Be­yond NAFTA—Ad­van­tage U.S. Econ­omy

Policy - - In This Issue - Sarah Goldfeder

While most en­gaged ob­servers in Canada have been watch­ing the NAFTA rene­go­ti­a­tions the way we watch hockey—with an eye to who’s ahead af­ter each round as if they’re pe­ri­ods—the process is un­fold­ing within a larger eco­nomic con­text that mat­ters. The big­ger pic­ture in both coun­tries bears con­sid­er­ing, and for­mer U.S. diplo­mat Sarah Goldfeder is here with a tour d’hori­zon.

While Canada fo­cuses on the North Amer­i­can Free Trade Agree­ment and whether the Amer­i­cans will walk away from the ne­go­ti­a­tions, the real show has been the U.S. econ­omy. The United States has seen growth in a num­ber of eco­nomic in­di­ca­tors that speak to the work of the pre­vi­ous ad­min­is­tra­tion, but also in some that demon­strate that Pres­i­dent Don­ald Trump’s eco­nomic growth strat­egy is work­ing.

Trump came to power declar­ing that the “for­got­ten men and women of Amer­ica would be for­got­ten no more.” His cam­paign cen­tered around the Amer­i­cans who had yet to feel the eco­nomic ef­fects of a resurg­ing econ­omy, an econ­omy that the Obama ad­min­is­tra­tion had been point­ing out was in re­cov­ery. Stag­nant wages and flat-lined pro­duc­tiv­ity con­trib­uted to a re­al­ity in which many Amer­i­cans felt left out of the up­swing. Many of these Amer­i­cans had voted for Barack Obama and were wait­ing for some­thing that felt like the promised change in their lives. Don­ald Trump of­fered them another shot at change, another at­tempt at find­ing some­one who could make their lives bet­ter.

Eco­nomic re­cov­er­ies take time, and the eco­nomic cat­a­clysm of the global fi­nan­cial cri­sis hit the United States in the fall of 2008, just as Obama was elected pres­i­dent. His poli­cies, some of which were in­her­ited from the prior Ge­orge W. Bush ad­min­is­tra­tion, slowly stoked the Amer­i­can econ­omy back to life. But cer­tain in­di­ca­tors lagged—em­ploy­ment, wage growth, pro­duc­tiv­ity. All those in­di­ca­tors that are felt by in­di­vid­u­als. Add to that monop­sony power—the cre­ation of mo­nop­o­lies within the labour mar­ket—and the fears sur­round­ing how tech­nol­ogy will im­pact em­ploy­ment and the con­cerns of the for­got­ten men and women are very real. Don­ald Trump came to the White House with the Amer­i­can econ­omy safely on its way up. He claims credit for many of the re­sults of Obama and even Bush eco­nomic poli­cies, but that’s not ab­nor­mal. The trick will be main­tain­ing that tra­jec­tory.

De­spite the slow leg­isla­tive start for this ad­min­is­tra­tion, the Trump White House has man­aged to push through a com­bi­na­tion of reg­u­la­tory and eco­nomic mea­sures that have done ex­actly what he promised. The reg­u­la­tory en­vi­ron­ment is be­com­ing friend­lier to in­vest­ment and de­vel­op­ment, and with no end in sight, com­pa­nies are be­gin­ning to di­rect dol­lars into the United States. The tax re­form bill, re­ally the only leg­isla­tive ac­com­plish­ment of 2017, is be­gin­ning to pull cap­i­tal back into the United States, again, as promised. And most im­por­tantly, the tax re­form bill has put more money in the hands of Amer­i­cans. Most mid­dle and work­ing class Amer­i­cans have seen their pay­checks grow in the first weeks of 2018, not be­cause of wage pol­icy, but be­cause of taxes. When you look at the ag­gre­gate of what Pres­i­dent Trump has ac­com­plished for the Amer­i­can econ­omy, it’s ar­guable that de­spite his early mis­steps, he has man­aged to do ex­actly what he promised. Look­ing at the con­ven­tional mea­sure­ments, the econ­omy of the United States is in great shape and get­ting bet­ter. Con­sumer spend­ing is up, un­em­ploy­ment is down, the stock mar­kets are (even with the lat­est cor­rec­tions) soar­ing, and over­all, Amer­i­cans are op­ti­mistic about both the larger econ­omy and their per­sonal sit­u­a­tion. It is worth not­ing that the poli­cies this ad­min­is­tra­tion has ad­vo­cated are in many cases not sus­tain­able, even the tax cuts are sub­ject to sun­sets, so the long-run im­pact is an open ques­tion for now. So, the ques­tion for Canada and Mex­ico is: what about NAFTA?

