Episode 09: NAFTA, international relations and Canadian trade

Nadine Habib:

From the corner of Bay and Dundas in downtown Toronto, this is Like Nobody's Business, a podcast of thought leadership and business innovation. I'm your host [Nadine Habib].

On today's episode of Like Nobody's Business, we speak to Michael Manjuris, professor and chair of the Global Management Studies Program and TRSM. We sat down in his office and spoke about the North American Free Trade agreement and the effect it may have on Canadian politics and our future ties with the United States.

 Will a bad NAFTA deal hurt the Liberals in the next election? Could our relationship with the United States sour across the board? Professor Manjuris is here with more.

Hi Michael, thank you so much for joining us.

M. Manjuris:

My pleasure.

Nadine Habib:

So let's get right into it. How do you think Canada has handled NAFTA talks so far?

M. Manjuris:

Generally I think our federal government has done a pretty good job. And the reason I say that is, NAFTA negotiations are really, international trade negotiations among three or more parties is quite complex. Our federal government's done a very good job in, first of all, explaining the interests of Canadians and our line in the sand on a number of different issues, and they've held to that line in the sand, if you wish. I'm sure we'll get into a few examples in a moment, but by doing so they've shown that, in this case, American counterparts that past that there's a resistance in Canada to be able to offer extra compromise on a particular interest.

For example, the dairy farmers. Dairy farmers are very important to Canada, as they are to any nation. It's in a nation's best interest to have dairy farmers to make sure that you can feed your population. If we were to enter into an agreement that would jeopardize the survival of that sector of our agricultural community, then we are jeopardizing, in essence, our ability to feed ourselves. And that would make it difficult for any government to sign.

So I'm really happy that our federal government has been both professional and very firm in terms of the way they've communicated the interests of Canadians in this negotiation. So I think they've been doing a pretty good job.

Nadine Habib:

And how will NAFTA potentially impact the next federal election in Canada?

M. Manjuris:

That's a very good question and it's very interesting, because as you and I were talking earlier, it's a question that seems to be coming up more and more these days. There's been this link between the trade negotiations with, primarily the United States, but also Mexico and what is going to be the outcome of the next federal election. And I guess my take on it is that because of the last three issues that we face in negotiating, renegotiating in NAFTA, there are different groups within Canada that have varying viewpoints about how we should proceed with that.

Again, let's talk about dairy. There are those that are in Canada that believe we should just eliminate our protection for our dairy farmers altogether and sign off on the deal with the United States because the dollar value of that trade is very low. It's actually less than one half of one percent of the total trade with the United States. So why are we stopping it and why are we bothering to protect them? It's not as important a sector as others, for example, auto or energy is into Canada. But on the political landscape, protecting our dairy farmers and our agricultural sector is a huge issue in the Province of Quebec.

And in order to win a federal election, any party has to make sure they pay attention to those issues that are important to people of the Province of Quebec. And if they don't put policies forward that the people of Quebec agree with, they're not going to win the federal election. So it ties in.

In other words, our negotiators, our federal government negotiators in NAFTA, are well aware of what the political landscape is in Canada and are well aware of the limitations of that in terms of what they can and cannot do in negotiations.

So I believe that if we have successful negotiations and NAFTA is resigned, that bodes well for our incumbent Liberal Party. I think that if they were to sign a really bad deal, that was bad for our economy et cetera, that both the Conservative and NDP parties would grab onto that and attack the Liberals in terms of their ability to govern in the next federal election. And I think if there's no signature, no agreement done and we're sort of in this limbo state, then I think it gives a chance to both sides to say why that's good for Canada. But in any of those scenarios, it means that NAFTA and the concept of international trade is going to be a major issue in our next federal election.

Nadine Habib:

It seems like there are three sticking points for the Canadians during negotiations. The first is chapter 19, the second is the Canadian dairy industry and the third is culture. Can you tell us why you think those two things are so important for Canada?

M. Manjuris:

Well those three things are-

Nadine Habib:

I'm sorry, three things.

M. Manjuris:

Those three things are the last of the major issues. And that's what is right now holding up our ability to just sign off on whatever the Americans demand or their ability to sign off on whatever we demand.

So, chapter 19 is the dispute resolution mechanism, part of our existing NAFTA agreement. And in very simple terms what it means is, when there's a dispute between two parties, let's say an American and a Canadian company in terms of how they're conducting their business and whether they violated NAFTA rules, there has to be a perceived objective and fair place to go to voice their positions and have somebody make a judgment on who's right and who's wrong. But to do it in a fair and objective manner.

So chapter 19 right now provides an opportunity for a panel to be created, it's a five person panel, so it's an odd number. So no matter who votes what, there's going to be a winner. That the selection of the members of that committee are agreed to by all three countries and that there's always a long list of people. Typically it's between 50 and 100 people that you can vet until you come up with five that you all agree on.

