Derek H. Bur­ney

Be­yond USMCA: The En­emy is Com­pla­cency

Policy - - In This Issue - Derek H. Bur­ney

While the USMCA has yet to be rat­i­fied, Canada should be­gin strate­giz­ing be­yond the sta­bi­liza­tion of its North Amer­i­can trad­ing re­la­tion­ships and look to the pos­si­bil­i­ties of­fered by the Euro­pean trade deal, the new TPP and our po­ten­tial trade growth with China and In­dia. FTA and NAFTA ne­go­ti­a­tion alum­nus and for­mer Am­bas­sador to the United States Derek Bur­ney of­fers some guid­ance.

The re­sult of our trade ne­go­ti­a­tion with the U.S. and Mex­ico is more a source of re­lief than cel­e­bra­tion, es­pe­cially given the chal­lenge of deal­ing with the highly un­con­ven­tional Trump ad­min­is­tra­tion on trade. Bet­ter a deal than no deal or a bad deal. More com­mend­able per­haps for what it re­tained than what it gained. With some warts to be sure but, on bal­ance, a de­cent, re­spectable deal.

Let’s con­sider first the talks, and how they came to­gether in the end. The

first nine months of the ne­go­ti­a­tion pro­ceeded cau­tiously, with each side do­ing their home­work and stak­ing out their ba­sic po­si­tions. Not a lot of con­sen­sus. The Amer­i­cans de­cided that the best way to gain trac­tion was to di­vide and con­quer. So they moved first to reach agree­ment with the Mex­i­cans and then turned their fo­cus on Canada.

My im­pres­sion is that the two ma­jor out­stand­ing is­sues with Canada were, num­ber one, ac­cess for the Amer­i­cans to the dairy market in Canada, which is highly pro­tected un­der sup­ply man­age­ment. This, more than any­thing else, seemed to ag­i­tate Don­ald Trump, fu­el­ing many of his bom­bas­tic at­tacks on Canada.

Pre­serv­ing the bind­ing dis­pute set­tle­ment mech­a­nism of the ex­ist­ing agree­ment, NAFTA, was of pri­mary im­por­tance to Canada. Why? Be­cause, when you’re deal­ing with some­one 10 times your size, you need to pro­tect your­self from the ar­bi­trary or capri­cious ac­tions of any U.S. ad­min­is­tra­tion.

That had been the sine qua non of the ini­tial agree­ment, the FTA in 1987. It was pre­served in the NAFTA, and Canada made it a “red-line” is­sue for us from the out­set this time. The Amer­i­cans wanted to get rid of it. We in­sisted that it stay. In the end, there was move­ment by Canada on dairy open­ing 3.6 per cent of our market (up from 3%) and by the U.S. agree­ing to leave in­tact the dis­pute set­tle­ment pro­vi­sions. That cre­ated mo­men­tum to re­solve the re­main­ing is­sues.

I sus­pect that the United States wanted to put a “win” on trade in the win­dow be­fore the midterms in Novem­ber. Af­ter all, they are fight­ing ev­ery­where in the world on trade. They ob­vi­ously saw po­lit­i­cal ad­van­tage in be­ing seen as get­ting rid of NAFTA (“prom­ise kept”), even if only nom­i­nally.

Canada held firm against the most egre­gious U.S. de­mands—scrap­ping dis­pute set­tle­ment and sup­ply man­age­ment, in­sist­ing on 50 per cent U.S. con­tent for au­tos, at­tack­ing our ex­emp­tion for cul­ture, etc.—and the Cana­dian team de­serve credit for that.

What did Canada gain? Some of the mod­ern­iza­tion mea­sures that were im­ported from the Trans-Pa­cific Part­ner­ship (TPP) ne­go­ti­a­tion, whether on dig­i­tal com­merce or the facilitation of busi­ness travel, should yield in­creases in ac­cess for Canada to the U.S. market.

We have ac­cepted a man­aged trade quota on the auto sec­tor, one that of­fers sig­nif­i­cant head­room for growth. That is a big plus given the im­por­tance of the auto sec­tor to our ex­ports. The auto parts firms have room to grow and the unions see the wage rate in­creases ac­cepted by Mex­ico as help­ing cre­ate a more even play­ing field. On bal­ance, a good re­sult.

We also wanted more cer­tainty for in­vestors and the deal has given us a de­gree of cer­tainty, or at least tem­pered some of the un­cer­tainty.

What did we miss out on? We still face tar­iffs on steel and alu­minum that have no ba­sis in Amer­i­can law—none what­so­ever. Imag­ine, Canada is an ally in NORAD, an ally in NATO, and a part­ner in the Five Eyes in­tel­li­gence as­so­ci­a­tion and yet is sub­ject to tar­iffs on the grounds of “na­tional se­cu­rity”. That is ab­surd. For in­dus­tries that are fully in­te­grated, these tar­iffs make nei­ther prac­ti­cal nor strate­gic sense.

