Victory on NAFTA means limiting damage

Victory on NAFTA means limiting damage


We will enjoy debating the wisdom of Prime Minister Justin Trudeau’s NAFTA strategy someday.

But for now, that is a waste time. Our partners in the North American Free Trade Agreement have come up with a revised deal and they want us to sign by the end of the week. Trudeau must decide if the gains from ending a yearlong distraction outweigh accepting an agreement that will include a fair number of concessions.

The decision will be complicated by the promise — repeated over and over by Chrystia Freeland, the global affairs minister and lead NAFTA negotiator — that Canada would settle for nothing less than a “win-win-win.”

I forget what baseball reporters were writing back in the spring, but I suspect the managers of the Toronto Blue Jays went into Opening Day promising a winning season. Like the Jays, no one should have taken seriously that Canada might “win” something in this negotiation. The real objective always was to contain damage, and therefore victory should be measured by the extent to which Canada emerges unscathed.

“Failing to secure even a ‘bad deal’ for Canada would be devastating for the country,” said Meredith Lilly, a trade professor at Carleton University and one of the few former advisers of Stephen Harper who isn’t reflexively opposed to everything Trudeau does. “With no NAFTA deal or regard for international trade rules, there is little to stop a petulant and vengeful president from introducing tariffs on other Canadian exports, or from obstructing cross-border flows of goods and people.”

It’s noteworthy that Trudeau on Aug. 29 framed a successful NAFTA outcome differently than he had previously; instead of talking about a win, or refusing to sign a “bad” agreement, he said he was seeking the “right deal for Canada.” It could be nothing, but Trudeau’s choice of words nonetheless are a better way to think about what negotiators should be trying to achieve in Washington this week.

Details will matter. The United States has a history of using trade agreements to write rules around intellectual property that make it harder for upstarts to compete against that country’s technology giants, for example. So it’s possible Canada’s negotiators will uncover language in the U.S.-Mexico arrangement that would severely curtail the ability of Canada’s emerging tech companies to gain market share.

Trump has supplied all the evidence necessary to support Trudeau’s fight to retain a dispute-settlement mechanism, and he should walk away from an agreement that doesn’t contain one.

To be sure, the U.S. International Trade Commission overturned malicious duties on Canadian newsprint on Aug. 29, a sign that Washington’s institutions are capable of resisting Trump’s protectionist agenda.

Still, former prime minister Brian Mulroney made dispute-resolution a deal-breaker during the negotiations that led to the original Canada-U.S. Free Trade Agreement for a reason. The U.S. has an arsenal of trade laws that can do lots of damage if placed in the hands of the wrong president, as Canada and plenty of other countries have been reminded. An agreement without a check on that sort of abuse would be of little benefit to Canada, considering a significant number of companies don’t apply for the preferential NAFTA duties because they can’t be bothered to deal with the paperwork.

But if the offer instead is a series of relatively minor concessions, including some additional access for U.S. dairy farmers, the right deal for Canada at this stage would be a completed one. The country’s international competitiveness has eroded over the decade since the financial crisis, and uncertainty about trade isn’t helping.

The situation isn’t as bad as Conservatives and some business lobbyists describe it, but nor is it as rosy as Liberals such as Jim Carr, the trade minister, seem to believe. Foreign direct investment in Canada increased 1.9 per cent in 2017 from the previous year, the fourth consecutive year that growth slowed. The average annual increase is about seven per cent, according to Statistics Canada data that goes back to 1987. Something is wrong. That thing might be bigger than NAFTA, but a protracted trade battle with Trump can only makes things worse.     

“The test for the Canadian (government) in coming days is whether they want to continue to play chicken with the Canadian economy to aid the anti-Trump ‘resistance’ or whether they want to look for a reasonable exit ramps from a trade war that can only be won in faculty lounges,” Mark Warner, a Toronto-based trade lawyer, said on Twitter on Aug. 28.

New data show that trade uncertainty isn’t having a dramatic effect on investment. StatCan reported on Aug. 29 that non-Canadians invested $8.9 billion in Canada in the second quarter, suggesting foreign investment is back at a more normal level after last year’s slump.

But I would encourage the officials at Finance and Trade to dig a little deeper. StatCan measures the extent to which Canadian companies reinvest profits earned abroad in their foreign affiliates. The number has surged over the past year to $11.7 billion in the second quarter from about $9 billion in the second half of 2016 and about $6 billion in the first quarter of 2016. Much of that spending is taking place in the United States: more than 50 per cent in the first and second quarters, after seven consecutive quarters in which the U.S. accounted for less than half of such investment.  

There are too many variables to draw conclusions from those figures alone. Still, Bank of Canada Governor Stephen Poloz has warned that some companies will choose to hedge against the collapse of NAFTA by expanding in the U.S. rather than at home. And that might be exactly what’s happening.

• Email: [email protected] | Twitter: carmichaelkevin

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