When weighing a new NAFTA deal’s potential legacy, think technology, not autos

When weighing a new NAFTA deal’s potential legacy, think technology, not autos

Donald Trump had one good idea this week. The U.S. president’s suggestion that NAFTA needed a name is perhaps the first positive thing he’s personally put on the table.

My suggestion: the North American Free-ish Trade Agreement. If that’s too glib, let’s just drop “free” like the president did when he raised the idea in the Oval Office. It would more accurately reflect what is shaping up to be a future of managed cross-border exchange rather than the more liberal kind of which we dreamed back in the early 1990s.  

NAFTA might have felt like a free-trade agreement because it eliminated duties on things that we see, smell, taste, and touch. But many less tangible sources of wealth — and political influence — remained mostly protected. Financial services is a good example. The original NAFTA contained more than 2,000 articles, and not one of them required Canada to adjust the ownership rules that effectively shield the Bay Street banking oligopoly from international competition.

The outcome of that decision makes for a good debate. True free trade, or even freer trade, in financial services might have boosted investment and productivity by making it easier for entrepreneurs to obtain credit.

On the other hand, the decision to leave protections in place allowed the big banks to get bigger, while a handful of others were able to achieve scale that wouldn’t have been possible if institutions from the U.S. and Mexico had been permitted behind Canada’s walls. Royal Bank, Toronto-Dominion, and Bank of Nova Scotia now are the three most important publicly traded companies in the country, and they also are among a relatively small number of Canadian companies with enough size to make some noise abroad.

We’ve spent a year fretting about rules of origin for automobiles and farm subsidies. Those things matter, of course.

A drive down the rural route in New Brunswick on which I grew up is slowed by farm tractors far less today than a couple of decades ago. Farmers will continue to vanish without some level of government support, if only because their competitors in other countries benefit from so much of it.

Jose Boisjoli, chief executive of Montreal-based BRP Inc., the highly profitable maker of Ski-Doo snowmobiles and Sea-Doo jet skis, told a reporter from TheNewsEditorial this week that he would have to rework his supply chain to qualify for NAFTA preferences under terms agreed by the U.S. and Mexico on Aug. 27. That’s what managed trade gets you. The story didn’t say how those changes would affect BRP’s profits, but we probably can guess.  

Still, agriculture and vehicle manufacturing are the stars of the previous quarter century, not the next one. By allowing established lobbies to dictate the public debate, we risk missing the off-stage dickering that could determine the economy’s ability to create wealth two decades from now. Canada will continue to grow lots of food, we probably have a comparative advantage in developing snow machines. But most of the wealth in the near future will be created by the companies that own ideas and data. That means the children of Justin Trudeau, the prime minister, and Chrystia Freeland, the global affairs minister, will be affected more by what an updated NAFTA has to say about intellectual property and digitalization than dairy quotas and car parts.

Nothing will be known for sure until a final text is published, but there are reasons to worry that the U.S. is trying to make it harder for Canadian and Mexican startups to gain ground on America’s tech behemoths.

The summaries of the terms to which the U.S. and Mexico agreed aren’t entirely reliable because they are vague and could have changed after several days with Canada back at the table. Yet they likely represent the items in play.

Canada’s technology companies will be wary of language that suggests the Trump administration is seeking to tip the scales even more for companies such as Alphabet Inc. and Amazon.com Inc.

Mexico apparently accepted a “modernized, high-standard (IP) chapter that provides strong and effective protection and enforcement of IP rights critical to driving innovation, creating economic growth, and supporting American jobs,” according to briefing material released by the U.S. Trade Representative. The U.S. and Mexico appear to have expanded the range of drugs that will be eligible for minimum patent protection and agreed to stricter patent rules in general. The outline also says the U.S. and Mexico agreed that limits on how data can be used, and where it must be stored, would be “minimized,” which would help Big Tech fight attempts by local authorities to regulate data collection.

The current IP provisions are terribly concerning,” said Patrick Searle, spokesman for the Council of Canadian Innovators (CCI), an assembly of fast-growing tech companies. “The most important thing to remember in these NAFTA negotiations is that Canada has virtually no IP stocks,” Searle said, referring to the value of IP owned by Canadian entities. “Stronger and longer IP protections entrench and extend pre-existing IP holders.”

The value of IP peaked at around $38 billion in each of the first two quarters of 2008, and has struggled to get even close to that mark after collapsing during the recession. Canadian IP was worth about $31 billion in the second quarter, Statistics Canada reported this week.

Some of what the CCI has asked for is blatantly protectionist. For example, when Freeland asked for submissions on what her priorities should be in the NAFTA negotiations, the group asked specifically that she fight for the ability to control data collection as a “barrier to entry” for American firms.

That makes Canada’s upstart wealth creators like all those that came before them. If the U.S. and Mexico are negotiating in good faith, Canada will have an opportunity to adjust some of those provisions that it was presented this week, but not all. Trudeau’s choices will show the extent to which he favours established industries over next generation ones.

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