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Are we facing a worsening bilateral arrangement with the U.S.?
Naomi Powell – Financial Post
August 27, 2018
An agreement between the United States and Mexico to renovate key portions of NAFTA is being cast as a near-final deal, with U.S. President Donald Trump signalling his negotiators will take a hard line with Ottawa as talks move to the next stage.
“The Americans are clearly trying to spin this as a deal they’ve reached with Mexico, and Canada can take it or leave it,” said Avery Shenfeld, chief economist with CIBC Capital Markets. “Trump was trying to emphasize that he’s prepared to leave Canada out, even though the Mexicans are making it clear that they would prefer a trilateral deal.
“This could just be the initial tough negotiating posture, but it does signal that the Americans are intending to take a tough line with Canada.”
Trump’s announcement of the agreement with Mexico — a move that clears the way for Washington to turn its focus to Ottawa and contentious bilateral issues such as dairy supply management — was accompanied by a threat to slap Canada with a 25 per cent tariff on auto imports if the two countries don’t reach a deal to revamp the 24-year-old trade pact.
“It’ll either be a tariff on cars or a negotiated deal,” Trump said during the announcement in the Oval Office, where he also mused about renaming the deal the ‘U.S.-Mexico free trade agreement.’
American and Mexican negotiators worked through the weekend to forge an agreement on key issues related to the automotive industry. Under the deal, 75 per cent of the content of each North American vehicle must come from NAFTA countries in order to qualify for duty-free treatment, up from the current 62.5 per cent.
The two sides also agreed to a provision requiring 40 to 45 per cent of each vehicle be made in factories where workers earn at least US$16 an hour — crucial to discouraging factory jobs from leaving the U.S. for Mexico.
Those elements — which line up with what was proposed at the NAFTA bargaining table in May — are “workable,” said Flavio Volpe, president of the Automotive Parts Manufacturers’ Association. “The knuckles are out, but I think at least in automotive, the development that Mexico is now onside is positive because they weren’t in May.”
A sunset clause could see NAFTA expire in 16 years, a considerable softening of the original U.S. proposal calling for a five-year clause. Details on other issues including dispute resolution and U.S. rules on government procurement remained unclear. Dispute resolution in particular is a crucial issue for Canada and one that nearly prompted negotiators to walk away from the original NAFTA talks back in 1987.
“The biggest issue for Canada isn’t whether we’re kicked out of the deal, but what’s next,” said Shenfeld. “The U.S. has not only put tariffs on steel and aluminum but is threatening to do the same on autos and uranium, so if we’re not in the trade deal, are we facing a worsening bilateral arrangement with the U.S.?
“That threat is material to Canada’s economy because once you include automotive products, uranium, stee, (and) aluminum you are hitting a significant portion of Canada’s economy.”
A 25 per cent tariff on autos would subtract as much as 1 per cent from Canada’s GDP and could prompt a significant decline in the Canadian dollar, Shenfeld said. It is also projected to cut hundreds of thousands of auto industry jobs on both sides of the border and raise the prices of automobiles for consumers.
Though Canada’s economy is expected to grow by 3 per cent in the second quarter, it grew by just 1.3 per cent in the first three months of the year. While the country posted its best month of international trade ever in June — with a record level of exports headed south of the border — a significant hit to the trade file could jeopardize that performance, Shenfeld cautioned.
“We had a very healthy second quarter but there’s obviously still some concern that, if the trade files gets worse, we won’t have enough momentum on exports and business capital spending to replace sectors like housing as a driver of growth,” he said.
Markets nevertheless responded positively to news of the deal. Despite Trump’s warnings to Canada, the Mexican peso and the Canadian dollar both jumped on the announcement, a “curious reaction” given Trump’s tough talk on Canada, said Doug Porter, chief economist at BMO Financial Group.
“Overall, the market is assessing this as good news for Canada, and I don’t know if that’s the right reaction,” said Porter, who expects the Bank of Canada to hold off on raising interest rates given the uncertainty on trade. “It’s potentially a positive in that I’ve long seen auto as the toughest nut to crack in these negotiations, but I did not find the tone of the U.S. President toward Canada to be very positive.”
Trump is rushing to draft a final NAFTA deal by the end of this week. This deadline would enable current Mexican President Enrique Pena Nieto to get the deal signed before he leaves office Dec. 1, rather than see negotiations carry on under incoming president Andres Manuel Lopez Obrador. Trump is looking to kickstart a 90-day notification period with the U.S. Congress.
Though Trump said negotiations with Canada would resume soon, he also threatened to move ahead with a plan to break the single trilateral pact into two separate deals with Canada and Mexico. Pena Nieto has repeatedly said he expects Canada to rejoin the talks.
Trump’s comments aside, there’s still “a lot of play left in the NAFTA talks,” said Eric Miller, president of the consulting firm Rideau Potomac Strategy Group, which focuses on trade issues.
“If these negotiations were an opera, we’re at the end of the first act,” Miller said. “This is really about narrative: The midterm elections are coming and the Trump people have to reassure their base that the strategy is working.”
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