The world has changed considerably in the three decades since the NAFTA trilateral signing ceremony on October 7th, 1992 in San Antonio, Texas. Geopolitics have evolved, politics is in flux, and the fourth industrial revolution has transformed human life in ways society is still grappling with, including the ways in which commerce and trade are conducted. Former Privy Council Clerk Kevin Lynch and former White House economic aide Paul Deegan provide a prescription for how Canada can navigate an altered trade reality.

Kevin Lynch and Paul Deegan

It was a mere 30 years ago, in October 1992, that the North American Free Trade Agreement (NAFTA) was successfully completed and initialed by the leaders of the United States, Canada, and Mexico – President George H. W. Bush, Prime Minister Brian Mulroney and President Carlos Salinas de Gortari. NAFTA came into effect on January 1, 1994, after side letters on the environment and labour were agreed by President Bill Clinton and Prime Minister Jean Chrétien. It fundamentally changed how Canadian business thought about doing business, and it reshaped Canadian views about our ability to compete and prosper beyond our borders.

NAFTA extended the free trade provisions of the 1987 Canada-US Free Trade Agreement (FTA) continent-wide, creating new markets for exporters, more choice for importers, new opportunities to build North American supply chains, increased ease of cross-border labour mobility, and novel dispute settlement mechanisms. What Donald Trump preposterously called the “worst trade agreement in history” has become the global model for trade liberalization agreements, while significantly raising economic growth, productivity, and incomes in all three countries.

That Canada and NAFTA emerged relatively unscathed from the tumultuous renegotiation triggered by Trump in 2017 says much more about the value American business and US border states see in the trade relationship with Canada and the effectiveness of our lobbying campaign, than it does about the policy wisdom of the Trump administration. 

So, as we prepare to enter the fourth decade of NAFTA, as of March 2020 the Canada-United States-Mexico Agreement, what should we expect and what should we do? Here are six possible pivots, or shifts, in the global economy that we should consider building into our trade and investment planning for the decade ahead.

First, global cooperation is fragmenting into blocs. In the UN vote to condemn the Russian invasion of Ukraine, more than 30 countries abstained, including China and India, and both continue to do business with Russia. China has ramped up its rhetoric with respect to Taiwan and doubled down on its aggressive diplomacy. Middle Eastern oil producers have deflected to OPEC any discussion of increasing energy production to attenuate the global gas price spike. And the political dysfunction in the US is likely to get worse after the Congressional mid-term elections this fall, where Republicans and their nationalistic tendencies are expected to take the House of Representatives, while the Senate is a toss-up. 

Second, the era of ultra-low interest rates is ending. Clearly, inflation in Canada, the US, European Union and the United Kingdom is much higher and more persistent than central banks had ever expected. That interest rates were too low for too long is now recognized as a significant contributor to current inflation pressures. Interest rates are now shooting back to “neutral” or higher levels as central banks, including the Bank of Canada, which kept inflation within the target range for 25 years, struggle to rein in inflation and re-anchor inflation expectations. While that is a needed change, it will cause lasting reverberations in financial markets, particularly with respect to highly leveraged (indebted) companies and asset values for housing, equities and venture capital investments.

Third, peak globalization has been reached. Supply chains, which have been a driver of globalization over the past decade, will change: shorter, more diversified, more resilient. Protectionism and sanctions will further constrain trade growth. Regional trade strategies and alliances, rather than global trade strategies, will be the order of the day. 

Fourth, left and right-wing populism could increasingly dominate our domestic and shape global politics. Nationalism and tribalism are on the rise. The Trump brand of nation-state populism and economic nationalism resonates with those facing financial uncertainty and social angst. It is in their face every time the fill up at the gas pump or turn on Fox News. This next generation of populists will likely attack traditional institutions and reduce trust in them, eschew international cooperation and rules in favour of transactional relations and power-based relationships, making progress on issues like climate change, global tax rules and international security even more difficult.

Fifth, while technology stocks have pulled back from stratospheric levels and hype, the digital-tech revolution is very far from over. During the pandemic, the way many of us work and live changed overnight, and the future of work will not be a return to the past. Businesses and governments will increase investments in digital technologies to make services better and cheaper. And the metaverse, artificial intelligence, machine learning and advanced data analytics are just in their infancy, with massive potential to change how firms work and to transform social interaction.  

