Updated: date

Published: July 26, 2018

With Donald Trump in the White House, the question likely isn’t ‘if’, but rather ‘when’ NAFTA will fail

Analysis by SUSY ABBONDI

Writing from Montreal

Editor’s Note: This is Susy Abbondi’s follow-up, detailed analysis of the stalled NAFTA negotiations, 14 months after her first masterful “look" into the NAFTA talks was posted by us on May 17, 2017. Those readers who wish to know what makes Susy so proficient at researching and explaining complicated subjects, such as NAFTA, should check out her biography here.

Donald Trump has always sold himself as a great negotiator, the ultimate problem-solver. But just 18 months into his presidency – by summer 2018 – he had proved himself to be more of a dealbreaker than a dealmaker.

So far, the dealbreaker-in-chief has exited three major treaties – the Trans-Pacific Partnership, the Paris Agreement on climate change, and the Iran nuclear deal. And a fourth deal, the North American Free Trade Agreement, appears to be next on the chopping block, especially in light of Trump’s shenanigans following the G7 Summit at La Malbaie, Quebec on June 7-8, 2018, when he attacked Prime Minister Justin Trudeau for saying Canada would not be bullied by punitive tariffs imposed on Canadian steel and aluminum exports to the U.S. Trump said Trudeau’s outspoken position about the U.S.-Canadian trade dispute was going to “cost a lot of money for the people of Canada.”

Trump’s aggressive use of punitive tariffs has now landed him in the midst of a trade war of global proportions. From the outside looking in, it resembles the world of professional wrestling, where the “good guys” take on the “bad guys” in the midst of a grandstanding charade. The only trouble is that the U.S. has decided to start a wrestling match by hurling a folding chair towards the good guys. Perhaps this is not surprising from a president who made a cameo appearance in the World Wrestling Entertainment ring long before he stepped into the Oval Office.

At this point, the question begs to be answered: what happens if – or should we say when – NAFTA fails? It is a question not easily answered, but in this piece I will attempt to explore the biggest underlying issues preventing us from striking a deal, as well as the economic repercussions of a post-NAFTA world.

Is a deal even possible?

Now that NAFTA has come unglued, it has often been said that Canada has less to worry about as compared with Mexico because we have the luxury of falling back on our original bilateral Canada-U.S. Free Trade Agreement (CUSFTA). The agreement seized national attention for the better portion of two years as then-Prime Minister Brian Mulroney fought hard for re-election and for the agreement which faced a great deal of opposition, in what became known as the great free-trade election of 1988.

As per diplomatic notes, the CUSFTA was merely suspended when NAFTA was enacted in its place in 1994, and it is said it would come back in force should NAFTA lapse. Of course, there is no reason to believe this agreement is not also going to find itself in Trump’s crosshairs given Trump’s zero sum economic view and perceived hostility towards trade partners.

In short order, Trump has managed to undermine the liberal trading environment that American presidents of both parties worked very hard to foster since the first General Agreement on Tariffs and Trade (GATT) emerged from the ashes of World War II in 1948, which was the organizational precursor of the World Trade Organization (WTO).

The formation of the WTO brought with it a solemn promise for a more rational, predictable and fairer global economic order by reducing barriers and providing a forum for members to work out trade disputes. The system is far from perfect, but it is also far superior than the prospect of reverting to the 1930’s style of high tariff trade conflicts, which ultimately led to the Great Depression. With the way things are going, Canada may not only find itself with no treaty framework, but no WTO rules to fall back on either as the U.S. retreats from its leadership position on the global stage.

Take, take – no give

As Wilbur Ross, the U.S. Secretary of Commerce, put it during a CNBC interview on October 25, 2017, referring to the NAFTA negotiations: “We’re trying to do a difficult thing. We’re asking two countries to give up some privileges that they have enjoyed for 22 years. And we are not in a position to offer anything in return.”

There is a clear rift in philosophy (at least within the Trump-led administration) among the NAFTA partners. While Mexico and Canada have demonstrated their willingness to keep borders open, the U.S. keeps pushing a winner-takes-all agenda, which is seemingly incompatible with the principles of open trade.

Despite the empirical link between freer trade and economic growth, the U.S. strategy is exceptionally self-serving: to strengthen its position by weakening that of its trade partners. The danger is that it does so using arguments and facts that are either outdated or purely manufactured (more on that later).

The U.S. is seeking, among other things, to force a greater percentage of motor-vehicle-parts manufacturers to locate within its borders by strengthening American content rules as a condition of duty-free market access. It is also looking to limit access to the awarding of public procurement projects and to diminish the available recourse for foreign companies in unfair trade practice claims.

There is also the issue of the five-year, uncertainty-inducing sunset clause – akin to an automatic divorce every five years unless all parties to the pact agree to its renewal. Trudeau revealed that he was scheduled to travel to Washington at the end of May 2018 to discuss the trade deal with Trump, until Vice President Mike Pence presented him with an ultimatum: the meeting would only happen if he agreed to the sunset clause.

With no trade deal in sight, matters really began to ratchet up when the White House announced the temporary exemption on steel and aluminum tariffs, originally announced on March 1, 2018 would officially come to an end at the stroke of midnight on May 31, 2018. Tariffs of 25 percent on steel, and 10 percent on aluminum are now in effect on imports from Canada, the European Union, and Mexico.

Trade skirmishes

One of the best-known metaphors for the relationship between Canada and the U.S. is that of a mouse sleeping next to an elephant, as recounted by then-Prime Minister Pierre Trudeau almost half a century ago. Today, his son Justin Trudeau likens Canada to a majestic moose, even-tempered and strong – despite Trump’s volcanic reactions to perceived trade imbalances and the fact that Canada is massively outweighed by the American superpower.

Throughout the NAFTA negotiations, Canada, in an effort to pen a deal, inevitably ceded ground on many points it originally deemed “non-starters”, but it has also played its own game of hardball by filing its most damning complaint to date with the WTO in the midst of the contentious talks.

