3@SnakeDoc Even that statement sounds great, but in practice fair is rather subjective and has a tendency to change over time. For instance, what was once a good deal for US dairy producers can change into something that doesn't help or even hurts their bottom line because markets are not static. This doesn't mean that Canada got one over on the U.S. when NAFTA was signed, it just means that people are consuming more butter nowadays so duty-free exports of milk products coming out of the U.S. are down so people feel they are being taken advantage of. – Jeff Lambert – 2017-05-02T18:52:45.067

@JeffLambert That's sort of precisely the point of Fair Trade. Trade deals shouldn't be set in stone... they should be more fluid depending on current conditions. Lots of things change. Nobody should be "getting one over" on the other party, otherwise people feel they're getting the short end of the deal. Fair Trade ideology seeks to keep things more fair for those involved... and when things get "unfair", have the ability to make changes. Easy example might be car imports vs. exports and high tariffs overseas on US manufactured cars. – SnakeDoc – 2017-05-02T19:28:45.803

This answer seems to completely ignore the fact that NAFTA is a crony-capitalist "free trade" agreement. Politicians and lobbyists went to great efforts to write it (evident by its length and density, the genesis of the OP's question), which they would not have done if they (or their financiers) weren't going to particularly benefit. A genuine free-trade agreement should take no more than a page of text. (After all, how much text was required to enable trade between New York and Boston?) – Chris W. – 2017-05-02T19:38:55.410

@ChrisW For what industry? Printed out, theres probably tons of regulations and laws governing everything from railroads to telecommunications. You can argue that the amount of regulations are a bad thing and you would have a point but if someone showed me a single page of text and said that it guaranteed fair trade I would be extremely skeptical that a loophole didnt exist for someone to take advantage of, your opinion notwithstanding.

– Jeff Lambert – 2017-05-02T20:28:58.237

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I've created a chat please use comments for criticism of the answer.

– None – 2017-05-02T20:57:10.900

@JeffLambert I was more referring to a pre-US era -- Boston and NYC surely traded for 100+ years before any "federal" gov't "oversaw" them. You could argue it wouldn't have worked for railroads or telecom, but I'd beg to differ (no space for it here). Re, "if someone showed me a single page of text and said that it guaranteed fair trade I would be extremely skeptical" -- me too. And if someone showed me 100 pages to "guarantee" fair trade (and what does that even mean?), I'd be 100x skeptical. – Chris W. – 2017-06-29T16:30:25.787

Please remember that a Nafta repeal has nothing to do with repealing free trade and has everything to do with the mechanism to resolve trade disputes (in the context of US-Canada relations). Nafta gives the US heavy leverage in how they can approach trade disputes with Canada...a Nafta repeal is Canada's gain and the US's loss. – Twelfth – 2017-10-13T03:56:48.647

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As a general rule, free trade agreements do more good for small countries than for large countries.

Here is why: It pays to have trading partners who are as different from you as possible. If you love apples, you want a trading partner who hates apples and will sell them cheap. If you're great at lawnmowing, you want a trading partner who's terrible at lawnmowing so he'll value your services. And so forth.

With no international trade at all, Canadians trade with Canadians. With free trade across the border, Canadians trade with North Americans. That's a win, because if you're Canadian, you are likely to differ more from the average North American than from the average Canadian.

It's also a win, of course, for the people on the US side, but not nearly as much, because, just as a result of sheer numbers, the average North American is a lot more like the average US'an than like the average Canadian. So when trade opens up, there's more of a difference between the average Canadian and that average Canadian's new average trading partner than there is between the average USian and that average USian's new average trading partner.

Steven Landsburg

Posted 2017-05-02T14:51:34.183

Reputation: 169

3Welcome to Politics.SE! Generally, answers solely based on the common sense are discouraged. Your post is good as per motivational part, but it also needs some argument based on facts and evidence. Please consider adding some references about specific pros/cons of NAFTA for the U.S. and Canada. – bytebuster – 2017-05-03T03:51:51.477

5@bytebuster: I appreciate that you're trying to maintain standards. But in this case, the argument I've given (which appears in dozens of standard economics textbooks, including mine) is self-contained and stands or falls on its own. Listing the many sources in which this argument appears will not strengthen or weaken it. Of course if I were citing some obscure fact or appealing to some logical conclusion without providing the logic, you could quite reasonably ask for references. But that's not the case here. – Steven Landsburg – 2017-05-03T04:36:26.513

Your answer assumes NAFTA provides symmetrical rights and responsibilities on both parties in neutral areas; it doesn't. – Josh – 2017-05-09T08:36:19.193

@Josh: There is no such assumption, and I'm unable to figure out which step in the argument appeared to you to require such an assumption. – Steven Landsburg – 2017-05-09T13:08:53.137

@steven-landsburg "As a general rule": the question is about NAFTA – Josh – 2017-05-09T13:10:56.553

