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Gordon Ritchie is a former Canadian ambassador for trade negotiations and deputy chief negotiator of the Canada-U.S. free-trade agreement (FTA)

With the current meetings in Washington, the real NAFTA negotiations are about to begin. U.S. President Donald Trump has proclaimed that he is determined to tear up the worst trade agreement in the history of the world and prefers to engage in head-to-head negotiations with Canada.

Canada's preferred option must be to stick with the North American free-trade agreement, either in its present form or somehow modernized. Updating this 25-year-old pact could see some minor adjustment and the extension to new fields, such as the digital technologies with implications for copyright, trademarks and other intellectual properties under attack from piracy from China and elsewhere. Unfortunately, the Americans seem to be unprepared to address these positive steps.

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Instead, they are obsessively focused on the trade deficit. This spells serious trouble for Mexico. Although U.S. exports to Mexico have increased by more than 450 per cent since 1993, U.S. imports have risen even faster, by nearly 650 per cent, to generate a bilateral deficit of $63-billion (U.S.) on merchandise trade. U.S. negotiators are insisting on draconian measures to redress this imbalance, notably by rigging the rules of origin for duty-free products to shift production, particularly in the auto sector, away from Mexico and into the United States.

For Mr. Trump – the self-proclaimed world's greatest negotiator – the opportunity to formally announce withdrawal from NAFTA must be irresistible. The Mexican government and economy will come under great pressure to bend to his demands. It costs him nothing, as no action can be taken for six months and then only if Congress acts to "repeal and replace" the NAFTA implementing legislation. The worst that can happen, from his self-centred perspective, is that he fulfills his election commitment to tear up NAFTA.

The Mexican government finds itself between a rock and a hard place, and has made it clear that it intends to walk out of the negotiations if the American threats escalate, and is attempting to prepare for the serious economic consequences of a breakdown. If, instead, Mexico accedes to American demands, it will face an angry reaction from the electorate in next year's presidential elections.

Prime Minister Justin Trudeau has expressed his moral support for the Mexicans in this dilemma but will be compelled to focus on his own country's interests if things get nasty, as they almost surely will.

In the very near future, expect the NAFTA option to be off the table. That will almost inevitably lead to one-on-one negotiations between Canada and the United States, which is indeed Mr. Trump's preferred option. Some have held out hope that we could simply fall back on the original Canada-U.S. free-trade agreement (FTA), which would lead to a number of technical issues. This would depend on Congress's willingness to repeal only the laws relating strictly to NAFTA.

Whether or not the original FTA framework proves useful, bilateral negotiations would come up against the same hard U.S. demands. Canada's situation is very different from Mexico's. The Canadian and U.S. economies, at comparable stages of development, were closely integrated long before NAFTA. Although no one has apparently briefed Mr. Trump, this trade is balanced. In fact, according to his own Special Trade Representative, "The U.S. goods and services trade surplus with Canada was $12.5-billion in 2016." Canada remained by far the best customer for American products over all, and the most important export market for 35 American states.

None of this has deterred the U.S. negotiators from pressing their aggressive demands, which have reportedly included:

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  • Repealing the dispute-settlement provisions that give Canadian exporters some limited insurance against the most aggressive American protectionism, e.g. lumber, Boeing/Bombardier;
  • Loaded rules of origin stipulating a very high level of U.S. content for duty-free goods;
  • Access to procurement by Canadian governments at all levels while capping Canadian firms’ access to U.S. public purchasing;
  • Busting open the supply management system protecting Canadian farmers, especially dairy.

All of these demands come with a five-year "sunset" clause requiring that we go through all this again a few years down the road. This adds up to demands for one-way free trade. On the face of it, this is an absurd overreach. The Trump administration is obviously counting on pressure from business and financial interests to force the Canadian government to accept such a one-sided proposal that they have already dismissed as a complete "non-starter."

The Canadian government (as well as the provinces, business and labour) is now forced to contemplate life without a free-trade agreement. While this is far from a preferred choice, it would not be the end of the world. In the absence of a bilateral agreement, the most-favoured-nation rules of the World Trade Organization would apply and offer many of the same protections. Tariffs would be restored, but at a much lower level than before the free-trade agreement, averaging roughly 3.5 per cent on shipments to the United States. Unquestionably, existing economic linkages would be put under stress but most would survive. This is clearly not the option the Canadian government would prefer but it could be better than what is currently on offer from the Trump administration.

Meanwhile, the impact on U.S. businesses would be just as severe if not more so. In an unprecedented statement, the U.S. chamber of commerce, the broadest and perhaps most influential business lobby, came out strongly against dismantling NAFTA, which it earlier estimated underpinned about 12 million American jobs. The powerful U.S. agricultural lobby has also weighed in, particularly concerned over threats to its booming exports to Mexico.

These interest groups could be expected to have a real impact on Congress where the final decisions must be taken. In other words, for all his bluster, Mr. Trump does not hold all the cards.

Prime Minister Justin Trudeau spoke to reporters after a meeting with President Donald Trump at the White House. Trudeau said that he says Canada is taking NAFTA negotiations seriously, but he is optimistic there will be an outcome that benefits both Canada and the United States.
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