The 32-page complaint not only cites the age-old softwood lumber dispute between the two countries, as well as the American punitive tariffs on paper and Bombardier jets. It also includes 122 cases where the U.S. imposed duties on a long list of other countries, including China, India, Japan, Mexico, South Africa and the European Union.

The document serves as an example of America’s uncouth approach to trade, including improper application of levy penalties beyond what is acceptable by WTO standards, as well as the retroactive application of improperly calculated tariff rates. There are also accusations of bias – by limiting evidence from uninvolved parties and through a lopsided panel voting system rigged in favor of the U.S.

Washington reacted angrily to the filing, a move American trade czar Robert Lighthizer called a “broad and ill-advised attack on the U.S. trade remedies system.” He went on to say: "Canada's claims are unfounded and could only lower U.S. confidence that Canada is committed to mutually beneficial trade."

Canada appears to be acting as an ambassador for the benefits of trade and fighting the good fight on behalf of the globalized world, making its way to center stage just as the U.S. is turnings its sights inwards. Canada has demonstrated that we do indeed have a backbone – sorry! – and that we will not sign a deal at any cost.

Under friendlier circumstances, the trade grievance could also prove to be an effective negotiating tactic as the case could be dropped in exchange for a side deal on steel and aluminum export limits, softwood lumber, or laxer rules of origin for the auto sector.

But since the application of steel and aluminum tariffs, which Canada’s Minister of Foreign Affairs Chrystia Freeland has deemed “illegal”, the country has since filed another WTO complaint. That being said, Washington, Ottawa and Mexico City have litigated dozens of cases against one another over nearly a quarter century since the pact has been in place, and none of these disputes has ever escalated to threaten the existence of NAFTA – but there have also never been such high levels of animosity (and insults of a personal nature) between our leaders.

A matter of national defense?

Overall, Trump has taken an unconventional approach in his attempt to fulfill his campaign promise to protect U.S. steelworkers, as the tariffs come under the guise of a national security imperative. By applying Section 232 of the Trade Expansion Act of 1962, the president is authorized to restrict imports and impose unlimited tariffs on the grounds of national security. The justification is that a healthy industrial base is crucial to the nation’s military – even if, according to the Pentagon, only 3 percent of U.S. steel production goes towards defense.

Essentially, the Trump administration slapped allies with the most severe economic penalties to date with its tariffs on steel and aluminum. And resorting to calling it a matter of “national security” has added insult to injury given that Canadians have fought side by side with the Americans in every conflict since World War I.

This historic relationship is best exemplified by the Peace Arch, built 100 years after the War of 1812, where Canada (as a British colony) was swept up in the military conflict between the United States and Great Britain. Located at the westernmost point of the world’s longest undefended border between the U.S. and Canada, on the one side the inscription reads “children of a common mother” and on the other “brethren dwelling together in unity”.

Conflict between our two countries, whatever the cause, defies this very concept.

Understandably, to many trade analysts, the administration’s national security narrative looks weak – especially since Trump let it slip in a post-G7 tweet that the steel and aluminum tariffs were actually in response to Canada’s tariffs on dairy (which represent only 0.2 percent of U.S. exports into Canada). Anyhow, whatever the justification, the WTO gives countries broad leeway in defining their national security interests, in which case the governing body of trade could be reluctant to declare Trump’s tariffs a violation of global trade rules.

At this point, the only certainty is that the panel ruling process will be long and drawn out. It could be years before the national security rationale was deemed to be baseless and for the tariffs to be unwound. At which point, the WTO rules allow for compensation up to the value of the exporting country’s lost trade.

According to the Peterson Institute for International Economics, a Washington-based non-partisan institution devoted to the study of economic policy, Trump’s steel and aluminum tariffs would eliminate an estimated $14.2 billion of foreign product from the American market.

Trade losses to Canada due to these tariffs are estimated to reach $3.2 billion, while the European Union will experience losses to the tune of $3.5 billion (approximately €2.8 billion). Understandably, when faced with the prospect of these tariffs in March 2018, the E.U. was quick to draw up a list of products it would hit with a reciprocal tariff to make up for lost trade – it included cranberries, Kentucky bourbon and Harley-Davidson motorcycles. These duties finally came into force on June 24, 2018. Perhaps the president of the European Commission, Jean-Claude Juncker, put it best when he said: “We can also do stupid.”

China on the other hand – the one country that Trump repeatedly berated on the campaign trail and supposedly the main offender in question – is known to overproduce, flood global markets and, therefore, depress prices to the detriment of others. But Trump’s steel and aluminum tariffs are not likely to do much to solve that problem, given that of the decrease in American imports, only $689 million of the trade loss is slated to be from China. Thanks to trade barriers, China is only America’s 11th-biggest supplier, accounting for a mere 6 percent of imported steel. That’s because anti-dumping and countervailing duties have already blocked the majority of Chinese steel out of the American market.

The irony is that Trump's linking of trade and national security has targeted more allies than foes. Canada, for example, is the single largest market for U.S. exports – larger than Japan, China, and the U. K. combined. Canada is also America’s No. 1 supplier of metals, while Mexico is the fourth.

According to the Export Development Bank of Canada, 95 percent of Canadian steel exports and 88 percent of aluminum exports in 2017 were sold to the U.S. For the same period, Canadian aluminum producers supplied nearly 50 percent of all aluminum consumed by the U.S. market. In total, Canadian steel and aluminum exports totaled $16.6 billion.

Now the gloves are off – Canada has announced dollar-for-dollar tariffs of its own. By July 1, 2018, Canada commenced charging a surtax on 128 different American imports, ranging from steel to felt tip pens, to yogurt, beer kegs and even ketchup. The idea is that absolutely everything on the list can be replaced with a Canadian equivalent or that of countries other than the U.S. What’s more, all of the items have been strategically chosen to target high profile Republican districts and to grab the attention of Congress.