This then provides, it's kind of like a jury in a court, it provides the most objective approach to settling disputes. What the Americans want to do is do away with that and have the judicial branch of wherever the complaint originates and have in essence the courts decide.

So if an American company feels that a Canadian company is not abiding by the NAFTA rules, then it would be an American court that would decide. Often, as has been witnessed in other parts of the world, it creates very biased views and therefore biased judgment.

So we've stood pretty strong against any changes to chapter 19. And that's very, as I said earlier, and that's very good. Our government is saying, "Look this particular kind of arrangement with the United States and Mexico is going to exist for many years and decades to come, far past the Trump Administration's survival and perhaps even that of our Trudeau government. And so whatever we establish, we have to realize is going to be the way of doing business across our borders for decades." And they want to make sure there is a fair and unbiased way of settling disputes.

Second of all, you were talking about dairy. We both introduced that. And this is something Mr. Trump has grabbed onto as completely unfair. And he has indicated that we are horribly treating the farmers of the United States because we have a 300%, I'm quoting him, a 300% import duty on all dairy products coming into Canada. And of course, that's not quite accurate. First of all, the duty is high, so he's right there. It's 270% and that was agreed to in 1994 when the original NAFTA was signed because it was deemed necessary by ourselves and the Americans, to protect our farmers here in Canada.

The size of our farms are much smaller than the mega-factory farms they have in the United States. And as I mentioned to you earlier, one of the mega-farms in Wisconsin alone could supply most of Canada with it's dairy needs. So it would literally destroy that farming sector. And for national interests we can't let that happen. The Americans wouldn't let that happen if the tables were turned on their own farmers. So they understand the point of view.

One of the things we can maybe do though, is still have protection, but maybe not as much protection. We don't need that level of protection, I think, anymore for our farmers. They're more modern, they're more efficient, the quality of the products, of the dairy products we're producing is much greater than it has been in the past. To the point that often they can compete on the quality alone even if it's at a higher price. So I think the idea of a 270% tariff has maybe done it's course and maybe we agree to some number that's smaller, but we still have a tariff.

Second of all, we've already agreed with the Europeans in our free trade agreement with them to allow them to come in, the dairy producers, to come into our market, up to about three percent duty-free. And then after that we impose an import tariff. Maybe we have the same kind of arrangement or maybe it's a different number but a similar arrangement with the Americans. We give them some portion of the market duty-free. It's a quota system, and then after which we impose a tariff. That allows for Mr. Trump to say he's got a win. He created more access to our market and therefore protected American farmers. And we have a win because we continue to protect our dairy farmers up here.

I'd just like to mention though that what perplexes me is we're talking about, as I said earlier, half of one percent of all trade done with the United States. It's a very very small portion of the entire trade relationship we have and yet it's a major sticking point right now.

And then the third one you mentioned was cultural. And it's the cultural industries we have up here in Canada that we are seeking to have protection from American buyouts or acquisitions. It's exactly what we have right now in NAFTA. We're not asking for anything more, we're simply asking for a continuation of what already exists. And the reason we're doing that, Nadine, is simply if we don't protect our culture, we will be consumed even more so by American culture. And I think one of the entities that I can identify that everybody knows and understands is our own CBC.

One of the real benefits of having the CBC is when the CBC reports or presents documentaries et cetera, it does so in a very objective way. And by being professional it ensures that multiple viewpoints are presented and allows for it's own viewers to develop their opinion based on what it is the CBC has told them. As opposed the CBC telling you an opinion on every single case. Very different than how the broadcasters operate in the United States.

Nadine Habib:

And you teach an entire class on NAFTA and another class on international trade at TRSM. Can you tell us a little bit about what students will learn when they take this class?

M. Manjuris:

Those classes are very interesting and have become more relevant in the last, probably, two years. Simply because of the change of administration in the United States, but also what's happening in Europe and Asia. So the growth and dominance now of the Chinese economy in the world stage, but also it's influence in the Asian theater. And two major, maybe three major changes happening Europe, they still have sovereign debt issues, certainly not as bad as it once was. The idea that the UK wants to leave the European Union, whether that's still going to happen or not, again, has created uncertainty.

But also it's the rise of more right wing policies among government and other parties across Europe. So it's not just in one country or in a small pocket of countries, it seems to be spreading across Europe. So, and a very quick example of a policy has to do with immigration, where the idea of not allowing immigrants coming into a number of different countries in Europe, that idea starting to rise in many government areas of thinking.

What that's doing is it's changing the way business is done now across the world. And so these courses are designed to better prepare students, not just to understand the theory, but to understand how it applies and how it might work.