On the cam­paign trail, Trump iden­ti­fied trade deals as the all-pur­pose vil­lain. Trade deals like the Trans-Pa­cific Part­ner­ship and the North Amer­i­can Free Trade Agree­ment were tak­ing Amer­i­can jobs, sti­fling Amer­i­can abil­i­ties to ex­port, and in gen­eral, just a raw deal for Amer­ica, Trump claimed. The re­al­ity is far-re­moved from all those as­ser­tions, but it did not mat­ter to the Trump vot­ers. Early in the NAFTA rene­go­ti­a­tions, many pun­dits and trade-watch­ers in Canada wor­ried that the Amer­i­cans would walk away from the deal just to score po­lit­i­cal points with the base. That ar­gu­ment, which never had the at­ten­tion of Amer­i­cans, is now turned on its head.

U.S.-watch­ers have al­ways re­minded those pay­ing at­ten­tion that in the end, these trade ne­go­ti­a­tions have been about do­mes­tic pol­i­tics, just like ev­ery other hot-but­ton is­sue be­tween Canada and the United States has been for as long as they have been neigh­bors. The do­mes­tic po­lit­i­cal nar­ra­tive that drove the United States to rene­go­ti­ate NAFTA has been down­graded from a shout to a whis­per, which is bet­ter for the agree­ment in the end.

NAFTA ne­go­ti­a­tions will no doubt

Many of these Amer­i­cans had voted for Barack Obama and were wait­ing for some­thing that felt like the promised change in their lives. Don­ald Trump of­fered them another shot at change, another at­tempt at find­ing some­one who could make their lives bet­ter.

When you look at the ag­gre­gate of what Pres­i­dent Trump has ac­com­plished for the Amer­i­can econ­omy, it’s ar­guable that de­spite his early mis­steps, he has man­aged to do ex­actly what he promised. Look­ing at the con­ven­tional mea­sure­ments, the econ­omy of the United States is in great shape and get­ting bet­ter.

con­tinue, well past March and likely into 2019. There is no pres­sure in the do­mes­tic po­lit­i­cal nar­ra­tive in the United States to do any­thing dif­fer­ent. Po­lit­i­cal gains on trade deals are pretty nar­row in any case, and the com­plex web be­tween the needs and de­sires of the agri­cul­ture and ser­vices sec­tors in the U.S. and those of the labour move­ment, leave lit­tle doubt that at the end of the day, do­ing noth­ing is the safe bet.

Canada might not ap­pre­ci­ate that re­sult. The re­al­ity is that many sec­tors in Canada are ner­vous about the po­ten­tial for con­tin­ued un­cer­tainty while ne­go­ti­a­tions ei­ther are paused, stall out, or con­tinue in slow mo­tion. As they should be. The cur­rent en­vi­ron­ment bol­sters the Trump ad­min­is­tra­tion goal of at­tract­ing com­pa­nies to the U.S. Af­ter all, if your com­pany sells into the U.S., right now in­side its bor­ders is the safest place to be. In ad­di­tion, the de­creased tax bur­den has all but erased the fi­nan­cial ad­van­tages of head­quar­ter­ing a busi­ness in Canada vs. the U.S. And NAFTA? An af­ter­thought in the end; why rely on that when all but three of the 50 U.S. states will pro­vide some sort of tax in­cen­tive for in­vest­ing in their ju­ris­dic­tion.

