Conjoncture

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Conjoncture // November 2017  
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In May 2017, Donald Trump triggered a renegotiation of the North American Free Trade Agreement (NAFTA). Some proposals, 23 years  
after NAFTA came into force, aiming to introduce a chapter on the digital economy and strengthen the agreements current  
arrangements, have been generally welcomed. Others, such as a tightening of rules of origin and changes to trade remedies, have  
prompted concern.  
During his election campaign, Donald Trump was a harsh critic of free economy that would guarantee the free movement of data and make it  
trade, holding it responsible for the USAs trade deficit and the decline easier for companies to locate infrastructure wherever they wished. The  
in US manufacturing jobs in the last 30 years.  
three NAFTA members had also reached agreement on these matters  
when negotiating the TPP. However, some of the US administrations  
other proposals have sparked major disagreement. Canada and Mexico,  
presenting a united front, are particularly critical of the USAs desire to  
review anti-dumping or countervailing measures, and to change  
NAFTAs rules of origin.  
Accordingly, after being invested as president in January 2017, Mr  
Trump ended the USAs involvement in the Trans-Pacific Partnership  
(
TPP). That agreement, formed in February 2016 between 12 countries  
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in the Americas and Asia  including Mexico and Canada  had yet to  
be ratified by its signatories and so had not come into force. In August  
2017, the US administration also decided to apply preliminary To assess the issues involved in the NAFTA renegotiation, we will  
countervailing duties to Chinese aluminium foil, which it claims is present, in the first section of this report, its current main provisions. We  
heavily subsidised. In addition to these symbolic decisions, there have will then review the agreements effect on the economies of its member  
been several executive orders, including one requiring strict compliance countries. Finally, we will address the issues arising from the demands  
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with the Buy American Act . The government has also commissioned an made by the US administration.  
enquiry into whether steel and aluminium imports are a threat to  
national security.  
However, Donald Trump is paying particularly close attention to the  
renegotiation of the North America Free Trade Agreement (NAFTA),  
which was formed between the USA, Canada and Mexico in 1992 and  
came into force in 1994. Canada and Mexico are the USAs second-  
and third-largest trade partners behind China. The renegotiation is also  
important for Mr Trumps credibility, since he has suffered several  
political setbacks since he became president. Having threatened, during  
his presidential campaign, to scrap NAFTA if he could not change some  
whereas the USA had for a long time been developing close relations  
of its aspects, Donald Trump started the process of renegotiating it on  
It was mainly the USA that initiated talks to set up a free-trade zone in  
North America. Links between Canada and Mexico were fairly limited,  
with both countries. However, their trade relationships with the USA,  
with which they share both history and a border, have seen differing  
trajectories.  
18 May 2017.  
Some positions adopted by the US administration since the  
renegotiation began have been fairly well received by Canada and  
Mexico. All parties wish to strengthen the agreements labour-related  
and environmental aspects, and to include a chapter on the digital  
The Canada-US Free Trade Agreement: the precursor to NAFTA  
Relations between Canada and the USA, which saw many bouts of  
turbulence until the mid-1930s, changed significantly following the  
signature of the General Agreement on Tariffs and Trade (GATT) by 23  
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United States, Brunei, Chile, New Zealand, Singapore, Australia, Peru, Vietnam,  
countries on 30 October 1947 . The ratification of that agreement,  
Malaysia, Mexico, Canada, Japan  
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The BAA dates from 1933 and, subject to exceptions, requires the US government to  
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prefer US-made goods when making purchases.  
Canada and the USA have been members of GATT since 1 January 1948.  
Conjoncture // November 2017  
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followed by several rounds of talks during the following years, caused had to seek help from the Bank of International Settlements (BIS) and  
the signatory countries to reduce customs duties, quotas and non-tariff the International Monetary Fund (IMF). The IMF granted Mexico a loan,  
barriers on goods.  
on the condition that the country adopts austerity measures and  
liberalise its economy, i.e. promote free trade and foreign direct  
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In 1965, the USA and Canada also ratified the Auto Pact . This was  
more of a managed-trade agreement than a free-trade agreement, but it  
eliminated customs tariffs on auto-industry products5.  
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investment. The Baker plan in 1985 and the Brady plan in 1989 went in  
the same direction. Mexico gradually removed barriers to trade and  
investment from abroad, and became a member of GATT in August  
The USA and Canada went further in 1987, signing the Canada-US 1986.  
Free Trade Agreement (CUSFTA). That agreement, which came into  
President Carlos Salinas de Gortari, elected in 1988, continued to  
force on 1 January 1989, has brought a gradual elimination of customs  
duties and import and export quotas and a reduction in certain non-  
liberalise the Mexican economy. He also started talks aimed at reaching  
a trade agreement with Canada and the USA. Mexico had wanted to  
distance itself from the USA and create closer ties with European  
countries, but the latter, at the time of the fall of the Berlin Wall, had little  
interest in Mexico. As a result, Mexico decided to strengthen its trade  
links with the USA, which was a key trade partner for Mexico even  
before NAFTA. A trade agreement was therefore intended to maintain  
or improve Mexicos access to the US market through the scrapping of  
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tariff barriers on products. The agreement, which was innovative at the  
time, also led to a greater volume of public contracts being open to  
competitive bids from suppliers in both countries. In addition, trade in  
some services, and investment rules, were liberalised. The agreement  
also included a dispute-settlement mechanism to resolve trade  
disagreements.  
NAFTA: the result of an ambiguous relationship between the tariff barriers and the reduction of non-tariff barriers. Mexico was also  
USA and Mexico  
hoping for jobs to be created through greater foreign direct investment  
from Canada and third-party countries, since those countries would be  
more confident that Mexico would no longer adopt protectionist  
measures.  
Mexico and the USA have often had a conflictual relationship, which  
has affected their trade links. The USA has invested massively in  
Mexico since the middle of the 19th century. The initial aim was to  
support Mexicos economy and avoid conflict. However, several events  
have led the USA and Mexico to forge increasingly close links since the  
mid-20th century, particularly at the time of the Second World War,  
during which Mexico supplied commodities and labour to the USA.  