So a couple of quick examples. I'm going to deal with Canadian chocolate, Canadian aluminum and then the Harley-Davidson company in the United States. There's a chocolate factory just outside of Niagara on the Lake here in Ontario and they produce wholesale chocolate. That's chocolate that is then used by the people that they sell to, to produce their own chocolate products. Whether it be chocolate milk, chocolate bars, chocolate raw material that then goes into cakes et cetera, or other specialty products. They also produce various amounts of pure chocolate, so this is pure cocoa. It can go from 50% chocolate to so called dark chocolate, which is 70% or higher of cocoa. And then they produce final products for the retail market. So these could be something as simple as an Easter bunny, but it could also be, again, chocolate bars, what I would call a variety pack. Often it's a ceremonial pack for a wedding or for Christmas or something of that nature. So they produce all these different kinds of products.

80% of their income, or their revenue, pardon me, comes from export market, and not just the United States. As a matter of fact, they export to Australia, to New Zealand, to Japan, to South Korea. It is a family run business, there are 21 employees there. They absolutely depend on the global market. But the reason they setup shop here in Canada is because of the expertise related to what in essence is a job shop. A custom shop to make these specialty chocolates.

So they, if you wish, market their products based on quality not on price and they've been very successful in what they're doing. By understanding the NAFTA course, you understand the ability for that chocolate manufacturer to access the American market and to do so, currently, duty-free. And that market, that industry, is not on Mr. Trump's radar in terms of imposing import tariffs. So you see how his policies and what's currently happening in the United States, does not apply across all sectors of our economy.

When we look at the aluminum industry, and specifically we have aluminum smelters primarily in Quebec, Ontario and British Columbia. And in Quebec we have the major aluminum producer of aircraft grade aluminum. Things that are used for airplanes and rocket-ships et cetera. And we're really good at it. We make the top, and this is not a Canadian talking, we make, this is the industry that does quality checks and offers awards et cetera, and in Bagotville Quebec that plant consistently wins the top price for the top quality and consistent production of aircraft grade aluminum. So we do it, we do it well and others say we do it well.

 Well their biggest customer are the companies in the United States in the aerospace and aircraft manufacturing business, but also Airbus in Europe for example, so Boeing in the United States. And what's interesting about this is, when the United States imposes an import duty on aluminum, they don't hurt the Quebec plant, because there is nobody else that produces that level of quality. So the Quebec plant will continue to supply the same amount of aircraft grade aluminum to the industry in the United States. The industry in the United States now pays more money. So we talk about that both in NAFTA and we talk about that in international trade and how, if it continues, trade will start to be diverted or investment will start to be diverted. So international trade we talk a lot about how to assess business risk.

Harley-Davidson in Wisconsin did just that. When Trump imposed import duties on steel and aluminum, Harley-Davidson looked at what that meant to their costs and what they realized was the Europeans were going to retaliate, that the Europeans were going to say, "All right, America if you're going to impose duties on us, we're going to duties on your products, including Harley-Davidson." Harley-Davidson looked at their business model, their globe and they said, "Our market in Europe is growing the most, our profits in Europe are growing the most. If we don't do anything, all that's going to get cut and we're going to hurt." So they decided to move production to Europe to avoid European import duties. And they have been successful at it.

Their revenues and profits continue to grow faster in Europe than anywhere else in the world. Which means their investment was diverted from the United States to the European market. And we talk about that in international trade.

So what we're showing in those courses and what we're trying to help students with is that theory's nice, but it gives you a framework from which to make a sound business decision. And the courses help you realize that there are outside factors that are always changing. And as a result of that you have to modify the theory to make sure it's applicable. And that's what we talk about.

Nadine Habib:

That's a very interesting course. So back to NAFTA, what does a bad NAFTA deal look like and what does a good NAFTA deal look like for Canada?

M. Manjuris:

A bad NAFTA deal would be us choosing to acquiesce on the positions we've currently been holding. So you and I talked about those three major issues. There's one also in automotive where we just say, "Yup, no problem." We give into the American's demand to have American content in the cars. And we do this for political expediency to simply get an agreement signed. Why that's bad is, it will result in at least three things.

First of all what will happen is there'll be a shift in investment, business investment, from Canada probably to the United States. That will result in less jobs available here. Certainly it will decline the job growth in the future.

And then ultimately what it can also lead to is the potential for an increased, believe it or not, inflation, because then we will be having to purchase final products that are mostly manufactured elsewhere, whether it be Europe or the United States. And generally, because they're not locally made or locally grown, we usually are looking at a higher price point.

Good NAFTA on the other hand will fuel ... First of all, what it will do is it will eliminate the uncertainty that the business community sees right now. It will now establish what the rules are and those rules will be, business rules, and those rules will be seen as good. In other words, okay, there aren't going to be any more threats of punitive import tariffs. Those tariffs will be reduced or eliminated.

