Analysis: Trump Has Canada Over The NAFTA Barrel, Maybe

The 1994 North American Free Trade Agreement (NAFTA) sits on a razor’s edge — at least as we’ve known it as a trilateral trade agreement.

I’d say the Trump administration pulled a fast one by negotiating a side deal with Mexico and putting Canadian negotiators between a rock and hard place. That is if President Donald Trump hadn’t telegraphed he preferred bilateral to multilateral negotiations and as much as threw Mexico under the bus himself before Mexican negotiators wised up and threw Canada under the bus instead (see Throw Mexico, Not Oil Industry, Under Trump Trade Bus).

Trump made Canada’s lack of negotiating space abundantly clear in off-the-record comments made to Bloomberg News, but reported by the Toronto Star, on August 31, which he subsequently confirmed through another of his infamous Tweets.

In response, Prime Minister Justin Trudeau drew a line in the sand on September 5, warning Canada is unwilling to sign a revised treaty without continuing protection for Canada’s cultural industries — publishing, broadcasting and film production — and a dispute resolution mechanism similar to the one in Chapter 19 of the original NAFTA. “We will not sign a deal that is bad for Canadians and, quite frankly, not having a Chapter 19 to ensure that the rules are followed would be bad for Canadians,” Trudeau said.

To date, the possibility of the Trudeau government using energy exports as a bargaining chip in the NAFTA renegotiation has been met with a great deal of skepticism, but if negotiations continue to falter, and with Trump threatening to impose a 25 per cent tariff on Canadian-made automobiles if they fail, it may be only a matter of time before Trudeau ups the ante and threatens to restrict the export of our oil and gas to the U.S.

Trump put a gun to Canada’s head when the U.S. agreed to a new trade deal with Mexico on August 27, following several weeks of bilateral negotiations between the two countries, while imposing a four-day deadline for Canadian and U.S. negotiators to agree upon substantial bilateral and trilateral issues remaining between the two countries.

The U.S. supposedly went off to negotiate only bilateral issues with Mexico,  but came back with a number of compromises on trilateral issues as well, including: 75 per cent North American content in all non-tariff automobiles; and a potential 16-year sunset clause, to be reviewed every six years — compared to Trump’s original demand for a five-year sunset clause.

Hence, last week, Foreign Affairs Minister Chrystia Freeland and her team were presented a virtual fait accompli, with apparently little or no bargaining room to protect Canadian interests. In his off-the-record quote, Trump said the deal with Canada would be “totally on our terms.” In his typically classless and somewhat incoherent fashion, Trump went on to say: “If I say no — the answer’s no. If I say no, then you’re going to put that, and it’s going to be so insulting they’re not going to be able to make a deal … I can’t kill these people [Canadian trade negotiators].”

It was reported the same day that U.S. trade negotiators, led by Robert Lighthizer, the U.S. Trade Representative, had not budged over the four days of negotiation leading up to the August 31 deadline, despite significant compromise by Canada on a number of outstanding issues. The U.S. Trade Representative serves under the direction of the president.

Fortunately, Trump’s August 31 deadline was bogus — as so much of what he says and does is — and the U.S. may not have as much bargaining power as he claims, which he appears to have inadvertently telegraphed in yet another Tweet.

Trump had to give the U.S. Congress 90 days notice that his administration planned to sign a revised version of the NAFTA treaty by December 1, to allow it to be signed by outgoing Mexican President Enrique Peña Nieto, but the administration does not have to provide a text to Congress until October 1, making that the real deadline for Canada and the U.S. to hammer out a deal.

Trump may have Canada over a barrel, but the fact Trump warned the U.S. Congress to not interfere with his administration’s negotiation with America’s largest trading partner “or I will simply terminate NAFTA entirely & we will be far better off...” in a September 1 Tweet, suggests that he understands that even a supine Republican-led Congress may not accept a bilateral trade treaty with Mexico in place of the original three-country pact.

As a result, there may be some room for negotiation after all, increasing the possibility of a successful three-way NAFTA agreement. Frankly, it would be political suicide for Trudeau to allow Trump to take Canada to the woodshed and gloat about it, especially after bungling the renegotiation through a lack of flexibility earlier on and by letting Mexico cut a side deal while his trade negotiators twiddled their thumbs.

But with Trump threatening to slap a 25 per cent tariff on Canadian-made automobiles — one of the two most important industries in Canada along with energy — if no new deal is cut, it may be only a matter of time before Trudeau uses the oil and gas “trump card,” which former Canadian ambassador to the U.S. Derek Burney warned prior to the start of the NAFTA renegotiation in mid-August 2017  would be the case, if the Trump administration played hardball. History is littered with countries cutting off their noses to spite their faces during trade wars.

Last autumn I argued that NAFTA was dead (NAFTA is Dead – Act Accordingly), I flip flopped and argued it would survive this spring (A Trade War Boon for Canadian Oil Industry?), and as of now believe the likelihood of a successful NAFTA renegotiation is slightly greater than failure, but it could get butt ugly between now and the signing of a revised treaty.