BE PREPARED TO WALK AWAY
Trump’s ‘America first’ agenda poses a challenge, but Canada is not without leverage, Andrew Coyne writes.
Canada survived for 120 years without a free trade agreement with the United States. It can survive without one in future, if it has to.
The first principle guiding Canada’s negotiators, then, as they begin talks with the United States and Mexico on “improving” NAFTA, the North American Free Trade Agreement (successor to the original 1987 Canada-US FTA), must be a willingness to walk away from the bargaining table, if need be. And by walking away, I mean being willing to risk the United States abrogating the entire treaty in response.
That’s obviously not what anyone would or should prefer, nor should it be undertaken lightly. A less-than-perfect NAFTA is better than no NAFTA; even a worse-than-status quo NAFTA might be. But threatening to walk away is of no use as a bargaining tactic unless you are prepared to actually walk away. That means having a clear idea where your bottom line is: What balance of concessions is acceptable, and what is not.
Of course, it’s hard to imagine any deal that would not be better than no deal. There is a paradox at the heart of every international trade negotiation: the thing that each party most zealously protects, access to its market, is the thing it should be most eager to give up. The real “win” from any free trade deal, as any economist will tell you, is the extent to which it forces us — allows us, rather — to open our own market. Whether the other side opens theirs is frankly a bonus.
A complicating factor in the present negotiations is that the Trump administration, or at least one significant faction thereof, really and truly does not believe in free trade. That’s true to an extent of every government: If they really believed in it they’d just do it, not wait to negotiate it. But officials like chief strategist Steve Bannon, Commerce Secretary Wilbur Ross, and trade adviser Peter Navarro — and of course, Donald Trump himself — do not see trade as economists do, as a way of increasing imports, or even as most governments do, as a way of increasing exports, but in either case as a way of expanding the amount of trade.
They see it, rather, wholly and completely in terms of the balance of trade: The larger the surplus of exports over imports, in their view, the better. Needless to say, this is nonsense. The trade balance is an indicator of precisely nothing meaningful about an economy’s state of health; indeed, booming economies typically exhibit trade deficits, as they suck in imports faster than slower-growing partners can absorb their exports.
This is one of many ways in which the Trump administration is, shall we say, unique. And it offers the first clear red line for Canadian negotiators: There can be no question of any overhaul of NAFTA that is designed to deliver permanent trade surpluses to the Americans — for example, by setting limits on movements of the Canadian dollar.
Beyond that, the rule should be a simple one: We should be for any change that would open trade further, against any change that would restrict it. The original NAFTA contains a number of carve-outs, many of them inserted at our insistence: in agriculture (hello, supply management), in transportation and telecommunications, and so on. Most of these anti-consumer, oligopoly-protecting policies we should be glad to be rid of, and if renegotiating NAFTA offers the pretext (“we fought as hard as we could, but in the end the Americans were adamant”), so much the better.
Others might more genuinely be classed as concessions. For example, the U.S. may demand we accept longer patent protection for pharmaceuticals, leading to higher prices for consumers and governments here to the benefit of American drug makers. That’s unpleasant, but may well be acceptable in the context of an overall deal.
A trickier proposition, politically, are measures that would keep trade open between the countries of North America, at the cost of restricting it further with countries outside our continent: for example, higher North American content requirements. These might well find favour with industry on both sides of the border, but should be strongly resisted — not only for the usual pro-consumer reasons, but because Canada’s strategic interests lie in diversifying our trade as much as possible
Finally, there is what many have described as a potential deal-breaker: NAFTA’s famous Chapter 19, with its provision for binational dispute-resolution panels as a kind of court of appeal from each country’s domestic trade tribunals. There’s no doubt this was a huge gain for Canada, insofar as it protected us from the notorious abuses to which the American process is prone. And, yes, we’ve won more cases than we’ve lost. But there is, at least in principle, a replacement for it, if the Americans could be persuaded to adopt it.
Suppose, that is, each country scrapped its trade remedy laws altogether, as they applied to each other, and agreed to police trade practices using domestic competition laws instead. One of the bedrock principles of NAFTA is supposed to be “national treatment” — each country is obliged to treat the other’s companies in law no worse (and no better) than its own. Trade remedy laws are a curious exception. Practices that are considered perfectly respectable when carried out within the confines of a single country — selling for less in one market than another, say — suddenly become crimes the minute a national border is crossed.
Conversely, abuse of market dominance is surely a problem, whether the perpetrator is domestic or foreign. Logically, then, it would make sense simply to extend the principle of national treatment to trade law. Each country’s domestic courts would then be free to apply their own competition laws, free of meddling binational overseers — a win for sovereignty-obsessed Trumpians. They would just have to apply them even-handedly.
We probably won’t get that. But we shouldn’t think we have no leverage in these talks. Trump is a greatly weakened president, mired in the mid-thirties in the approval polls, at war with his own party, facing potential impeachment or even prosecution in the Russian affair. Meanwhile, Canada has many allies in the cause of keeping NAFTA’s borders at least as open as they are now: Mexico, but also in Congress, the states, and the private sector.
And we have the ultimate leverage: our own willingness to walk away.
The first clear red line for Canadian negotiators: There can be no question of any overhaul of NAFTA that is designed to deliver permanent trade surpluses to the Americans.
Government officials and energy industry representatives are eyeing key changes that could deepen ties between the three countries’ oil, gas and electricity industries as the North American Free Trade Agreement renegotiation kicks off next week.
Energy ministers in Canada, Mexico and the United States have so far struck a conciliatory tone ahead of Wednesday’s scheduled start to the talks, a stark contrast to President Donald Trump’s campaign rhetoric in which he threatened to dismantle the deal in favour of more U.S.-friendly policies.
