Trade: Where we are right now
- It’s official: U.S. President Donald Trump’s administration has triggered the 90-day countdown to renegotiating the North American free-trade agreement, aiming to get talks under way in August.
- U.S. Trade Representative Robert Lighthizer sent Congress the White House’s formal notice last Thursday morning to begin negotiations for a new trade deal. The 90-day window ends on Aug. 16.
Notification letter is far less detailed than the draft that was circulating in March pic.twitter.com/tUs5iZGQcQ— Adrian Morrow (@AdrianMorrow) May 18, 2017
- Canada is willing to work with Washington on the trade file, but “we will always be resolute and firm in how we stand for Canadian interests,” Prime Minister Justin Trudeau said Friday on a visit to B.C.’s Lower Mainland.
- Behind the scenes, the Canadian negotiating position has hardened since the United States took aim at the country’s dairy supply-management industry and Mr. Trump threatened in April to tear up NAFTA entirely, sources with knowledge of the situation have told The Globe.
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.
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.
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.
But behind the scenes in the White House, the Trump administration’s NAFTA plans aren’t as straightforward. Mr. Trump’s inner circle disagrees about what demands to make in NAFTA renegotiations. There is a moderate camp, including Treasury Secretary Steve Mnuchin and Mr. Trump’s son-in-law Jared Kushner, that wants to enhance NAFTA and make cross-border business easier for corporations, and a protectionist camp, including chief strategist Steven Bannon.
The two approaches appeared to clash in April, 2017, when Mr. Trump planned to sign an executive order terminating NAFTA, drafted by Mr. Bannon and National Trade Council director Peter Navarro. But Mr. Trump changed his mind after talks with his Canadian and Mexican counterparts. Sources familiar with the matter told The Canadian Press that a well-timed call from Mr. Kushner to Katie Telford, Mr. Trudeau’s chief of staff, prompted Mr. Trudeau to call Mr. Trump, persuading him to spare NAFTA for now. If the accounts of Mr. Kushner’s phone call are accurate, it’s unclear whether it constitutes a power struggle between the two camps or a negotiating tactic carried out on the President’s behalf.
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:
Canada has made business for our dairy farmers in Wisconsin and other border states very difficult. We will not stand for this. Watch!— Donald J. Trump (@realDonaldTrump) April 25, 2017
Canadian Prime Minister Justin 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.
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.
The federal cabinet discussed a package of options for up to $1-billion in aid for the softwood industry, but as of late May, negotiations with industry and provincial governments were still under way.
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.
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.
Who’s deciding NAFTA’s future?
Here’s some more reading on key people to watch on the trade file.
The Canadian side:
- Chrystia Freeland, Foreign Affairs Minister
- François-Philippe Champagne, International Trade Minister
- David MacNaughton, Canadian ambassador to the U.S.
The American side:
The Mexican side:
- Ildefonso Guajardo, Economy Minister
- Luis Videgaray, Foreign Minister
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:
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).
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. At May’s Asia-Pacific Economic Conference in Hanoi, Canada and 10 other nations agreed to re-evaluate the trade deal.
Here’s some more commentary and analysis exploring the global questions.
NAFTA talks: The earliest NAFTA talks can begin is Aug. 16, 90 days after Mr. Lighthizer gave notice to Congress about the administration’s plans to revisit the trade deal.
Trump vs. Pena Nieto: Mr. Trump said earlier this year that he plans to meet his Mexican counterpart to discuss trade, immigration and the border.
With reports from Steven Chase, Robert Fife, Adrian Morrow, Barrie McKenna, Evan Annett, Reuters and The Canadian Press
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