In a week of twists and turns, zigs and zags, ups and downs, the trade news that most surprised me was the recruitment of Paul Ryan, son of Wisconsin, to Canada’s side in the contest with Donald Trump’s administration over steel and aluminum tariffs.
Ryan, the Republican speaker of the U.S. House of Representatives, was an early and vocal critic of the president’s willingness to risk economic chaos on the pretense that unfair competition has diminished the United States’s ability to maintain its War Machine.
Ottawa took note. Prime Minister Justin Trudeau and Foreign Affairs Minister Chrystia Freeland reportedly called Ryan as they rounded up support for an exclusion. All the lobbying appeared to have an effect. Trump went ahead with his tariffs, but exempted Canada and Mexico, for now. Ryan vowed to keep fighting until the president drops the threat completely. “Our economy and our national security are strengthened by fostering free trade with our allies,” he tweeted.
Freeland called Trump’s decision “logical.” Maybe so, but logic isn’t winning many arguments in Washington these days. Trump gave ground after the congressional wing of his party mounted a counterinsurgency. It’s fair to assume Canada now owes Paul Ryan one. I wonder what he might consider fair payment?
That’s a rhetorical question. Ryan supports the North American Free Trade Agreement, but agrees with Trump that it needs to be updated, and said in January that the biggest problem “comes from the North.”
Wisconsin produces considerably more milk and cheese than its population of 5.8 million people can consume; the state’s dairy farmers would like to export more of their excess production to Canada. When Ryan met Trudeau on Capitol Hill in February 2017, he “reemphasized the importance of breaking down trade barriers and improving market access for America’s dairy farmers.”
You know where I’m going with this. John Curtis, a senior fellow at the C.D. Howe Institute and a former Ottawa mandarin, says dealing with the U.S. is like negotiating with the mafia. It is bigger than you, and more ruthless, so you can’t win. But you might come away relatively better off if you find a way to play along. Recent events suggest our dealings with Trump have entered a new phase; if we don’t soon give something, Canada risks a serious beating.
The Trudeau government’s approach with the NAFTA talks to date has been to stall for time. That made sense initially. It was impossible to know whether Trump would govern the same way he campaigned. And it would take a while to rally a pro-trade, pro-Canada constituency within the U.S. that might check some of Trump’s worst instincts. The steel-and-aluminum exemption was vindication of that approach.
But you can’t rag the puck forever.
I doubt material from the Bank of Canada is high on the prime minister’s reading list, but I do hope someone at least sends Trudeau a memo on what the central bank is saying about trade. Governor Stephen Poloz this week opted to leave borrowing costs unchanged, mostly because Trump’s repeated threats to quit NAFTA and his capricious use of retaliatory tariffs are an “important and growing source of uncertainty for the global and Canadian outlooks.”
An extended period of cheap money might sound good, but lower rates correlate with economic weakness, not strength. Many news outlets characterized Trump’s steel decision as a win for Canada, but Jean Simard, the president of the country’s aluminum lobby, wasn’t celebrating on Friday. He told the Canadian Press that investment in the industry has stalled because there are too many unknowns about what the cost of trade will be under Trump.
Prices also could rise, which would hurt manufacturing. That’s problematic because Canada’s non-energy exports remain lacklustre, suggesting factories already are uncompetitive. “Recent developments with respect to steel and aluminum, alongside increased protectionist rhetoric, carry potentially serious consequences,” Timothy Lane, a deputy governor at the Bank of Canada, told an audience in Vancouver on Thursday.
It’s unclear whether the Trudeau government accepts the gravity of the situation. Last month’s budget said nothing about what Trump has done to Canada’s competitiveness, a decision that recalls former Prime Minister Stephen Harper’s flat-footed response to the financial crisis a decade ago. That’s not to say that a recession is imminent, only that the business lobby’s angst might be more than a self-serving ploy for tax cuts. Their members sense trouble.
There might be an opening to resolve the NAFTA negotiations by the spring.
At the end of the latest round of talks this week, Robert Lighthizer, the U.S. trade representative, emphasized that elections in all three countries in the second half of the year mean negotiators are running out of time to complete an agreement in 2018. And then Trump explicitly linked the Canadian and Mexican exemptions on steel to progress at the negotiating table. It seems possible that he wants a deal.
That means the time has come for Canada to get real about what it will take to preserve NAFTA. Trudeau and Freeland mostly have refused to negotiate on any of Trump’s key demands.
When it comes to the U.S.’s desire to dismantle dispute-settlement procedures, that makes sense.
But everyone knows that Canada will have to give something on agriculture, if only because it has done so to secure trade agreements with the European Union and the nations that make up the Trans-Pacific Partnership, which Trade Minister François-Philippe Champagne signed in Chile on Thursday.
A concession on dairy now would counter suggestions that Canada is obstructionist, and strengthen Ryan’s ability to fight for free trade. It probably will take more than that to get a final agreement, which is why the time has come for Trudeau and other leaders to get the public ready for some difficult decisions. It would be delusional to carry on hoping that Trump can be won over without offering some kind of sacrifice.
That’s the price of doing business with the mafia. It might hurt initially, but the pain of allowing this uncertainty to drag into 2019 could be much, much worse.
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