Between 1942 and 1964, millions of Mexicans came to work on US  
farms as part of the Bracero Program. When that agreement expired,  
assembly plants known as maquiladoras, mainly subsidiaries of foreign  
companies, were built in free zones on the border between the two  
countries, in order to provide jobs to Mexican workers. The goods  
produced in those plants used primary materials coming from the USA  
Mutual interest  
At the same time, since the start of the 1980s, the USA had wanted an  
answer to the creation of Europes common market in 1958 and to the  
plan, unfinished at the time, to create the European Union and the  
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eurozone . To achieve that, the USA wanted to set up a free-trade zone  
in North America, in order to reduce production costs by importing  
lower-cost products and make its economy more competitive. The USA  
also wanted to boost Mexicos growth in order to stabilise its political  
situation and contain the flow of immigrants.  
free of customs duties, and most of them were exported to the USA on Canada had less of an interest than the USA in negotiating a free-trade  
preferential terms. The debt crisis in the early 1980s was another agreement that included Mexico. The USA was already Canadas  
turning point. Mexico had to liberalise its economy in order to escape number one trade partner, and Canada had few links with Mexico. It  
the debt crisis that rocked the country in 1982. It had become unable to was also tricky for Canada to start new trade negotiations given the  
finance its external dollar-denominated debt when the US Federal domestic controversy that the Canada-US Free Trade Agreement had  
Reserve raised its interest rates to fight inflation. As a result, Mexico already caused. However, it decided to go ahead with the plan. For  
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The Baker plan offered additional loans to the most indebted countries, mainly in Latin  
The pact was incompatible with WTO rules, and was abolished in 2001.  
The products included cars, trucks, buses, tyres and original auto parts. The agreement  
America, to allow them to continue their economic development.  
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only concerned auto assembly companies already present in Canada. Producers also had  
to meet requirements regarding Canadian content.  
The Brady plan proposed that bank creditors exchanged their claims for securities  
guaranteed by the international monetary authorities and the US Treasury, provided that  
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Except in clearly defined circumstances, such as imports of pornographic material or  
banks wrote off some of their claims and put money back into the system.  
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The Treaty of Rome was signed in March 1957.  
agricultural products.  
Conjoncture // November 2017  
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Canada, a bilateral deal between the USA and Mexico would have public-sector contracts that is no less favourable than it gives to its own  
created a risk of seeing Canadian goods compete directly with US products and local suppliers.  
products incorporating Mexican components unavailable to it. Canadian  
However, NAFTA contains certain exceptions. Some services are  
products could also have found themselves in direct competition with  
excluded, such as public services, transport and, in Canadas case,  
Mexican goods in the US market. In that scenario, foreign investors  
healthcare and social services. NAFTA expressly lists the public-sector  
might have focused on the US market, which would have given them  
companies covered. For example, the US Agency for International  
free access to the US, Mexican and Canadian markets, unlike an  
Development is excluded from NAFTA when it provides foreign aid. The  
investment in Canada.  
US and Canadian agriculture ministries may exclude from the  
In 1990, therefore, the USA, Canada and Mexico started discussions agreement purchases of agricultural products under farm support or  
with the aim of reaching a trade agreement. Talks started in 1991 and food aid programmes. Certain contracts can also be reserved, in the  
ended in December 1992 with the signature of the North American Free USA and Canada, for small companies and those owned by members  
Trade Agreement or NAFTA. It came into force on 1 January 1994, one of minorities.  
year after the Maastricht Treaty that gave rise to the EU.  
Federal states and provinces must also be consulted, and are only  
encouraged to open up their contracts. However, the 1994 Agreement  
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on Government Procurement (GPA) , ratified by Canada and the USA  
as part of the WTO, along with the 2010 Canada-US Agreement on  
Government Procurement, have led federal states and provinces to  
open their public-sector contracts up to a little more competition.  
Gradual reduction in customs duties and goods quotas...  
NAFTA, which was based on the previous CUSFTA, was intended to  
scrap customs duties on goods and start a process to eliminate  
regulations and other non-tariff barriers, i.e. bans or restrictions on  
Support for investment  
imports and exports. The aim was also to remove duties, taxes and Each party also undertook to treat investors and investments from other  
costs on exporting goods to another partys territory. On 1 January 2008, NAFTA members no less favourably than their own investors and those  
the last of North Americas customs duties and quotas were scrapped.  
from third countries. In particular, a NAFTA member cannot require an  
investor from another NAFTA country to grant its nationals a minimum  
stake in a company located on its territory or to ensure that its  
production includes minimum national content.  
.
..and in technical barriers to trade  
NAFTA members must accept the technical regulations and results of  
conformity assessments of the other parties, except where there are  
issues of security, protection of the lives and health of people and  
Liberalisation of the service sector  
animals, the preservation of plants and environmental or consumer NAFTA members must treat the other NAFTA members service  
protection. Each party must also treat its partners no less favourably providers, except for providers of financial and aviation services, in the  
than it treats similar products or service-providers from any other same way as it treats its own providers and those of third countries  
country. NAFTA members, which must apply international standards (“Most favoured nation” treatment). The agreement also intends to  
and particularly those of the International Organization for favour the practice or professional recognition of professional service  
Standardization (ISO), must also make their respective standards or providers, particularly lawyers, and to give engineers a temporary right  
conformity assessment procedures compatible, and ensure that their to work. NAFTA members must guarantee the protection of intellectual  
property (patents, trademarks, copyright, geographical indications 12  
etc.), and facilitate the temporary presence of businesspeople from  
certain professions so that they can make business trips across North  
America.  
respective standardisation organisations co-operate.  
Liberalisation of public procurement  
As part of NAFTA, each country must give to the other members, where  
the amount of a contract is above a certain threshold , access to  
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0
10  
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This agreement applies above certain thresholds. For federal public-sector entities  
The aim of the GPA is the mutual opening-up of government procurement. However,  
between 1 January 2016 and 31 December 2017, the contract amount must be at least  
USD 77,533, or USD 89,600 for services, and USD 10.08 million for construction services.  
For public-sector companies, the contract amount must be at least USD 387,667 for  
products and services, and USD 12.4 million for construction services.  