I know that our gov­ern­ment claims that they rep­re­sent a sep­a­rate is­sue but these tar­iffs, and threats of more, were used bla­tantly to ca­jole con­ces­sions at the ne­go­ti­a­tion ta­ble. We can only hope that they will be re­moved ex­pe­di­tiously af­ter the con­gres­sional elec­tions

Is it fair to say that things haven’t changed that much? Yes, but never for­get that what has changed and re­mains most trou­bling is the “Amer­ica First” ap­proach to trade gen­er­ally by the U.S. With the orig­i­nal FTA, and with NAFTA, there was a con­sen­sus and a de­gree of trust among the lead­ers about the ob­jec­tive—mu­tu­ally ben­e­fi­cial trade lib­er­al­iza­tion that would make the bloc of NAFTA more com­pet­i­tive in the world.

The fact that Pres­i­dent Trump had a very dif­fer­ent at­ti­tude about trade made these ne­go­ti­a­tions more ar­du­ous, if not ex­as­per­at­ing. He clearly missed the les­son on mu­tual ben­e­fit.

We still face tar­iffs on steel and alu­minum that have no ba­sis in Amer­i­can law—none what­so­ever. Imag­ine, Canada is an ally in NORAD, an ally in NATO, and a part­ner in the Five Eyes in­tel­li­gence as­so­ci­a­tion and yet is sub­ject to tar­iffs on the grounds of “na­tional se­cu­rity”. That is ab­surd.

This ne­go­ti­a­tion had a se­ri­ous hand­i­cap, and I take my hat off to the Cana­dian ne­go­ti­at­ing team in par­tic­u­lar for their stamina and re­solve. They ig­nored the pres­i­dent’s barbs and tweets, held firm against key U.S. de­mands and dealt prag­mat­i­cally with the sub­stance.

This ne­go­ti­a­tion had a se­ri­ous hand­i­cap, and I take my hat off to the Cana­dian ne­go­ti­at­ing team in par­tic­u­lar for their stamina and re­solve. They ig­nored the pres­i­dent’s barbs and tweets, held firm against key U.S. de­mands and dealt prag­mat­i­cally with the sub­stance. Yes, the re­sult is es­sen­tially a do-over of NAFTA, al­though we can’t say that be­cause it’s a ti­tle that’s been ex­punged from the vo­cab­u­lary. At Trump’s in­sis­tence, it’s now the USMCA, the U.S.-Mex­i­coCanada Agree­ment.

One new thing is the “non­mar­ket econ­omy” re­stric­tion in Clause 32, the so-called China Clause. The clause stip­u­lates that when one of the three USMCA coun­tries wants to be­gin trade ne­go­ti­a­tions with a non-market econ­omy, the other North Amer­i­can coun­tries must be given three-months’ no­tice.

That may be more po­lit­i­cal rhetoric aimed clearly at China than bind­ing sub­stan­tively. In my opin­ion, it has no place in this tri­lat­eral trade agree­ment.

I see it as a “knuck­le­ball” one that was deemed es­sen­tial by the Amer­i­cans. I would hope that our gov­ern­ment will do ev­ery­thing pos­si­ble to show that this has no bind­ing ef­fect on Canada. If it had any ef­fect, this re­stric­tion would be ex­trater­ri­to­ri­al­ity out of con­trol, and would raise ques­tions of sovereignty.

We have mis­fired in our ap­proaches to China thus far. I think we have to re­dou­ble those ef­forts and get more se­ri­ous—not just with China, but with In­dia as well.

Di­ver­si­fi­ca­tion has to be more real than rhetor­i­cal as an ob­jec­tive for Canada when it comes to trade. We’re never go­ing to re­place the U.S. as our num­ber one cus­tomer. But we do have to find op­por­tu­ni­ties else­where, es­pe­cially in economies that are grow­ing faster than the economies in North Amer­ica.

The mini-TPP gives us good ac­cess to Ja­pan, Malaysia, Viet­nam, and other sig­na­to­ries. We have the Com­pre­hen­sive Eco­nomic and Trade Agree­ment (CETA), which gives us pref­er­en­tial ac­cess to Europe. We need to make bet­ter use of those agree­ments and, as well, ne­go­ti­ate sig­nif­i­cant new agree­ments in an in­creas­ingly volatile global en­vi­ron­ment.

