FINAL STRETCH
Amid inevitable setbacks, impasses and harsh rhetoric, NAFTA’s fate will be determined by four big facts,
As we head into the final stretch of renegotiating the North American Free Trade Agreement (NAFTA), brace for even more of the setbacks, deal-breaking impasses and harsh rhetoric that have characterized the talks to this point.
But know this: It’s still more likely than not that the U.S. will settle for a renegotiated NAFTA rather than scrap it. NAFTA’s demise commands little support among America’s business and political leadership, and would be chaotically disruptive for the world’s most integrated continental economy outside of the European Union (EU).
Enormous pressure is building for an agreement by April, after the two remaining scheduled NAFTA negotiating rounds. At that point, the political agenda is hijacked by U.S. Congressional election campaigning, and a Mexican election to select a new president.
Probably the best-case scenario to be expected is the achievement of at least an agreement in principle in the spring, as David McNaughton, Canada’s ambassador to the U.S., optimistically forecast recently.
At that point, the tentative agreement would be handed to the technical experts. Over the summer, they would turn the agreement into a detailed trade treaty that the three national legislatures can ratify.
The outcome of the next two months of talks obviously is uncertain. But here are four of the realities by which it will be determined: Donald Trump’s protectionist trade policies have failed. In attempting to honour his 2016 campaign vow to eliminate America’s trade deficit, Trump has cast a veil of uncertainty over NAFTA and America’s trade pact with South Korea, as well. Trump has withdrawn the U.S. from the proposed Trans-Pacific Partnership (the TPP, since renamed the Comprehensive and Progressive Agreement for TransPacific Partnership, or CPA-TPP). And Trump terminated discussions for a U.S.-EU trade deal not unlike the Canada-E.U. Comprehensive Economic and Trade Agreement (CETA).
Trump has also launched retaliatory trade strikes against China. And not waiting for the outcome of the NAFTA talks, Trump has begun an undeclared, but real trade war with Canada over aerospace, lumber, fine paper and dairy products.
Result? Instead of making progress on its trade deficit, America has suffered a 12-per-cent jump in the deficit in Trump’s first year in office.
So far, not one lost U.S. job has been restored by Trump’s policies. That’s a betrayal of Trump’s political base that will increasingly trouble the U.S. president, especially if his Republicans fare badly in this fall’s Congressional elections. The U.S. needs NAFTA. Scrapping it would destroy at least one million U.S. jobs, according to the U.S. Business Roundtable, the club of leading U.S. corporate CEOs. The Roundtable is among the majority of U.S. business groups that favour retaining NAFTA, as do U.S. governors and senators whose state’s biggest trad- ing partner is Canada or Mexico.
“Country of origin” rules in vehicles is possibly the biggest sticking point in the NAFTA talks. The U.S. complains of too many non-North American components in North American vehicles. But intelligent sourcing to gain competitive advantage means buying components with the best value from whomever offers them, which might be Malaysia or Slovakia rather than Michigan or southern Ontario.
“The idea that more domestic content per vehicle means more domestic jobs ignores that uncompetitive companies make fewer cars,” Matthew J. Slaughter, dean of the Tuck School of Business at Dartmouth College, points out in a recent Wall Street Journal essay.
In his case for NAFTA, Slaughter also cites the estimated $10.5 billion (U.S.) in savings for American consumers each year due to reduced tariffs under the pact. Most of that bonanza is reaped by U.S. households with annual income of less than $70,000 (U.S.). Which means that scrapping it would further widen an already alarming U.S. gap between rich and poor.
Canada is the world’s biggest buyer of America’s exports. “I don’t think most Americans realize that Canada is your best customer,” Chrystia Freeland, Canada’s foreign affairs minister, said in a U.S. interview soon after the most recent round of NAFTA talks, in Montreal. “We buy more from the U.S. than America sells to China, Japan and the U.K. combined.”
It’s not just the Fortune 500 with much at stake. Canada also accounts for a remarkable one-quarter of all U.S. small-business exports.
Canadian purchasing of U.S. exports accounts for at least 0.6 per cent of U.S. GDP, or about $120 billion (U.S.) per year, according to the Business Roundtable.
Trump’s obsession with eradicating the U.S. trade deficit clashes with his method of achieving that goal. Killing NAFTA, the Roundtable estimates, would cut U.S. exports by about 2 per cent, further enlarging the U.S. trade deficit. Canada is playing hardball. Justin Trudeau, on a U.S. tour this week to sell NAFTA’s virtues, said early this month that he’ll quit the talks rather than accept “any old deal.”
The Trudeau government has shown resolve on trade pacts. When the Belgian province of Wallonia held up CETA, then trade minister Freeland’s response was to quit those talks, stormily accusing the EU of “not having its act together.”
More recently, Canada was the lone holdout in joining the 11-member-country TPP. Again, Ottawa said it wasn’t going to sign just any deal, even one promising to eliminate about 18,000 tariffs. That enraged prospective TPP members Japan and Australia.
But the CETA setback was quickly resolved. And on Jan. 23, Canada said it would sign on to a rechristened CPA-TPP, hastily improved as Canada had demanded. Trump needs a win. The Trump presidency has conspicuously underachieved. And that was before a booming stock market for which Trump frequently claimed credit fell out of bed this week.
Trump’s delight was obvious in surprising interviewers at Davos recently with his strong suggestion that he might join the CPA-TPP, after all, if he can get a better deal than the one he rejected. With NAFTA, too, Trump can score a win by claiming authorship of a new deal that benefits American workers. Failing to do so will count as yet another Trump loss, like the botched effort to kill Obamacare or to make Mexico pay for a wall along the Rio Grande.
Actually, it may be that Trump is not the problem and that Canadian exporters are.
In 2017, Canada’s non-energy trade deficit hit a record $87 billion. And that was despite the advantages of NAFTA, a deep-discount loonie, and a Canadian economy that outperformed its G-7 peers in GDP growth.
Our enthusiasm for multilateral trade deals has not been matched by Canadian exporters exploiting those deals to crack offshore markets.
With export performance a traditional and continuing drag on the Canadian economy, our less than intrepid exporters should concern us as much as a NAFTA in limbo. dolive@thestar.ca