Trade Gap Widens between Canada & the U.S.

The Business Journal of the Greater Triad Area has an interesting article on the widening trade gap between Canada and the United States.

WHAT ARE THE ISSUES?

What's interesting is that this news follows talk by both Canadian and U.S. politicians on revising the North American Free Trade Agreement (NAFTA).

NAFTA is a treaty signed by Mexico, Canada, and the United States. The purpose of the treaty is to allow a free flow of goods and services across the borders between each country. It also provides an arbitration framework for reconciling disputes.

The theory went, drop trade restrictions and each country would get wealthier by providing their best resources in a wider marker.

And to be honest, NAFTA has been successful in several economic areas.

U.S. exports to Canada and Mexico grew from US$134.3 billion (US$46.5 billion to Mexico and US$87.8 billion to Canada) to US$250.6 billion (US$105.4 and US$145.3 billion respectively).

Mexican exports to the United States reached over US$138 billion, while Mexican exports to Canada grew from US$2.7 billion to US$8.7 billion, an increase of almost 227%.

Canada’s exports to its NAFTA partners increased by 104% in value.

(Numbers taken from the Office of United States Trade Representative Report: NAFTA: A Decade of Success.)

This economic success has not been felt by every person. Especially in the United States, blue collar workers and union organizers attribute continuing loss of jobs in the manufacturing sector on free trade agreements like NAFTA.

These factions want free trade agreements stifled or amended to include increased protections for manufacturing jobs in the United States.

As part of the 2007-2008 U.S. presidential primary campaigns, Democratic Party candidate Barack Obama spoke to voters about his plan to force Canada and Mexico to change NAFTA to be more advantageous to the U.S. It is widely agreed that he took this position in order to pander to working-class voters that are rightfully fearful that more of their jobs will be sent to other countries.

So, the U.S. wants a better deal that protects the U.S. manufacturing center.

Canada is probably quite happy with NAFTA - considering their ever increasing economic growth and widening gap in trade with the U.S.

Mexico's been pretty silent on the matter.

WHAT IS THE CONTROLLING INTERNATIONAL LAW?

NAFTA's own treaty controls the process of changing NAFTA.

There are two methods available:

Article 2202 of the NAFTA treaty allows for 'any modification of or addition to this Agreement. ' And that 'when so agreed, and approved in accordance with the applicable legal procedures of each Party, a modification or addition shall constitute an integral part of this Agreement.'

So for NAFTA to be changed, all of the Members of NAFTA will have to agree to change it.

Given that Canada is mostly happy with how NAFTA is functioning, such an agreement is not likely to happen.

The second method is withdrawal.

Article 2205 of NAFTA allows a country to withdraw from NAFTA six months after they give written notice to the other member countries.

So, if the U.S. truly believes the NAFTA is not in its best interest, the U.S. could pull out of NAFTA altogether.

Withdrawal may be the U.S. only method of altering NAFTA.

HOW DOES THIS AFFECT YOU?

We'll focus on the U.S. readers here.

Article 603 of NAFTA currently makes it easier for goods to enter the U.S. This includes the large volumes of oil and gas that Canada is currently extracting from its oil sands and shipping to the U.S.

The U.S. currently imports more fuel from Canada than any other single supplier. Mexico is in the top three suppliers.

(Source: Crude Oil and Total Petroleum Imports Top 15 Countries)

So, if withdrawal is the only likely alternative to remaining in NAFTA, U.S. readers should prepare for a large range of goods to become more expensive.

Oil, gas, and other raw materials shipped from Canada would increase in price due to U.S. trade restrictions.

These price restrictions would apply to everyone - not just the worried manufacturing sector. Families, companies, and everyone else would probably see a dramatic increase in prices.

With the U.S. currently grappling with high energy costs, making it harder to import goods would be disastrous to the economies of all NAFTA members.

Remember this, NAFTA equals cheap gas. Leaving NAFTA equals higher gas prices.

The U.S. can find better means of dealing with lost manufacturing jobs (unemployment insurance, increased educational assistance) than hamstringing the economies of both the U.S. and other NAFTA members.

Note: This analysis does not look at the affect of the General Agreement on Trade and Tariffs (GATT) and the World Trade Organization (WTO) on trade between current NAFTA members.