Why the NAFTA Negotiations Can be a Difficult Challenge to Canada?

Image credit: Stephen Crowley/The New York Times

Reports on the events surrounding the revelations that the Trump Administration was about to withdraw from the North American Free Trade Agreement (NAFTA), described how on a Wednesday morning, Stephen K. Bannon, Donald Trump’s Senior Political Strategist and Peter Navarro, the head of the National Trade Council at the White House, drafted an executive order declaring the intention of the U.S. to withdraw from NAFTA. It also reported on the reactions to the revelations which included: nervousness in the financial and currency markets, astonishment on Capitol Hill, calls from leading republican senators on the White House to reconsider, and opposition to the measure from free trade supporters in the White House such as Gary Cohn, the head of the National Economic Council, and Steve Mnuchin, the Treasury Secretary.

Consequently, the President postponed his decision about terminating NAFTA, reportedly after he “received calls from the president of Mexico and the Prime Minister of Canada asking to negotiate NAFTA rather than terminate, to which he agreed”. This change of heart however, did not stop the president from imposing a twenty percent tariff on the imports of softwood lumber from Canada, instigated by another Bannon ally, the Secretary of Commerce Wilbur Ross, who has also launched an investigation into the national security implications of steel imports.

Some observers have opined that stepping back from terminating NAFTA, “provides further evidence that the globalists in the administration are taking charge of economic policy”, at the expense of the economic nationalist Bannon and trade protectionist allies such as Navarro and Ross, among others. As further evidence, they pointed to the failure of the travel ban to the U.S. from certain Muslim majority countries, to Stephen Bannon losing his position at the National Security Council, and to the departure from the presidential campaign rhetoric about alleged Chinese unfair trade practices and currency manipulation to cooperation with China.

While the setbacks suffered by the Bannon faction cannot be ignored, they are never the less believed to be overblown and are more tactical than strategic. In the context of all the measures enacted so far by the Trump Administration, it can be observed that almost all were consistent with Trump’s campaign policy rhetoric, whose mastermind and main influencer is Stephen Bannon and his likeminded colleagues.

Asking the question “What does Donald Trump wants for America?” Messer Gwynn Guilford & Nikhil Sonnad, writing in QUARTZ, suggests an answer: “His supporters do not know. His Party does not know. Even he does not know. If there is a political vision underlying Trumpism, however, the person to ask is not Trump. It’s his eminence grise, Stephen K. Bannon, the chief strategist of the Trump administration”.

Looking at the achievements of the Trump Administration to date from a Bannon perspective, the record does not seem bad by any measure, it is quite the contrary. In his mission to “deconstruct the administrative state”, the President, already revoked many of the important environmental regulations enacted by the Obama Administration, initiated the repeal of the Affordable Health Care Act, withdrew from the Trans Pacific Partnership, and finally, placed a dark cloud over future Canada-US relations, and threw the future of NAFTA into uncertainty.

The motives behind the unexpected attack on NAFTA, the most successful regional free trade agreement, along with the disappointingly harsh criticism of the historical U.S.-Canada relationship, one of the World’s oldest, highly integrated, and mutually beneficial bilateral relationship, cannot be rationally explained except when looked at through the ideological prism of Bannonism with its three tenants: Capitalism, Nationalism, and the primacy of the Judeo-Christian Tradition.

Canada, with its Social Democracy, Pluralism and Secularism is a flourishing antithesis of Bannon’s regressive vision. Canada’s commitment to the environment, to halting global warming, and mitigating the negative effects of climate change, stand in stark contrast to the climate change denialism of the alt-right such as Bannon and his Tea Party ideologues. Consequently, NAFTA provides the ideal testing ground for Bannon’s strategy, especially when “deconstructing the administrative state” does not have to stop at the national borders of the U.S.

It can be fairly assumed that if the anti-globalists get the upper hand in influencing the upcoming NAFTA negotiations, their objective will not be to improve the agreement, as one may rationally expect, but to devalue and steer the outcomes to serve their national vision and international agenda. Such presumptions are enforced by the unrealistic criteria by which the fairness of NAFTA is to be assessed.

The leaked draft executive order that Trump was supposed to sign terminating NAFTA betrays the intent of its authors by basically stating the criteria by which free trade agreements shall be judged. According to the draft, the agreements must “increase America's economic growth, decrease America's trade deficit, raise American wages, maintain the integrity of America's borders, and strengthen the manufacturing and defense industrial bases of the United States." These requirements echo the Trump Economic Plan which is authored by Peter Navarro and Wilbur Ross and was frequently sourced by the Trump Campaign. This stance however, flouts logic and economic fundamentals and constitutes a false criterion for judging the benefits of free trade zones.

The main attraction of free trade zones stems from enabling the optimal allocation of factors of production, and consequently redistributing production among the zone members, so that overall productivity and consequently the competitive advantage of the free zone vis a vis the rest of the world is enhanced. Trade imbalances between members of the free trade zone are natural and are to be expected especially in the presence of gabs in income and costs of production factors. These imbalances however, are expected to narrow over time as the income gab narrows which is one of the main objectives of free trade agreements. A case in point is the Canada-U.S. trade balance, which is narrowly to Canada’s advantage.

Free trade benefits ought to be assessed by asking the question: how economic growth, trade balances, employment and other relevant parameters would have been in the absence of the agreement, whether on the zone or national levels. Without NAFTA and other similar agreements, the state of the economic parameters that the Trump administration complains about would likely be worse, and since this is an obvious fact, then one may suspect that NAFTA is being scapegoated.

The above suspicion is enforced by the unjustified complaints related to the Canada-US trade since the trade balance is effectively to the US advantage. The narrow surplus that Canada has is due to energy exports to the US which complement domestic US production, and are the least costly energy imports available. In other words, the US must import these energy products to satisfy its domestic demand, and Canada is the least cost source available for these imports due to geographical proximity. The US on the other hand, has a sizable surplus with Canada in trade in services that far exceeds the overall deficit.

As to the trade issues related to soft lumber wood and some dairy products, these are considered minor relative to the total volume of trade between the two countries and are outside NAFTA. Notwithstanding the need to reach a mutually satisfactory resolution of these issues, they certainly do not justify putting a long-standing relationship of cooperation in jeopardy.

What does all this mean to Canada’s strategy come November when NAFTA negotiations are expected to start?

Obviously, a good part of this strategy will depend on which faction of the Trump administration has the greater influence on the negotiations. If the globalists and pro free trade factions have the upper hand, then the negotiations could be an opportunity to improve NAFTA to the mutual benefits of its three partners: Canada, Mexico, and the United States. If on the other hand Bannon and other hardliners hold the sway, then the negotiations could be quite challenging, especially when arguments based on the benefits that NAFTA brings to the consumers of the three countries are expected to be irrationally discounted.

There is a silver lining however, that lies in the fact that the Canadian and Mexican negotiators will not only be representing the interests of their citizens, but also the majority of Americans who stand to pay a hefty price for any damages caused to NAFTA.

Moreover, the US Congress would have to approve any proposed changes to the agreement, and considering the inability of the Trump Administration to pass any major legislation, then it will be unlikely for the present offensive on free trade and globalization generally, and NAFTA particularly, to succeed.

KZ

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