NAFTA: Apple Pie and Maple Syrup

…the struggle for protectionism

Since August 2017, the US, Canada and Mexico have been locked into renegotiations of NAFTA. I’d love to see a tri-lateral resolution to the ongoing talks but as a Canadian I am more concerned about a bi-lateral situation between the US and Canada if all else fails.

As apple pie is synonymous with America so too is ‘friend’ tied to the relationship Canada shares with our neighbor to the south. It’s a prized relationship based on respect, familiarity and a couple hundred years of a shared border. Our friends and families live on both sides of the border, we transfer good and services like no other border and our cultures are very similar.

Any country that denies it is protectionist is less than candid. Globalism is an admirable philosophy so that all countries can share in wealth and prosperity but the reality is that competition always trumps (no pun intended) cooperation. Cooperative Nationalism is good for all countries locked into a trade agreement.

Trump’s slogan ‘Make America Great Again’ was a winning philosophy during his campaign amidst trade erosion and deficits with it’s trading partners. Jobs moving offshore, foreign ownership spiking in both the US and Canada made nationalism/protectionism a worthwhile goal. US industry has been abused for years with offshore production and cheap labor elsewhere with its’ anti-union sentiment.

While I agree nationalism is a good idea – don’t use it against Canada!

There needs to be a mutual cooperation that will benefit both countries overall not taken as individual sectors. I don’t see how threatening tariffs on Canadian steel and aluminum can benefit US industry considering we produce the most of it for the US market. Please, Mr. President, don’t use rhetoric like this as a threat.

NAFTA came as a result of the Free Trade Act of 1989 between the US and Canada. Twenty US states consider Canada (specifically Ontario) as their #1 export destination and eight more count it as second. Among those states are North Dakota and Georgia; so it’s not just border states as one might suspect benefitting from trade with Canada.

In 2016, Ontario imported $141B in US goods and 9 million jobs in the US count on trade with Canada.

Canada wants to modernize NAFTA, work on the digital trade market and improve regulatory, labor and environmental laws including temporary cross-border working relationships. The biggest issue we have is the dispute resolution mechanism that has always been a problem with the US.

Chapter 19 on countervailing (or anti-subsidy duties) and anti-dumping is very important to Canada because the US sees government involvement in the form of subsidies as an unfair advantage. Consider the Boeing/Bombardier fight over a 300% tariff on Canada’s Bombardier because Boeing didn’t want competition in a sector they don’t even work in. This stupid squabble resulted in Bombardier joining forces with France’s Airbus to build the Bombardier jets in Alabama. While giving Boeing ‘the finger’ it will create hundreds of jobs in America.

The US wants to ‘win’ this non-fight so that NAFTA is re-oriented to the ‘US First’ policy by President Trump. While the President is clearly interested in protectionism and a strong America, Congress, Governors and most of the stakeholders believe international cooperation needs to trump (no pun intended) nationalism. With the recent resignation of the White House’s Gary Cohn, a globalist, his successor will probably be more geared to Trump’s personal policy of protectionism. Protectionism is a slippery slope.

Mexico’s stake in all this is that it wants a liberal approach to trade continued foreign investment, i.e. US companies moving to setup shop in Mexico and a stop to the protectionist rhetoric. Mexico’s goals are easily seen as protectionist on their side that may cause the negotiations to become bi-lateral in the end.

Generally, NAFTA has worked for all partners to some degree.While the US claims Canada benefits the most from the agreement, the CBC reports In “January, Canada exported $34.1 billion worth of goods to the United States, a decline of 2.9 per cent. But imports fell too, by 1.8 per cent to $30.9 billion. As a result, Canada did indeed have a trade surplus in goods with the U.S. of about $3.1 billion in January.” If you take into account services that number is even lower.

So what happens if the US cancels NAFTA?

It could go back to the way it was in 1989, a bi-lateral arrangement. If it is canceled altogether there would be panic on both sides of the border while the situation is analyzed. RBC economists report that many sectors would be harmed especially the auto industry and agriculture among them but the cancelation would not cripple the Canadian economy.

Like a good entrepreneur, Canada would pivot and find opportunity elsewhere. Sure, there will be increased pricing while Canadian companies seek other markets. The EU, China and India are already being groomed by Canadian trade officials to fill the gap.

Bob Kirke, executive director of the Canadian Apparel Federation, said the revival of U.S. clothing tariffs as high as 27 per cent would likely prompt bigger Canadian companies to shift the rest of their production to facilities offshore, smaller companies to shut down.

The investments by foreign companies would certainly slow or stop without NAFTA even with the Canadian dollar 25% lower than the American.

From our perspective the NAFTA discussion affects the US worker far more than Canada. Imagine what Ford would do with their skilled unionized employees in Oshawa or their factories? I’d much prefer to see Canadian fruit and vegetables in the market versus the pesticide treated US produce anyway. I’d hate to see huge increases in US products to Canada but they don’t call it a trade war for nothing.

Threats, off the cuff remarks and calls for Mexico to pay for ‘the wall’ are negotiating tools. The problem with threats is that unless you are a good poker player you might lose. Canada is in a stronger position than many think. Let’s hope for a mutually cooperative trade agreement that respects the values, challenges and nationalism of each partner rather than trying to force one side or another to their knees. No one wants to lose!

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