Until the official Brexit date of March 29, 2019 the UK remains in the European Union — which means that Britain remains a party to the Comprehensive Economic and Trade Agreement (CETA) between the EU and Canada.
And the CETA accord is a very fine agreement (as it should be, because it took 7-years to negotiate) but it may take another year or two to become fully implemented. At the moment CETA is only partially implemented, but eventually 98% of tariffs between Canada and the EU will be eliminated.
Once Brexit happens on March 29, 2019, the UK will cease to be a CETA signatory and something else (a ‘drop-in’ agreement) will need to replace it.
That is the topic of this blog post.
Enter the United States, Canada, and NAFTA.
Where’s Canada on the International Trade Map?
Canada is a surprisingly strong exporting country. With a population of only 36 million and a territory that measures 3.855 million square miles, it means the country is practically empty.
Across this huge landscape are fields of crops larger than the entire UK, but Canada’s few cities are large. In fact, the Greater Toronto Area (the GTA) is larger and has a greater population than the New York Metropolitan Area.
And it’s an exporting superstar; Making it the 11th highest exporting nation in the world.
“Canada is currently the fourth largest exporter of cars in the world and the ninth largest auto producer in the world, making 2.1 million cars a year. Trade with the U.S. is by far the most powerful driver for the automotive sector.” — Export Development Canada
What if There’s No New NAFTA Agreement?
If the NAFTA agreement falters due to insufficient efforts between U.S. and Canadian negotiators Canada will end up producing cars for itself — which means it won’t be exporting 1.8 million cars to the United States annually once NAFTA is terminated (or) once President Trump slaps a 25% tariff on Canadian cars exported to the United States.
Which means a lot of Canadian autoworkers are going to become unemployed the day after that announcement.
Which means that Canada (insert drum roll here) needs a ‘Plan B’.
President Trump Isn’t ‘Being Evil to Canada’ He’s Protecting American Interests Because That’s His Job!
You can’t blame him for that. For goodness sake he’s the President of the United States, not of Canada.
But Canada can’t sit idly by and wait for the world to end. The country must pick itself up and get on with business.
And the best way to do that is to respectfully approach the UK and inform them that it’s likely NAFTA will be terminated or changed in ways that result in Canada having an excess auto manufacturing capacity of up to 1.8 million units per year.
Such manufacturing capacity could be very useful to the UK government and to UK industry.
How Canada and the UK can Work Together for Mutual Benefit
The cost of living in the UK is much higher than it is in Canada, therefore wages in the UK are higher than in Canada.
And it’s the reason why only premium car lines are built in the UK where the high labour cost for exceptional hand-built cars are reflected in the final price and nobody minds paying extra. See; Aston Martin, Jaguar, Land Rover, etc.
Even Rolls Royce and Bentley were forced to move to continental Europe because they couldn’t afford the high labour costs of UK workers and the costly land/building/business costs of manufacturing cars in the United Kingdom.
Post-NAFTA, huge opportunities exist for Canada to export lower-priced GM, Ford, and Fiat Chrysler (FCA) cars and trucks to the UK — freeing-up huge amounts of disposable income for Britons.
Which means that saved money will be spent elsewhere in the UK — whether on home renovations, tuition, school supplies, vacations or investments — because it isn’t going anywhere (it isn’t going to magically vanish!) it will simply be spent on other items.
Any Canadian-built vehicles that are exported to the UK over what the UK market can sustain can be forwarded to Commonwealth of Nations countries by UK re-exporters.
India alone has a population of 1.32 billion and its economy is rising fast to become the third-largest consumer economy in the world. There’s no lack of demand for cars and trucks in the Commonwealth.
A Must Read: India Poised To Be Third Largest Consumer Economy (Forbes)
All of which works to help the UK economy.
Trump Wins, Trudeau Wins and May Wins!
President Trump wins because he will have prevented Canada from exporting 1.8 million vehicles to the United States annually, and American factories (meaning American workers) will need to fill that demand gap, Prime Minister Trudeau wins because he will have saved the Canadian jobs associated with the manufacturing of those 1.8 million cars and trucks, and Prime Minister May wins because she will have ushered in three new lines of lower-priced vehicles for UK consumers and those savings will translate into higher levels of disposable income for British consumers that can be spent elsewhere in the UK economy.
It’s so easy when you know how...
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Peter Zeihan (zeihan.com) indicated on Twitter that the three countries have reached an agreement regarding NAFTA. It seems that a version of NAFTA will continue to exist, but I don’t know the details yet.
BTW, this means less potential leverage for China. Zeihan commented awhile back that, due to rising wages in China, Mexican labor is now both cheaper and more skilled than Chinese labor.
And there remains the possibility that the UK might make a trade deal with NAFTA as a bloc.
Agreed, all your points.
I’ve included this preliminary link from today’s headlines regarding the new NAFTA agreement…
Canadian dairy farmers slam new trade agreement, say it will have ‘dramatic impact’
The United States won in key areas, allowing a greater percentage of U.S. milk to be sold in Canada, and limits on the number of automobiles that Canada can export to the United States. Beyond a certain number of vehicles, Canada will have a 25% tariff placed on those additional cars and trucks.
Canada also retains the all-important trade dispute mechanism which is important to Canada when dealing with an economic superpower like America.
Thank you again for your thoughtful comments! JBS
Came across a comment in regards to Zeihan’s tweets. It seems that the new agreement includes a restriction in regards to to vehicles assembled in Mexico or Canada-Chinese parts are to be excluded.
I understand Trump on this.
But I also realize that we live in a global and interdependent world, so IMHO, any country that wants 50% domestic content in manufactured goods that are sold in their country, that’s fine.
If it starts getting ridiculous, like 99% content on manufactured goods, that needs to be rolled back.
We are an interdependent world and that is one of the strengths of the present era.
(If we need each other, then, we’re less likely to fight each other)
As always, very best regards, JBS
BTW, I think that something like the trade dispute provision is something that the British should insist upon.
Yes, I strongly agree with you.
Smaller countries need to have a dedicated and fair trade dispute mechanism — especially when dealing with the world’s Superpower, and any future Superpowers (China) and if there’s no guile involved, there shouldn’t be any problem obtaining such a provision.
Best regards, JBS