NAFTA Renegotiations and Energy

In June, U.S. President Donald Trump called for an end1 to the pursuit of “energy independence” given the boom in oil, gas and renewables production in the United States. Instead, he called on the United States to seek “energy dominance”2 in global markets.

In August, the Trump administration launched the renegotiation3 of the North American Free Trade Agreement (NAFTA) with Canada and Mexico. But soon after, Trump4 and U.S. Secretary of Commerce Wilbur Ross5 separately said that the withdrawal of the United States from NAFTA was a possible outcome if talks fail.

Without NAFTA, U.S. energy dominance in global markets is a fantasy. With a better NAFTA, it could become a reality.

As Kevin Book notes6, “independence” is a goal for captives, while “dominance” is a goal for competitors. Trump’s paradigm shift to pursuing a dominant position in global energy markets is a recognition that the United States is no longer captive to energy imports.

Energy dominance is inherently outward-oriented. Achieving this goal will depend on whether the United States can become a competitive exporter of energy – not just oil but gas and even electricity – that other countries depend on for their energy needs to such an extent that the United States becomes a preferred supplier of energy in global markets.

Source: Energy Fact Book 2016-2017, Natural Resources Canada

Source: Energy Fact Book 2016-2017, Natural Resources Canada

 

Canada has been a major exporter of all forms of energy since the 1980s at least, when Canada became the United States’ leading source of imported oil, gas, electricity and uranium. But instead of dominance, Canada achieved a kind of co-dependence with the United States, where domestic supplies of energy made up the majority of U.S. consumption.

The Conference Board of Canada’s Glenn Hodgson recently7 raised the question of whether Canada could remain an “Energy Superpower”, invoking former Prime Minister Stephen Harper’s vision for Canada, and implicitly suggesting it had become a reality. What Trump has in mind for the United States gives a closer approximation of what becoming an energy superpower would mean.

Dominant energy producers dominate markets through scale and cost advantages that allow them to produce in high volumes and at lower cost than other producers, allowing them to influence prices. Think Saudi Arabia as a dominant oil producer in its heyday. Dominant energy suppliers must have secure access to global markets, and this is where trade policy becomes important.

The United States’ path to energy dominance would involve increasing U.S. energy exports to markets like Canada, where current infrastructure makes this possible, and developing additional export infrastructure that could enable expanded U.S. exports to Latin America, Asia, Europe and Africa. For electricity, Canada and Mexico are the likeliest foreign markets for the United States. Oil and LNG can reach global markets with adequate port capacity, and the U.S. will need more than it has.

NAFTA renegotiation casts a shadow over Trump’s plan for energy dominance. NAFTA gave the United States secure access to Canadian energy when it incorporated the provisions of the Canada-U.S. Free Trade Agreement (CUFTA). The Reagan administration negotiated CUFTA in the wake of Canada’s National Energy Program (NEP) to prevent Canada from returning to NEP style protectionism. The U.S. was a net oil importer then, and wanted Canada to agree not to give preference to domestic consumers over U.S. consumers in times of shortages. The U.S. also wanted national treatment for its firms in the Canadian oil patch and related oil field services. Natural gas was included, as was electricity, since parts of the United States, particularly New England, were dependent on Canadian electricity supplies.

NAFTA renegotiation casts a shadow over Trump’s plan for energy dominance.

“NAFTA renegotiation casts a shadow over Trump’s plan for energy dominance.”

 

NAFTA did not provide secure access to Mexican energy. In 1993, Mexico’s constitution prohibited foreign ownership of energy resources, and Mexico took energy off the NAFTA table. But Canada and the United States used NAFTA to confirm CUFTA provisions and make some minor updates for bilateral energy trade.

In August, when the United States Trade Representative made public the U.S. negotiating objectives8 for NAFTA 2.0, energy rated just a single bullet item:

“Preserve and strengthen investment, market access, and state-owned enterprise disciplines benefitting energy production and transmission and support North American energy security and independence, while promoting continuing energy market-opening reforms.”