Mexico is not a signatory to that agreement.  
An indication is used to identify a product as coming from a party's territory, or a region  
or place in that territory, in cases where a specific quality, reputation or other  
characteristic of the product can be attributed essentially to its geographical origin.  
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Finally, the agreement created official dispute-settlement mechanisms, labour discrimination for reasons such as race, religion, age or sex,  
helping to resolve disagreements related to trade and investment equal remuneration between men and women, the prevention of  
between the various parties, and is accompanied by two related accidents at work and occupational illnesses, compensation in the event  
agreements.  
of accidents at work and occupational illnesses, and the protection of  
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migrant workers .  
NAFTAs related agreements  
NAFTA members also formed two other agreements, the North  
American Agreement on Environmental Cooperation (NAAEC) and the  
North American Agreement on Labor Cooperation (NAALC), which both  
came into force in 1994.  
The first agreement aims to encourage greater environmental protection  
across the territory covered by NAFTA. It gave rise to the Commission  
The USA is the hub for regional trade  
for Environmental Cooperation (CEC), which aims to increase There are close ties between NAFTA countries. Canada and Mexico are  
environmental co-operation between the three parties. Each party must important for the USA given their respective clout in the world economy.  
also ensure that the activities over which it has jurisdiction do not Canada accounted for 1.3% of the worlds GDP in 2016 and Mexico  
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damage the environment of the other parties. For example, each party 1.9% , and they are the USAs number one and number two export  
must ban exports to the other parties of any pesticide or toxic substance markets respectively. According to the IMF, 18.3% of the USAs goods  
that is banned in its own territory. A party that breaches its exports went to Canada in 2016 and 15.9% to Mexico (see chart 1).  
environmental obligations may be subject to the same type of dispute-  
US goods exports by country  
settlement procedure as those included in NAFTA for commercial  
obligations.  
%
0
of total  
3
However, parties retain some leeway in determining their own  
environmental policies. Accordingly, the agreement does not affect the  
partiesexisting rights and obligations under other international  
agreements relating to the environment. Parties also have the sovereign  
right to exploit their resources in accordance with their own  
environmental and development policies. Above all, however, the  
parties have the right to establish and modify their own environmental  
and development policies. In addition, no party can ask for its  
environmental legislation to be applied in the territory of another party.  
China  
Canada  
Mexico  
EU  
25  
20  
15  
1
0
5
0
1
992  
1996  
2000  
2004  
2008  
2012  
2016  
The second agreement requires each member to apply its labour  
legislation effectively, and is intended to foster greater co-operation  
between NAFTA members. Again, however, members still have some  
leeway. The agreement is not intended to establish minimum  
requirements. Members have the right to determine their own labour  
standards and to modify their legislation in that area. The agreement  
only sets out certain labour-related principles, for information only.  
Those principles cover freedom of association and the protection of the  
right to organise, the right to collective bargaining, the right to strike, the  
prohibition of forced labour, protection for children and young people in  
Chart 1  
Source: IMF  
Similarly, Canada accounted for 12.7% of the USAs imports in 2016  
and Mexico 13.4%. However, Mexico and Canada account for only a  
small proportion of the USA’s trade deficit (4.1% of GDP in 2016)  
compared with the volume of their trade. The USAs trade with Mexico  
resulted in a US trade deficit of USD 70.5 billion in 2016 according to  
the BEA (Bureau of Economic Analysis), i.e. 9.4% of the USAs total  
deficit, while trade with Canada accounted for only 2.2% of the USAs  
trade deficit (see chart 2).  
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relation to work, minimum employment standards , the eradication of  
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Granting migrant workers in one party's territory some of the same protection granted by law to  
that party's nationals regarding work conditions.  
The USA, Mexico and Canada rank 2nd, 12th and 17th respectively in the World Bank's  
league table. GDP is expressed at purchasing power parity and in current international dollars.  
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15  
The establishment of minimum labour standards, such as the minimum wage and overtime  
pay, for employees including those not covered by collective agreements.  
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US trade balance by country (in billions of USD)  
Canadian goods exports by country  
% of total  
USD bn  
0
% of GDP0  
% of total  
10  
90  
United States  
-
-
-
-
-
1
EU  
-
-
-
-
200  
400  
600  
800  
8
5
8
6
4
2
0
2
3
4
5
80  
7
5
0
7
China  
Mexico  
Others  
Mexico  
Canada  
China  
EU  
-6  
-7  
Trade balance  
-
1000  
65  
2
000 2002 2004 2006 2008 2010 2012 2014 2016  
1992  
1996  
2000  
2004  
2008  
2012  
2016  
Chart 2  
Source: BEA  
Chart 3  
Source: IMF  
Mexican goods exports by country  
0 % of total  
86  
The USA, which accounted for 15.5% of world GDP in 2016, is the main  
trading partner of both Mexico and Canada. In 2016, 81.3% of Mexicos  
goods exports and 76.4% of Canadas goods exports went to the USA,  
while almost 46% of Mexicos imports and 52.2% of Canadas imports  
came from the USA (see charts 3 and 4).  
% of total  
9
United States  
8
6
4
2
0
EU  
However, there are few direct links between Mexico and Canada. Only  
82  
2.8% of Mexicos goods exports went to Canada in 2016, and only 1.5%  
of Canadas goods exports went in the opposite direction. Canada  
imports more from Mexico (6.2% of its total goods imports in 2016) than  
Mexico imports from Canada (2.5% of its imports), but they remain  
closely linked because of their strong ties with the USA.  
