Prime Minister Justin Trudeau’s NAFTA mantra has been that no deal is better than a bad deal.
So what would a bad deal look like?
The answer depends in large part on how you read the threat. If there’s no deal, U.S. President Donald Trump might tear up the existing North American free-trade agreement. But the more fearsome danger comes from punishing tariffs – Mr. Trump has already imposed them on steel and aluminum and warned he’ll adopt new ones on cars that will be the “ruination” of Canada’s economy.
Toronto trade lawyer Mark Warner says that danger is bigger than any of the issues left on the table at the NAFTA negotiations. But University of Ottawa professor Patrick Leblond, the Paul Tellier chair in business and public policy, warns Canada will have to live with a bad deal for decades.
Much of the talk emanating from negotiations has focused on late disputes – Mr. Trudeau’s insistence on a binational dispute-settlement mechanism like the one in Chapter 19, and Mr. Trump’s demand for concessions on Canada’s dairy protections.
But there are other key measures of a deal. For starters, there’s the question of whether it provides lasting trade peace.
Mr. Trump, after all, has used tariffs imposed on national security grounds, under section 232 of the U.S. Trade Expansion Act, to browbeat Canada, Mexico and others to renegotiate trade deals. He overtly threatened more devastating tariffs as a pressure tactic.
So if Canada agrees to a new, updated NAFTA, will he be able to do that again, any time he wants?
“If you don’t discipline the subsequent use of section 232, all you’re doing is giving in to a bully,” said Borden Ladner Gervais partner Matthew Kronby. “And you’re setting yourself up to be bullied again.”
It would obviously be better for Canada to gain a complete exemption from section 232 tariffs, but Mr. Warner argues that’s just not going to happen. So will the deal include a written agreement that the U.S. will lift steel tariffs and forego such tariffs on cars? Or at least be accompanied by a strong political statement that the Trump administration – capricious as it is – won’t use them? There has to be something, or it’s a bad deal.
Mr. Trudeau’s government is admittedly playing defence, notably trying to dilute five “poison-pill” demands the U.S. put on the table last year.
A bilateral U.S.-Mexico deal watered down the U.S. demand for a sunset clause that would have forced a renegotiation of NAFTA every five years. The demand for half the content of all cars to be made in the U.S. was scrapped in exchange for wage floors in Mexican car plants. The biggest victories are avoiding defeats.
Positive gains will probably come in areas where NAFTA will be modernized, like digital commerce, said Derek Burney, a former Canadian ambassador to the U.S. and chief of staff to Brian Mulroney.
But Canadians can also expect a string of concessions, such as extending patent protections on pharmaceuticals or opening a slice of the dairy market to U.S. producers.
It’s one thing to open the luxuriously protected dairy market – that’s reducing preferential treatment a little. But some other concessions could make a bad deal.
One is going too far to ease U.S. cross-border sales in raising the so-called “de minimis” threshold under which goods enter Canada duty- and tax-free. At the moment, only orders under $20 come into Canada duty-free; the U.S. has asked for it to be raised to $800 and is pushing for at least $200.
A small concession will make life easier for consumers. A big one is a bad deal that would give U.S. companies a big tax advantage over Canadian ones.
What matters is not just how high the de minimis exemption is, but what kind of taxes it covers. If it simply allows goods in an order under $100 or $200 to enter Canada without duties, that’s just a concession. But if it lets U.S. companies ship those orders into Canada without GST or provincial sales taxes, then it will give U.S. retailers a devastating advantage – creating two tax systems by allowing U.S. firms to skip Canadian taxes that Canadian businesses must pay. If that’s a deal that lasts decades, it will be a bad one.