The United States and Canada have cho­sen to fo­cus on dif­fer­ent pol­icy pri­or­i­ties writ large, but specif­i­cally on the econ­omy. Canada has cho­sen a path de­signed to get it to the econ­omy of the fu­ture—one fo­cused on in­no­va­tion, tech­nol­ogy, in­tel­lec­tual prop­erty, and ser­vice-based sec­tors. The U.S. con­tin­ues to fo­cus on man­u­fac­tur­ing, con­struc­tion, and nat­u­ral re­source de­vel­op­ment. Canada is look­ing for ways to meet car­bon re­duc­tion goals through car­bon pric­ing and re­ward­ing re­search and de­vel­op­ment. The United States is open­ing it­self back up to re­duced en­vi­ron­men­tal pro­tec­tions, even re­vis­it­ing the “en­dan­ger­ment find­ing” that re­quires the En­vi­ron­ment Pro­tec­tion Agency to reg­u­late green­house gas emis­sions. The ef­fects of these dif­fer­ences in pri­or­i­ties have al­ready been seen at the NAFTA ne­go­ti­at­ing ta­ble. Canada pro­posed a series of ad­just­ments to the au­to­mo­tive rules of ori­gin that would have in­cluded things like en­gi­neer­ing, re­search and de­vel­op­ment and mar­ket­ing in the com­po­nents list for re­gional con­tent cal­cu­la­tions. Dur­ing the dis­cus­sion, Amer­i­can ne­go­tia­tors ap­peared op­ti­mistic about the abil­ity of this ma­trix to break the stale­mate on this is­sue. But when Robert Lighthizer, the United States Trade Rep­re­sen­ta­tive, ar­rived in Mon­treal, he roundly re­jected the pro­posal as open­ing the door to yet more man­u­fac­tur­ing flight from the United States. What was notable about the ex­change was the earnest­ness of the pro­posal from the Cana­di­ans, which goes to their be­lief in their pri­or­i­ties. In the end, the two coun­tries were talk­ing past each other, each frus­trated by the other’s pro­pos­als and tac­tics.

Where this dif­fer­ence re­ally mat­ters is (again) in the com­par­a­tive com­pet­i­tive­ness of the two mar­kets. The United States is throw­ing open its doors to in­dus­tries for which Canada is cre­at­ing new ob­sta­cles. Rather than look­ing to min­i­mize its car­bon foot­print, the United States has de­clared that it will walk away from its Paris Agree­ment emis­sions re­duc­tions. The changes in the en­ergy reg­u­la­tory struc­ture an­nounced in early Fe­bru­ary in Ot­tawa have only in­creased the un­cer­tainty for now. The long run­way to a new process does not limit the un­cer­tainty. Nei­ther does the em­pha­sis on in­creased en­gage­ment by stake­hold­ers and the po­ten­tial in­clu­sion of projects not pre­vi­ously sub­ject to fed­eral re­view. Does it mat­ter? The proof is in the pud­ding. In mid-Fe­bru­ary, the in­vest­ment num­bers into the oil in­dus­try demon­strated that the reg­u­la­tory changes, in ad­di­tion to mori­bund pipe­line ca­pac­ity and po­lit­i­cal squab­bling, make a dif­fer­ence. In­vestors pulled $56 mil­lion out of Canada and in­vested an ad­di­tional $32 mil­lion in the United States since the be­gin­ning of 2018.

What would a con­clu­sion to these NAFTA rene­go­ti­a­tions do for Canada if they were wrapped up to­day? Not much. The forces that will con­tinue to limit eco­nomic growth in Canada are per­haps ag­gra­vated by the NAFTA talks, but are not due to them nor would they be elim­i­nated by a suc­cess­ful con­clu­sion. The United States has, through a com­bi­na­tion of car­rots and sticks (but heavy on the sticks) cre­ated an en­vi­ron­ment for busi­ness that, when faced with a choice, will chose the United States. In­clu­sive val­ues and a pref­er­ence for cli­mate change ac­tion will not change that cal­cu­lus for many. Sell­ing val­ues is a tricky propo­si­tion, es­pe­cially dif­fi­cult when your num­ber one trad­ing part­ner is en­gag­ing a more ag­nos­tic ap­proach. The ad­van­tage, for now, will be with the United States, but there is a salient ar­gu­ment that in the long-run, that will change.

Con­tribut­ing writer Sarah Goldfeder, a prin­ci­pal of Earn­scliffe Strat­egy Group, is a for­mer U.S. diplo­mat who served as an ad­viser to two U.S. am­bas­sadors in Ot­tawa, as well as three years at the U.S. Mis­sion in Mex­ico. sgoldfeder@earn­scliffe.ca

What would a con­clu­sion to these NAFTA rene­go­ti­a­tions do for Canada if they were wrapped up to­day? Not much. The forces that will con­tinue to limit eco­nomic growth in Canada are per­haps ag­gra­vated by the NAFTA talks, but are not due to them nor would they be elim­i­nated by a suc­cess­ful con­clu­sion.

Adam Scotti photo

Prime Min­is­ter Trudeau takes part in a round­table at Sales­force HQ in San Fran­cisco. Fe­bru­ary 8, 2018.

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