78  
Canada  
2012  
7
4
0
7
1992  
1996  
2000  
2004  
2008  
2016  
Production chains distributed across North America  
Chart 4  
Source: IMF  
The high level of trade between NAFTA members arises mainly  
because value chains have been deployed in their territory. US  
companies have a major presence in Canada and Mexico, showing how  
Integrated auto production  
integrated the NAFTA economies are. According to the IMF, in 2015 the The auto sector is probably the one that best illustrates the integration  
USA alone accounted for almost half of Canadas foreign direct of NAFTA economies, because the import content of exports is high in  
investment stock and 43.7% of Mexicos, whereas Canada accounted that industry, and because there is heavy trade in vehicles and auto  
for only 8.6% of the USAs FDI stock and Mexico 0.5% (see figures 5 parts. Transport equipment, alongside industrial supplies and materials,  
and 6). The import content of NAFTA members exports also shows the are the goods most traded between the USA and its NAFTA partners  
deployment of production chains within the region. OECD figures show (see charts 7 and 8). According to 2016 figures from the Bureau of  
that, in 2011, 9.4% of the value added of goods exported by Canada Economic Analysis (BEA), the USA exported almost 60% of its vehicles  
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and 11.6% of those exported by Mexico came from the USA. The total and auto parts to its NAFTA partners . Canada is the USAs number  
import content of exports is much lower in the USA (15% in 2011) than one export market in this sector, slightly ahead of Mexico. Similarly,  
in Canada (23.6%) and Mexico (31.7%), but NAFTA members still almost half of the USAs imports of vehicles and auto parts came from  
contribute to it. Canada accounts for 2.2% of the value added of US Canada and Mexico (12.6% and 42.9% respectively in 2016). According  
exports, and Mexico 1.3%.  
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According to 2015 figures from the International Trade Administration (ITA), the USA  
exported almost 75% of its auto parts to its NAFTA partners.  
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to UNCTAD, 73% of Mexican vehicle exports are destined to the USA  
and almost 95% of Canadian vehicle exports.  
US goods imports from Canada by products in 2016  
Capital goods  
except  
automotive  
Others  
7.8%  
The auto sector is therefore highly integrated. The USA produces  
almost a quarter of the content of the vehicles it imports from Canada  
Foods, feeds &  
beverages  
8.4%  
11.8%  
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7
and Mexico according to a PIIE study . These figures are not directly  
comparable with the OECDs, which take into account all transport  
equipment, i.e. vehicles, parts and components. However, they show  
that in 2011, the USA was the origin of almost 18% of the value added  
Automotive  
Consumer  
vehicules,  
Parts, and  
Engines  
22.9%  
goods except  
Food and  
Automotive  
6.3%  
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8
of vehicles imported into Mexico and almost 26.4% of the value added  
of vehicles imported into Canada.  
Industrial  
supplies and  
materials  
Inward investment position in Canada by country in 2015  
42.9%  
Chart 7  
Source: BEA  
Others  
17.9%  
US goods imports from Mexico by products en 2016  
Mexico  
.2%  
0
Others  
3.7%  
Foods, feeds &  
beverages  
8.3%  
United States  
0.4%  
Capital goods  
except  
automotive  
5
European  
Union  
29.8%  
31.5%  
Automotive  
vehicules,  
Parts, and  
Engines  
Consumer  
goods except  
Food and  
35.9%  
Chart 5  
Source: IMF  
Industrial  
supplies and  
materials  
Automotive  
Inward investment position in Mexico by country in 2015  
12.6%  
9.7%  
Chart 8  
Source: BEA  
Canada  
Others  
5
.5%  
10.6%  
However, despite the high level of trade, it is hard to gauge NAFTAs  
direct impact on its member countries over the last 20 years. The  
agreement was formed at a time when global trade was becoming more  
liberalised in any case due to the creation of the WTO (World Trade  
Organization) and the adoption of a new set of agreements that lowered  
average customs duties on manufactured goods. The most-favoured-  
nation tariff for all NAFTA countries fell sharply in the 1990s and 2000s.  
All of these factors, combined with technological progress, allowed  
companies to benefit fully from the comparative advantages of the  
various participants in global trade. During the 1990s, transport  
improvements and new information and telecommunication  
technologies made it easier and quicker to co-ordinate tasks across  
increasingly long production chains, spread across a growing number of  
production hubs located some distance away from each other.  
United States  
3.7%  
4
European  
Union  
40.2%  
Chart 6  
Source: IMF  
17  
Caroline Freund, A US Content Requirement in Nafta could hurt manufacturing, PIIE, 14  
September 2017  
18  
Automobiles, trailers and semi-trailers  
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The issues raised by NAFTA also vary between economies, which in 2016 as it was in 1993. However, it is hard to distinguish the impact  
differed substantially in the mid-1990s and still do today. This is shown that NAFTA has had from that of globalisation in the world economy and  
by the wealth gap between the USA and Canada on the one hand and Mexicos domestic policies. It seems that the Mexican economys  
Mexico and the other. GDP per capita in the USA was almost three persistent difficulties also result from deficiencies in its banking sector  
times higher than Mexicos in 2016, and Canadas 2.5 times higher (see and a lack of control over public spending. These factors have restricted  
chart 9).  
investment, technical progress and productivity growth in the last few  
years. Stagnating real wages, resulting from limited productivity growth,  
have weighed on Mexican households real incomes .  
GDP per capita (in thousands of international dollar (PPP))  
2
3
7
6
5
4
3
2
1
0
0
0
0
0
0
0
0
Moreover, Mexico seems to be playing an increasing role in global trade.  
Trade between Mexico and its NAFTA partners increased sharply  
between 2000 and 2014, although more slowly than its trade with third  
countries. Mexicos exports to the USA doubled between 2000 and  
United States  
Canada  
7.5  
Mexico  
5
4
4.0  
2014 and its exports to Canada tripled, but those to its other trade  
partners quadrupled. Similarly, Mexico is importing increasing amounts  
of Chinese products. In 2016, 18% of Mexicos goods imports came  
from China, which was only a marginal trade partner of the country in  
the early 1990s.  
26.5  
21.3  
17.9  
8.5  
NAFTAs limited impact on Canadian trade  
1993  
2016  
Source: World Bank  
NAFTA seems to have had much less impact in Canada than in Mexico.  
According to the Caliendo and Parro study (2014), intra-zone trade  
increased by only 11% in Canada between 1993 and 2005 because of  
lower customs tariffs alone, and welfare fell 0.06%. According to a study  
by Gary Clyde Hufbauer, Cathleen Cimino and Tyler Moran, Canadas  
GDP has grown an extra USD 50 bn, equal to around 4%, through  
higher trade in NAFTA in 2013.  
