The NAFTA has improved Canadian access to the U.S. and Mexican markets and enhanced the attractiveness of the Canadian economy to foreign investors. Since the NAFTA’s entry into force, Canadian exports to those markets have shown impressive growth, and foreign direct investment in Canada from all sources has increased steadily.
More importantly, the NAFTA and its predecessor, the Canada-U.S. Free Trade Agreement (FTA), have stimulated significant advance; in productivity and specialization within the Canadian economy, and have promoted grater economies of scale, product quality, and cost competitiveness. The result has been improved competitiveness of Canadian exports of both goods and services.
Total trade is a key driving force for economic growth and employment creation in an open economy such as Canada’s. The ratio of exports of goods and services to gross domestic product (GDP) in 1996 was 38.4 percent, making Canada’s economy the most globally integrated of all G-7 countries.
After three years of implementation, the NAFTA has further advanced existing trends toward market convergence in North America. This is demonstrated by the figures for 1996, which show $388.3 billion in total Canadian two-way trade with our NAFTA partners, over $200 billion in outward and inward foreign direct investment, and over $50 billion in trade in services between Canada and the United States. These figures indicate that important markets for a wide range of goods, services, financial resources, and technologies already exist and have prospered in a well-integrated commercial environment.
The NAFTA Commission
The Free Trade Commission, which includes cabinet-level representatives from the three member countries, is the central institution of the NAFTA. The Commission supervises the implementation and further elaboration of the Agreement and helps to resolve disputes arising from its interpretation. It also oversees the work of the NAFTA’s 30-plus committees and working groups. The Commission last met in Washington, D.C. in March 1997. Ministers have agreed that the Commission’s next meeting will take place in Mexico early in 1998.
NAFTA Coordinating Secretariat
Ministers have agreed that the Commission will be assisted in its work by the NAFTA Coordinating Secretariat (NCS), which is to be established later this year in Mexico City. The NCS will serve as the formal archive for the work of the NAFTA and serve as a working secretariat to the Commission.
Working Groups and Committees
The NAFTA envisages further work to help fully achieve the objective of a free trade area. Under the Agreement, over 30 working groups and committees were established to facilitate trade and investment and to ensure effective implementation and administration of the NAFTA’s rules. Key areas where this work is being undertaken include rules of origin, customs, agricultural trade and subsidies, standards, government procurement and the cross-border movement of business people. These working groups and committees report annually to the NAFTA Commission, composed of the trade ministers of Canada, Mexico and the United States.
The NAFTA working groups and committees also help to smooth the implementation of the Agreement and provide a forum for exploring ways of further liberalizing trade between members. One example is Canada’s continued effort to pursue the accelerated reduction of tariffs on specific goods. The NAFTA working groups and committees also provide an apolitical arena for the discussion of issues and, through early dialogue on contentious points, the possible avoidance of dispute settlement procedures.
The Dispute Settlement Process
The vast majority of trade in North America now takes place in accordance with the clear and well-established rules of the NAFTA and the World Trade Organization (WTO). Nonetheless, in such a large trading area disputes are bound to emerge. In such cases, the NAFTA directs the governments concerned to seek to resolve their differences amicably, through the NAFTA’s committees and working groups or other consultations. If no mutually acceptable solution is found, the NAFTA provides for an expeditious and effective panel procedure.
The administration of the dispute settlement provisions of the NAFTA is the responsibility of the Canadian, U.S. and Mexican National Sections of the NAFTA Secretariat. In the first nine months of the 1996-97 fiscal year, the Secretariat administered 14 panel reviews under Chapter Nineteen of the Agreement and one arbitral panel proceeding under Chapter Twenty. Eight Chapter Nineteen panel decisions and one Chapter Twenty panel report were issued in 1996.
Chapter Twenty of the NAFTA sets out the institutional arrangements and dispute settlement procedures. As of the end of 1996, 11 consultations had been requested under Chapter Twenty on 10 measures. One of these proceeded to an arbitral panel. Chapter Fourteen adds special procedures for any disputes that may arise over financial services.
Building on the Canada-U.S. FTA, the NAFTA also includes, in Chapter Nineteen, a unique system of binational panel review of domestic decisions regarding anti-dumping and countervailing duty issues, which replaces judicial review in each of the three countries. There have been 73 requests for panel review under Chapter Nineteen since the adoption of the FTA.
Despite the clear success of Chapter Nineteen under the FTA and the NAFTA, Canada continues to believe that the application of trade remedies has no place in a free-trade area. Accordingly, Canada will continue to pursue the significant reform, if not elimination, of trade remedies within North America.
