Pending NAFTA result, Trump exempts Canada and Mexico from tariffs

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U.S. President Donald Trump has exempted Canada and Mexico from his steel and aluminum tariffs pending the renegotiation of NAFTA, simultaneously offering his continental trading partners a welcome reprieve and tightening the vise on them at the bargaining table.

Mr. Trump unveiled details on Thursday of his tariffs of 25 per cent on steel and 10 per cent on aluminum, which will take effect in 15 days. For now, only Canada and Mexico will escape the levies; other countries will have to negotiate for exemptions.

The President is citing national security – the need to secure a domestic supply of metal for military equipment – as the reason for applying the duties under an obscure 1962 law.

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"We're going to hold off the tariff on those two countries to see whether or not we're able to make a deal on NAFTA," Mr. Trump said. "If we're making a deal on NAFTA, this will figure into the deal and we won't have the tariffs on Canada or on Mexico. … I have a feeling we're going to make a deal on NAFTA."

The proclamation of the tariffs said Canada and Mexico are expected to "take action" to stop other countries from using them as a back-door to get their steel into the United States. One Canadian source said Ottawa is serious about ensuring it does not become a conduit for countries trying to thwart the U.S. tariffs. It was not immediately clear if the United States expected its partners in the North American free-trade agreement to write tougher trade barriers of their own into the renegotiated pact.

The exemption follows a lobbying blitz by Canadian officials, who focused much of their effort on mobilizing pro-trade forces within the administration.

Canadian government sources said two channels of communication were particularly vital: Defence Minister Harjit Sajjan to Defence Secretary James Mattis, and Finance Minister Bill Morneau to Treasury Secretary Steve Mnuchin. Mr. Mattis, who hunkered down with Mr. Sajjan in Brussels on the sidelines of a North Atlantic Treaty Organization meeting in February, told Mr. Trump the tariffs should be narrowed as much as possible to spare U.S. allies.

Canada's ambassador to Washington, David MacNaughton, made a final push in a White House meeting on Wednesday with U.S. national security adviser H.R. McMaster, and a subsequent dinner at the Willard Hotel, the sources said. Ontario Premier Kathleen Wynne pressed U.S. Ambassador Kelly Craft and Republican governors, including Michigan's Rick Snyder, to take Canada's case to the administration, one source said.

Ottawa argued its industries are so integrated with those of the United States that penalizing them would hurt U.S. businesses. The national security issue was particularly compelling to the White House, one source said: Canada is a close ally and supplier of metals to U.S. military production, so the tariffs would be counterproductive.

Canada is both the largest supplier and the largest export market of the United States for aluminum and steel.

The President's move increases the pressure on Canada and Mexico to agree to a NAFTA deal with the United States, which is demanding greater advantages. The three sides wrapped up the seventh round of talks in Mexico earlier this week with little progress on the most contentious issues.

Canadian officials said they will keep working towards a NAFTA settlement, and still hope to lobby for a permanent exemption on steel and aluminum as a separate issue.

"Today is a step forward," Foreign Affairs Minister Chrystia Freeland told reporters at a government office in Toronto. "There's more hard work to do, and we will not let up. This work continues and it will continue until the prospect of these duties is fully and permanently lifted."

Jerry Dias, leader of Canada's largest private-sector union, called Mr. Trump's exemption "trade blackmail." The Unifor president insists Washington has no interest in reaching a reasonable deal on NAFTA.

Mr. Trump's tariff action makes good on his long-standing pledge of trade barriers to foreign imports, but is certain to trigger a global trade war.

Chinese Foreign Minister Wang Yi warned on Thursday that he would make a "justified and necessary response" to the tariffs. "Especially given today's globalization, choosing a trade war is a mistaken prescription. The outcome will only be harmful," he told reporters in Beijing.

The European Union has released a list of U.S. goods it plans to target with retaliatory tariffs, including Kentucky bourbon, Levi's jeans and Harley-Davidson motorcycles.

Mr. Trump is also facing a battle with some Republicans. Arizona Senator Jeff Flake said on Thursday he would present legislation to "nullify" the tariffs before they come into effect.

"These so-called 'flexible tariffs' are a marriage of two lethal poisons to economic growth – protectionism and uncertainty," Mr. Flake said in a statement. "Trade wars are not won, they are only lost. Congress cannot be complicit as the administration courts economic disaster."

Jean Simard, CEO of the Aluminum Association of Canada, a non-profit that represents aluminum producers, called the announcement "relatively positive" news for the industry.

"There is oxygen in the room," he said. "It's an opening to work together to find a way out of this for Canada."

Still, he said uncertainty over the final outcome on tariffs will weigh on the domestic industry and put the brakes on major new investment: "When you are investing billions of dollars, you have to be able to see ahead very clearly."

The Canadian Steel Producers Association (CSPA) said it welcomed the exemption, but cautioned that Canada needs to ensure that offshore steel now too expensive for the U.S. market is not diverted to Canada.

"We continue to support the dialogue between Canadian and U.S. governments to ensure our integrated markets remain open," CSPA president Joseph Galimberti said in a statement.

Mr. Trump said any decisions on further exemptions would be tied to national security and "who's paying the bills, who's not paying the bills" – an apparent reference to his complaint that other NATO members are not picking up their share of the tab for defence.

Mr. Trump said he is also planning further trade actions against both China and India in the form of a "reciprocal tax" on imports.

With reports from Lawrence Martin in Washington and Reuters