On the same grounds of national security, the Trump administration has announced another investigation to determine whether automobile imports (including cars, trucks and auto parts) are also a threat. When asked how tariffs on foreign autos could be justified, Trump replied: “It’s very easy. It’s economic. It’s the balance sheet. To have a great military, you need a great balance sheet.”

On July 19, 2018, U.S. automotive manufacturers, car-parts suppliers, car dealers and foreign diplomats lined up to testify at a U.S. Commerce Department hearing in Washington, D.C. looking into Trump’s threatened imposition – once again under the guise of national security concerns – of an additional 25 percent tariff on all autos and automotive-parts imports, including those from Canada supposedly protected by NAFTA. The Commerce Department, led by Wilbur Ross, is charged with recommending to the president whether or not to proceed with those 25 percent tariffs that he has indicated would help American workers.

However, the entire auto sector, including the Big Three of GM, Ford and Chrysler, oppose such a move, saying it would lead to higher prices for consumers, fewer cars being manufactured in America and fewer jobs in the industry.

The Financial Post reported on July 18, 2018 that Democratic Senator Doug Jones of Alabama and Republican Senator Lamar Alexander of Tennessee had announced plans to introduce legislation opposing Trump’s proposed 25 per cent tariffs on automotive imports. Both warned that the tariffs threatened tens of thousands of jobs in their states.

“Foreign automobiles and auto parts are not a threat to our national security,” Jones was quoted as saying. “But you know what is a threat? A 25 percent tax on the price of these imported goods.”

The Financial Post reported that U.S auto sales reached 17.2 million in 2017 — the fourth-best production year on record – and that U.S. automakers and parts suppliers had added 343,000 jobs since the end of the Great Recession in 2009. The Toronto-based daily went on to quote Mary Lovely, a Syracuse University trade economist, as saying of Trump’s threatened 25 percent tariff on auto imports: “This is really taking it up one gigantic notch. I do think it may be a bridge too far.”

A July 25, 2018 story in The Washington Post quoted President Trump’s senior economic advisers as saying that the president wanted to push forward to impose 25 percent tariffs on close to $200 billion worth of foreign-made automobiles and parts imported annually into the U.S. despite warnings from his own inner circle, Republican leaders and automobile business executives.

Trump is making it clear that he trusts only his own instincts and intuition when it comes to crafting policy, tweeting on July 25, 2018: “Every time I see a weak politician asking to stop Trade talks or the use of Tariffs to counter unfair Tariffs, I wonder, what can they be thinking? Are we just going to continue and let our farmers and country get ripped off?"

If Trump moved ahead with the 25 percent tariffs on autos and auto parts, it would more than quadruple the value of products covered by tariffs, bringing the total to $445 billion worth of goods, compared with $85 billion worth of goods covered by tariffs announced by Trump as of July 2018. It would also decimate the North American auto industry, especially Canadian plants in Ontario, which for the last 24 years have counted on the special status afforded by NAFTA to create a tariff-free, seamless auto production supply chain involving the U.S., Canada and Mexico.

The complaints of most Americans (and, of course, all foreigners) impacted by Trump’s trade wars seem to fall on deaf ears when it comes to the president. His answer to American farmers who say they are losing billions of dollars worth of foreign produce sales due to recently-imposed tariffs was to offer them $12 billion in subsidies starting in September 2018, saying he needs time to win his trade wars with foreign countries.

Trump’s “solution” for farmers did not sit well with his own party. “If tariffs punish farmers, the answer is not welfare for farmers,” Sen. Rand Paul (R-Ky.) wrote on Twitter, echoing many Republicans. "The answer is remove the tariffs.” Sen. Ben Sasse (R-Neb.) added: “The trade war is cutting the legs out from under farmers and White House’s ‘plan’ is to spend $12 billion on gold crutches. America’s farmers don’t want to be paid to lose — they want to win by feeding the world.”

Knowing that he was losing the support of the GOP with his harsh trade actions, Trump toned down his behaviour at a July 25, 2018 White House meeting with European Commission President Jean-Claude Juncker whereby he agreed temporarily to hold off on his proposed 25 percent auto tariffs against European cars if Europe would import more American soybeans and liquified natural gas. Of course, nothing was resolved concerning tariffs already put in place by both sides since March 2018 – such as those on steel and aluminum. Those issues would have to be dealt with in talks – which the two men indicated that they aspired to – aimed at signing a bilateral trade deal between the U.S. and the E.U.

Trump engaged in his typical hyperbole, calling the meeting with Juncker a major breakthrough. But the reality is that nothing was signed and no negotiating process or schedule was set up for future trade talks, which typically can take many months or even years to work out details acceptable to all sides in any future pact – well beyond the president’s attention span.

The truth is that while Juncker is the symbolic head of the E.U., any future trade deal would have to be ratified unanimously by the E.U.’s 27 member states in order for its provisions to come into force. Obtaining such unanimous consent from 27 countries is not an easy challenge or one that is resolved quickly. In the meantime, Trump could upset the entire process with its veneer of goodwill with one of his toxic tweets if even one E.U. leader were to make a statement on trade that irked him.

Even as he made a conciliatory gesture towards the E.U. in terms of not imposing any additional tariffs for now, that didn’t change the fact that Trump’s original tariffs against the E.U. are still in place, as are the tariffs he imposed in recent months against many of America’s other trading partners, including Canada, Mexico, China, Japan, South Korea, and Turkey. He has also complained about unfair trade practices by India, suggesting that the world’s second most populous country could be in line for similar tariff treatment.

What’s in a can of soup?

In a media blitz to justify and generate support for the steel and aluminum tariffs, the U.S. Secretary of Commerce explained during an interview with CNBC on March 2, 2018 that the national security concern, as per the action taken under Section 232, covers broader areas than just the military.