Chart 9  
Smaller-than-expected impact for Mexico  
NAFTA seems to have tied Mexico a little more closely to the North  
American market. A study by Caliendo and Parro (2014) shows that  
Mexicos trade within NAFTA grew 118% between 1993 and 2005  
through lower customs tariffs alone . According to a study by Gary  
Clyde Hufbauer, Cathleen Cimino and Tyler Moran , Mexicos GDP However, NAFTA does seem to have influenced the structure of  
has grown an extra USD 170 bn, equal to around 13.5%, through higher Canadas trade. Mexico has played an increasing role in Canadas trade  
1
9
2
0
2
1
trade within NAFTA in 2013.  
over the last 23 years. Canadas goods imports from Mexico rose by a  
factor of around 9.5 between 1993 and 2016, while those from non-  
NAFTA countries rose by a factor of around 3.5. As a result, 6.2% of  
Canadas goods imports came from Mexico in 2016, versus 2% in 1993.  
However, NAFTA does not seem to have fully lived up to its members’  
expectations. Welfare, which is measured by trade and the terms of  
2
2
trade , has increased only 1.31% in Mexico, according to the Caliendo  
and Parro study. Similarly, the gap between Mexico and the USA in The situation is more nuanced in the USA. The USA accounted for  
terms of GDP per capita (at purchasing power parity) was just as wide much of the increase in Canadas trade between the early 1990s and  
2000, and is still Canadas main trading partner. However, Canada has  
been diversifying its export markets, selling more to the EU, and has  
been importing more goods from Mexico and China since the late 1990s.  
The USAs share of Canadas total goods imports has therefore fallen,  
from almost 65% in 1993 to 52.2% in 2016. The same is true of the  
USAs direct investments in Canada, although its FDI stock almost  
quintupled between 1993 and 2016. In 2016, the USA owned almost  
1
9
Caliendo, L., and F. Parro (2015), Estimates of the Trade and Welfare Effects of NAFTA,  
Review of Economic Studies, July 2014.  
The study selected that timeframe because, in 1993, customs duties averaged 12.5% in  
20  
Mexico, 4.2% in Canada and 2.7% in the USA, but became almost non-existent within  
NAFTA from 2005 onwards.  
21  
Gary Clyde Hufbauer, Cathleen Cimino and Tyler Moran, NAFTA at 20: Misleading  
Charges and Positive Achievements, Peterson Institute for International Economics, May  
2
014  
2
Welfare effects include trade in volume and terms of trade effects. The terms of trade  
2
23  
represent the relationship, for a given product, between the export price index and the  
import price index.  
Sylvain Bellefontaine and Tarik Rharrab, Mexico: US anchor called into question,  
Conjoncture, February 2017  
Conjoncture // November 2017  
economic-research.bnpparibas.com  
9
half of Canadas FDI stock, but that proportion has been falling since regarding NAFTA centres on its impact on jobs and wages.  
the early 2000s in favour of the EU and to a lesser extent China.  
Manufacturing employment as a proportion of total employment fell  
sharply in the 1990s and 2000s: having been 16.8% in 1990, it fell to  
The diversification of trade has accompanied the rise of Asian countries  
and their integration within global value chains. The fall in Canada’s  
10.2% in 2016 (see chart 11).  
export share in the USA market also reflects the deteriorating As a result, a number of studies have looked at NAFTAs impact on  
competitiveness of the Canadian economy relative to the USA because manufacturing employment and wages. Most of them show that  
of weak productivity growth. In addition, the Canadian dollar NAFTAs total impact in the USA is sometimes positive, but always  
appreciated in the mid-2000s (see chart 10).  
limited. The Caliendo and Parro study (2014) suggests that the  
reduction in customs duties was accompanied by a 0.11% increase in  
US real wages between 1993 and 2005. The study by John McLaren  
and Shushanik Hakobyan also estimates that NAFTA has had little  
overall effect.  
NAFTAs patchy impact on US employment  
According to the same Caliendo and Parro study (2014), intra-zone  
trade increased by 41% in the USA between 1993 and 2005 because of  
lower customs tariffs alone, and welfare rose 0.08%. According to a  
study by Gary Clyde Hufbauer, Cathleen Cimino and Tyler Moran, the  
USAs GDP has grown an extra USD 127 bn through higher trade in  
24  
However, the impact has been significant for a small proportion of  
workers. The McLaren and Hakobyan study shows a reduction in wage  
growth for workers in industries and regions that have seen competition  
from Mexico. They also show that service-sector employees in those  
regions are also affected, even if they have not seen direct competition  
from Mexican employees. These employees are in competition with  
people who originally worked in an industry affected by NAFTA and who  
are looking for a new job in services. As a result, wage growth in an  
industry that saw reduced customs duties under NAFTA was, between  
2
013, equal to around 0.8% of GDP. In the USA, however, the debate  
Real effective exchange rate - Unit labour cost based  
1
40 1992=100  
United States  
Canada  
Mexico  
130  
120  
110  
100  
1990 and 2000, 17 points lower than in an industry that had not been  
affected by NAFTA. In addition, the wage growth enjoyed by an  
employee leaving secondary education was, between 1990 and 2000,  
eight points lower than that of an employee working in a region not  
affected by NAFTA.  
90  
80  
70  
60  
As a result, NAFTAs has caused jobs  particularly the least skilled  
jobs to shift from the manufacturing sector to higher-value-added  
sectors. This fits with the HOS (Heckscher-Ohlin-Samuelson) model,  
which postulates that it is in a countrys interest to export goods for  
which the required factors of production are relatively abundant (and  
therefore cheaper), i.e. skilled labour in the USA, and import goods for  
which the required factors of production are relatively rare, in other  
words unskilled labour.  
