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How to make NAFTA great again

By Alexandre Moreau      

Protections for supply-managed industries and softwood lumber are blocking the growth of Canada-U.S. trade.

Justin Trudeau and Donald Trump at the White House on Feb. 13. Photograph courtesy of Donald Trump's Twitter
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MONTREAL—During the American election campaign, Donald Trump criticized the North American Free Trade Agreement on several occasions, going so far as to call it “a disaster,” and he clearly stated his intention to renegotiate it. Although the new president is wrong to target it as the source of the economic ills afflicting his country, it is true that NAFTA could be improved.

The growth of Canada-U.S. trade was rapid in the years following its signing, such that it now totals over $880-billion, or about $2.4-billion a day. Yet trade has stagnated since the turn of the millennium, due to the trade barriers that persist.

Exempting Canadian softwood lumber from tariffs and opening up the agricultural sectors under supply management (dairy, eggs, and poultry) to American producers are two examples of measures that would be beneficial to consumers, and that would breathe new life into the economic partnership between the two countries.

Such reforms would provoke an outcry from certain producers who want to preserve a situation that benefits them at the expense of consumers on both sides of the border.

Beware the tariffs

Currently, the U.S. Department of Commerce is evaluating the possibility of imposing tariffs on Canadian softwood lumber imports that could go as high as 25 per cent. Lumber from New Brunswick and certain softwood lumber by-products, historically excluded from agreements, could be subject to these new tariffs.

These tariffs would hurt the Canadian forestry sector since they would reduce exports to the American market. Under the last softwood lumber deal, Canadian producers lost about $2-billion between 2006 and 2015. Today, over 24,300 jobs and $7.6-billion in exported softwood lumber are directly connected to American market conditions and the decision that the Department of Commerce will make.

Unsurprisingly, American softwood lumber producers would be the big winners of a return to protectionist measures, as was the case with the last agreement. But the imposition of such a high tariff would raise the average price of a new home by nearly $1,300. This would have led to additional costs for homebuyers on the order of $1-billion just for single-family homes built in the United States in 2016.

A captive market

On the Canadian side, it is farmers under supply management who are fighting tooth and nail to defend the tariffs and quotas that restrict Canadian consumers’ options. According to OECD estimates, this system costs households $258 a year, for a total of $3.6-billion a year for Canadian households. Other estimates find costs of up to $6.1-billion.

Yet Canadian farmers are also hurt by supply management, since it deprives them of access to billions of consumers around the world. This means that they have not been able to benefit from increased global food consumption, which is ongoing.

The countries that opened up to international trade will have a clear path to increase their domestic production. The OECD expects Australia to increase dairy product exports by 13 per cent, New Zealand by 18 per cent, and the European Union by 50 per cent. The example of New Zealand speaks volumes. That country nearly tripled its production after having liberalized its dairy industry. In comparison, Canada’s milk production hasn’t budged since the 1960s.

Trade barriers have never made more than a small minority of people richer, at the expense of the vast majority. Eliminating those that persist in the agricultural sectors under supply management and in the softwood lumber sector, and making sure not to erect new ones, would be good both for consumers and for producers.

Ultimately, the renegotiation of NAFTA is an opportunity for Canada and the United States to broaden their economic partnership and contribute to its durability. That opportunity should be seized without hesitation.

Alexandre Moreau is a public policy analyst at MEI, the Montreal Economic Institute.

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