Skip to main content

The proposed border-adjustment tax, which would stick a levy to many goods imported into the United States from Canada at crossings such as the Ambassador Bridge into Detroit, would make Canadian products less appealing to the world’s largest market.

Mark Spowart/THE CANADIAN PRESS

President Donald Trump's administration is sharply divided over what demands to make in the upcoming renegotiation of the North American free-trade agreement, with some top officials favouring limited tweaks that would open markets further while others want a significant overhaul to usher in a new era of "America First" economic nationalism, sources who have taken part in high-level trade discussions with the administration say.

On one side are economic adviser Gary Cohn and Treasury Secretary Steve Mnuchin, who favour an enhanced NAFTA that would make it easier for companies to do cross-border business. On the other are chief strategist Steve Bannon, policy guru Stephen Miller and National Trade Council director Peter Navarro, who want protectionist measures to fortify the U.S. market against foreign competition.

Commerce Secretary Wilbur Ross, the administration's NAFTA point man, is somewhere in between the two poles, speaking the language of open markets privately while flirting with economic nationalism in public.

Story continues below advertisement

Economic Insight: U.S. tourism industry facing blowback from Trump's 'America First' message

The NAFTA rift is part of the larger internecine battle between moderates and nationalists being waged in the West Wing. The rift blew into the open over the last week, with Mr. Trump publicly denigrating Mr. Bannon's importance in government and instructing him to mend fences with his rivals, particularly the President's son-in-law, Jared Kushner, who is on the side of the moderates.

Mr. Trump spent much of last year's campaign blaming NAFTA for hollowing out the U.S. manufacturing sector and promising to tear it up once in power. During a September debate, he called the pact "the worst trade deal maybe ever signed anywhere."

But nearly three months into the job, say sources in the Canadian, U.S. and Mexican governments, the Trump administration does not appear to know what it actually wants to get from the negotiation, with wildly opposite messages coming from different people in the President's circle.

Further complicating the uncertain landscape in Washington, Congress is mulling a border-adjustment tax that would curb imports to the United States. And the country's convoluted method for negotiating trade deals gives senators power to add different trade priorities to the agenda, leaving everyone uncertain as to what will ultimately end up on the table.

Two other key moves – the confirmation of U.S. Trade Representative Robert Lighthizer and 90-day notice to Congress of the intent to open renegotiation – have still not taken place, meaning formal talks will not start until midsummer at the earliest.

It is all leaving a trilateral trade zone worth $1.1-trillion (U.S.) in limbo, exposing one of the world's most lucrative economic partnerships to the whims of a chaotic administration and a fractious Congress.

Story continues below advertisement

The White House declined to discuss the split. "As of now we're not ready to comment on NAFTA talks," spokeswoman Natalie Strom wrote in an e-mail. Neither Mr. Ross's nor Mr. Mnuchin's offices responded to requests for comment.

The closest the Trump administration has come to setting out specific NAFTA demands was a draft of its notification letter to Congress, which leaked two weeks ago. The missive listed a wide-ranging set of negotiating objectives: A "safeguard mechanism" that would allow the United States to slap temporary tariffs on Canadian and Mexican goods if a sudden influx of them hurts U.S. companies; the scrapping of trade panels that have consistently ruled in Canada's favour in the softwood-lumber dispute; tightening "rules of origin" requirements on goods produced in the NAFTA zone.

Much of the language, however, was vague – hinting at U.S.-content requirement for manufactured goods, for instance, but not saying it explicitly. And the 40-point list of objectives is exhaustive, alternating between more targeted provisions to beef up the deal – gaining more access for U.S. agricultural exports, for example – along with tougher protectionist measures that could tear it apart.

"The letter reflects the diversity of viewpoints that exist within the administration, and I think that's going to continue," said trade lawyer Stephen Claeys, a former adviser to ex-president George W. Bush and congressional Republicans. "What they do with it now is going to depend on how the dynamics of the administration work out."

Scotty Greenwood, senior adviser at the Canadian-American Business Council, says the White House appears to be keeping its options open as it tries to simultaneously push forward with renegotiation and get congressional backing.

"It's probably purposefully vague because they're not completely sure what they are going to do. They're trying to build a bike and ride the bike at the same time," she said. "They're leaving themselves room to interpret it later."

Story continues below advertisement

Such fluidity leaves an opening for Canada's strategy to fight back against the protectionist tide. A parade of federal and provincial cabinet ministers, premiers and MPs have flooded Washington and state capitals across the country to lobby the administration, legislators and business. The uniform message: Blowing up NAFTA would hurt businesses on both sides of the border. Ottawa is also insisting the deal remain trilateral, arguing that replacing NAFTA with a series of bilateral pacts would be inefficient when many companies do business across all three countries.

Foreign Affairs Minister Chrystia Freeland, who will be overseeing the NAFTA talks, has been meeting with Mr. Ross. And several other Trump administration officials – including Mr. Cohn, Mr. Mnuchin, Mr. Bannon, Mr. Miller and Mr. Navarro – have had discussions on trade with Canadian and Mexican representatives, insiders said. Mr. Kushner, who helped organize Mr. Trudeau's February visit to the White House, has also been involved in some discussions around trade, the sources said.

The two camps in the administration have given wildly different messages on what to expect at the negotiating table. One source said the divide is so stark, "it's like dealing with two different governments."