The big­gest hand­i­cap I see in Canada is com­pla­cency. We’ve be­come too com­fort­able in the cocoon of deal­ing with the Amer­i­cans for 75 per cent of our trade. There are other op­por­tu­ni­ties, other out­lets for Cana­dian ex­ports. The new LNG fa­cil­ity in Kiti­mat is an ex­cel­lent op­por­tu­nity for Canada to open the vista, es­pe­cially to the Asian mar­kets where there’s strong de­mand for our nat­u­ral gas.

We also have to take a hard look at our de­clin­ing com­pet­i­tive­ness in North Amer­ica, es­pe­cially on the tax and reg­u­la­tory front. As the smaller econ­omy, that is not a lux­ury we can in­dulge.

This agree­ment in prin­ci­ple is the first con­crete step to­wards a new trade agree­ment. But it has to be ap­proved by Congress, which has the rat­i­fi­ca­tion author­ity for trade and del­e­gates the ne­go­ti­at­ing author­ity to the ad­min­is­tra­tion. Once the ad­min­is­tra­tion pro­vides the de­tails of the agree­ment, Congress then has to vote its ap­proval. Per the pro­vi­sions of fast-track trade pro­mo­tion author­ity, they can only vote up or down with­out mak­ing changes to the agree­ment.

If the agree­ment passes, then Congress has to ap­prove im­ple­ment­ing leg­is­la­tion. Which means we’re look­ing to 2019, at a min­i­mum, be­fore all of the Con­gres­sional ac­tions take place.

We have to do the same in Canada with our Par­lia­ment. But when the ex­ec­u­tive and leg­is­la­ture are com­bined, as in our sys­tem, it is more straight­for­ward. The Mex­i­cans have a new ad­min­is­tra­tion com­ing in De­cem­ber, and a new Congress of the Union tak­ing of­fice in De­cem­ber. The team that is sign­ing the agree­ment will be gone.

Through­out all the pend­ing steps we have to re­main at­ten­tive, keep our wits and en­sure that the re­view and the leg­is­la­tion are con­sis­tent with what has been agreed and that no new hooks sur­face. Above all, re­mem­ber that “it’s not over un­til it’s over, and in Wash­ing­ton it’s never, ever over.”

There are a lot of pit­falls ahead on the trade front in a world where pro­tec­tion­ism, populism, na­tion­al­ism and “Amer­ica First” are get­ting po­lit­i­cal trac­tion. But hope­fully the suc­cess of this ne­go­ti­a­tion will have a ther­a­peu­tic, calm­ing ef­fect.

Canada has to do a cou­ple of things. The Trump Ad­min­is­tra­tion is do­ing its level best to un­der­mine the World Trade Or­ga­ni­za­tion and the global rules gov­ern­ing trade. So, Canada, to­gether with Ja­pan, the Euro­peans and with other ma­jor play­ers at the WTO, should look at prag­matic ways to strengthen the dis­ci­plines and the rules un­der­pin­ning the WTO.

Com­plaints about China as a non­mar­ket econ­omy stem from the fact that they’re not play­ing by the rules, es­pe­cially on in­tel­lec­tual prop­erty, and that is a valid crit­i­cism. It would be best to tackle that overtly and col­lec­tively at the WTO.

Se­condly, di­ver­si­fi­ca­tion has to be more than part of the trade min­is­ter’s ti­tle. We must get more se­ri­ous about ne­go­ti­at­ing with coun­tries, even those that do not share our val­ues or that have po­lit­i­cal sys­tems dif­fer­ent from ours. Af­ter all, China is a ma­jor part of the global econ­omy, soon to be­come num­ber one. We have to de­cide whether we are go­ing to deal with the world as it is or as we wish it were.

We have to de­ter­mine from anal­y­sis whether we can get a proper ne­go­ti­a­tion with China that suits our in­ter­ests with­out com­pro­mis­ing our fun­da­men­tal val­ues. We have com­ple­men­tary economies. There’s scope for ne­go­ti­a­tion. It’s not with­out its dan­gers but it is wor­thy of se­ri­ous at­ten­tion.

A sim­i­lar ap­proach to In­dia has ob­vi­ous merit and would also en­able us to use a ne­go­ti­a­tion with one Asian gi­ant as lever­age on the other. We should do it in a more co­her­ent and strate­gic man­ner than what has been at­tempted over the past decade.

We have an im­age of be­ing a risk averse, cos­set­ted econ­omy and that is un­for­tu­nate. We have en­trepreneurs with bril­liant ideas, in­no­va­tion skills, all of that. But we have to be more am­bi­tious, more con­fi­dent and strive for op­por­tu­ni­ties be­yond North Amer­ica while mak­ing the most of those in our im­me­di­ate neigh­bour­hood.

Adam Scotti photo

Prime Min­is­ter Trudeau meets with Pres­i­dent Don­ald Trump of the United States dur­ing the G7 in Charlevoix. June 8, 2018.

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