As Wilbur Ross explained, because both the steel and aluminum industries in the U.S. are working well below the capacity utilization that is needed for long-term viability of those industries, they are down to one supplier of the aluminum alloy used in satellites and other aerospace applications. Similarly, there is only one supplier left who can provide the steel alloy needed in the production of armored plates for vehicles used in warfare. As such, the tariffs are simply a means of getting these industries working towards a goal of 80 percent capacity because government contracts alone are not enough to ensure the necessary survival of these paramount businesses.

Defending the tariff decision, Ross asserted that the cost to American consumers from any retaliatory actions would be a small price to pay for the security of maintaining domestic steel and aluminum production.

For example, the Commerce Secretary contends that tariffs on steel would add a paltry 0.5 percent ($175) to the cost of a $35, 000 vehicle when the tariffs are applied to the tonne of steel used in manufacturing a typical car. (We should note that the calculation by Ross appears elementary, as there is a fair deal of waste in the process of production, as well as the use of generally more expensive steel alloys.)

To further illustrate what he called the negligible effect the tariffs would have, he held up a Campbell’s Soup can. “In the can of Campbell’s Soup,” Ross said, “there’s about 2.6 pennies’ worth of steel. So if that goes up by 25 percent, that’s about six-tenths of one cent on the price of a can of Campbell’s Soup...who in the world is going to be too bothered by six-tenths of a cent?”

President Trump’s move to impose tariffs on imported steel is meant to protect an industry that employs about 140, 000 Americans. Yet by raising the price of steel, those same tariffs stand to hurt a far larger group – the 6.5 million who are employed by industries which need to buy the steel.

Tariffs will eventually lead to higher consumer prices, which typically lead to slower economic growth and a reduction in the very type of employment the U.S. is trying to protect. Trade Partnership Worldwide, a consultancy that researches international trade, estimates that the proposed tariffs would create a little more than 33, 000 jobs in the metal industry, while at the same time destroying around 179, 000 metal-dependent jobs. The result is a net negative.

There is, in fact, a lesson to be learnt from the history books of economic policy. In 2002, President George W. Bush attempted to revive a struggling steel industry with the application of punitive tariffs he deemed “temporary safeguards” – although Canada was excluded. Sound familiar?

“This relief will help steelworkers, communities that depend on steel, and the steel industry adjust without harming our economy,” Bush proclaimed in a statement at the time. What actually materialized was essentially the opposite, with steel shortages, production delays, increased costs, and of course, job losses – by some estimates, as many as 200,000. Bush ultimately removed the tariffs.

If history teaches us anything, it’s that Trump’s proposed tariffs could jeopardize economic growth, ultimately leading to a significant increase in Americans forced to survive on cans of more expensive soup.

Revival of the old economy

It is hard to know how the situation will pan out, with far too many moving parts to make a realistic prediction, given amongst other things, the recently passed stimulative tax breaks, and the highly anticipated $1 trillion infrastructure bill to come.

The bigger question, however, is whether the U.S. should really desire to compete in the realm of industrial commodities, as these are the types of businesses that peaked decades ago. The White House nonetheless chooses to defend the “old economy” jobs, but it does so at the expense of value-added manufacturing, the evolution to higher tech and greater- paying jobs. Ironically, similar to the effect of the proposed rules of origin, higher prices for industrial materials could stimulate the desire to move production out of the U.S.

There’s also the matter of productivity: the steel manufacturing business has changed over the years. It may be convenient to pinpoint foreign competition as the culprit for lost jobs – especially given the national security argument for protectionist actions – but the biggest threat to steelworker jobs has actually been technology.

Allan Collard-Wexler of Duke University and Jan De Loecker of Princeton authored a study in 2015 titled, Reallocation and Technology: Evidence from the US Steel Industry. It found that steel jobs vanished principally because of new, extremely efficient mini-mills which produce steel largely from scrap metal.

With no available details at the time, the off-the-cuff tariff announcement made by President Trump sent markets into a tariff tantrum. Understandably, the potential for a wave of protectionism spreading across the globe is a serious matter. It is also tough to see how aluminum used to make beer cans and baseball bats could be considered a national security threat.

At its lowest point, the Dow Jones Industrial Average plunged over 550 points (nearly 2 percent) after the announcement was made on March 1, 2018. The S&P 500 and the NASDAQ Composite (which is heavily weighted towards tech stocks) both sunk 1.3 percent on the news. As a whole, the U.S. stock market lost more than $600 billion in value over tariffs that would be applied to a mere $40 billion of metal imports. Either stock market participants believe these tariffs will deliver a bigger blow than the White House thinks is possible or this is a matter that reaches far beyond just tariffs – my gut tells me it’s the latter.

As the U.S. indices sank, the old economy stocks reacted positively to the news because the tariffs charged on steel and aluminum will raise metal prices – and profits – across the board. The iconic United States Steel Corporation rose just shy of 6 percent on the news, and Century Aluminum skyrocketed 14.7 percent.

As the shares of steel and aluminum companies soared, those of America’s industrial manufacturers dropped, as the hike in input prices will inevitably make it harder for them to compete abroad. The likes of General Motors sank nearly 5 percent on the news. As imagined, Canadian producers, such as the Steel Company of Canada (now known as Stelco), got hammered by 7 percent.

The North American sell-off produced a knock-on effect as metals and mining stocks reacted in a similar fashion across the globe. The volatile carnage continued in the days to follow as trade war worries weighed on stocks, as did the resignation of Trump’s chief economic advisor Gary Cohn, who is an avid advocate of free trade – and potentially the last hope in changing Trump’s mind. As he exited the White House for the last time in early March 2018, markets feared that he may have taken with him the last shred of free trade spirit left in the West Wing.

Since then, market volatility has been on the rise with each rumor, new policy and trade-related tweet. The tariffs and threats have reportedly begun to take a toll as steel and aluminum prices – which are normally steady – have been on the rise and supplies have become scarce.