1992  
1996  
2000  
2004  
2008  
2012  
2016  
Source: BEA  
Chart 10  
Share of manufacturing employment in total employment  
%
21  
19  
17  
15  
13  
11  
9
United States  
Canada  
Mexico  
However, the loss of manufacturing jobs is not solely due to free trade  
in general and NAFTA in particular. Other studies suggest that it is also  
the result of the technological progress that took place in the 1990s and  
2
000s. A study by Michael Hicks and Srikant Devaraj 25 posits that  
24  
John McLaren et Shushanik Hakobyan, Looking for Local Labor-Market Effects of  
1995  
1998  
2001  
2004  
2007  
2010  
2013  
201  
NAFTA, University of Virginia, Fordham University, June 2015  
25  
Michael Hicks, Srikant Devaraj, The Myth and the Reality of Manufacturing in America,  
Ball State University, June 2015 and April 2017  
Chart 11  
Source: OECD  
Conjoncture // November 2017  
economic-research.bnpparibas.com  
10  
productivity growth was behind 87% of job losses in the manufacturing property and avoid improper use of geographical indications by its  
sector between 2000 and 2010.  
NAFTA partners. The USA wants environmental protection measures to  
be an integral part of NAFTA, rather than merely being mentioned in an  
annex. However, it remains unclear how demanding the USA will be in  
terms of environmental protection, especially given that it has withdrawn  
from the Paris climate agreement, which Canada and Mexico have  
signed. Some proposals have been fairly well received by Canada and  
Mexico. However, others have been more controversial.  
From the outset, NAFTAs negotiators made provisions for the  
agreement to be amended, provided that modifications or additions be  
approved in accordance with the legal procedures of each party. On 18  
May 2017, therefore, the US administration initiated the process of Employment law and the protection of workers  
renegotiating NAFTA, notifying its intention to Congress in writing, and  
The USA wants worker protection measures to be an integral part of  
was able to start talks with its trade partners on 16 August once the  
required 90-day period for consultation with Congress had expired.  
Since then, NAFTA members have held several sets of meetings .  
However, there will be many obstacles to reaching a new agreement  
given the differing viewpoints of NAFTA members.  
NAFTA, rather than merely being mentioned in an annex.  
It is asking NAFTA members to recognise and incorporate in their own  
legislation the fundamental labour standards defined by the  
International Labour Organization (ILO), i.e. the freedom of association  
and the effective recognition of the right to collective bargaining, the  
elimination of forced or compulsory labour, the effective abolition of  
child labour and the elimination of discrimination in respect of  
employment and occupation. Member countries will have to adopt a  
legal framework enshrining a minimum wage, working time rules and  
health and safety at work.  
2
6
Consolidating existing rules  
In July 2017, the Office of the United States Trade Representative  
published the US administrations general aims in the talks. In the report,  
the USA reasserted its intention to reduce its intra-NAFTA deficit. There The USAs demands in this area echo Donald Trumps criticism of  
is no longer any intention to bring back customs duties, but to attack NAFTA, i.e. that it encourages companies to move manufacturing jobs  
non-tariff barriers which, and in certain areas such as agriculture, are to Mexico, where labour laws are less strict than in the USA. However,  
still too numerous and discriminatory from the US point of view. The talks in this area could be of limited effect. They involve minimum rules  
report calls for greater compatibility between the various parties with which Canada, the USA and Mexico, as members of the ILO, are  
regulations, particularly regarding sanitary and phytosanitary measures. already required to comply. In addition, Mexico has ratified more ILO  
The USA also wants co-operation and transparency in technical trade conventions than its partners, and although the proportion of unionised  
barriers, requiring NAFTA members to publish their technical employees in Mexico is low (13.5% in 2014), it is slightly higher than in  
2
7
regulations and conformity assessment procedures, and to promote the the USA (10.7% in 2014) . Of course, the minimum wage is lower in  
use of international regulations and procedures, particularly those of the Mexico than in the USA and Canada, but protection for permanent and  
WTO.  
temporary jobs is weaker in the USA and Canada than in Mexico (see  
chart 12).  
The USA wants to NAFTA members to guarantee fair competition in the  
service sector, and particularly in telecoms and financial services, by Improving access to government procurement contracts  
combating discrimination against foreign providers and favouring cross-  
border data flows. Similarly, public-sector companies must ensure equal  
treatment when buying or selling goods and services. Competition must  
also not be skewed by the granting of subsidies. The USA wants  
customs procedures to be more transparent, simpler and faster, and  
wants to streamline the customs processing of shipments. It also wants  
to take fuller account of WTO recommendations regarding intellectual  
The USA wants to make it easier for US companies to access  
government procurement contracts in Canada and Mexico. However, it  
wants the agreement to maintain national preference for small  
companies and those led by women or members of minorities, and to  
exclude the defence sector as well as procurement contracts granted by  
federal states and local authorities. The USA is also demanding that the  
Buy American Act continue to apply where local projects benefit from  
federal aid. Government procurement procedures must also be  
2
6
Meetings have taken place in turn in the USA, Mexico and Canada, on 16-20 August, 1-  
September, 23-27 September, 11-15 October and 17-21 November 2017.  
27  
5
In Canada, 26.5% of employees were unionised in 2014.  
Conjoncture // November 2017  
economic-research.bnpparibas.com  
11  
3
0
Real annual minimum wage  
exceptions to safeguard measures . These measures, which allow a  
country temporarily to restrict imports of a given product, must be  
applied non-selectively within the WTO framework (i.e. in accordance  
with the most-favoured-nation principle). However, NAFTA states that,  
without exception, safeguard measures of a member country must only  
apply to imports from countries outside NAFTA.  
USD  
20 000  
16 000  
12 000  
A very small proportion of imports from Canada and Mexico is currently  
subject to US restriction measures. According to work done by the  
Peterson Institute for International Economics (PIIE) , 1.6% of imports  
8
4
000  
000  
0
Canada  
Mexico  
United States  
3
1
from Mexico and 1% of imports from Canada were, in 2016, subject to  
3
2
sanctions under US trade laws . By comparison, 9.2% of the USAs  
imports from China and 2.7% of imports from the rest of the world  
1
993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015  
(
excluding China and its NAFTA partners) were subject to the same  
Chart 12  
Source: OECD  
restrictions.  
This apparent tolerance originates from the high level of integration  
between the NAFTA economies. The major corporations that are  
susceptible, because of their size, to request that the US government  
apply sanctions, also usually have a presence in the other NAFTA  
countries. As a result, they would also suffer from any sanctions  
imposed on Canada and Mexico. Tolerance also results from the  
disapplied in certain cases, in order to protect national security,  
intellectual property and the lives and health of humans, animals and  
plants. These provisions are the same as in the WTOs Agreement on  
Government Procurement (GPA), which came into force in 1996 with  
the aim of mutually opening up government procurement contracts, and  
has been signed by Canada and the USA.  
