Analysis: Throw Mexico, Not Oil Industry, Under Trump Trade Bus

There may be more prominent targets in U.S. President Donald Trump’s multi-front trade war, such as China and the European Union, but Canada and Prime Minister Justin Trudeau have recently been the primary recipients of Trump administration vitriol. This has led to a spike in Canadian nationalism, much tough talk on future trade negotiations with the U.S., and calls to diversify the country’s massive oil and gas exports away from our southern neighbor — in 2017, 100 per cent of Canada’s 8.2 bcf/d of natural gas exports went to the U.S., and about 99 per cent of its 3.3 million bbls/d of crude oil exports — given Trump’s apparently erratic actions and related factors.

These include the probability of the Trudeau government using energy as a “trump card” in future trade negotiations — a tactic recommended by Derek Burney, a key trade advisor to the feds, on the eve of the North American Free Trade Agreement (NAFTA) renegotiation — increasing substantially with the Trump administration now threatening to impose tariffs on Canada’s automotive industry, our largest export to the U.S. given relatively low energy prices in recent years.

Federal government decision-making has traditionally been influenced heavily by the interests of the highly-populated Central Canadian provinces, where the country’s automotive and other manufacturing industries tend to reside — think National Energy Program (NEP) in the early 1980s — due to Canada’s representation by population democratic system.

Instead of using our country’s oil and gas as a bargaining chip, which could easily backfire given Trump’s notoriously vindictive personality, the Trudeau government should instead agree to two-track NAFTA negotiations, which the Trump administration requested shortly before the G7 Summit in La Malbaie, Quebec on June 8 and 9. This would likely minimize the trade concessions needed to maintain relatively cordial trade relations with the U.S., given Mexico is much more of a target in the NAFTA renegotiation than Canada.

Trump prides himself a tough negotiator, and, unfortunately, the U.S. holds most of the trade cards. Canada is significantly more reliant on the huge American market for our exports than the U.S. is on us. For example, in 2016, the U.S. accounted for almost three-quarters of Canada’s total exports of goods, whereas Canada made up only 16 per cent of America’s exports. In a special report released in late March by the National Bank of Canada, analysts at the bank estimated that 5.8 per cent of the Canadian economy is at risk from a trade war with the U.S., with almost two-thirds of that number representing industries the Trump administration has directly threatened.

The economies of Ontario and Quebec are at greatest risk, eight per cent and 6.8 per cent, respectively, given the important role aluminum, steel and manufacturing industries play in these two provinces. In contrast, the major oil and gas producing provinces — Alberta, British Columbia, Saskatchewan and Newfound & Labrador — tend to be at the bottom of the list, with between 1.7 per cent and 4.3 per cent of their economies at risk. The fact National Bank analysts did not include energy as one of the Canadian industries at risk from U.S. protectionism should not be a great surprise, given the pivotal role Canada’s oil and gas continues to play in U.S. energy security.

In the months before the NAFTA renegotiation began in mid-August, U.S. Energy Secretary Rick Perry made it abundantly clear that the Trump administration would like Canada and Mexico to forge a North American energy strategy with his country. Mexico is a longstanding, albeit declining exporter of heavy crude to the U.S., and is becoming an increasingly important market for U.S. natural gas and petroleum products. There is substantial two-way traffic of crude, products and gas between Canada and the U.S., with Canada continuing to be a substantial net-exporter of these on the whole despite America’s Shale Revolution.

But there is a more benign way to view Trump’s extreme rhetoric and trade tantrums against Canada. The Trump administration is simply attempting to soften the Trudeau government’s negotiating position on NAFTA. It was announced on June 14 that treaty talks would reconvene sometime this summer. Trump’s madman act, straight out of his book Art of the Deal, appears to have worked well to encourage North Korea to accept denuclearization.

Trump warned last summer that the use of nuclear weapons by the hermit kingdom would lead to “fire and fury like the world has never seen,” much more apocalyptic rhetoric than Canada and Trudeau have had to withstand. On June 12, in an interview with Fox News to discuss the nuclear agreement, Trump as much as admitted he was simply using hyperbole to get the North Koreans to negotiate in good faith, saying he “felt foolish” using such language.  Upon signing the nuclear deal, Trump referred to the North Korean leader Kim Jong-un as “very impressive,” “intelligent” and “skilled.”

On June 5, also during an interview with Fox News, Larry Kudlow, the White House economics advisor, said Trump would prefer separate trade talks with Canada and Mexico to bypass the NAFTA impasse and to get individual deals with each country. “His preference now, and he asked me to convey this, is to actually negotiate with Mexico and Canada separately,” Kudlow said. “He prefers bilateral negotiations, and he’s looking at two much different countries.”

The most important difference between Canada and Mexico in this regard is their bilateral trade positions with the U.S. In 2017, Mexico had a US$64.1 billion trade surplus in goods and services with America based on U.S. Trade Representative (USTR) figures, whereas Canada had an US$8.4 billion bilateral trade deficit — not a US$100 billion trade surplus as suggested by Trump in a recent Tweet. The key objective of the NAFTA renegotiation based on a USTR report released in July 2017 is a reduction in the country’s trade deficit, putting Mexico in America’s crosshairs, not Canada. In addition, since NAFTA was enacted in 1994, manufacturing jobs have been moving to low-cost Mexico, not relatively high-cost Canada, another major concern of the Trump administration.

To conclude, the Trudeau government should reconsider its position on two-track NAFTA talks, which it negated out of hand on June 6, to minimize the trade concessions we will need to make to maintain relatively cordial trade relations with the U.S. In the North American context, the Trump administration’s trade beef is primarily with Mexico, not Canada, rhetoric and supply management in the dairy industry aside.

At the same time, the feds should not use our oil and gas exports as a bargaining chip in trade negotiations with the U.S. This would likely antagonize Trump, leading him to retaliate, for example, by rescinding the March 2017 executive order authorizing the cross-border Keystone XL crude pipeline project. Anyways, the Trump administration knows as well as we do that Western Canada lacks the pipeline and LNG infrastructure to export our oil and gas to alternative markets.