Automotive rules of origin

Perhaps no industry is more closely intertwined with NAFTA, or has more at stake with a shift in trade policy than the automotive sector. Not only is it both America’s and Canada’s largest manufacturing sector, but it is a major employer in all three member nations, supporting more than 7 million jobs in the U.S. alone. NAFTA also played an essential role, according to the American Automotive Policy Council, in the recovery of the sector after the global financial crisis of 2008.

The crisis slashed the demand for vehicles and pushed two (GM and Chrysler) of the “Big Three” American automakers to the verge of bankruptcy. The Canadian and American governments were forced to bail out the industry to the tune of $85 billion. Since then, total automotive production for the members of the trade pact has nearly doubled from 8.6 million light vehicles in 2009 to 17.9 million in 2016 (of which 12.2 million rolled off U.S. assembly lines), as per the Automotive News publication data center.

Over the years, NAFTA has pushed the auto-manufacturing sector to evolve in flexibility and efficiency. The industry that was once Motor City-centric found the majority of its assembly plants and auto parts suppliers close to the northern border with Canada. Today, as a result of the free movement of parts, the manufacturing footprint has shifted south, closer to Mexico which is not only booming in terms of production, but has emerged as a sales market and export base – thanks in part to its free trade pacts with more than 40 nations.

It is no wonder that one of the biggest hurdles to surmount in the NAFTA negotiations has been one of Washington’s earliest proposals to include the caveat that no vehicle shall be eligible for tariff-free treatment unless 50 percent of its content is manufactured on American soil. In the current agreement, there is no U.S. content requirement, only the stipulation that 62.5 percent of the parts originate from within the trade region. Throughout the negotiations, the U.S. had been pushing for this minimum to reach 85 percent, all in an effort to repatriate jobs and appease Trump supporters.

Given that the U.S. content demand would give the Americans a guaranteed economic advantage over their trading partners, the proposal was categorically rejected by Canada and Mexico. It should also be noted that according to the U.S. Chamber of Commerce, a domestic content rule in a trade agreement was previously ruled to be a violation of WTO rules in a case settled nearly two decades ago.

The current NAFTA rules of origin for autos is already the most stringent in any trade agreement in the world. But in an effort to find middle ground, Canada suggested including the value of intellectual property in the calculation instead of just parts because car companies and parts manufacturers spend millions of dollars on research and development to meet the ever-increasing fuel efficiency and emissions standards. This would inflate the numbers and, hopefully, be less disruptive to the industry.

The U.S. has since gone back to the drawing board, not only building upon Canada’s suggested compromise, but also dropping the antagonistic American origin demand which has been one of the biggest sticking points in the trade talks.

Initially, the U.S. proposal also called for more aggressive traceability (from raw material to finished product) and rigorous enforcement. In other words, the end of tariff-shifting, which is the practice (or coping mechanism – depending on your view) of changing the treatment of a product through the process of substantial transformation. It means that if a non-NAFTA item is further processed by a NAFTA partner, that item is deemed to be “transformed” and, therefore, counted as locally sourced in Canada, Mexico or the U.S. What’s more, the substantial transformation rule has been part of U.S. trade policy since it entered into force with the GATT in 1948.

In an op-ed written by Wilbur Ross, the U.S. Commerce Secretary, and published in The Washington Postem on September 21, 2017, he makes it abundantly clear that this will be a sticking point in the NAFTA talks. He argues that the current rules of origin, which were intended to limit non-NAFTA content in final goods is flawed, as the percentage of U.S. content in manufactured goods imported from both Canada and Mexico has fallen since the introduction of the trilateral trade pact.

The data Ross cites is from the Organization for Economic Cooperation and Development between 1995 (the year after NAFTA went into effect) and 2011. He states: “The data is available only until 2011, but there is no reason to think that the situation has improved since then.” In Canada’s case, he contends U.S. content decreased from 21 percent to 15 percent, and it dropped even further in comparison with Mexico, from 26 percent to 16 percent. Given that automobiles account for 27 percent of total U.S. imports from NAFTA trade partners, the content figures for the auto industry follow a similar pattern.

The Commerce Secretary’s argument goes on to say: “This problem is particularly troubling because the previous U.S. share of the content found in imports from Canada and Mexico is largely being absorbed by non-NAFTA trading partners and not by Canada and Mexico themselves…We cannot forget that the point of a free-trade agreement is to advantage those within the agreement – not to help outsiders. Instead, NAFTA has provided entry into a bigger market for outside countries, and the United States is paying the price.”

There is plenty of viable research available which disputes the figures stated by Ross. For example, the Center for Automotive Research (CAR) found that U.S. content in cars manufactured in Mexico has risen from 5 percent prior to NAFTA to hit a record 40 percent in 2014. In the case of Canadian-assembled autos, a Scotiabank Economic Report pegged the U.S. content at nearly 60 percent. A stark difference from the data used in the justification by the U.S. government.

Not surprisingly, Canadian and Mexican negotiators have called the strict rules of origin proposal “wholly unworkable”, but they are not alone in their frustration; the U.S. auto industry was vehemently opposed to Trump’s plan as it could throw a wrench into the gears of the U.S. auto sector. The good news is that after some much needed (and reportedly intense) consultation with the automakers, the Trump administration has adopted a new way of thinking. Not only did they drop the proposal to have 50 percent of the content produced in the country, but they have also scaled back their North American requirements from 85 to 75 percent.

The latest proposal also stipulates that rather than tracing or keeping track of the materials that are not originating within North America to meet the exemption requirements, they would instead adopt an all-or-nothing approach. The idea is to group material inputs into defined categories by content thresholds (ranging from 65 to 75 percent). If the parts in the category meet the content threshold, the total value will be counted as 100 percent, if not, they will simply be counted as having zero originating content.

Sourcing more auto components locally is in theory possible, although there are certain components which cannot be procured from wholly North American sources, such as semiconductors, for example, which make up an ever-increasing portion of modern vehicles.

Moreover, although we have seen that the auto industry is able to adapt and change, it can take an awfully long time, especially when the planning process of a new car ranges between seven to 10 years. Any abrupt changes to the system may result in damaging existing contracts and a diminished viability in existing plant and equipment. It would also hamper the flexibility of automakers to adapt to changes in the global marketplace.