NAFTA clauses allowing member countries to disapply safeguard  
measures and challenge anti-dumping measures 33 or countervailing  
Possible changes to trade remedies  
The US administration, which intends to limit imports from Canada and measures taken against them.  
Mexico, wants to change anti-dumping and countervailing measures28  
As a result, intense negotiations are taking place regarding the  
relating to those imports. In particular, it wants to scrap the dispute-  
settlement mechanism described in Chapter 19 of NAFTA, which  
ensures that member countries comply with legal procedures and  
procedures relating to the establishment of evidence before imposing  
sanctions (anti-dumping or countervailing measures). In particular, the  
dispute-settlement mechanism guarantees a certain level of neutrality  
when resolving a dispute, and prevents these matters being dealt with  
scrapping of the dispute-settlement mechanism and of the exception to  
safeguard measures. Canada and Mexico want to be able to continue  
protecting themselves against trade retaliation measures taken by the  
USA. They could even ask for NAFTA to limit the USAs use of national  
security laws, fearing that the USA will abuse them for the sole purpose  
of reducing imports from Canada and Mexico. Otherwise, the scrapping  
of the dispute-settlement mechanism and of the exception to safeguard  
measures could trigger a trade war between the three parties and  
destroy the benefits of NAFTA.  
2
9
before a national court . The US administration also wants to remove  
28  
According to the WTO, these measures, which allow a country temporarily to restrict  
3
0
imports of a given product, are "emergency" actions that can be taken when an absolute  
or relative increase in imports of a given product causes, or threatens to cause, serious  
injury to the importing member's domestic industry. The measures can consist of  
quantitative import restrictions (quotas) or of duty increases to higher than bound rates.  
Safeguard measures may apply if imports from one party, regarded separately, make  
up a substantial proportion of total imports or if imports from one party regarded  
separately or, in exceptional circumstances from other parties regarded collectively,  
contribute materially to the serious injury caused by imports.  
29  
31  
The process starts with government-to-government consultation. Dispute-settlement  
Chad P. Bown, Steel, Aluminum, Lumber, Solar: Trump’s Stealth Trade Protection,  
provisions state that a party may "request a meeting of the NAFTA Free-Trade  
Commission (comprised of the Trade Ministers of the Parties). If the Commission is  
unable to resolve the dispute, a consulting Party may call for the establishment of a five-  
member arbitral panel. "The parties have established several national rosters of  
individuals, who must be of high standing and repute and have been chosen strictly on the  
basis of objectivity, reliability, sound judgement and with a general familiarity with  
international trade law."  
June 2017, PIIE Chad P. Bown, Trump’s Renegotiation Could Take the “Free” Out of  
NAFTA’s Trade, July 2017, PIIE  
3
2
These laws include anti-dumping, safeguard, countervailing duty and national security  
measures.  
Dumping is the practice by which a company exports a product at a price lower than its  
33  
normal value, i.e. lower than the price applied "in the ordinary course of trade, for the like  
product when destined for consumption in the exporting country".  
Conjoncture // November 2017  
economic-research.bnpparibas.com  
12  
Tougher rules of origin  
As a result, the changes could prompt carmakers to flout the rule or  
move production outside of North America, so that they can use  
cheaper components, even if they have to pay, in both situations,  
In 1994, NAFTA defined the rules of origin that are used to determine  
whether a product can benefit from preferential treatment. In particular,  
the rules are designed to ensure that a product traded within NAFTA is  
not a product that has come from a third country and undergone minor  
transformation, or that has been imported from a third country by the  
NAFTA member that has the lowest customs duties. Currently, a  
product originates in a partys territory if it is entirely obtained or  
produced in the territory of one or more parties, or if, through  
transformation, it has changed its classification within the Harmonized  
System (HS) of the World Customs Organization. In other words, its  
classification must be different from that of the non-originating material  
used to make it. The extent of the required transformation varies  
according to the product, but it may need a change of chapter, identified  
by the first two digits of the six-digit HS nomenclature. That would  
require substantial transformation of non-originating products. Aside  
from that requirement, a product may need to have a minimum regional  
value content. As a result, rules of origin vary by product, which  
explains their complexity and the scale of administrative costs involved  
when companies want to obtain a certificate of origin. In the auto sector,  
the required regional value content for a vehicle may be as much as  
3
5
customs duty of 2.5% when selling their vehicles in the USA . A  
company will be even less inclined to produce components in North  
America if the price of components made in a third country is lower than  
that of components made in NAFTA countries, and if the gap between  
the customs duty on the final product and the preferential tariff is small.  
The rules of origin could therefore have the opposite effect on US  
production from the one the US administration is seeking, especially  
since they could affect competitiveness in other sectors. The US  
approach could also prompt Canada and Mexico to take similar action,  
demanding a change to the rules of origin when a product or type of  
product gives rise to a large trade deficit.  
All of these areas of disagreement could slow the pace of the talks, at a  
time when there are certain major events scheduled for 2018. Mexico  
will hold a general election in July 2018 and the USA will hold elections  
for all seats in the House of Representatives and a third of seats in the  
Senate in the November 2018 mid-term elections. These elections  
could make life harder for Donald Trump, because of the procedure that  
needs to be followed and the timeframe involved for a trade agreement  
to be approved by Congress. This fast-track Trade Promotion Authority  
6
2.5% of the net cost 34 . That means that 62.5% of a vehicles  
components must come from NAFTA members, and only components  
that fully originate from NAFTA members are included in that proportion.  
(
TPA) procedure, after which Congress will accept or reject the  
agreement negotiated by the administration without being able to table  
amendments, involves certain requirements to be met before and after  
an agreement is reached. Once the President has reached a trade  
agreement with the USAs partners, it takes 105 days before the text  
can be officially presented to Congress, during which time it is subject to  
various examinations. Then, it takes another 75-90 days before it can  
be put to a vote in Congress. In addition, this legislative procedure,  
which gives the US government extended powers regarding trade  
negotiations, expires on 1 July 2018 and will have to be prolonged by  
the President with the agreement of both houses of Congress until 30  
June 2021.  
