There is some concern that U.S. President Trump will cancel NAFTA (because he has said he would terminate NAFTA if he does not get what he wants from Canada and Mexico during the NAFTA renegotiation meetings).  One of the concerns raised in the media is that Canada will impose customs duties on U.S.-origin manufacturing inputs, thereby increasing the cost of goods manufactured in Canada and resulting in change in competitive advantages/disadvantages for Canadian businesses.

This in not likely to happen.  It is important to remember that Canada’s former Prime Minister, Stephen Harper, unilaterally eliminated customs duties on most manufacturing inputs (from fasteners to manufacturing equipment).  In the 2015 Budget, the Government of Canada reminded Canadians that since 2009, Canada had unilaterally eliminated over 1,800 tariffs.  Further tariff eliminations on manufacturing inputs were announced in the 2015 Budget.

The tradition of unilateral tariff elimination was continued after Justin Trudeau became Prime Minister of Canada.  In March 2016, we reported on the Budget announcement of additional unilateral tariff relief in “More Tariff Reductions Coming In Canada As Promised In The 2016 Budget”.  On June 13, 2016, the Government of Canada issued an Order-in-Council to eliminate customs duties.  Canada provided duty-free treatment to eleven types of manufacturing inputs, including eliminating all tariffs on machinery, equipment and inputs used in the industrial manufacturing sector. On December 17, 2016, the Government of Canada issued an Order-in-Council to eliminate duties on a number of manufacturing inputs used by agri-food processors (which came into effect on January 17, 2017).

This means that in Canada, the most-favoured-nation rate of customs duties is at 0% for most manufacturing inputs.  If NAFTA’s preferential duty-free treatment is no longer available, then the MFN rate would apply.  The UST or MUST or MT 0% duty rate would be replaced with he MFN 0% duty rate. In other words, the customs duties applicable at the Canadian border on manufacturing inputs would not change.

What changes is the customs duty rates on finished goods purchased and imported by consumers.  The NAFTA duty preferences would end and the MFN rates of customs duty would apply.  This would increase the cost to consumers of purchasing U.S.-origin goods (that is, consumer goods manufactured in the United States that meet the applicable rule of origin – goods that are not manufactured in the U.S., but are shipped from the U.S. do not benefit from NAFTA).  If the consumer cost of U.S. origin goods increases, then Canadian consumers would be incentivized to purchase Canadian manufactured goods or goods manufactured in a country with which Canada has an active free trade agreement (e.g., the European Union, an EFTA country, Chile, Colombia, Costa Rica, Peru, South Korea, Israel, Jordan, Honduras, Guatemala, Panama, Ukraine, etc.) or a lower manufacturing cost jurisdiction, such as China, Malaysia, Vietnam, etc..  in other words, Canadian consumers may purchase fewer U.S.-origin goods.

The more important concern for Canadian manufacturers is that the United States will impose duties on Canadian-origin manufactured goods.  This would put Canada at a disadvantage to other countries with which the United States has not terminated their free trade agreement and lower manufacturing cost jurisdictions, such as China, Malaysia, Vietnam, etc.. If Canadian-origin goods become more expensive to import because customs duties will be imposed at the U.S. border, then U.S. businesses and consumers may find alternative sources of supply.

Canada is gaining market access to the EU countries and Ukraine through free trade agreements implemented/to be provisionally implemented in 2017. The Government of Canada has consulted and continues to consult with Canadians concerning the possibility of a free trade agreement with China.  The Government of Canada has consulted Canadians with respect to a possible free trade agreement with MERCOSUR countries (Argentina, Brazil, Paraguay and Uruguay) The Government of Canada is consulting Canadians with respect to a possible free trade agreement with the Pacific Alliance (Chile, Colombia, Mexico and Peru). The loss of market access in the United States may be offset by new access elsewhere in the world.

Assuming that U.S. businesses and consumers prefer U.S.-origin goods and purchase Canadian goods when an alternative is required, the termination of NAFTA will incentivize U.S. businesses and consumers to purchase higher cost Canadian goods (higher cost because the importer would have to pay customs duties to the U.S. government) or other foreign goods (which may or may not be higher cost depending as customs duties would be payable to the U.S. government).  This means that the termination of NAFTA could result in higher costs to U.S. manufacturing businesses and higher prices for U.S. consumers.

For more information about the NAFTA modernization, please contact Cyndee Todgham Cherniak at 416-307-4168 or at cyndee@lexsage.com.  There are other articles on the LexSage website about the NAFTA.