Mr. Ross, for his part, has sent mixed signals. Publicly, he has complained about other countries offering rebates to exporters on value-added taxes, such as the GST, and is overseeing a review of trade deficits with 16 countries, including Canada, to determine if those countries are ripping off or cheating the United States. "It's not our fate in life that we have to absorb all the net exports from everyone else," he declared on Bloomberg TV last month.

But behind closed doors, people who have dealt with him say he has been less hawkish. In some cases, he has spoken of using NAFTA to eliminate more trade barriers. Mr. Ross was also behind a push to exempt the Keystone XL pipeline from Mr. Trump's edict that new pipelines use only American steel, sources said.

While Ottawa is happy to discuss measures that could expand NAFTA (labour mobility and the digital economy are two frequently cited examples), increased protectionism, in the form of taxes or tougher rules-of-origin requirements, are non-starters.

Story continues below advertisement

Mr. Ross is said to be particularly keen on the rules-of-origin revamp. These rules set limits on the amount of non-NAFTA materials and work that can go into a particular product for it to be exempted from tariffs in the NAFTA zone.

Autos, for instance, must contain 62.5 per cent NAFTA content. Also included in the rules-of-origin provision are so-called "tracing requirements" that determine which components of manufactured goods are traced to see whether they come from within NAFTA or not.

Mr. Ross wants to look at tightening these rules to ensure more content is made within the NAFTA zone. And the Trump administration is also toying with adding an additional requirement that a percentage of content be made in the United States, sources with knowledge of its thinking said. The leaked letter hinted at this, declaring that rewriting rules of origin to "ensure … production and jobs in the United States" would be a negotiating objective.

The theory is that tighter rules of origin and tracing will help suppliers located in the NAFTA zone, and particularly the United States. But any such move – whether raising the limits, adding more items to the tracing requirements or slapping on a "buy America" clause – would mean manufacturing companies would either have to start paying tariffs on some goods or switch to new suppliers.

Moving in parallel is the border-adjustment proposal. Such a move would slap an extra tax on U.S. companies that import goods while offering a rebate to firms that export. The levy threatens to make the products of all non-U.S. countries, including Canada, less attractive to the world's largest market. After failing to pass health-care legislation last month, legislators may turn their attention to tax reform, including the border-tax idea, when they return from break in the last week of April. But with a heavily divided GOP caucus, it is unclear what exactly will happen.

Ontario Economic Development Minister Brad Duguid contends that his province's international supply chains – particularly in the auto sector and other manufacturing businesses – are so interconnected that adding extra burdens will hurt companies on both sides of the border.

"Any costs that are imposed on trade, on moving goods and people across our border, have the potential to make our collective economies less competitive globally," he said. "We hope that, out of a sense of enlightened self-interest, the decision makers in the U.S. take that into account."

Adding to the complication is the United States' complicated negotiating system. Under the Trade Promotion Authority, Congress has given the President the right to negotiate with other countries – but the final agreement must be submitted for approval. This means that legislators can demand their own interests be put on the negotiators' agenda in exchange for backing the deal in Congress.

Representative Kevin Brady, chairman of the powerful House Ways and Means committee, told The Globe and Mail that the administration had promised to give Congress a major role in setting the agenda.

"The Trump administration is clearly committed to following the new trade rules, which is an unprecedented amount of consultation before negotiations begin," he said following a closed-door meeting with Mr. Ross and several officials from the Office of the United States Trade Representative.

The Senate finance committee, which must confirm Mr. Lighthizer, used a hearing last month to press him to commit to a long string of specific trade policies: Ending Canada's system of supply management for milk, eggs and poultry; getting Ottawa to stop counterfeit goods flowing through the country en route to the United States and pushing Canada to raise its $20 (Canadian) limit on the amount of cross-border goods Canadians can buy online without paying duty.

The tight time frame for talks only makes it harder to get through so many items: A deal would likely have to be done in time to be ratified before Mexico's June, 2018, election, lest an anti-NAFTA administration win power.

Whether the fragmented Congress – and the internecine battles within the administration – work in Canada's favour or against it are anyone's guess.

At a forum sponsored by the Canadian American Business Council in Washington last month, Representative John Delaney confidently predicted Speaker Paul Ryan would never be able to marshal enough support for a border tax.

"Let's face it: It's never going to happen. Why would you take the No. 1 economy in the world and bet it on a theory?" the Maryland congressman said. "It doesn't have the votes."

But Liberal MP Wayne Easter, who led an all-party delegation of MPs and senators to Washington last month to lobby members of Congress to back away from a border tax and protectionist NAFTA measures, cautioned that such sweeping predictions are a mug's game – particularly after last month's chaotic unravelling of the health-care bill.

"You've got so many different factions: the Blue Dog Democrats, the Freedom Caucus, the Tuesday Group, the Tea Party," said Mr. Easter, co-chairman of the Canada-United States Inter-Parliamentary Group. "It's really uncertain which way this goes. It's too close to call."

Report an error Editorial code of conduct
Comments

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • All comments will be reviewed by one or more moderators before being posted to the site. This should only take a few moments.
  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

Comments that violate our community guidelines will be removed. Commenters who repeatedly violate community guidelines may be suspended, causing them to temporarily lose their ability to engage with comments.

Read our community guidelines here

Discussion loading ...

Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.
Cannabis pro newsletter