Land of notso-free trade
Cuddling up to U.S. won’t keep NAFTA on rails
Yeah, so about those “tweaks”? Those minor adjustments, barely worth mentioning, that Donald Trump suggested were all that he had in mind with regard to renegotiating NAFTA, at least as far as Canada was concerned? Well there’s been a bit of tweaking of the tweaking.
Whatever Trump might have meant by his remark after meeting with the prime minister — who can really say what he means at any given moment? — his people plainly have other ideas. In a television interview this week Wilbur Ross, the U.S. Commerce secretary, was practically salivating at the meal he anticipated making of his NAFTA partners.
“The Mexicans know, the Canadians know, everybody knows times are different …. And they all know they’re going to have to make concessions. The only question is: What’s the magnitude and what’s the form of the concessions?”
All of the Trudeau government’s assiduous wooing of the administration, all of that sucking up before, during and after the summit — the sanitizing photo op of the groper-in-chief with a group of women entrepreneurs and the “feminist” prime minister, the courtly demurring from criticism at their joint press conference, the Unnamed Senior Adviser’s description of Steve Bannon, Trump’s chief strategist, as a “working class kid” who just “has a different approach to resolutions than we do,” Trudeau’s own statements in Europe (“what I saw from the American president was a focus on getting things done for the people who supported him”) — would appear to have won us nothing.
So we are into the vortex: a wholesale redrafting of NAFTA on Trumpian lines, to be completed by late next year. But not to worry — the Commerce secretary assures us “it’s not going to be a shooting war. If people know you have the big bazooka, you probably don’t have to use it.” The big bazooka, of course, being the president’s oft-repeated vow to tear up NAFTA if his demands are not met.
At this point you are probably reacting in one of two ways. The first, reflecting the natural human desire for normalcy, is to think: things aren’t as bad as they seem. We’ll get through this. We’ll put our best negotiators on it. We’ll seek out allies in every corner of the American political system, hire half of K Street to lobby for us, mobilize the American business community. We’ll point out how tightly integrated our two economies are, how foolish it would be to disrupt continental supply lines. Why, did you know the average North American auto part crosses the border seven times on its way to final assembly? And in the end it will all be OK, because it would just be so foolish to break up such a successful relationship. Because it would hurt American consumers. Because Canada is the No. 1 export destination for 35 of the 50 states. Because people will be reasonable.
But Trump’s people aren’t reasonable. If they were reasonable we wouldn’t be in this fix. These are not normal people, on trade as much as any other matter. They do not see trade through the same lens as generations of political leaders have done, still less in the way economists have taught for 200 years. They simply do not understand trade as a mutually beneficial activity, but as a kind of war, in which one side must prevail over the other.
As such they are fixated on the trade deficit, a wholly meaningless indicator of economic health — the U.S. ran trade surpluses in every year but one of the Dirty Thirties — to the extent that Peter Navarro, Trump’s chief trade adviser, has proposed inserting a trigger clause in all future trade agreements: the minute the balance of trade goes against the U.S., the treaty automatically comes up for renegotiation.
Yes, he’s that crazy. And lest you think Ross, the billionaire businessman, will be the pragmatic counterweight to this, think again: he is the co-author with Navarro on some of his more lunatic papers.
The other common reaction is to panic. Oh my God: they have us over a barrel. We need them much more than they need us. Trade with the U.S. makes up 20 per cent of our GDP; trade with Canada, just two per cent of theirs. Were they to rip up NAFTA, we’d be lost. We have no bargaining position. All that remains is to plead for mercy.
Somewhere between the two, I suspect, is the truth. If dealing with the Trump team will take more than mere clever negotiators, neither does it have to mean an endless string of concessions. But we will have to decide what we can concede, and when we should walk away from the table rather than give up. And by walking away, I mean potentially sacrificing NAFTA.
Trade negotiations, notwithstanding their broadly liberalizing mission, are by their nature mercantilist. If countries truly believed in free trade, they would simply lift their own trade barriers unilaterally. The negotiations are less about what they will open to trade, as what they will continue to protect, even if by protecting them they drive up prices to consumers and lock workers and capital into inefficient, low-wage industries.
As such most of the “concessions” extracted in trade agreements aren’t concessions at all: they’re things we should have gotten rid of long ago, in our own interest. So if, say, Trump were to demand we give up the complex web of agricultural quotas and punitive tariffs known as supply management, we should make haste to concede. And if this were a normal, hardnosed American government, that might be the sort of thing we were talking about.
But this is not a normal government. Leave aside the Navarro clause: it is not inconceivable that, in their obsession with the trade balance, they might demand some sort of limit on how much the Canadian dollar could depreciate. Or, to take up another obsession: suppose Canada were to strike a free trade agreement with China, as it has with Europe and other powers, with the explicit purpose of lessening our dependence on the U.S. Trump, or at least Bannon, cannot possibly view that with equanimity, especially just as the U.S. is launching a trade war with China. So suppose they were to react by demanding that we convert NAFTA into a customs union, with a common external tariff.
The point is there are things the Americans — these Americans — might demand that we could not accept. And if we do call their bluff, we have to be prepared for them to call ours. That means swallowing hard and contemplating life without a free trade agreement with the U.S.
What would that be like? It would be like life before free trade. Trade barriers, unless they involve literally closing the borders, don’t mean the end of trade; they don’t even close trade deficits, as the Americans are about to find out. The first effect of a 10-per-cent across-the-board tariff, so far as it was anticipated to reduce imports of foreign goods, would be an appreciation of the American dollar relative to other currencies, undoing much of whatever competitive advantage for domestic industries might have been expected — and penalizing exporters. Protectionism, in other words, doesn’t protect America from other countries, but protects some sectors of the American economy from other sectors: import-replacers from exporters, producers from consumers, the inefficient from the efficient.
So if the price of keeping NAFTA should prove too high, we have to be prepared to give it up. Or rather, to let the Americans give it up.
If the Trump administration were foolish enough to abrogate the treaty, there’s no reason we need to reciprocate. The biggest benefit of the free trade treaties we have signed has been to force us to open our own borders, with all of the gains that have flowed therefrom, from cheaper imports to more efficient producers. Not even Trump can take that away from us.