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NAFTA, dairy and softwood: What’s going on with Trump? A guide to the trade file

For more than 20 years, the North American free-trade agreement has tied the continent’s economy together. Donald Trump promises he’ll change it dramatically, and has ramped up criticism of Canada on long-standing trade issues. Check back here for the latest news, analysis and opinion on what Canadian and U.S. leaders are doing and what it could mean for you

Trade: Where we are right now

  • President Donald Trump has given the North American free-trade agreement a stay of execution, saying Thursday that the U.S. would work with Canada and Mexico to renegotiate the deal, instead of terminating it as he recently planned to do. But he cautioned that “if we do not reach a fair deal for all, we will then terminate NAFTA.”
  • On Wednesday, U.S. media reports cited senior officials as saying that Mr. Trump was about to sign an executive order withdrawing from NAFTA. Mr. Trump confirmed the next day that he was “going to terminate NAFTA as of two or three days from now.” But after emergency talks with Canadian Prime Minister Justin Trudeau and Mexican President Enrique Peña Nieto, Mr. Trump said he decided to hold off and give renegotiation “a good, strong shot.”
  • Mr. Trudeau said Thursday that, in their phone conversation, both leaders agreed that renegotiation was the way to go. “For now we’re trying to keep this on a positive and cooperative level and, in fact, the President himself said that he wanted the same thing in our discussion,” Mr. Trudeau said in Saskatchewan.
  • Behind the scenes, Mr. Trump’s inner circle disagrees about what demands to make in NAFTA renegotiations, The Globe’s Adrian Morrow explains. One side wants an enhanced NAFTA that would make cross-border business easier for corporations, while others – including chief strategist Steven Bannon, who drafted the abortive executive order along with National Trade Council director Peter Navarro – want protectionism.
  • The NAFTA drama emerged as the Trump administration has ramped up tensions with Ottawa on two fronts: Canada’s supply-management system for dairy products, and the long-standing softwood lumber dispute.

The contentious issues for Canada

Dairy supply management

Canada’s dairy, egg and poultry industries are governed by a supply-management system that dates back to the 1970s. It has three parts, The Globe’s Barrie McKenna explains: Fixed prices, production quotas and tariffs to protect Canadian producers from foreign competition. The dairy tariffs – which run up to 270 per cent, and which Canada tightened last year to include unfiltered milk products used to make cheese and yogurt – have been a thorn in the side of other dairy-producing nations like the United States, Australia and New Zealand.

Mr. Trump’s interest in the dairy file began with events in Wisconsin, a major dairy-producing state, The Globe’s Joanna Slater explains. Local processor Grasslands Dairy Products Inc. wrote a letter to Wisconsin farmers recently saying it would stop buying the farmers’ milk because of new Canadian classification rules for a product used in cheese making, which would give companies an incentive to buy domestically instead of from the United States. A letter-writing campaign to Mr. Trump – who narrowly won the state in last year’s election – and congressional efforts by Wisconsinite House Speaker Paul Ryan made the dispute into a national issue, and at an April 18 event in Kenosha, Wisc., the President vowed to challenge Ottawa on its dairy policy:

In Canada, some very unfair things have happened to our dairy farmers, and others, and we're going to start working on that. It's another typical one-sided deal against the United States.

He followed that up with more criticism in Washington – which also took aim at Canada’s energy and lumber sectors – and a tweet on April 25:

Mr. Trudeau objected to Mr. Trump’s assertions, saying Canada was not the cause of U.S. farmers’ misfortunes and that Canada would stand by supply management:

The U.S. has a $400-million dairy surplus with Canada so it's not Canada that's the challenge here. Let's not pretend we're in a global free market when it comes to agriculture.

Softwood lumber

Feuds over softwood lumber have been a recurring part of Canada-U.S. relations since the 1980s. Their root cause is U.S. industry’s contention that Canada unfairly subsidizes its lumber by providing cheap access to public land. It’s led to a cycle of American punitive action, followed by trade cases mostly won by Canada, and then a compromise settlement.

The fifth and most recent softwood-lumber war was set off on April 24, when U.S. Commerce Secretary Wilbur Ross said his agency would impose new anti-subsidy duties averaging 20 per cent on Canadian softwood imports. His statement on the issue also brought up the dairy dispute and the Trump administration’s dissatisfaction with NAFTA:

It has been a bad week for U.S.-Canada trade relations. Last Monday, it became apparent that Canada intends to effectively cut off the last dairy products being exported from the United States. Today, in a different matter, the Department of Commerce determined a need to impose countervailing duties of roughly $1-billion on Canadian softwood lumber exports to us. This is not our idea of a properly functioning free-trade agreement.

Natural Resources Minister Jim Carr made plans to meet with seven provinces hit by the new round of tariffs – New Brunswick, Quebec, Ontario, Manitoba, Saskatchewan, Alberta and B.C. – and devise a joint plan to challenge the tariffs. In a joint statement, Mr. Carr and Foreign Affairs Minister Chrystia Freeland strongly objected to the U.S. decision:

The Government of Canada disagrees strongly with the U.S. Department of Commerce's decision to impose an unfair and punitive duty. The accusations are baseless and unfounded. ... Canada will continue to press their American counterparts to rescind this unfair and unwarranted trade action. We are committed to working with the U.S. Administration to achieve a durable solution.

What is NAFTA?

The 1994 agreement – an expanded version of a Canada-U.S. free-trade deal from 1988 – created what was then the biggest free-trade area in the world. It removed barriers to the flow of goods and labour between Canada, the United States and Mexico, under the oversight of an independent dispute-settlement process.

