New NAFTA only a smidgen more free
When the revamped, Trumpified NAFTA was first announced, the general reaction here was relief. Disaster had been averted. The agreement had been saved. Maclean’s magazine featured Foreign Affairs Minister Chrystia Freeland on its cover by the headline, You’re Welcome, Canada.
This was probably overstated. The worst-case scenario for the talks was never that Donald Trump would pull out of the agreement. Whether or not he ever had any intention of doing so, the chances he could get Congress to pass the necessary legislation were always remote.
Rather, it was the potential for Trump to turn a simple free-trade agreement among sovereign states, in which each country remained free to set its own trade and monetary policies, into a kind of customs and currency union. As I wrote in March of last year:
“It is not inconceivable that, in their obsession with the trade balance, (the Trump administration) might demand some sort of limit on how much the Canadian dollar could depreciate. (Or) suppose Canada were to strike a free-trade agreement with China … (Trump) cannot possibly view that with equanimity … So suppose they were to react by demanding that we convert NAFTA into a customs union, with a common external tariff.”
My worst fears, then, have not been realized. The revamped NAFTA (we are under no obligation to call it USMCA, just because Trump says we must) contains neither explicit limits on exchange rate movements nor a common external trade regime. It does contain, however, measures that hint at both.
Chapter 33 of the draft text, while affirming the importance of “market-determined exchange rates,” could as easily open the door to politically determined exchange rates. All it would take would be for the U.S. to claim a decline in the Canadian dollar was not due to market forces, but rather was the result of some nefarious scheme of currency manipulation.
To be sure, most of the language in the chapter is merely about the need for “transparency” and “reporting.” Even the strange new tripartite Macroeconomic Committee is supposed to just “monitor” and “consider” each country’s monetary and exchange rate policies. But then there’s that bit about any party being able to demand “consultations” with another whenever it suspects the latter is engaged in “competitive devaluation,” or to haul it into trade court (“dispute settlement”), with appropriate penalties imposed if it has not been “transparent” enough.
It probably doesn’t mean anything. Folks at the Bank of Canada seem unfussed by it. Still, it’s unsettling to see such intrusive language in a trade agreement, especially at the behest of an administration with such a tenuous, paranoid grasp of trade and monetary policy as this one.
Then there’s Article 32.10, now notorious as the “China clause.” Not only would “a Party,” say Canada, be obliged to submit the text of any free-trade agreement with a “non-market country” to the United States (and Mexico) for their “review,” but if they didn’t like what they saw, “the other Parties” would be allowed to “terminate this Agreement” and replace it “with an agreement as between them … comprised of all the provisions of this Agreement.”
This has been explained away as being no different than the status quo: any party can withdraw from NAFTA on six months notice. But what’s described here isn’t the U.S. withdrawing from NAFTA, but the U.S. and Mexico kicking Canada out of it. Is this likely? Probably not. But if the clause is entirely meaningless, it’s hard to understand why it was included. Certainly the Chinese seem to think it means something, to judge by their loud, angry protests.
These are by no means the only concerns that have come to light. Politico Pro Canada editor Alexander Panetta has unearthed half a dozen similar provisions giving the U.S. unprecedented power “to scrutinize, micromanage, or punish its neighbors’ trade policies,” on matters ranging from dairy exports to counterfeit goods. Indeed, the longer one looks at the text, the harder it is to see the promised “wins,” at least if free trade is your objective.
In only two areas was trade noticeably liberalized, supply management and cross-border purchases, and then only by a smidgen. Everywhere else the movement is in the other direction, where there was any movement at all. We can probably be thankful the Liberals were unable to insert the threatened gender, Indigenous and climate change chapters into the agreement.
But neither did they make any headway on government procurement or mobility rights for professionals.
While the Chapter 19 binational dispute settlement panels were retained, and a sunset clause mostly averted, trade in autos is now subject to a raft of restrictions that will shelter uncompetitive manufacturers and drive up prices for consumers: higher North American content quotas, new “non-Mexican” quotas (setting how much content must be produced by workers earning more than $16 an hour), plus agreement that Canadian and Mexican cars would be exposed to Sect. 232 “national security” tariffs when either country’s exports exceed a certain quota.
Perhaps these concessions were unavoidable. But in other areas the Trudeau government seems to have taken the opportunity of the talks to insert certain changes unbidden, in line with their own ideological preferences. It wasn’t Donald Trump, I suspect, who insisted on scrapping NAFTA’s Chapter 11 investor-state dispute settlement process, which protected foreign investors from arbitrary discrimination and expropriation.
Neither was it Trump, I am certain, who demanded removal of the agreement’s proportionate energy-sharing provision, which prevented federal governments from diverting cross-border energy flows in favour of domestic customers, as they had done under the National Energy Program.
These are being claimed as “wins” for Canada, but in fact they are only wins for government. To the extent they have any effect, it can only be to restrain trade and discourage investment in this country. The “Trump made us do it” excuse only stretches so far.
Prime Minister Justin Trudeau and Foreign Affairs Minister Chrystia Freeland in Ottawa on Oct. 1 after a new trade deal was reached. The “wins” for Canada in the USMCA were in fact only wins for government, writes Andrew Coyne.