For investment matters, the NAFTA sets out procedures for “Mixed” arbitration between the aggrieved investor and the host government concerned, using procedures common to Canadian foreign investment protection agreements and the World Bank’s Center for the Settlement of Investment Disputes. The NAFTA also requires domestic agencies to respect the principles of due process, fairness and transparency. For example, it requires each country to institute or maintain a system for bid challenge review of government procurement decisions.
As of January 1, 1997, the Canadian Section of the NAFTA Secretariat is also responsible for the administration of the dispute resolution process under Chapter 8 of the Canada Israel Free Trade Agreement. Effective in July 1997, the Canadian Section will assume responsibility for the administration of the dispute resolution process under Chapter N of the Canada-Chile Free Trade Agreement.
Accession to the NAFTA
The NAFTA was designed as an outward-looking agreement with the potential to be expanded to include new members. Canada believes that membership should remain open to countries willing and able to undertake the NAFTA?s obligations, including the parallel agreements on labor and the environment.
Negotiations to achieve Chile’s accession to the NAFTA were officially launched in June 1995. Canada has been an active proponent of Chile’s accession to the NAFTA. Stronger economic ties with Chile will create more opportunities for trade and investment in this high-growth market.
In view of the present lack of fast-track authority for trade negotiations in the United States, Canada and Chile successfully completed negotiations on a interim bilateral free-trade agreement and parallel agreements on environmental and labor co-operation, which will serve as a bridge to Chile’s eventual accession to the NAFTA. Mexico and Chile currently are negotiating revisions to strengthen a bilateral trade agreement between them.
Trade Results
In the wake of the implementation of the Agreement on January 1, 1994, total trade between NAFTA member countries began expanding at unprecedented rates. The average annual increase in total trade for the three years ending on December 31, 1996 was 13.8 percent.
In 1996 Canada’s total trade with NAFTA partners increased by 5.8 percent to reach $388 billion. Strong export performance contributed to a merchandise trade surplus with those partners to an all-time high of $41.2 billion – and is an important contributing factor in reducing current-account deficits that have prevailed for more than a decade. Merchandise export surpluses have very nearly offset Canada’s deficit in services and non-merchandise transactions with its NAFTA partners.
In particular, the increase in Canadian exports since the implementation of the NAFTA has led to a steady narrowing of the overall current-account deficit. Exports have been especially strong in automotive equipment (trucks, cars and parts), machinery and industrial goods, aluminum, iron ore and fertilizers. Reflecting this trend, the share of exports to NAFTA partners in Canada’s total exports has increased from 80.8 percent in 1993 to 81.5 percent in 1996.
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Imports to Canada from NAFTA members also increased – particularly for machinery and equipment, communications equipment, automotive equipment, and agricultural products. The share of imports from NAFTA partners in Canada?s total imports has also increased from 69.2 percent in 1993 to 70.2 percent in 1996.
Following already impressive growth since the FTA came into effect on January 1, 1989, Canadian exports to the United States increased by 22 percent in 1994, followed by a further increase of 14 percent in 1995 and 6 percent in 1996 to reach $223.5 billion. Two-way trade also expanded at similar rates to reach $3 8 1.0 billion in 1996. Canada and the United States currently exchange over $1 billion in goods and services each day.
The graphs below demonstrate that trade in machinery and transportation equipment continues to be at the core of trade between Canada and the United States. Since the FTA was implemented, Canadian exports to the United States for manufactured and industrial goods, with their higher value-added component, have steadily increased. Similarly, Canada continues to be the main destination of exports from the United States, the value of which rose by 82.9 percent – $71 billion -between 1988 and 1996.
One important benefit of the NAFTA for Canada is better access to the Mexican market. Canadian firms have been able to expand sales in sectors that were previously highly restricted, such as automotive products, financial services, trucking, energy and fisheries. Also, Canadian exports have become steadily more diversified, with value-added manufactured products accounting for more than 50 percent of total exports to Mexico in 1996. As a result, Mexico is now Canada’s ninth largest export market and fourth largest import source.
Despite the economic adjustments required in Mexico as a result of the financial crisis of December 1994 and its aftermath, Canadian exports to Mexico increased by 5.4 percent to $ 1. 1 billion in 1995, bringing two-way trade to nearly $6.5 billion. Exports to Mexico rose by a further 5.3 percent in 1996, with two-way trade climbing by 10.4 percent to over $7.2 billion. By 1996 the two-way trade between Canada and Mexico represented a doubling of the trade levels registered in 1992. Ongoing market liberalization efforts in Mexico, particularly in the energy, banking, telecommunications and transportation sectors, continue to create opportunities for Canadian exporters. As the Mexican economy evolves and strengthens, the demand for goods and services will continue to increase. Canada is well placed to respond to those needs.
