The North American Free Trade Act (NAFTA) came into effect on January 1, 1994 with the promise to promote free trade among three countries: Canada, Mexico, and the United States. The last two decades have seen trade flourish among the region in a number of ways: liberalization of trade in agriculture, textiles and automobile manufacturing.While the Act's popularity has always been replete with controversies, experts have long speculated NAFTA has been good for Canada. Over the two decades, it has led to regional trade more than triple, while also giving a boost to cross-border investments.
So when the Trump Administration decided to go ahead with imposing tariffs on Canada and Mexico, it struck a blow to the free trade that NAFTA has channeled effectively so far in North America - leaving many wondering what influence NAFTA has had on Canada’s imports and exports.
How Free Trade Works
Before discussing the effects NAFTA has had on Canada’s imports and exports, it helps to begin with a quick refresher on how free trade functions. When countries enter into these agreements, they agree to give each other preferential treatment when it comes to imports and exports. Under NAFTA, this means the elimination of tariffs on many products moving among Canada, the US, and Mexico.
Canada has long had preferential arrangements with the United States, which remains the country’s largest trading partner. Canada is the US’s second-largest trading partner.
Mexico is Canada’s third-largest trading partner, and Canada ranks fourth on Mexico’s list.
Total trilateral trade between Canada, Mexico, and the United States has reached almost US$1 trillion under NAFTA - with the three partners exchanging nearly US$2.6 billion in merchandise each day—that’s about US$108 million per hour. This represents more than three-fold increase in trade since 1993. In the same period, trade between Canada and the US doubled.
Canada relies heavily on US demand. Nearly 76 percent of all Canadian exports were bound for the US market in 2017. Around $2.4 billion worth of goods and services cross the Canada-US border each day.
Canada also relies heavily on imports from the US. In 2016, nearly $266 billion made its way from the US into Canada.
What Does Canada Export?
NAFTA is a wide-ranging agreement affecting many different sectors of the economy. It covers both merchandise and services. NAFTA even includes provisions for the movement of people across the borders.
1. Oil and Natural Gas: Canada’s top export is mineral fuels, including oil. The Alberta oil sands have long been proposed as a better alternative to Middle Eastern oil, and the US’s oil-dependent economy has benefited from Canadian oil imports.
2. Automobiles: The second largest automotive market in North America, automobile exports make up nearly 13% of total exports of Canada to the U.S.A.
American auto manufacturers set up shop in Canada before NAFTA took effect, but they have benefited from the agreement. Machinery, plastics products, and electronic equipment are other large categories.
3. Iron, steel, and aluminum: Combined, the three resulted in over $13Bn worht of exports from Canada to US in 2017. The current tariffs are supposed to hit this sector the most.
4. Timber: Another common export, although it’s lower down on the list. Canada’s forest products exports contribute $17.1 billion in net trade. Paper products account for over $6 billion in exports each year.
Canada exports much of the same merchandise to Mexico, although meat and cereal products represent two of the largest categories in the top ten.
What Does Canada Import?
Canada imports much of the same from the US. Vehicles make up for the biggest import from the United States. Paper, iron, steel and machinery round up the large import categories. Canada also imports aircraft and spacecraft, as well as medical and technical equipment.
Canada’s imports from Mexico include some of the same categories such as vehicles and medical equipment. Mexico is also a large supplier of produce, including fruits, nuts, and vegetables.
What Will Happen with Renegotiation?
NAFTA is almost 25 years old now. No wonder it’s time to update the agreement. Although the recent tariffs have been no less than a bolt from the blue, Canada needs to renegotiate a good deal since so much is at stake. NAFTA could continue to develop the country’s international business and export markets, but only if the agreement continues to support Canadian interests.