The auto sector as a whole is already contending with several challenges, such as the emergence of autonomous vehicles, the ride-sharing phenomenon and the ever-increasing need to reduce emissions through electrification technologies. It is the cost efficiencies created by NAFTA’s integrated supply chains that have allowed U.S. automakers to remain competitive against the likes of lower-cost Korean and Japanese autos that have flooded the market with their affordable vehicles. Much of this continued success has been thanks to the ability to move certain aspects of production to lower wage Mexico.

Unfortunately, the shift in mindset towards content requirements was accompanied by the notion that would require U.S. automakers to produce in jurisdictions that have a set minimum wage. According to Jude Webber of The Financial Times, “The US is pushing for 40 per cent of light vehicles, and 45 per cent of pickup trucks, to be produced in areas where average wages in the sector are $16” per hour – well beyond those prevailing in Mexico.

The idea is to level the North American playing field, either incentivizing automakers to bring jobs back to the U.S. or otherwise increasing wages in Mexico. Given that labor costs make up about 10 to 15 percent of vehicle production, a sudden increase in wages could have a material effect on already single-digit profit margins.

Whether it is the increased compliance demands of origin tracking systems, the potential for wage increases, or some other aspect of the renegotiated NAFTA that ultimately raises costs for suppliers and manufacturers, the next question then becomes: does it make economic sense to adapt the business to meet the new tariff-eliminating requirements?

Trump believes that his suggested policies are going to be a boon for his country, its workers and the economy, but if the U.S. were to get its way, there would likely be some unintended consequences. Complying with the more stringent rules of origin or added costs is likely to cause producers to make non-optimal procurement decisions – but they can only be pushed so far. We should not forget the beneficial use of NAFTA, or any other trade deal, is certainly a privilege, but not an obligation.

Let me explain: if the resulting cost of compliance surpasses the saving from preferential duty qualification, the producer will simply ignore the rules and opt to pay the applicable WTO Most Favored Nation (MFN) tariffs. In the case of auto parts, it is a mere 2.5 percent, but it can also have a big impact on an already low-margin business in a trade-sensitive sector, such as auto parts.

Because tariffs are a tax on trade flows and not on net production, even a small levy could have a disproportionate impact in NAFTA’s tightly-knit supply chains. Auto parts often cross the border numerous times at different stages of production (estimates reach as high as seven or eight times), which means that the same product will be included in both export and import totals. To give you an idea, in an RBC report published in November 2017, titled Life After NAFTA? it states: “Canadian exports of finished motor vehicles to the U.S. totaled $63 billion last year, though the sector’s direct contribution to GDP was about $8 billion.”

For those manufacturers who elect to pay the tariff, there would be an extra incentive to reduce costs by moving production to a lower-cost zone, such as Asia, for example. For those who choose to remain, there are several options for firms to adjust to squeezed margins – none of which are likely to please the Trump administration – such as replacing workers with robots or moving production abroad.

Finally, limiting the ability of manufacturers to source raw materials globally will not only raise costs, but will produce lower returns for investors, give fewer choices to consumers and render the industry less competitive. According to CAR, the withdrawal from NAFTA could also result in the loss of tens of thousands of U.S. automotive and parts manufacturing jobs. They also noted, “China would become a more dominant player in automotive parts, components, and intermediate goods” should NAFTA collapse.

China, China, China

China – albeit indirectly – may further complicate the NAFTA negotiations, as both Canada and Mexico are participating in the recently rebooted TPP – now called the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). The Asia Pacific trade pact runs counter to Trump’s trade goals – especially in the auto sector. As Trump pushes to shrink the foreign content in duty-exempt vehicles (somewhere in the range of 15 to 25 percent), the TPP allowance is at the other end of the spectrum at 55 percent. The deal will allow for more pieces to be imported from Asia, including from countries not in the deal – like China.

A report published by the Office of the Chief Economist at Global Affairs Canada, titled Economic impact of Canada’s participation in the Comprehensive and Progressive Agreement for Trans-Pacific Partnership concludes that the “liberalization of Canada’s trade with other new FTA partners will displace imports from existing FTA partner countries in Canada”. As such, American imports into Canada are expected to fall to the tune of $3.3 billion, led by a decline in automotive parts.

In percentage terms, the decline which amounts to nearly 1.2 percent of a $278 billion U.S. import market (of which $58 billion was in vehicles for 2016) may not be significant, but it may be enough to leave a sour taste and give this protectionist administration all the more reason to be inflexible in its demands. Especially now that China is also in Trump’s aggressive line-of-trade fire and matters on that front have escalated beyond the initial 25 percent tariffs imposed by the president on $50 billion worth of Chinese imports as of July 6, 2018. Not surprisingly, there was swift retribution from Beijing.

All told, there is the potential for $450 billion in tariffs, covering nearly 90 percent of the goods China sends to the U.S. The issue is that the U.S., in turn, does not send as many goods back to China, leaving China short-changed in its revenge. The fear among American businessmen is – and it had already begun by July 2018 – that this would lead China to adopt other tactics for revenge, such as calls for a boycott of U. S imports and the imposition of additional bureaucratic measures, such as increased paperwork and delays for American goods trying to clear Chinese customs.

There is no doubt that China has failed to live up to its WTO commitments, but America’s position with that country would be much stronger if it were able to present a united front, with the support of Europe, Mexico and Canada. Instead Trump has picked trade fights with his allies, which in turn has driven them to explore closer relations with Beijing.

Decisions, decisions

As reported by The Associated Press on June 21, 2018: “John Murphy, a senior vice president at the U.S. Chamber of Commerce, estimates that $75 billion in U.S. products will be subject to new foreign tariffs by the end of the first week of July.” And these figures are expected to keep climbing.