Energy trade and investment ties between the three markets have been highly integrated since NAFTA came into effect in 1994, but all three see several opportunities for further integration, nudging the continent closer to forging a North American energy bloc — a grandiose plan that has been tried, and repeatedly failed, for decades.
The premise: In an increasingly uncertain energy market, harmonized economic and environmental ties between Canada, the U.S. and Mexico could position North America as the dominant energy superpower.
Although Trump’s pointedly “America first” foreign policy stance has dampened hopes of finding common ground, the countries’ respective energy ministers in recent months have suggested they are at least open to a broader agreement.
Public officials point to several current policies that could be improved, such as tweaking the “rules of origin” agreements on petroleum imports, expanding crossborder electricity corridors and solidifying the recent liberalization of Mexico’s oil and gas sector.
U.S. Energy Secretary Rick Perry in June told reporters he was interested in pursuing a North American energy strategy, saying that Canada-U.S. relations were more important than ever, “particularly from an energy perspective.”
Perry and Canadian Natural Resources Minister Jim Carr have met in person on three occasions, according to Carr’s office. He has also spent recent months meeting U.S. energy executives, union leaders and industry representatives ahead of the talks.
“(Energy) is one area where the three governments actually have converging interests,” said Todd Weiler, a London, Ont.-based arbitration lawyer who specializes in NAFTA disputes.
A joint statement released this month by the Canadian Association of Petroleum Producers (CAPP) and its U.S. and Mexican counterparts highlighted several energy regulations and trade laws that could be updated or streamlined.
In particular, they called for better cross-border mobility of people and infrastructure, including everything from drilling rigs to emergency response equipment.
The groups also advocated for looser restrictions on rules of origin for oil imports.
Currently, for example, some Canadian oil exports to the U.S. and Mexico, if mixed with a thinning agent called diluent that allows bitumen to flow through a pipeline, have been slapped with duties because buyers cannot verify that the product originated in a NAFTA country.
As a result, Canadian oilsands producers have in recent years been forced to import higher volumes of diluent from the U.S. to mobilize their heavy crude as bitumen production in northern Alberta continues to climb.
The groups also advocated for provisions allowing for the unrestricted flow of data between countries.
The Canadian and U.S. energy sectors in particular are highly dependent on one another. A recent report by the Canadian Energy Research Institute estimates the total capital investment and revenues from operations over the next 11 years will generate $2.7 trillion in GDP in Canada and US$45.6 billion in the U.S.
But integrating an energy market is not easy, even within one country.
Canadian provincial and federal politicians have long tried to establish common energy goals in order to streamline the construction of oil pipelines or install federal regulations aimed at cutting carbon emissions.
Their efforts are in direct response to the political and environmental opposition on major pipeline proposals, which have been delayed for years.
Such efforts have involved warm-sounding agreements, but have been criticized for not being backed by hard policy.
Former Alberta premier Alison Redford began talks on a national energy strategy in 2012, and 13 premiers eventually signed a written agreement.
But the language in the final document was imprecise and nonbinding, and failed to lower First Nations’ wariness of pipelines, or hasten the regulatory process around major infrastructure projects.
The agreement followed an earlier document in 2007, published by the Council of the Federation, that was similarly long on ambition and short on detail.
Seeing that Canada has failed to integrate its energy markets, a continental strategy seems even more unlikely — particularly since Trump and Prime Minister Justin Trudeau sharply diverge on environmental policy.
And yet, some are calling on Canada to use NAFTA negotiations to interlock the three countries’ physical energy systems and establish itself as a leader on climate policy.
“I think we can use the NAFTA negotiation table to put a stake in the ground on aligning environmental policy,” said Sen. Doug Black, who founded the Energy Policy Institute of Canada, which focuses on energy market integration.
“It’s in Canada’s clear interest to do that, because we are now offside on where president Trump wants to go, and the result of that adds to the competitive burden that Canadian business is incurring month after month after month.”
Mexico is seen as a critical wild card in energy negotiations. Analysts say the three countries are particularly eager to formalize the liberalization of Mexico’s energy industry, which in mid-2014 opened up large blocks of onshore and offshore oil and gas leases to foreign investors.
The changes, introduced by President Enrique Peña Nieto, created billions of dollars in foreign direct investment.
U.S. and European energy companies, including Royal Dutch Shell PLC, Statoil ASA and Chevron Corp., were among the top bidders.
Several U.S. pipeline companies, along with Calgary’s TransCanada Corp., have been building natural gas pipelines in Mexico as it expands output. And General Electric Co., among others, is selling natural gas generators to Mexican buyers as the country modernizes its electricity grid.
Negotiators are keen to bring some level of permanence to Mexico’s new-found openness to foreign investment, but some believe it could be threatened by left-leaning opposition leader Andrés Manuel López Obrador, who objects to economic liberalization. He leads several public polls ahead of the country’s presidential election next year.
“One could rewrite NAFTA to put a firmer foundation in place to keep those markets open,” said Alan Krupnick, a senior fellow at the RFF Center for Energy and Climate Economics in Washington, D.C.
Krupnick and others also see opportunities for improved trade ties in electricity generation, particularly along the Mexico-U.S. border but also between the U.S. and Canada.
Expanding existing power generation and creating new power corridors could be part of a broader plan to map out a fully integrated electricity grid, RFF researchers said in a 2016 report.
But even if NAFTA members eventually agree to improve the most obvious faults within the agreement, the countries are a long way off of a true North American energy strategy.
Nevertheless, Canada can take solace that its sector will remain deeply relevant to Trump’s central energy ambition: achieving energy security.
“The U.S. cannot be energy secure without Canada,” Sen. Black said. “In order to achieve president Trump’s goals, Canada is essential.”