Canada is Sucking and Blowing on NAFTA

The renegotiation of the North American Free Trade Agreement, NAFTA has been going on for over a year now with several rounds of discussions held between its three partners – the US, Canada and Mexico.  Up until very recently, the American negotiating team, led by chief trade negotiator Robert Lighthizer have complained of slow progress due to a reluctance by Canada and Mexico to engage wholeheartedly on US demands for massive changes to pillars of the existing pact.  These most contentious points include the auto sector and US demands for minimum US content in all autos manufactured for sale in the US as well as proposing the effective dismantling of Canada’s supply management programs in the food and dairy industries.

The go-slow approach taken by Canada, with Mexico tagging along was designed to run out the clock until the Congressional mid-term elections this November, believing that a Democratically-controlled Congress would never approve a White House request to scuttle the existing NAFTA agreement.  NAFTA was initially ratified by Congress in 1993 and one would reason that they would have to endorse its abrogation as well.  Current polling indicates that the Republicans would lose the House of Representatives, especially after the Democrats won a House special election in Pennsylvania in a district that Trump carried by 20 points in the 2016 general election.  The Senate is a different story – the Republicans are likely to hold their majority, but the Senate as a body is not protectionist and would view the abandonment of NAFTA as damaging to US economic interests.  So this is the “blowing” part – going slow, pushing off US demands to get to the summer when a preoccupation with looming election fights would take over the Trump administration’s attention.

Suddenly this is no longer the strategy – what changed?  US-imposed steel industry tariffs, for one, initially ensnaring Canada until we were granted an exemption, on the insinuation that the exemption could be lifted if NAFTA negotiations continued to go slowly.  The Canadians and the Mexicans clearly got the message.  Lighthizer just concluded testimony before Congress that indicated he was pleased with a new attitude expressed by his trade partners and that he expected that a two week “super round” of negotiations would result in a new deal well in advance of the mid-term elections.  So, this is Canada “sucking it up” and bowing to pressure imposed by the Trump administration.  An unintended consequence of the steel tariffs imposed by the US is now Canada needs to be vigilant to prevent foreign steel from being dumped in its domestic market.  Canadian steel producers may have preserved their access to the US market, but they will face increased competitive pressures at home from non-North American imports.

On the one hand, Trudeau appears determined to protect Canadian steel producers as he tours facilities across the country and vowing to not tolerate damaging tariffs on what is a heavily integrated industry between Canada and the US which would have caused damage on both sides of the border.  A more nuanced analysis of the Liberal government’s behaviour reveals a realization that if they do not engage earnestly with the Americans now, they could face a far worse deal imposed on them if Trump gives notice to pull out of NAFTA and imposes all kinds of additional tariffs as part of a broader trade war.

Canadians must brace themselves for the reality that any renegotiated NAFTA will weaken Canada’s hand significantly, including the dilution or repeal of the Dispute Settlement Mechanism that former PM Brian Mulroney achieved due to his close relationship with Ronald Reagan.  NAFTA II will be worse for Canada, but not as bad as a complete abrogation of the deal would have been.  What Canada really needs is a trade diversification strategy that does not rely on lying with giants like China and is not connected to slow-growth economies like Europe.  The initiative to cement closer ties with India, while strategically correct, is not in good shape due to the spat over Sikh extremism and separatism coupled with the PM’s poorly executed trip with little of substance and a great deal of costume. India held great promise for Canadian trade but now the realization of those closer ties is pushed off indefinitely, and Canada will have to shift focus onto the TPP, the Trans-Pacific Partnership, which is now being promoted to exporters.

The markets have already voted on Canada’s perceived weakness in trade, sending our dollar back into the mid-70 cent US range after exceeding 80 cents only a few months previously.  What’s worse, however, is even if Trump is replaced in 2020, NAFTA II will survive him – and it will likely emerge as one of the notable achievements of his outsider’s presidency.