The Calm Before the Trade Storm

This November will mark 20 years since the historic election of 1988, when free trade with the United States dominated the debate. The Conservatives emerged from that election with a reduced minority and proceeded to enact the agreement that had been negotiated with the US. At the time, many Canadians believed that free trade threatened the Canadian healthcare system and that the deal would give the US unimpeded access to our natural resources, including water. At the same time across the border, the US was threatening that if the deal failed, there would be severe repercussions on the sustainability of Canada-US trade. Members of Congress were planning to use Section 301 of the US Trade Act to impose unilateral tariffs and restrictions on Canadian goods crossing the border.

Our passage of the FTA avoided testing Congress’ resolve to attempt punitive actions against Canada. In the 20 years since, two-way trade between Canada and the United States has more than doubled, and Canadian manufacturers benefitted overall from the privileged relationship, regardless of intermittent irritants like the softwood lumber dispute. For those unfamiliar with the numbers, I will make it simple for you. In a typical month, Canada exports $45 billion in goods to the US and imports $40 billion in return, netting us a tidy surplus of $5 billion a month or $60 billion a year. The resilience of Canada’s exporters is impressive, given the rise in the Canadian dollar since 2002; while the mix has skewed in favour of natural resources at the expense at manufactured goods, our manufacturing sector has held up much better than that of the US; even the Canadian auto sector has done better than its US counterpart.

All this may change quickly if Barack Obama becomes president, especially if he receives significant support from rust-belt states like Michigan and Ohio, badly hit by the US manufacturing recession and the loss of lower value jobs to China. During the primaries against Senator Hillary Clinton, Obama courted support in these states by openly declaring that he would seek to renegotiate NAFTA (the FTA successor that includes Mexico) to protect American jobs. A minor scandal erupted when a senior Obama insider briefed Canadian officials and indicated that this was only for populist consumption during the primaries, and that Obama would undertake no such action as president. We have not heard any negative trade comments directed against Canada since that time, but Obama and Biden continue to court votes in states where manufacturing is suffering, saying that they will act to preserve American jobs and end “unfair” trade practices.

Canada will not be immune to such initiatives, even if many of these veiled threats are primarily directed at low cost-producers like China. If John McCain wins, he is likely to do so without the support of Michigan (though he will have to win Ohio) and his reputation as a committed free-trader means that a renegotiation of NAFTA is unlikely. If Obama wins big, he is likely to carry all the traditional northeastern “blue” Democratic states, as well as most of the border states with Canada (Montana and North Dakota will remain Reublican). It is conceivable that Obama’s coattails will produce significant Democratic majorities in the House and Senate. Should that occur, all the newly minted members of Congress who ran on job preservation for their electors will expect the Executive branch to deliver on its campaign promise of trade reform.

Earlier I mentioned Section 301 of the 1974 US Trade Act. It was referred to as Super 301 for a reason; it empowered Congress and/or the Executive to propose punitive tariff and non-tariff measures against its trade partners and allow the devastating economic effects to take place as it negotiated agreements more to its liking. Super 301 was allowed to lapse in 2001 and was not renewed; this does not mean that an anti-trade US Congress could not vote to re-instate the clause in an effort to scare its trading partners into making concessions, without even using the measures available in the statute. You can Google Section 301 and read the statue on the website of the US Department of Commerce; it is a compact statute, written in understandable English, and very, very scary to anyone who understands the importance of reciprocal trade between the US and Canada.

By now you have noticed that Canada is involved in a federal election as well. Since trade has been a major issue in the US election since the primaries, one would expect that the federal parties would be spending some time on it up here as well. Nope!

No federal party wants to touch this one because the reality is that Canada is not the driver on the trade issue when we transact with an economy 10 times the size of our own. The Conservatives are selling competence, and Harper does not want to legitimize the notion that trade with the US is an emerging issue since that would spill over into the US race and force Obama to make populist statements which would be difficult to disown once elected. The Liberals are too busy selling the Green Shift and don’t want to remind Canadians that they opposed the FTA 20 years ago and that Chretien promised to rip it up when he ran for the leadership in 1990. In short, the Liberals have enough problems without opening another front against a brainy economist like Stephen Harper. Harper wants to maintain the rhetorical peace with the Obama campaign that was negotiated after the skirmish during the primaries.

What of the New Democrats and the Bloc? Even the NDP knows that everyone loses in a trade war, and they would prefer not to radicalize their union base into making inflammatory statements that would scare off the centrist voters that they are trying to attract. The NDP has discovered that the environment makes a more compelling unifying issue than trade. The Bloc would prefer to portray Harper as a devil and campaign to deny the Tories a majority, rather than invite an investigation into how well Quebec has fared (relatively speaking) since the advent of the FTA. If the Greens have a trade policy, then it is in its infancy and has yet to be vetted.

So, we have cross border and intra-Canadian collusion to avoid trade as a major issue, at least until November 4th and all the elections have concluded. The risk is that if the US economy remains weak and unemployment continues to grow, the political pressure for expedient action may be so great that the new President will be unable to resist. We should all expect that 2009 will bring tensions across the border; expect manufacturing, the tar sands, other natural resources and even water(!) to be on the table as the US seeks to redefine the trading relationship that has greatly benefitted both nations for two decades. It will take great imagination and political skill to avoid a trade tragedy and a deeper economic recession than the one we are experiencing today.