We are already beginning to see the impact of retaliatory trade barriers on business decisions with the latest announcement on June 25, 2018 from America’s iconic motorcycle manufacturer, Harley-Davidson. As a consequence of retaliatory tariffs set by the European Union, the Milwaukee-based company has decided that it will shift some of its production oversees in an effort to circumvent the applicable tariffs which have reportedly jumped to 31 percent from 6 percent for motorcycles imported from the U.S. In the case of Harley’s premium bike prices, this adds approximately $2, 200 to the price of the average motorcycle sold on European soil. In response, Trump threatened that moving production abroad would “be the beginning of the end.”

In 2017, the company sold nearly 40, 000 motorcycles in the E.U. (about 17 percent of worldwide sales). For the time being, the company is expected to eat the added expense of the tariffs in an effort not to alienate buyers and to avoid permanent damage to the market. If sales remain at a similar level to last year, the tariffs are expected to cost the company between $90 and $100 million a year – a major hit to the bottom line. Harley reported that it could take up to 18 months to effectuate the change in production.

In the meantime, Trump has continued to tweet about the company saying, “Surprised that Harley-Davidson, of all companies, would be the first to wave the White Flag. I fought hard for them and ultimately they will not pay tariffs selling into the E. U…Taxes just a Harley excuse – be patient!” The president seems confident in his assertion of victory, but companies which exist for the benefit of their shareholders do not have the luxury of waiting around, nor did they enlist for the trade battle they find themselves in.

Of course, Trump famously believes that “trade wars are good, and easy to win” despite the fact that casualties are now starting to roll in from the battlefield. Senators on both sides of the isle have begun to take notice and are raising their concerns as companies such as Kraft-Heinz contemplate returning their ketchup production to Canada to avoid retaliatory tariffs.

Pulling out of NAFTA

Does Trump really have the authority to pull out of the trade pact? Experts offer up mixed opinions: for the time being, there is no clear answer.

From the time Trump made his way onto the political scene in June 2015, we have heard him utter threats many times about a NAFTA termination. He has always talked about the pact’s demise, as if he could pull the plug as easily as he tweets his famously inflammatory remarks.

With no deal in sight, a hot debate has since ensued amongst legal scholars as to a president’s powers and whether he could withdraw without being authorized by statute.

The U.S. Constitution is based upon separations of power: in essence, after the president gives notice to Congress of negotiation intent, Congress is consulted throughout the process and is liable to review the draft agreement and its accompanying legislation. When the agreement is finalized, it is Congress which ultimately rejects or approves it. If approved, the president has the authority to sign the trade agreement and make it official.

To bridge this division of the president’s executive powers and Congress’s power over trade, Congress passed the Trade Priorities and Accountability Act in 2015. In essence, Congress lends its power to the president who works under a new set of rules known as fast-track legislation. Under this scenario, Congress can merely approve or deny international trade agreements, but it cannot amend them or subject them to filibuster.

Interestingly, the act is silent on the matter of withdrawal or termination. Similarly, the U.S. NAFTA Implementation Act gives the president the power to make a proclamation on the implementation of the pact, but it does not grant him the power to revoke it.

If no deal can be reached and Trump ultimately decides to pull the plug, he would need to sign an executive order with the intention of withdrawal, at which point the countdown would officially begin. Once the six months was up, another executive order would be needed to make the exodus official.

Many regulatory and legislative experts argue that the second executive order would not suffice, given that Congress ratified and implemented the agreement in the first place. Trump may very well need Congress to repeal the enacting legislation, but there is no guarantee the measure would pass because there are many supporters of NAFTA on each end of the political spectrum.

Also, since the negotiations began, Canada has turned the charm offensive into high gear by enlisting the help of Canadian ministers and consular officials in a grassroots effort to generate support for the trade deal – these meetings have continued despite the apparent stall in the official talks. By pushing the merits of NAFTA to local businesspeople, chambers of commerce, farmers, union leaders, as well as local and state legislators, the hope is to persuade Congress to block a move to kill NAFTA. But congressional opposition may not be enough to save the day.

It could be quite possible for Trump to go over the head of Congress – but it could also turn into a sticky situation. Lawmakers could, in turn, try to stop Trump on constitutional grounds. This would be uncharted legal territory: no court has ruled on a comparable matter because the only trade deal the U.S. has ever terminated was in 1866 – before the formation of Canada.

In the meantime, so long as the litigation was tied up in the U.S. court system, the trade pact would remain in force. We would in theory be spared – at least temporarily – the short-term economic shock and post-NAFTA adaptation period. Trump would normally also require the authorization of Congress to apply new tariffs to any imported goods and services – which he avoided with the steel and aluminum tariffs by citing national security concerns. It is a pattern we have seen continue with his threats on imported vehicles.

In Canada’s fallback case, in regards to the suspension of the original CUSFTA, CBC News reported on June 9, 2018 that according to international trade lawyer Mark Warner: “It's entirely plausible that Canada and the U.S. would disagree about whether the earlier deal would remain suspended or automatically brought back into force. And that dispute could well end up in international court.”

However the matter turned out, trade partners would be left in limbo – what has come to be known as a “Zombie NAFTA” state. Economic uncertainty would become the new normal as we lumbered along, each step slow and arduous, dealing with the thickening of the border, interrupted supply chains and investment insecurity.

Life without NAFTA

Withdrawal from NAFTA (and the FTA) – whether authorized or not – would subject trade among the three countries to most favoured nation rates, as set by the WTO. This would render the divorce more manageable, provided the U.S. continued to respect its WTO commitments, although this would seem unlikely given the recent behavior of the administration.

At this point, experts are hesitant to make any ambitious economic predictions because there are far too many unknowns involved. But all agree that while the end of NAFTA would certainly reduce short-term economic growth, it would not be a disaster of colossal proportions for Canada. In other words, the divorce would hurt a little, but eventually we would get over it.

