Since Canada, the U.S., and Mexico reopened the 25-year-old North American Free Trade Agreement (NAFTA) about a year ago, multiple deadlines have come and gone, and the latest one – October 1 – is likely to pass without a deal in place. While the U.S. and Mexico reached a bilateral trade pact in August, Ottawa remains sitting on the sidelines, deliberating at a snail’s pace.
Despite early optimism that American and Canadian trade representatives were close to striking an agreement before the upcoming midterm elections, administration officials revealed that they are ready to move on from Ottawa. President Donald Trump was a little blunter at a recent press conference in New York during the United Nations General Assembly.
Not only did President Trump slam Canada’s excessive tariffs on dairy, he conceded that he doesn’t like their negotiators, referring to Foreign Affairs Minister Chrystia Freeland, and he rejected a meeting with his counterpart, Prime Minister Justin Trudeau.
When pressed if he really did shun the prime minister, Trump told reporters:
“Yeah, I did. Because his tariffs are too high and he doesn’t seem to want to move and I’ve told him forget about it. And frankly, we’re thinking about just taxing cars coming in from Canada. That’s the motherlode. That’s the big one.”
The president did note that there was still “a good chance of a trade deal with Canada.” He added that a trilateral agreement would be renamed U.S.M.C. (U.S., Mexico, and Canada).
Under the multi-decade-old supply management system, the Canadian government maintains a 245% tax on cheese, a 270% levy on milk, and a 298% tariff on butter. The Great White North wants to pretend that it favors free and open trade, but its protectionist racket, one that prevents foreign competition in dairy, seems to be the driving force behind the crumbling trade talks.
Trying to avoid appearing weak, especially after a brief interaction at a UN luncheon where Trump did not stand up to shake Trudeau’s hand, the prime minister urged reporters to not “read into” the “quick but cordial” exchange.
“I have continued to engage regularly with the president. We had a very good call just last week. We continue to have regular conversations whenever necessary, whenever we want to,” Trudeau explained.
For weeks, U.S. and Mexican lawmakers have encouraged Ottawa to make a deal. However, reports suggest that Canada is ready to go beyond all deadlines until a new agreement benefits all three nations, not just one.
Does this mean there is a realistic shot of a deal? Canada’s ambassador to Washington, David MacNaughton, may have had the best answer: On a scale of one to ten, the chances of a new agreement by the latest deadline were “five.”
And this is where things get tough.
Is Trump Holding NAFTA Hostage?
The current state of NAFTA negotiations is a mess. Contradictory statements, negative news coverage, and missed deadlines have all become par for the course in this crusade of a better NAFTA deal.
So, what is exactly going on? There are a few things to consider.
First, Canada needs NAFTA more than the U.S. does. Because Canada sends about 75% of its exports south of the border and maintains a current account deficit, the Canadian economy would experience an enormous contraction should a new deal be abandoned.
Second, President Trump is spouting mercantilist rhetoric, leading to global leaders lamenting the U.S. for embracing protectionism, but it is these nations that have adopted import levies, restrictions, and quotas, too. A triple-digit tax on foreign goods is not the beacon of free trade. It is best that the U.S. refrains from mirroring this economic policy, but if all sides were committed to unmitigated trade, then these tariffs should be scrapped altogether.
Third, Prime Minister Trudeau turned down a reasonable request to install a five-year sunset clause – which has now been revised to six years. Trudeau did not like the idea, so this further delayed a new NAFTA. As we are witnessing in real-time, the global economy is rapidly changing – the international marketplace is vastly different than it was nearly three decades ago, and it will be quite different in five years time.
Fourth, it may seem like a trilateral pact needs to be completed as quickly as possible, but Canada could always join next month or next year. Soon, the U.S. government will publish the text of the U.S-Mexico pact to Congress, and Trade Representative Robert Lighthizer recently confirmed that Ottawa could also sign on later. For leaders, though, it’s all about timing: Mexico’s president-elect is set to take office soon and the Republicans are trying to cling to power in November.
Fifth, no matter what, the second incarnation will not be about real free trade.
NAFTA 2.0 Isn’t Free Trade
While crony trade is better than no trade at all, the latest NAFTA talks show that nothing has changed.
There was a lot of jubilation when Mexican President Enrique Nieto and President Trump announced a bilateral agreement. For markets, there was excitement. For those who want free trade, not managed trade, it was another day of consternation and disappointment.
Under the deal, governments will stipulate a specific number of North American steel and aluminum consumption, two-thirds of an automobile’s value must be constructed in North America, quotas will remain in place, and new labor standards will be imposed. More details will be released soon.
In the end, NAFTA 2.0 shifts regulations from one area to another. Even if Canada were to agree to the provisions, it doesn’t improve anything for businesses and consumers; it just means higher prices and more regulations.
Trump has slammed NAFTA on many occasions, and rightly so, as it raised prices, boosted illegal immigration, and failed at changing the tariff situation. This was Trump’s opportunity to really generate a free trade deal, but, unfortunately, his team fumbled the ball and created a situation whereby global commerce falls (again) under the weight of bureaucracy, red tape, and political ambitions. This isn’t good for markets or the people. Perhaps the old NAFTA should have been left alone.
Once again, free traders may have expected too much out of politics.
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