Trade In Services
The value of the two-way trade in services (such as travel, freight and shipping and commercial fees) between Canada and the United States has increased by 71 percent since 1988, growing in value from $30.4 to $52.0 billion in 1996. The NAFTA expanded the extent of coverage under the Canada-U.S. FTA to include virtually all aspects of cross border trade in services. Over the three-year period ending on December 3 1, 1996, Canadian service exports to the United States rose by 16.9 percent, while imports from the United States increased by 11.3 percent. In 1996, exports of Canadian services to the United States and Mexico showed small increases, moderating Canada’s traditional deficit in this sector to some extent.
The fastest-growing component of the services trade has been in the computer and information services area, where there is a high degree of specialization. In fact, bilateral trade between Canada and the United States in informatics services has emerged as one of the fastest-growing in the world. Exports to the United States have also increased in such areas as communications, architecture, engineering and other technical services. Imports of management and advertising services to Canada from the United States have increased for management and advertising services.
Canadian Trade in Services with the United States
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Although the trade in services is on the rise, it corresponds to only 14 percent of total merchandise trade. Given the large contribution of services to Canada’s GDP (almost two thirds) and the rapid growth of the services sector in both economies, this trade is expected to increase in the future.
Trade Liberalization Through Tariff Reduction Commitments
The NAFTA does not affect the tariff phase-out of the Canada-U. S. Free Trade Agreement (FTA), under which virtually all tariffs between the United States and Canada, will be eliminated by January 1, 1998. For trade between Canada and Mexico, the NAFTA will result in the elimination of virtually all tariffs by January 1, 2003.
In addition, the NAFTA provides for the accelerated elimination of tariffs where countries agree. This is an industry-driven process that includes public consultations, involving consumers and other interested parties, whereby the elimination of tariffs is negotiated based on support in the industry sector concerned.
Preliminary figures and studies indicate the extent to which tariff reduction under the FTA and NAFTA have had effects on growth rates of trade. Canadian exports to the United States have grown faster (in both value and volume terms) in some sectors liberalized by the FTA and NAFTA (e.g. industrial machinery, office machinery, textile materials, specialty papers, and consumer goods) than in sectors where tariffs were already low or at zero. Imports from the United States show similar trends (particularly in areas such as clothing, processed food and beverages, furniture, transportation equipment, and household products).
In value terms, between 1988 and 1995, Canadian exports to the United States of products liberalized by the FTA and NAFTA increased by about 140 percent, whereas the increase for exports as a whole was 100 percent. Imports of liberalized products from the United States increased by about 100 percent, while total imports increased by 75 percent.
Investment
The NAFTA has contributed to enhancing Canada’s attractiveness to foreign investors while providing more opportunities for Canadians to invest in NAFTA partners’ economies. The Agreement’s provisions ensure greater certainty and stability for investment decisions by guaranteeing fair, transparent and non-discriminatory treatment of investors and their investments throughout the free trade area. The NAFTA’s contribution to increased productivity – through more competition and better-priced inputs – has also prompted greater capital investment in Canada. Total foreign direct investment (FDI) in Canada increased by 8.7 percent in 1994, 9.3 percent in 1995, and 7.4 percent for a total of $180 billion in 1996.
There have been notable investment gains in financial services, transportation equipment, automobile equipment, chemicals, energy, communications, and food and beverages. Statistics Canada reports that, in 1996, Canada was the world’s third-largest recipient of direct investment by foreign multinational companies, which accounted for $12.0 billion of direct investment from a wide variety of sources. Foreign investors financed a significant portion of their investment through reinvested Canadian profits, benefiting all Canadians. At the end of 1996, 87 percent of FDI was in Canadian subsidiaries.
The United States remains the largest foreign investor in Canada. The stock of direct investment from the United States increased for the fourth straight year, by 9.1 percent in 1996 to $122.7 billion, representing 68 percent of total foreign direct investment in Canada.
The United States also remained the largest destination for Canadian direct investment with a total of $92.9 billion invested abroad, an increase of 7.5 percent in 1996. This represents 54 percent of all Canadian outward investment, an historically low, but relatively stable figure in the last four years.
The signing of the NAFTA has meant more dramatic increases in capital flows between Canada and Mexico. Total Canadian investment in Mexico more than doubled between 1993 and 1994 to $1.07 billion, decreasing slightly to $919 million in 1995, before increasing rapidly in 1996 to $1.3 billion. This made Canada one of the most important sources of new investment in Mexico in 1996. Current Canadian investment in Mexico is concentrated in mining, banking and telecommunications. Further potential exists in sectors such as gas and energy. Mexican investment in Canada is growing, but remains very small.