So for example, there'll be investment in the aluminum and the steel and the manufacturing industries, but also film production and what I call some of the newer industries. So for example, Amazon will finally conclude that it wants a second headquarters in Toronto. There's a better chance of that happening. So it will attract the talent of software and technical people and engineers et cetera.

But there'll also, for example, be a return to the oil patch out West. I think you'll start to see a different kind of discussion also on pipeline development across our nation. But all of these things are the idea of generating more economic activity, which will lead to a greater growth in our GDP. So I think it is very good.

And also we will keep the areas that we need protected. You and I talked about dairy and the cultural industries and that will continue. So I mean, clearly, we are hoping for a good NAFTA to happen. I really believe that a bad NAFTA will not.

Nadine Habib:

That's good. That's reassuring. And so what are some unintended consequences we might see if we get a bad NAFTA deal? Will prices of groceries increase? Or will trade become more expensive for the country?

M. Manjuris:

We're speculating of course because we just said we don't think there'll be a bad NAFTA. There may be a no NAFTA, but it won't be a bad NAFTA.

So to speculate, I think what we'll see is three things. Certainly prices will go up. So a bad NAFTA will mean, we just talked about it, will mean that there'll be a whole series of economic activities that shift down to the United States and Mexico. So we'll need to be buying more things from them. Those things will be more expensive because the currency's different. But it also means that we will start to see things we cannot grow or make, first things that come to mind are citrus fruits, oranges for example, but also certain types of raspberries and things that are made from that, fruit juices, orange juices et cetera, those are going to be substantially more expensive.

That will also, because it's a bad NAFTA and we have job loss, prices going up, we could see inflation. And if inflation does kick in more than it is now, you'll see a rise in interest rates. All of that, all of those things, if they were to happen simultaneously would cause a slowing down of our economy. So that's why a bad NAFTA is bad, because it will directly effect us all.

Our cars will be more expensive, we'll hold onto cars longer, but the parts we're going to need to repair could be more expensive. Air traffic, airline tickets et cetera, could be more expensive. I'm just picking examples.

But let's not forget we're speculating. I think the likelihood of a bad NAFTA is very very low. I don't think our government's going to sign that. They've made that statement many times. And I think the fact that we have, ahead of this, signed free trade agreements with other parts of the world gives us leverage because it means we will always have another market to go to to trade with and to sell our goods. And I think the European market is a very good market for us to access should NAFTA not go the way we want.

Nadine Habib:

Mm-hmm (affirmative). With that said, if there is no signed agreement, what does life look like after a no NAFTA deal?

M. Manjuris:

The very simple answer is, we'll be fine. A lot of people have talked to me and questioned, with some concern in their voice, "What's going to happen?" And, "How can they be this way?" And, "Will we be destroyed economically?" And the answer is, of course not.

The good news about the Canadian economy is it's very mixed. We have raw materials that we produce, we have agricultural products, we have manufactured goods, we have a large service sector whether it's financial services, entertainment services, telecommunication services, banking, I can go on and on. So we have an economy that's very well setup for no agreement with the United States and Mexico.

But let's also remember that we had already signed a free trade agreement with the United States back in 1989 and that was a two party or a two country agreement between ourselves and the US. And that remains in effect. So if NAFTA were to disappear, that FTA still exists and those rules would automatically kick in until one of the governments decided, in the future, to end that particular agreement. But I don't think that's going to happen, because we offer benefit to the United States and they know that. We offer benefit to the Mexicans, they also know that.

We've had free trade or a free trade relationship with the Americans since before the second world war and it certainly has accelerated since the second world war. The Auto Pact in the 1960's, free trade across the energy sector since the 1950's. All NAFTA did was expand that to the three countries and expand it across all the economic sectors. So we're going to be okay.

Also, every time there is a change, I like to say when there's a door that closes there's another door that opens, this may just force our businesses to start looking at other markets, South Korea, Japan and China particularly, but also over in Europe. I've mention the free trade agreement we signed with them recently. And I don't think that's been a market we've explored perhaps as extensively as we should have.

One of the reasons those markets now become more of an opportunity is that in the world of supply chain management the idea of containers or containerization has shown that, done properly, transportation costs can be really minimal. So it tends to bring, sort of metaphorically, it tends to bring these markets closer to us. And indeed we have a course on that as well.

Nadine Habib:

Good to know. Well thank you so much Michael, I really appreciate you giving us the time to talk about NAFTA.

M. Manjuris:

And I hope it has helped those that are listening. And also it's been great to help you out.

Nadine Habib:

Thank you.

M. Manjuris:

Thanks a lot.

Nadine Habib:

Like Nobody's Business is a presentation of Toronto Metropolitan University's Ted Rogers School of Management. For more information about TRSM visit ryerson.ca/tedrogersschool. Thank you for listening.