NAFTA is dead and Canada should move on

Posted on June 2, 2018 in Debates – Opinion
June 1, 2018.   

Peter Donolo is vice-chairman of H+K Strategies Canada. He served as director of communications to former prime minister Jean Chrétien.

NAFTA – at least as we know it – is dead. Donald Trump just killed it.

The reckless and crippling 25-per-cent tariff on steel and 10-per-cent tariff on aluminum that the U.S. President’s administration just used to bludgeon Canada and Mexico (not to mention the entire European Union) is the murder weapon.

For all those who have spent the past 20 months convincing themselves that Mr. Trump was just posing, that he could be reasoned with or charmed, this will come as a brutal awakening. In Canada, this group of wishful thinkers has been a large one indeed – almost the entirety of the country’s elite, including a bipartisan consensus of federal and provincial governing and opposition parties, former prime ministers, the business community and virtually every media pundit and analyst.

When someone keeps threatening to smash you, as Mr. Trump has since he announced his candidacy for president, it usually pays to take them seriously. Today, even the most committed somnambulist can’t ignore what the U.S. administration has done.

Now that Mr. Trump has, ahem, gotten our attention, what are we going to do about it?

Our government, like the government of Mexico and the European Union, has already announced specific retaliatory tariffs against the United States. Our Prime Minister has cancelled a tête-à-tête with Mr. Trump. But what about the longer term?

How can we, for a moment, believe that a renegotiated NAFTA can protect us from further unwarranted and equally ferocious economic attacks from our putative partner? The risible pretext that U.S. Commerce Secretary Wilbur Ross trotted out for the tariffs was “national security,” because, as he put it, “without a strong economy, you can’t have strong national security.” We can expect this elastic interpretation to be the standard approach of Mr. Trump’s administration to any disputes under a renegotiated NAFTA.

The compelling reason that Canada signed onto NAFTA (and to the original free-trade agreement) in the first place was to shield our economy from this type of capricious protectionism. It largely – if not completely – worked for us for the better part of three decades. Our automotive sector, in particular, has flourished and is consequently greatly at risk.

But now we are locked in a relationship with an unpredictable and (economically) aggressive partner. No amount of nostalgia or wishful thinking can change that.

To borrow a phrase from the relationship industry, this isn’t about us (Canada)… it’s about them (the United States). And the sooner we realize that, the better.

Our government increasingly understands it. This week the Prime Minister told a Toronto symposium that no NAFTA would be better than a bad NAFTA deal. And there are strong indications that no deal is the preferred option of Mr. Trump’s administration.

So, what is our Plan B?

It obviously means seriously and aggressively pursuing markets and investment beyond the United States. For example, new markets for Canadian resources are now more important than ever. That’s why the government’s decision this week to effectively nationalize the Trans Mountain Pipeline in order to finally get it built and deliver oil to Asia-bound tankers was such an important step. This decision in itself was a significant response to an unreliable American partner and a signal that we must look farther abroad for greater economic opportunity.

The same goes for the myriad of trade agreements on which our country has embarked – most prominently the Canada-EU trade agreement and the Trans-Pacific Partnership. The General Agreement on Tariffs and Trade (GATT) and World Trade Organization (WTO) breakthroughs of the 1990s also work in Canada’s favour, providing us with tariffs much lower than what existed before NAFTA and the original Canada-U.S. free-trade agreement. If NAFTA were to cease tomorrow, our trade with the United States would still operate under the WTO’s rules.

Finally, we need to redouble efforts to attract direct foreign investment into Canada. The government recently launched a new agency, Invest in Canada, to do just that. But there are obstacles. The Business Council of Canada cites the regulatory burden as the biggest challenge. In a globalized economy, tax competitiveness is always an issue. And governments need to walk the walk when it comes to opening up to investors from countries such as China, even when there is domestic political blowback.

The only negotiating stance that works against Mr. Trump is the ability and willingness to walk away. Mr. Trump sniffs out weakness or desperation – in a friend or a foe – and he pounces without mercy. A defensive crouch is the wrong position. “Sauve qui peut” is the wrong rallying cry. Negotiating with strength, from strength, is the only approach.

At the end of the day, even if we manage to finally achieve the elusive Third Option that Mitchell Sharp first proposed almost five decades ago, a majority of our commercial relations will continue to be with the United States – geography makes it so. But we will be able to do so not as a punching bag, but as a neighbour.

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