1@Josh: Yes, NAFTA is a particular case of a more general phenomenon. – Steven Landsburg – 2017-05-09T13:14:15.200

@steven-landsburg Yes, and as with most FTAs, it's asymetric. If NAFTA was all about the free trade of Maple Syrup, then things would go Canada's way; if it was about baseball bats, it'd go the USA's way. It's about a bunch of stuff, with all sorts of exclusions and exemptions, and talking about a general case doesn't help in a question about a specific case other than to provide background prior to actually answering the question. – Josh – 2017-05-09T13:20:11.657

1@Josh: You appear to be responding to an argument I did not make. The only assumption that went into this argument was that NAFTA allows some trades that would not otherwise have been allowed. If you think there is some hidden assumption, please point to the exact step where you believe that assumption was invoked. – Steven Landsburg – 2017-05-09T13:36:53.743

@steven-landsburg Your assumption is that NAFTA is a Free Trade Agreement, when it's really a Freer Trade Agreement, and so even estimating the likely benefits is fraught with assumptions. It's common for governments to do cost-benefit analysis prior to entering into a FTA, and not unusual for academics to do post-implementation analysis of actual effects. Have you seen any, or are you just going to assume you already have a tin opener? – Josh – 2017-05-09T13:47:27.337

@josh: If you care to point to the specific step in the argument that you believe rests on a hidden assumption, I'll be happy to have a discussion. If you prefer to just keep announcing that you have an objection while refusing to reveal what that objection actually is, I won't be responding further. – Steven Landsburg – 2017-05-09T13:56:16.303

@StevenLandsburg - Your answer really has very little substance beyond speculating at what free trade does, which really has little to do with NAFTA. The Canada-US free trade agreement of 1989 does exactly what you are saying here already (and likely what we will revert to if Nafta does die), but Nafta goes above and beyond that. If you can't tell the differences between free trade act of '89 and Nafta, the most you have is a little speculation that trade is good which makes for a poor answer. – Twelfth – 2017-10-12T22:29:03.123

@Twelfth: I believe you have confused the concepts of "speculation" and "providing a logical argument". – Steven Landsburg – 2017-10-12T23:02:49.850

@stevenlandsburg free trade occurs with or without nafta, canada and us have several free trade agreements. Your logical arguement/speculation that free trade is good shows you have no clue what a nafta repeal involves as it is irrelevant at best. The moon is good too, let us provide logical arguements about that here as its just as relevant as your answer here is. – Twelfth – 2017-10-12T23:29:29.427

@stevenlandsburg - perhaps a bit nicer put, nafta repeal is not free trade repeal when it comes to canada us relations, its simply the repeal of a framework. And a framework that heavily favours american sovereignty, back in the cold war days canada as a nation would have went without energy to ensure america can still fight when the nukes fell. Nafta repeal is not free trade repeal. – Twelfth – 2017-10-12T23:41:49.663

I don't get the main argument. The average Canadian may be more different to the average North American than the average US citizen, but that is solely an effect of population numbers. The absolute effect stays the same, just the effect per capita is different. But this is no surprise: No one would expect that a treaty between a large and a (relatively) tiny country would lead to a large effect on the large country. – Thern – 2017-10-13T10:50:11.953

@Nebr - It's hard to call Canada 'tiny' in this discussion though...US-Mexico trade is barely 60% of Canada-US trade. In 2016 US-Canada trade (valued at $662 billion per year) fell to number two as China-US trade hit a value of $663 billion. 35 states refer to Canada as their number one international trading partner and Canada accounts for upwards of 40% of American oil supplies. It is a large effect on the large country. Mind you, this relationship all predates NAFTA and a NAFTA repeal would have little effect on that. – Twelfth – 2017-10-13T15:22:45.550

@Twelfth NAFTA was enacted well after the end of the cold war. – phoog – 2017-10-13T20:40:33.603

I don't know how you managed to keep your cool given such a barrage of criticism! Admirable. – Mozibur Ullah – 2017-10-15T06:34:56.323

@Twelfth : I interpreted the question as asking for a comparison between NAFTA and no agreement. You interpreted it as asking for a comparison between NAFTA and some other agreement. I answered the question as I interpreted it. I agree that my answer is not responsive to your interpretation of the question. – Steven Landsburg – 2017-10-15T13:18:23.463

@stevenlandsburg - yes, i think youve got josh and my own objections now. Your answer isnt really relevant beyond generic trade agreement generalizations that arent really applicable to a canada us nafta discussion. Infact your answer is promoting the extremely dangerous view that will lead American popular opinion to kill a deal that benefits them greatly because they flat out dont understand it. Hence the stronger objections....your view here is dangerous to hold and spread. If this was in the context of free trade, then you are right. Context of nafta, its dangerous to think this – Twelfth – 2017-10-15T22:24:30.193

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NAFTA ending appears to be thought of as free trade ending. This may be true in regards Mexico, however it's very untrue in the case of Canada and the USA. Canada and the US's ties predate NAFTA and to fully end free trade between Canada and the US would take more than just NAFTA being repealed.