The USA wants to change these rules of origin in order to support its  
national production. It wants goods produced in the USA to include a  
greater proportion of goods produced in North America and the USA. It  
has the auto industry particularly in its sights, given the large portion of  
the US trade deficit attributable to it. The USA is apparently demanding  
that 85% of a vehicles components come from North America and 50%  
from the USA.  
However, it is not clear how changing the rules in this way will affect  
production in North America and the USA. The changes would generate  
additional costs. Companies could have to bear major costs in order to  
overhaul their production lines, which are already complex.  
The USAs demands should be seen in the light of the current  
Competitiveness damaged by the introduction of customs duties  
composition of vehicles produced in North America. Revamping the  
rules of origin in this way could therefore damage the competitiveness If NAFTA is abolished and in the absence of bilateral agreements, trade  
of companies operating in North America. It would make it even harder between NAFTA members would be governed by WTO rules. Members  
for them to purchase components from the most competitive suppliers.  
35  
NAFTA members must comply with the most-favoured-nation clause, which means that  
3
4
Net cost, which is the method favoured by NAFTA, is the total cost less sales promotion,  
a WTO member cannot discriminate between its trade partners. In other words, customs  
duties levied on a given country's imports cannot be higher than those levied on imports  
from the country with most-favoured-nation status.  
marketing and after-sales service costs, royalties, shipping and packaging costs and  
interest costs.  
Conjoncture // November 2017  
economic-research.bnpparibas.com  
13  
could then more easily reintroduce non-tariff barriers (technical Auto sector hit hard  
regulations, standards and conformity assessments, sanitary and  
38  
According to a CEPII study examining how scrapping NAFTA would  
affect the auto sector, production would fall for all NAFTA members, but  
Mexico and Canada would be particularly badly affected because of  
their favoured position in the auto production chain. Mexicos production  
would fall by 17% and Canadas by 24%, while US production would  
decline only 1% because of lower sales to Canada. As a result, the USA  
would lose scale in the auto market, and would risk being less influential  
on the definition of standards and regulations in force in the sector.  
phytosanitary measures etc.) and customs duties, provided that they  
comply with the most-favoured-nation principle, which means that a  
WTO member cannot discriminate between its trade partners. These  
customs duties, which currently average 3.5% in the USA, 4.1% in  
Canada and 7% in Mexico, can be very high, particularly on agricultural  
products.  
Scrapping NAFTA would therefore damage the competitiveness of US  
companies and their sales in both the USA and third countries. US  
companies operating in Mexico would suffer from the higher cost of  
semi-finished goods imported from the USA and used in their  
production processes, because of the application of customs duties,  
especially since certain components cross the border several times  
before the finished product is assembled.  
Adjustment of activity in Canada  
In Canada, some products would suffer from high customs duties,  
particularly in the agriculture, textiles and apparel sectors. However,  
3
9
according to a study by the Canadian Centre for Policy Alternatives ,  
almost 40% of Canadas exports to the USA  consisting mainly of  
natural gas, hydroelectricity and aircraft  are currently subject to zero  
customs duties under the MFN principle. As a result, those exports  
would not be affected by the application of WTO rules. In addition, two  
thirds of Canadas other exports are subject to duties of 3% or less. The  
IMF estimates that Canadas real GDP would fall by 0.4% in the short  
term if the USA applied an average MFN customs duty of 2.1% to its  
imports from Canada and in the absence of retaliation. The reduction in  
external demand would damage the profits of businesses and,  
eventually, investment and domestic consumption. Canadas trade  
balance would also deteriorate. The decline in the Canadian dollar  
would mitigate the impact of customs duties on Canadian exports, but at  
the same time the higher cost of Canadian imports would damage its  
trade balance.  
Revamp of production chains  
Companies would also suffer from the abolition of or challenges to  
arrangements that facilitate and protect foreign direct investment or that  
allow the production process to be co-ordinated more easily between  
several countries, such as the ability to organise business trips easily.  
New trade barriers would therefore affect the integration of the North  
American economies and the whole production chain. A US company  
4
0
exporting to Europe could decide to locate its factories in a territory,  
Turkey for example 36 , that provides security regarding its direct  
investment and from which it can export to Europe without customs  
duties. Similarly, foreign companies operating in North America and  
whose presence in Mexico or Canada no longer gives them preferential  
access to the US market, could repatriate production to their country of  
origin. For example, companies like Toyota could produce more in Asia.  
US companies could source auto parts from Chinese rather than  
American suppliers, in order to remain competitive.  
Canada and Mexico, which respectively have 13 and 17 regional trade  
agreements currently in force, could eventually turn away from the USA  
and take advantage of trade agreements signed with other partners.  
Mexico would suffer particularly badly from a revamp of production  
3
7
chains. According to CAR (Center for Automotive Research) , almost  
9
2
0% of new plans to build light-vehicle assembly plants have, since  
009, come from European or Japanese investors using NAFTA to  
The positive effects of NAFTA have fallen short of the expectations that  
existed at the time it was ratified. The agreement has allowed its  
members to take advantage of global developments and create  
export to the USA and North America. Foreign carmakers were, as a  
result, behind almost half of the light vehicles produced in Mexico in  
2
015.  
38  
Thierry Mayer, Brexit, Trumpit : la fin des accords régionaux ? Conséquences pour  
l’industrie automobile, CEPII no. 371, November 2016. The study assumes that countries  
comply with the most-favoured-nation principle when establishing customs duties.  
Pierre Laliberté and Scott Sinclair, What is the NAFA advantage? Putting the tariff  
36  
39  
Relations between the EU and Turkey have been governed by a customs union since 1  
July 1996.  
impacts of a rump termination in perspective, Canadian Centre for Policy Alternatives,  
June 2017  
IMF Country Report No. 17/210, July 2017  
37  
Center for Automotive Research, NAFTA Briefing: Trade benefits to the automotive  
industry and potential consequences of withdrawal from the agreement, January 2017  
40