In contrast, environmental issues rated thirteen bulleted objectives. Yet in this one energy objective there is room for improving on the current North American energy economy. Better disciplines on market access and investment would be helpful to U.S. and Canadian firms operating in Mexico, as would clearer rules for state-owned enterprises like oil and gas company Pemex9 and the Mexican electrical utility Comisión Federal de Electricidad (CFE)10.

Even more promising is the goal of benefitting energy production as well as transmission. The greatest single obstacle to greater efficiency in the North American energy economy is inadequate pipeline and powerline infrastructure, and here Canada and the United States each can improve on their permitting and approvals processes.

Port infrastructure, including LNG and oil terminals, will be particularly important for Canada, Mexico and the United States. The latest Energy Information Administration Outlook11 anticipates an 18 per cent increase in petroleum consumption and a 43 per cent increase in natural gas consumption between 2015 and 2050, with most of the growth coming from non-OECD countries. The path to energy market dominance for the United States and for North America as a production hub will require the capacity to deliver to meet this rising demand.

“Dominant energy suppliers must have secure access to global markets, and this is where trade policy becomes important.”

Commitments to timely, evidence-based decisions, due process and transparency for energy infrastructure would be a win for all three economies if included in NAFTA 2.0. And the Trump administration’s vision for energy dominance would be a win too for producers as well as consumers looking for affordable and secure energy supplies to fuel economic growth.

Port infrastructure, including LNG and oil terminals, will be particularly important for Canada, Mexico and the United States

“Port infrastructure, including LNG and oil terminals, will be particularly important for Canada, Mexico and the United States.”

 

If Donald Trump can pull off both, we may get tired of all the winning in the years to come.

Christopher Sands is senior research professor and director of the Center for Canadian Studies at the Johns Hopkins University School of Advanced International Studies (SAIS) and a nonresident senior associate of the Center for Strategic and International Studies (CSIS) in Washington, D.C.

  1. Bloomberg Politics, Trump to Call for U.S. ‘Dominance’ in Global Energy Production, online: <https://www.bloomberg.com/news/articles/2017-06-25/trump-to-call-for-u-s-dominance-in-global-energy-production>.
  2. USA Today, Trump: U.S. will be ‘energy dominant’, online: <https://www.usatoday.com/story/news/2017/06/29/donald-trump-u-s-energy-dominant/440494001/>.
  3. The Economist, The North American Free-Trade Agreement renegotiation begins (17 August 2017), online: <https://www.economist.com/news/finance-and-economics/21726711-rewriting-north-americas-trade-rules-will-not-be-easy-north-american-free-trade>.
  4. CNN, Trump playing ‘bad cop’ in NAFTA negotiations, online: <http://money.cnn.com/2017/08/23/news/economy/trump-nafta-arizona/index.html>.
  5.  Politico, Ross calls NAFTA withdrawal ‘right thing’ to do if 2.0 talks fail (8 September 2017), online: <https://www.politico.com/story/2017/09/08/wilbur-ross-nafta-withdrawal-242487>.
  6. CSIS, An Energy Policy of Dominance (28 June 2017), online: <https://www.csis.org/analysis/energy-policy-dominance>.
  7. The Conference Board of Canada, Can Canada remain an ‘energy superpower’? (8 September 2017), online: <http://www.conferenceboard.ca/(X(1)S(zrwkcckee5oqmaitj1tv4tix))/press/speech_oped/17-09-08/can_canada_remain_an_energy_superpower.aspx?AspxAutoDetectCookieSupport=1>.
  8. Office of the United States Trades Representative, Summary of Objectives for the NAFTA Renegotiation, online: <https://ustr.gov/sites/default/files/files/Press/Releases/NAFTAObjectives.pdf>.
  9. PEMEX, online: <http://www.pemex.com/en/Paginas/default.aspx>.
  10. Comisión Federal de Electricidad, online: <http://www.cfe.gob.mx/paginas/Home.aspx>.
  11. U.S. Energy Information Administration, International Energy Outlook 2017 (14 September 2017), online: <http://www.cfe.gob.mx/paginas/Home.aspx>.