In hindsight, it was clear something had gone askew with the NAFTA talks the moment Canadian officials got excited about wrapping things up.
Prime Minister Justin Trudeau and his ambassador to the U.S., David MacNaughton, spent the first part of Thursday telling people that an agreement was close. Trudeau even said the compromise that had been worked out automobiles likely would result in jobs returning to America from Mexico.
You got the impression that if President Donald Trump’s motorcade had showed up in New York, where Trudeau was speaking, he would have signed a new NAFTA right there on the hood of the president’s Suburban.
All this commentary was happening on the day that House Speaker Paul Ryan had set as the deadline if negotiators wanted Congress to approve an agreement before the end of the year — and before November midterm elections flip the House of Representatives to a Democratic majority in 2019 (according to current polling).
No one took Ryan’s timeline seriously, including Ryan himself, who would eventually concede that the deadline to satisfy all of Congress’s procedural hurdles was actually sometime in early June.
But that didn’t stop Canada’s leaders from using the opportunity to put some pressure on Trump. The gambit probably was worth a try, but it came off as odd, at least to this observer. The Canadian strategy had been to fake indifference about timing. Foreign Affairs Minister Chrystia Freeland has stated repeatedly that the only thing she cares about is getting a “good deal.” The decision to jump on the Ryan deadline suggests the Trudeau government is in fact aware of the Bank of Canada’s estimates of how much trade uncertainty is hurting investment.
It turns out that Freeland’s willingness to negotiate for as long as it takes is going to be tested. Robert Lighthizer, the U.S. trade representative, was busy negotiating with a delegation of high-ranking Chinese most of Thursday. But when he emerged from those meetings, he quickly sent a message to the Canadian front in this ever-expanding trade war. “The NAFTA countries are nowhere near close to a deal,” he said in statement emailed to reporters by his press office. “There are gaping differences on intellectual property, agricultural market access, de minimis levels, energy, labor, rules of origin, geographical indications, and much more.”
And with that, everything changed. Gone was the notion that Trump could be persuaded to accept a moderately reworked NAFTA and call it a win. Lighthizer’s statement showed that if he has his way, Canada, Mexico and the U.S. will be reworking NAFTA from top to bottom. That easily will push negotiations into 2019.
“I don’t see any evidence of this being wrapped up,” said Eric Miller, a Canadian trade consultant based in Washington. “You can’t have a comprehensive deal done quickly.”
Importantly, few think NAFTA is in mortal danger. Trump has stopped threatening to kill it and Lighthizer emphasized that he remained keen to negotiate, despite his many misgivings. But many who had hoped for a resolution this year were changing their timelines by the end of the week. Kevin Brady, the Republican chairman of the House committee that oversees trade policy, said in a statement Friday that he hoped the three NAFTA partners “continue working in good faith to get this done — whether that means a vote in Congress this year or next.”
A protracted negotiation means trade uncertainty will remain a headwind for Canada’s economy. The Bank of Canada has been trying to offset that drag on growth by keeping interest rates low, but Trudeau and the premiers are going to have to do more to help.
New figures show inflation is running at the central bank’s target, meaning it will have to gradually move borrowing costs higher to keep a lid on prices. If NAFTA isn’t settled in the next few weeks, Ottawa and the provinces should cut taxes on business investment to erase any U.S. advantage.
There’s a silver lining.
Faced with artificial time constraints, the best Canada could do was play defence and hope to limit the damage. But If Lighthizer truly wants to rewrite NAFTA, he will have to drop his bully act and allow Canada and Mexico some wins, too. That could be a net positive, assuming the Trudeau government seeks concessions that will benefit the Canadian economy a decade from now, and ignores the lobbyists attached to shrinking industries.
That will be hard. The advantage those shrinking industries’ lobbies have is they employ taxpaying voters here in the present. However, the future isn’t as uncertain as it might seem.
Meredith Lilly, a professor of international affairs at Carleton University who served as a trade adviser to former prime minister Stephen Harper, argues in a new research paper that Canada can make a reasonable guess at its destiny on the continent by looking at demographics. In 25 years, we will be sharing a continent with two of the world’s 10 biggest economies. That’s reasonably good news. The bad news is that Canada’s economy will shrink, raising the possibility that we could become the poor cousins of North America.
To avoid that fate, Lilly says Canadian trade negotiators need to structure NAFTA in a way that will play to a future Canada’s strengths. There is little reason to think Canada can compete as a manufacturer, but it is having success in attracting tech companies desperate for talent. That means a win for Canada at NAFTA would be securing the ability to move people across the borders relatively easily so the country is a magnet for tech workers and students.
With all the emphasis on autoworkers, the NAFTA talks to date have been more about the past. Now that the window for a quick deal has closed, maybe we can start debating the future.
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