Mered­ith Lilly

The USMCA and the New Rules of the Road

Policy - - In This Issue - Mered­ith Lilly

The suc­cess­ful ne­go­ti­a­tion of the United States-Mex­i­coCanada Agree­ment (USMCA) in prin­ci­ple has been wel­comed with a sense of re­lief across Canada. But rather than em­braced as a “good” deal for Canada, the USMCA is re­garded by most ex­perts as a “good enough” deal, the best that Cana­dian ne­go­tia­tors could have achieved given the un­pre­dictable and pro­tec­tion­ist pos­ture south of the bor­der.

Reach­ing an agree­ment with the Amer­i­cans had be­come in­creas­ingly nec­es­sary in or­der to re­store sta­bil­ity and cer­tainty to Canada’s lag­ging in­vest­ment cli­mate, and to pre­vent a far worse fu­ture from ma­te­ri­al­iz­ing. There is am­ple ev­i­dence that the Trump ad­min­is­tra­tion would have made good on its threat to im­pose puni­tive auto tar­iffs on Canada in the 25 per cent range had the Trudeau gov­ern­ment failed to sign on to the U.S.-Mex­ico deal that was con­cluded in Au­gust. Auto tar­iffs on Canada would have spelled dis­as­ter for both the sec­tor and the broader On­tario econ­omy, jeop­ar­diz­ing well over 100,000 jobs.

Many ac­counts have al­ready been writ­ten about what Canada gained and lost in the new deal. But one over­looked re­al­ity is that the end zones for a NAFTA 2.0 were pre­dictable from the out­set, sug­gest­ing the three coun­tries could have ar­rived at a tri­lat­eral agree­ment much faster and with less ac­ri­mony.

For ex­am­ple, be­fore ne­go­ti­a­tions be­gan in 2017, vir­tu­ally no close ob­servers ex­pected Canada or Mex­ico to come out fur­ther ahead un­der the Trump ad­min­is­tra­tion. In­stead, var­i­ous mod­ern­iza­tion chap­ters such as dig­i­tal, small busi­ness, ser­vices, labour and en­vi­ron­ment were ex­pected to be trans­planted from the Tran­sPa­cific Part­ner­ship (TPP) that the U.S. left in 2017. These mod­ern­iza­tion ob­jec­tives would be ac­com­pa­nied by a U.S. “re­bal­anc­ing” agenda that re­quired both Canada and Mex­ico to make con­ces­sions in po­lit­i­cally im­por­tant ar­eas for Trump in ex­change for on­go­ing ac­cess to the Amer­i­can market. Mex­ico would be forced to make con­ces­sions on auto rules of ori­gin and Canada would be pres­sured to pro­vide com­pa­ra­ble lev­els of ac­cess to its dairy market that were pre­vi­ously ne­go­ti­ated via the TPP. Any other Cana­dian or Mex­i­can pri­or­i­ties that were not shared by the Amer­i­cans were vir­tu­ally guar­an­teed to stall, in­clud­ing gov­ern­ment pro­cure­ment, tem­po­rary en­try, and Canada’s so-called pro­gres­sive trade agenda.

The best that the two smaller NAFTA part­ners could be ex­pected to achieve in those ar­eas would be the sta­tus quo.

In­deed, af­ter more than a year, the three coun­tries landed on an agree­ment that was largely spelled out from Day One. For all the po­lit­i­cal drama that un­folded in the fi­nal weeks of ne­go­ti­a­tions, the same deal could have been reached last spring, with less dam­age to Canada’s eco­nomic in­ter­ests. For it was over the sum­mer months that Canada was slapped with bil­lions in steel and alu­minum tar­iffs and Pres­i­dent Trump ramped up his rhetoric against Prime Min­is­ter Trudeau, fur­ther en­trench­ing the im­pres­sion that Canada re­mains an un­sta­ble in­vest­ment en­vi­ron­ment. But the most im­por­tant rea­son to reach a quick deal was to en­sure the USMCA ne­go­ti­a­tions did not get caught in the cross­fire of Trump’s de­vel­op­ing trade war with China that started rolling out last spring. The U.S. 232 na­tional se­cu­rity tar­iffs on steel and alu­minum hit Canada hard, but the U.S.’s real tar­get was China. It also took this very ag­gres­sive ac­tion by the Amer­i­cans be­fore Canada’s Depart­ment of Fi­nance took se­ri­ous mea­sures to ad­dress the dump­ing and trans-ship­ment of Chi­nese steel that the U.S. had long re­quested.

Fol­low­ing the im­po­si­tion of steel and alu­minum tar­iffs, the Amer­i­cans then pro­ceeded to cir­cle the wag­ons on an auto tar­iff strat­egy over the sum­mer months. With the com­ple­tion of rene­go­ti­a­tions with South Korea and NAFTA part­ners, the U.S. reached trade agree­ments with three of its ma­jor ve­hi­cle ex­port­ing trad­ing part­ners. The sub­se­quent launch of bi­lat­eral ne­go­ti­a­tions with each of Ja­pan, the Euro­pean Union and the United King­dom means the U.S. has also now made com­mit­ments to all of its trade al­lies who ex­port ve­hi­cles that can keep them pro­tected in­side any fu­ture U.S. tar­iff wall.

In short, this se­quenc­ing has set the ta­ble for the Amer­i­cans to now move for­ward ag­gres­sively with auto tar­iffs tar­get­ing China. When added to the $250 bil­lion in tar­iffs that the U.S. has fo­cused ex­clu­sively on China, the ground­work has been laid for a new Cold War be­tween the two su­per­pow­ers.