First it needs to be noted how integrated Canada's economy is with the US, especially within manufacturing. Even a 'made in America' car will see pieces built in Canada (Ford makes its fuel pumps almost exclusively in Canada)...to repeal the concept of free trade is pretty close to ludicrous and impossible. To go a bit further, most of Western Canada is on the same power grid as California and there are plenty of times where a home owner in Los Angeles can flick on a light and use the same power that's currently running a computer in Vancouver. Cross border shopping drives a good chunk of Washington state's exports. I don't think you could feasibly end free trade between the two nations any easier than New York could end free trade with Texas.

So what does a NAFTA repeal mean to Canada and the US? There is a 1989 agreement that was never repealed between the two nations that defers to NAFTA currently and would take its place if NAFTA was repealed. What NAFTA does is set up the regulatory format in which disputes are handled. Under NAFTA, this heavily favors the US and is why Canada would favor the scrapping of NAFTA.

There are a few disputes along the lines of dairy (Canada is protectionist of its dairy industry from province to province, let alone internationally), other farm products (including eggs), and softwood lumber. Currently the US can basically dictate to Canada what it feels and Canada has little recourse...as we are seeing Trump make use of now.

More-over, there is what is known as the "proportionality clause" which guarantees Canada send a certain amount of its oil production to the United States (primarily flowing into Texas out of Alberta). If Canada was to hit an energy crisis, under NAFTA they would have to continue sending oil to America regardless of their own needs. In 1989, this was a decently big thing as it protected American energy needs in the case of a nuclear war with Russia. In modern days, it's the key agreement that keeps Canadian oil on a discounted market and forces them to sell to the US regardless of more lucrative Asian markets. With NAFTA gone, there is little to prevent Canada from redirecting its oil through projects such as the 'Northern Gateway' to international markets. The end result is a near 10% instant increase in gasoline prices across the US as the cheap oil NAFTA guarantees is no longer guaranteed...Canada can use its oil as power leverage in all trade disputes with the US.

The major change with a NAFTA repeal has nothing to do with free trade between Canada and the US...it has everything to do with negotiation and leverage in trade disputes. NAFTA heavily favored the US...now Canada can insist on full prices as per the international oil market every time the US tries to address Canadian protectionism.

More recently...Bombardier got into some issues that saw a 220% tax levied against them. Under NAFTA, the US has this leverage. Without NAFTA, Canada gains a significant amount back.

Edit a bit more:

It's easy to call Canada the small trading partner here, but it's important to note how incredibly close the relation is and ultimately how large it is. It's easy to find claims that US-Mexico trade 'exploded' to $295 billion in 2016, a look into canada - us numbers by the the US embassy in Canada shows how small the us-mexico relation is. Also interesting, given our question posters disclaimer, that Canadian companies pay American employees some of the highest wages in the US. https://photos.state.gov/libraries/canada/303578/pdfs/us-canada-economic-relations-factsheet.pdf

U.S.-Canada two-way trade in goods and services totaled nearly $759 billion in 2014. U.S. and Canadian bilateral investment stock totaled nearly $698 billion.

U.S. exports to Canada totaled $375 billion in 2014 – 16 percent of total U.S. exports. Canada is the number one export market for 35 U.S. states.

Canada and the United States trade more than $2 billion in goods and services daily.

U.S. exports to Canada exceeded total U.S. exports to China, Japan, South Korea and Singapore combined in 2014.

U.S. subsidiaries of Canadian firms employed more than 546,000 employees in 2011, for an average wage of over $65,000 annually.

Compare these numbers with mexico around $550 billion, around 2/3rds of Canadian US trade...completely neglecting the foreign investment involved. sourced: https://www.census.gov/foreign-trade/balance/c2010.html

Twelfth

Posted 2017-05-02T14:51:34.183

Reputation: 2 269

Goong to rework this answer...becoming more apparent that the general view on a repeal of nafta is a repeal of free trade between canada and the us. This isnt true. Us amd canada are too inherantlt linked and agreements that predate nafta simply take over. Nafta repeal in this context is a repeal of a framework amd moving back to previous agreements – Twelfth – 2017-10-13T00:17:20.883

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One of the things that may hurt Canada and other contries may be the courts that handles disputes within the trade agreement. Which, according to the link, are positively biased towards the U.S.

Simon

Posted 2017-05-02T14:51:34.183

Reputation: 111

You have it perfectly simon. Nafta defines the court processes that over see disputes which currently heavily favour the US and is where canada stands to gain and the us stands to lose with the repeal of nafta – Twelfth – 2017-10-12T23:52:32.057