Flashback: President Clinton’s original signing of NAFTA into law in 1993

Canada – the world’s largest purchaser of U.S. goods – saw its exports to U.S. markets soar. The Americans are less dependent on NAFTA than Canada is, The Globe’s Steven Chase explains: Trevor Tombe, a University of Calgary economist, calculates that there are only two American states – Michigan and Vermont – where trade with Canada exceeds 10 per cent of their annual economic output.

There are only two U.S. states – Michigan and Vermont – where trade with Canada exceeds 10 per cent of their annual economic output, according to University of Calgary economist Trevor Tombe.

For years, the Canadian government has repeated its claim that Canada is the most important foreign market for 35 U.S. states. This map is posted on a government website that promotes trade.

This map, using data retrieved from the U.S. Census Bureau, shows Canada’s share of total U.S. exports, by state. It shows that, for a majority of states, less than 30 per cent of total exports go to Canada.

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Why change NAFTA?

The politics of free trade have undergone a remarkable U-turn since NAFTA, and the FTA before it, came into being.

In 1988, Canada had a Progressive Conservative prime minister, Brian Mulroney, who fought an election over the Canada-U.S. trade deal with the Liberals opposing it. He also had pro-free-trade Republican allies in the White House, with Ronald Reagan and later George H.W. Bush, backing him up.

Contrast that with 2016, when protectionism turned into a defining theme of the U.S. election. Both presidential candidates opposed the Trans-Pacific Partnership, a trade deal even bigger than NAFTA, but the Republican Mr. Trump also singled out NAFTA and promised to erect a wall along the U.S.-Mexico border. In his inauguration speech, Mr. Trump promised an “America first” attitude to trade, immigration and foreign affairs.

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What could replace NAFTA?

If the whole deal is on the table, the three countries have a few different options, Barrie McKenna explains: Go back to the original Canada-U.S. FTA (which would leave Mexico with nothing), renegotiate the existing deal with Mexico included, or draw up an entirely new bilateral deal that keeps the parts of NAFTA that Canada likes. Mr. Trump’s comment about “tweaking” the deal also suggest the possibility that he could just make smaller side deals on top of NAFTA so he can claim to have fulfilled his promise of reforming it, Adrian Morrow explains. Here are some other resources that explore the different options Canada, the U.S. and Mexico could take.

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What about Mexico?

Building barriers (both physical and economic) with Mexico has been Mr. Trump’s stated goal since he began running for president; in the 2015 speech announcing his campaign (the one where he said “rapists” and criminals were coming across the U.S.-Mexico border), he said Mexicans were “laughing at us” and “killing us economically.”

Now that Mr. Trump is president, Mexican President Enrique Pena Nieto in a tight spot. He is facing domestic pressure to stand up to Washington about the wall that Mr. Trump wants Mexico to pay for, which Mexico refuses to do. But Mr. Pena Nieto also has to avoid alienating a major trading partner and being shut out of the new North American trade regime.

The United States is reputedly seeking bilateral talks with Canada on the trade deal, which would effectively leave Mexico to fend for itself. While one senior official told The Globe that Canada didn’t want to be caught at the same bargaining table as Mexico, Canadian ministers have recently and publicly reaffirmed their support for a trilateral process. These include International Trade Minister François-Philippe Champagne, who visited Mexico City on March 16:

For me it is quite clear. NAFTA is a three-nation agreement. So the way to renegotiate a three-nation agreement is on a trilateral basis.

In an earlier interview with The Globe, Mexican Economy Minister Ildefonso Guajardo urged Ottawa to resist the temptation to go it alone, saying Mexico and Canada stand to gain more if they present a united front against Mr. Trump:

Our first responsibility is to look after our country’s interest, and no one can contradict that. But ... in doing that you do not need to run over other nations with your bus. You can do both things.

Mr. Guajardo also said that Mexico could retaliate against higher U.S. tariffs by refusing to co-operate on security, migration and anti-narcotics initiatives:

You cannot ask me to [accept poor] conditions in terms of trade and then request my help to manage migration issues from other nations or ... the prosecution of criminal activities and narcotics.

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Who’s deciding NAFTA’s future?

Here’s some more reading on key people to watch on the trade file.

The Canadian side:

The American side:

The Mexican side:

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How could this affect me?

Uncertainty over NAFTA’s future has already had far-reaching effects on the Canadian economy, from the dollar to the energy sector – and, ultimately, to your personal finances. Here’s some more reading on what might be coming.

More reading on the economy and personal finance:

More reading on oil and gas:

More reading on manufacturing and technology:

More reading on tourism:

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What about the rest of the world?

A new North American trade regime would be only part of larger changes in America’s, and Canada’s, role in the world – and with NAFTA’s future in question, Canada is looking for other sources of trade revenue.

Europe: The European Union, Canada’s second-largest trading partner, has finalized a trade deal with Canada even broader in scope than NAFTA: the Comprehensive Economic and Trade Agreement (CETA). Its approval by European legislators on Feb. 15 cleared away about 98 per cent of the tariffs on both sides.

Asia-Pacific: Mr. Trump’s decision to withdraw the United States from the Trans-Pacific Partnership effectively killed the 12-nation trade deal, but the signatories and other Pacific nations are trying to regroup, possibly with China’s help instead. Canada’s International Trade Minister, François-Philippe Champagne, attended a March 14-15 summit in Vina del Mar, Chile, on Asia-Pacific trade.

Here’s some more commentary and analysis exploring the global questions.

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What’s next?

NAFTA talks: No dates have been set for talks to renegotiate the deal.

Trump vs. Pena Nieto: Mr. Trump says he plans to meet his Mexican counterpart to discuss trade, immigration and the border.

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With reports from Steven Chase, Robert Fife, Adrian Morrow, Barrie McKenna, Evan Annett, Reuters and The Canadian Press


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