It is through this lens that the USMCA clause on non-market economies must be viewed: not as a de­lib­er­ate chal­lenge to Cana­dian sovereignty but in­stead as an Amer­i­can chess piece in a much more com­pli­cated game. Rather than an Amer­i­can veto on Cana­dian trade pol­icy, Ar­ti­cle 32.10 of­fers a plain mes­sage of de­ter­rence to all coun­tries seek­ing to trade with the U.S.: you’re ei­ther with the United States or you’re with China—pick sides.

One over­looked re­al­ity is that the end zones for a NAFTA 2.0 were pre­dictable from the out­set, sug­gest­ing the three coun­tries could have ar­rived at a tri­lat­eral agree­ment much faster and with less ac­ri­mony.

Af­ter more than a year, the three coun­tries landed on an agree­ment that was largely spelled out from Day One. For all the po­lit­i­cal drama that un­folded in the fi­nal weeks of ne­go­ti­a­tions, the same deal could have been reached last spring, with less dam­age to Canada’s eco­nomic in­ter­ests.

Trump’s pref­er­ence for the “stick” over the “car­rot” may be brazen and ag­gres­sive but this ori­en­ta­tion to China is not new for the Amer­i­cans. For ex­am­ple, other pro­vi­sions in USMCA that tar­get China date back to the Obama-era TPP text, such as cur­rency ma­nip­u­la­tion, data lo­cal­iza­tion and state-owned en­ter­prise re­quire­ments. Now that these pro­vi­sions are en­trenched in the USMCA, the Amer­i­cans can use the text as a tem­plate for ne­go­ti­a­tions with fu­ture trade part­ners.

Fur­ther­more, the Amer­i­cans have al­ready been ac­tively work­ing with the EU and Ja­pan to de­velop a tri­lat­eral ap­proach to ad­dress and en­force rules around China’s dis­tor­tionary prac­tices such as in­dus­trial sub­si­dies, state-owned en­ter­prises and forced tech­nol­ogy trans­fer. Once the three coun­tries have a united strat­egy, oth­ers in­clud­ing Canada will be in­vited to join this “con­sen­sus”. When the newly con­cluded USMCA is viewed in this broader con­text, Canada’s role is clearly a mar­ginal one. We needn’t fix­ate on Ar­ti­cle 32.10 as a de­lib­er­ate provo­ca­tion to Cana­dian sovereignty that re­quires us to re­flex­ively run to­ward China just to show the Amer­i­cans how un­con­strained we are by the pro­vi­sion. Nor should we halt Cana­dian progress with China on ar­eas of mu­tual ben­e­fit. In­stead, we should fol­low our nor­mal path of Cana­dian prag­ma­tism to sup­port the Amer­i­cans where it makes sense, while fall­ing back in ar­eas where it doesn’t. In fact, many of the tri­lat­eral ef­forts led by the Amer­i­cans to con­strain China would be pos­i­tive for Canada, par­tic­u­larly in sec­tors such as the dig­i­tal econ­omy where Cana­dian in­ter­ests are threat­ened by un­fair prac­tices that un­der­mine in­no­va­tions in such ar­eas as ar­ti­fi­cial in­tel­li­gence.

In the months ahead, Canada must re­main fo­cused first and fore­most on shoring up our trade agree­ments with es­tab­lished part­ners, in­clud­ing the U.S. and Mex­ico. And as we take stock of our in­ter­na­tional trad­ing po­si­tion now that USMCA is com­plete, we must rec­og­nize that pro­tec­tion­ism has be­come the norm in many parts of the world.

For ex­am­ple, the rat­i­fi­ca­tion of CETA is prov­ing to be dif­fi­cult in sev­eral key Euro­pean coun­tries, po­ten­tially jeop­ar­diz­ing its fu­ture. Canada is not in­no­cent ei­ther. We have re­cently jumped on the pro­tec­tion­ist band­wagon, rolling out our own safe­guard mea­sures on steel in or­der to pro­tect do­mes­tic in­ter­ests.

Fi­nally, Canada’s di­ver­si­fi­ca­tion goals are laud­able but must be kept in per­spec­tive. While there are many new op­por­tu­ni­ties for ex­porters in the fast-grow­ing mar­kets of the Asia Pa­cific via our new TPP part­ners and South Korea, none will re­place the US market next door. Canada’s in­ter­ests are al­ways bet­ter served when we co­op­er­ate with our friends and al­lies: we needn’t throw out the rule book as we con­sider what to do next with China.

We needn’t fix­ate on Ar­ti­cle 32.10 as a de­lib­er­ate provo­ca­tion to Cana­dian sovereignty that re­quires us to re­flex­ively run to­ward China just to show the Amer­i­cans how un­con­strained we are by the pro­vi­sion. Nor should we halt Cana­dian progress with China on ar­eas of mu­tual ben­e­fit.

Mered­ith Lilly is As­so­ciate Pro­fes­sor and holder of the Si­mon Reis­man Chair in In­ter­na­tional Af­fairs at Car­leton Univer­sity. Pre­vi­ously, she was for­eign af­fairs and in­ter­na­tional trade ad­viser to Prime Min­is­ter Stephen Harper.

Adam Scotti photo

Pres­i­dent Trump with Prime Min­is­ter Trudeau at a Canada-U.S. bi­lat­eral on the mar­gins of the G7 Sum­mit in Charlevoix, June 8, 2018. Also, from left, USTR Bob Lighthizer, U.S. Am­bas­sador to Canada Kelly Craft, and For­eign Af­fairs Min­is­ter Chrys­tia Free­land. They talked trade.

Wikipedia photo

Out­go­ing Mex­i­can Pres­i­dent En­rique Peña Nieto with For­eign Af­fairs Min­is­ter Chrys­tia Free­land in Mex­ico City on Fe­bru­ary 2, 2018.

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