Jack Mintz: Trump’s NAFTA tweaks means Canada needs to carefully plan a negotiation strategy

On Friday, President Trump signed an executive order directing the U.S. government to negotiate changes to the 1994 North American Free Trade Agreement (NAFTA). It looks like more than the few “tweaks” Canadians were hoping for. The list of issues is pretty lengthy, ranging from agriculture and services to digital trade, investment and government procurement. Canada will need to plan carefully its negotiation strategy.

In 2015 (in U.S. dollar values), Canada exported $325 billion and imported $337 billion in goods and services for a deficit with the United States of $12 billion. Canada has a significant deficit in services ($27 billion) and a surplus in goods ($15 billion).  Much of our trade surplus is due to exports in oil, gas and petroleum products while we have a large trade deficit in machinery.

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That is the nature of trade, however. Countries specialize in what they do best. We should expect trade surpluses in some categories and deficits in others, and not expect trade to be balanced.

Economists since David Ricardo have argued that the world economy gains from free trade among nations that specialize in their comparative advantage. This principle has become the basis for the removal of tariff and non-tariff trade barriers under bilateral, regional and multilateral trade agreements. Some sectors might be hurt by free trade policies but winners can afford to compensate losers, at least in principle.

We would have to give up some protective policies in return for eliminating those of others. But, why not?

Yet, the recent rise of economic nationalism has led to a shift in policy thinking to a mercantilist view that countries should run trade surpluses, at least in some key industries such as manufacturing. These economic nationalists have an argument that appeals politically.

“Free” trade agreements have been far from perfect, leaving barriers in place and making ambiguous the claim that more trade leads to overall gains for each country. Further, as Trump argued successfully in the fall election, many U.S. workers were left behind, hurt by unfair subsidy practices by China and some other countries designed to acquire market share.

Canadians have built our own barriers, despite numerous trade agreements: log export restrictions to favour forest-product manufacturers; supply management to protect dairy, egg and poultry; foreign ownership restriction in financial services, broadcasting and telecommunications; provincial trade and procurement policies inhibiting both internal and external trade; industrial subsidies to indirectly support aerospace markets and state-owned monopolies dominating power markets in most provinces, just to name a few.

Given the new mood by many Democrats and Republicans, Canada as a professed free trader faces a difficult negotiation with the U.S. administration. We have already seen Buy American procurement policies proposed by Democrat-led New York State and potential new anti-dumping actions and countervailing duties, such as in softwood lumber. “America First” reads loud and clear.

So what can Canada do?

The first and best option is to have a broad negotiation that would improve and update NAFTA.  A new agreement could include provisions related to agriculture, services, government procurement and intellectual property adopted elsewhere, such as in the Canada-Europe agreement. We would have to give up some protective policies in return for eliminating those of others. But, why not? Some of our policies cause unbelievable harm to consumers and hurt our export industries.

A broad negotiation, however, takes time. The current uncertainty is pushing businesses to hold off on investments in Canada and, in some cases, to invest in the large, resilient American market. Further, given the U.S. electoral cycle, a multi-year consultation may not be in the cards. The Trump administration will look for quick wins in the coming year, well before the 2018 election. 

A second approach is to agree to a fast-track negotiation for some NAFTA issues and a longer one for complex ones requiring congressional approval.  Some administrative changes can be made, such as to origin rules, for example, that would not require congressional approval yet could have profound impacts on certain sectors, such as the auto industry. The safeguard mechanism for temporary suspension of tariff preferences being proposed by the U.S. should be negotiated to ensure that it is not arbitrarily applied.

A third approach is to withdraw from any negotiation and disband NAFTA. Here we would lose significant access to the American market for our exports. We could pursue retaliation in limited cases, such as New York’s Buy American policy, but retaliation is risky with tit-for-tat actions that especially hurt the smaller partner — Canada.

We are just at the start of a difficult discussion with the U.S. on NAFTA.  Given the American mood for economic nationalism, the free trade principle will be hard to pursue. But we should be aggressive, not passive, in promoting it.

Jack M. Mintz is the president’s fellow at University of Calgary’s School of Public Policy.