BE PREPARED TO WALK AWAY
Trump’s ‘America first’ agenda poses a challenge, but Canada is not without leverage, Andrew Coyne writes.
Canada survived for 120 years without a free trade agreement with the United States. It can survive without one in future, if it has to.
The first principle guiding Canada’s negotiators, then, as they begin talks with the United States and Mexico on “improving ” NAFTA, the North American Free Trade Agreement (successor to the original 1987 Canada-US FTA), must be a willingness to walk away from the bargaining table, if need be. And by walking away, I mean being willing to risk the United States abrogating the entire treaty in response.
That’s obviously not what anyone would or should prefer, nor should it be undertaken lightly. A less-than-perfect NAFTA is better than no NAFTA; even a worse-than-status quo NAFTA might be. But threatening to walk away is of no use as a bargaining tactic unless you are prepared to actually walk away. That means having a clear idea where your bottom line is: What balance of concessions is acceptable, and what is not.
Of course, it’s hard to imagine any deal that would not be better than no deal. There is a paradox at the heart of every international trade negotiation: the thing that each party most zealously protects, access to its market, is the thing it should be most eager to give up. The real “win” from any free trade deal, as any economist will tell you, is the extent to which it forces us — allows us, rather — to open our own market. Whether the other side opens theirs is frankly a bonus.
A complicating factor in the present negotiations is that the Trump administration, or at least one significant faction thereof, really and truly does not believe in free trade. That’s true to an extent of every government: If they really believed in it they’d just do it, not wait to negotiate it. But officials like chief strategist Steve Bannon, Commerce Secretary Wilbur Ross, and trade adviser Peter Navarro — and of course, Donald Trump himself — do not see trade as economists do, as a way of increasing imports, or even as most governments do, as a way of increasing exports, but in either case as a way of expanding the amount of trade.
They see it, rather, wholly and completely in terms of the balance of trade: The larger the surplus of exports over imports, in their view, the better. Needless to say, this is nonsense. The trade balance is an indicator of precisely nothing meaningful about an economy’s state of health; indeed, booming economies typically exhibit trade deficits, as they suck in imports faster than slower-growing partners can absorb their exports.
This is one of many ways in which the Trump administration is, shall we say, unique. And it offers the first clear red line for Canadian negotiators: There can be no question of any overhaul of NAFTA that is designed to deliver permanent trade surpluses to the Americans — for example, by setting limits on movements of the Canadian dollar.
Beyond that, the rule should be a simple one: We should be for any change that would open trade further, against any change that would restrict it. The original NAFTA contains a number of carve-outs, many of them inserted at our insistence: in agriculture (hello, supply management), in transportation and telecommunications, and so on. Most of these anti-consumer, oligopoly-protecting policies we should be glad to be rid of, and if renegotiating NAFTA offers the pretext (“we fought as hard as we could, but in the end the Americans were adamant”), so much the better.
Others might more genuinely be classed as concessions. For example, the U.S. may demand we accept longer patent protection for pharmaceuticals, leading to higher prices for consumers and governments here to the benefit of American drug makers. That’s unpleasant, but may well be acceptable in the context of an overall deal.
A trickier proposition, politically, are measures that would keep trade open between the countries of North America, at the cost of restricting it further with countries outside our continent: for example, higher North American content requirements. These might well find favour with industry on both sides of the border, but should be strongly resisted — not only for the usual pro-consumer reasons, but because Canada’s strategic interests lie in diversifying our trade as much as possible
Finally, there is what many have described as a potential deal-breaker: NAFTA’s famous Chapter 19, with its provision for binational dispute-resolution panels as a kind of court of appeal from each country’s domestic trade tribunals. There’s no doubt this was a huge gain for Canada, insofar as it protected us from the notorious abuses to which the American process is prone. And, yes, we’ve won more cases than we’ve lost. But there is, at least in principle, a replacement for it, if the Americans could be persuaded to adopt it.
Suppose, that is, each country scrapped its trade remedy laws altogether, as they applied to each other, and agreed to police trade practices using domestic competition laws instead. One of the bedrock principles of NAFTA is supposed to be “national treatment” — each country is obliged to treat the other’s companies in law no worse (and no better) than its own. Trade remedy laws are a curious exception. Practices that are considered perfectly respectable when carried out within the confines of a single country — selling for less in one market than another, say — suddenly become crimes the minute a national border is crossed.
Conversely, abuse of market dominance is surely a problem, whether the perpetrator is domestic or foreign. Logically, then, it would make sense simply to extend the principle of national treatment to trade law. Each country’s domestic courts would then be free to apply their own competition laws, free of meddling binational overseers — a win for sovereignty-obsessed Trumpians. They would just have to apply them even-handedly.
We probably won’t get that. But we shouldn’t think we have no leverage in these talks. Trump is a greatly weakened president, mired in the midthirties in the approval polls, at war with his own party, facing potential impeachment or even prosecution in the Russian affair. Meanwhile, Canada has many allies in the cause of keeping NAFTA’s borders at least as open as they are now: Mexico, but also in Congress, the states, and the private sector.
And we have the ultimate leverage: our own willingness to walk away.
The first clear red line for Canadian negotiators: There can be no question of any overhaul of NAFTA that is designed to deliver permanent trade surpluses to the Americans.