Canada takes out insurance against NAFTA’s collapse

By agreeing to a new Pacific trade deal, Canada’s Liberal government has taken out what it hopes is an insurance policy against the collapse of NAFTA.

Canada’s decision to join 10 other nations in the Comprehensive and Progressive Agreement for Trans-Pacific Partnership comes as negotiators huddle in Montreal in a desperate effort to keep the North American Free Trade Agreement alive.

Back in November, Prime Minister Justin Trudeau said that he was in no hurry to make a decision on the Pacific deal. But that calculation appears to have changed as prospects for a successful NAFTA renegotiation dim.

Canada did not get what it wanted in the important area of auto parts from the Pacific deal. Nor is it clear that it successfully exempted its cultural industries from the new deal’s free-trade rules.

Yet at a meeting Tuesday in Tokyo, Ottawa agreed to join anyway. The new pact, which includes Japan, Mexico, Australia, New Zealand, Singapore, Vietnam, Malaysia, Chile, Brunei and Peru, comprises only 14 per cent of world trade.

But for fans of free-trade deals — including most of Canada’s big business class — it is better than nothing.

And nothing is what Canada might get from the NAFTA talks. American President Donald Trump has repeatedly said he will pull the U.S. out of the three-nation pact unless Canada and Mexico meet all his demands.

Canada and Mexico have responded by saying that some of those demands, particularly one that would eliminate the right of NAFTA signatories to challenge one another’s trade practices before an independent panel, are deal breakers.

Yet Ottawa has also signalled a new willingness to bargain other Trump demands that it had once dismissed out of hand, such as his insistence on eliminating NAFTA’s investor-state dispute settlement system. This allows foreign companies to challenge domestic laws before special trade panels.

How will Canada’s decision to buy into the Pacific pact affect the NAFTA talks?

First, it will irritate the Americans. One of Trump’s first actions as president was to pull the U.S. out of this pact’s predecessor, the Trans-Pacific Partnership. He will not be amused that his good buddy Trudeau is going ahead with a truncated version of that Pacific deal before NAFTA is resolved.

Second, it may make some of the NAFTA issues more difficult. Under the Pacific deal, autos and auto parts may be traded among member nations duty-free as long as 35 to 45 per cent of their content is manufactured within the bloc.

Under NAFTA, the rules of origin are far stricter, demanding 62.5 per cent North American content. Yet even then Trump thinks they are too loose.

It’s not clear how he would respond to a situation in which Canadian auto manufacturers were following two rules-of-origin regimes, with the possibility of cross-over between them.

Third, Ottawa’s decision to join the Pacific pact puts paid to the already remote possibility that Canada and the U.S. might come to an agreement without Mexico.

Mexico is part of the new Pacific deal. If Trump doesn’t want direct free trade with Mexico, he’s unlikely to accept indirect free trade with it via Canada.

In the end, Ottawa didn’t get what it wanted in the new and revamped Pacific pact. It is signing side deals with Japan, Australia and Malaysia on autos. But it appears to have acceded to Japan’s insistence that weak rules of origin for auto parts remain in place.

It did not win an exemption for Canadian cultural industries within the deal itself. But it will sign so-called side letters on cultural matters with the other 10 nations when the deal is inked. It’s not yet known what will be in those letters. And while promoting the deal as “progressive” (Canada insisted that the pact’s name be changed to reflect this), Ottawa has raised little objection to Vietnam’s request that it be given more time to improve labour rights.

Politically, however, all of this is secondary. With NAFTA on the ropes, the Trudeau government needs to show that it can still pull off free-trade deals. The Pacific pact, however imperfect, is the one that can be most quickly done.

Thomas Walkom’s column appears Monday, Wednesday and Friday.