Sixth, the energy transition will be anything but smooth. Putin’s heinous invasion of Ukraine has underscored our reliance of fossil fuels and global energy supply chains. Like it or not: natural gas – something Canada has in abundance – will remain an important transition fuel in power generation for quite some time. While consumers are feeling the pernicious pinch at the pump and with their electricity bill, the spike in energy prices will be both a catalyst to wean us off fossil fuels for transportation and a reality check on the length of the transition period away from fossil fuels. As a major energy producer and consumer, Canada has opportunities as well as challenges. 

These six pivots in the global economy present many challenges as well as upside potential for Canada. But we need to rethink our trade and investment policies now to seize the opportunities of tomorrow. And tomorrow is here today. 

Secure trade agreements matter. With the US focused on Russia and China, and Mexico looking inward, Canadian leadership is needed to harden the CUSMA and keep it up-to-date and relevant. And our leadership is needed now, given that the agreement has a sunset provision that will force all three countries to revisit the agreement every six years – meaning in 2026. Canada also has tremendous opportunity with the Canada-European Union Comprehensive Economic and Trade Agreement (CETA). With the EU’s annual imports greater than Canada’s GDP, the upside is massive. And, while the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) was an important step forward for trade between Canada and Japan, which is Canada’s fourth-largest trading partner, the time has come to strike a bilateral deal with this important Pacific economic and security ally.

The energy transition provides opportunities. Atlantic Canada can be a major LNG supplier to Europe, helping them to become less Russia-reliant and more energy secure. The Atlantic energy opportunity faces two domestic obstacles and a tough foreign competitor. We have no LNG export terminals despite efforts to establish ones at Saint John and Goldboro, where both proposed terminals would be about five days closer to Europe for an LNG tanker, compared to US gulf ports, which are already gearing up to supply LNG to Europe. And, we totally lack a supportive regulatory environment to build such projects despite the obvious need.

The shift to electric vehicles (EV) is another area that offers Canada a tremendous opportunity to be a leader. Both the federal and Ontario governments are stepping up, but we need to define where in the EV supply chain we want to be dominant, and invest accordingly. As well, we should have more cooperation to harness the collective talent and expertise of the mining sector – we have an abundance of the minerals used in EVs, but we lack the infrastructure and supply chains to bring it to market.

The war in Ukraine has put a spotlight on global food supply chains. Canada is blessed with natural resources to feed and supply the world, and we have strong port and rail infrastructure. But to be a leader in diversifying global supply chains, we need a thinner border with the Americans with more rapid clearance for goods and people combined with stronger ties to European and Asian agricultural supply chains.

Digital trade is thriving, with both the US and China the dominant market leaders, while our regulatory approach is stuck in the analog world and we are lagging badly. As Canadians, we should be very concerned about the impact of Big Tech on competition, economic growth, personal privacy, and our democratic institutions. We can’t move from start-up to scale-up when foreign behemoths who pay little to no Canadian taxes gobble up our start-ups and talent and stifle made-in-Canada innovation.

Competitiveness and trade are inextricably linked: trade agreements like the CUSMA are enablers of trade success not guarantors. What Canada needs is a competitiveness strategy that capitalizes on our comparative advantages, but also recognizes potential risks. Natural resources (oil, gas, coal, hydro, lumber, etc.) and transportation equipment (cars and car parts) account for 70 percent of goods exports. That level of concentration puts us at risk from decarbonization efforts, “Buy American” preferences and tariffs, and geopolitical tensions. We have not had an in-depth review of our competitiveness since Red Wilson’s Compete to Win report during the 2008 global financial crisis, and we’re overdue for another comprehensive one.

Brian Mulroney, Ronald Reagan, and their teams of public servants and diplomats had a great vision, which has served North America extremely well. Today, we need to build on that vision to make North America stronger, more prosperous, and more economically secure for all in a much more uncertain global environment.  

Contributing Writer Kevin Lynch is a former Clerk of the Privy Council and former vice chair of BMO Financial Group.

Contributing Writer Paul Deegan was Deputy Executive Director of the National Economic Council in the Clinton White House and a former executive at BMO and CN Rail.