RBC’s November 2017 research report aptly titled, Life After NAFTA? predicts that a 4 percent across-the-board increase in tariffs between Canada and the U.S. – roughly the equivalent of reverting from NAFTA to WTO tariff rates – could reduce Canadian GDP growth by about 1 percent over five to 10 years, which would mean between a 0.1 and a 0.2 percent decrease per year. These figures may seem trivial to some, but the RBC report says “it adds up to a substantial amount of foregone production potential – about $20 billion (in today’s dollars) of annual output over time.”

On a brighter note, only “a minority of the half million Canadians working in highly trade-sensitive sectors would be most affected.” The auto manufacturing and auto parts industries are chief among those at risk. It is also expected that the province of Ontario, which is heavily skewed towards the auto sector, would bear the brunt of the pain.

Even industries not reliant on trade could experience second-hand effects, such as the diminished support of retail and construction businesses from the rise in unemployment of autoworkers.

In response to NAFTA’s collapse, the Canadian dollar would be expected to swoon in an effort to offset the increased cost of Canadian exports and render them more competitive. The mere suggestion of Trump’s intent to withdraw has put pressure on the dollar, as have the steel and aluminum tariffs. Similarly, we have seen it bounce back when government officials successfully provide reassurance as to the future of the pact – sending the loonie on a temperamental roller-coaster ride.

Corporations that have integrated operations and supply chains scattered across the NAFTA free trade zone, such as General Motors, Ford Motor Company and Magna International, could see their share prices suffer. We have already had a taste of the market’s reaction to the proposed steel and aluminum tariffs amid fears of a trade war.

As we have already seen, we can expect a rise in market volatility, especially in the near term, which would weigh on business and consumer confidence, hampering growth even further. Interest rates would also experience downward pressure, as investors would be likely to abandon the stock market in search of safer assets.

The loss of NAFTA would also mean the loss of a bi-national panel review dispute settlement mechanism, which would mean ongoing battles such as that with softwood lumber would be relinquished to the U.S. court system. Canada would also become more vulnerable to non-tariff barriers, such as creating customs delays via additional shipment inspections, the need for additional licensing requirements, or simply the imposition of quotas.

Without tariff-free access to the U.S. market and in the face of uncertainty, the business investment equation changes significantly. Investors and foreign companies alike would not only face more costs, but inherently more risk. All the more reason to think twice before investing.

With that being said, a world without a Canada–U.S. trade agreement would not stop trade between our two countries. In fact, the majority of the world does business with the U.S. without any bilateral trade agreement, including Japan, the European Union, and, of course, China. There would be an inescapable adjustment period, but in the end, Canadian trade would recover.

Canadians abroad

Perhaps the biggest threat remains to Canadians who find themselves living in the U.S. under TN (Trade NAFTA) visas. It is a unique immigration category in that it was not created by domestic law, but rather through NAFTA itself.

It boils down to a list of 63 occupations (although it is in need of a modernizing facelift to include digital-era jobs), which liberally allows educated professionals to work and live in America. Unlike any other work visas, TNs are granted instantly at the border, and there is no limit on how many times the three-year work permits can be renewed.

Just as we have blended supply chains, businesses with operations on either side of the border need the mobility of labor in the name of innovation and efficiency. According to The Financial Post (December 29, 2017), the “U.S. issued 14, 768 NAFTA professional visas (TN visas) to Canadians and Mexicans in 2016.” And over 56, 000 were issued in the last five years – although the split remains unclear.

If NAFTA were to be no longer, it would be expected that this immigration category would disappear alongside it. It is unclear what would happen to those living in the U.S. – would they be sent home immediately because they are stealing good American jobs? Would they be allowed to stay until the expiry of their TN visas? Or would they be given an arbitrary amount of days to gather their things and leave? …Is that a marriage proposal I hear?!?

Similarly, E-2 investor visas are only available to citizens of countries with which the U.S. has trade agreements. These visa-holders are creators of jobs in the U.S., and should they be forced to leave, their expulsion could end up needlessly damaging the U.S. economy. According to the U.S. government, between 2007 and 2016 over 20, 400 such visas were granted to investors and their families.

Perhaps from this perspective, there is a silver lining for Canada. It may not only reverse the “brain drain”, but it could entice companies to open local Canadian offices. And if that’s not enough, Canadian companies could turn their sights to Europe to fill the void with the Canada-European Union Comprehensive Economic and Trade Agreement (CETA), which mimics NAFTA in terms of professional labor mobility.

Winners and losers

Whether we like it or not, Canada is now being forced to contemplate life without a free-trade agreement with its most prominent trading partner. U.S. trade czar Robert Lighthizer has said in the past that if three-way NAFTA negotiations fall through “we are prepared to move on a bilateral basis.”

In fact, on July 18, 2018, Trump announced that his administration was having “very good” trade talks with newly-elected Mexican President Andres Manuel Lopez Obrador and that the U.S. might strike a bilateral trade deal first with Mexico in the near future and then try to do a separate deal with Canada at a later date.

Mexican Economy Minister Ildefonso Guajardo Villarreal said on the same day that he planned to travel to Washington for bilateral trade talks on July 26, 2018, and would later meet with Canadian officials. At the same time, he told reporters that the three countries were scheduled to resume NAFTA negotiations at some point in the future.

When asked whether trilateral and separate Canadian trade talks were off the table, White House Press Secretary Sarah Sanders said on July 18, 2018: “We’re continuing both of those tracks. We see a lot of progress on the conversations with Mexico, and if we could make a bilateral deal with them, we’re certainly very happy to do that. But again, we’re continuing both conversations, both tracks.”

Bilateral – rather than trilateral – trade deals could change the playing field because Canada’s situation is significantly different than Mexico’s. Not only were the Canadian and U.S. economies integrated long before NAFTA, but our trade is fairly balanced. Despite Trump’s often-heard claim that the U.S. has a major deficit with Canada – usually citing a $17 billion figure. Of course, Trump does have a point if you only include the trade of goods and exclude the trade of services from the equation!

On March 15, 2018 Trump defended his trade deficit stance by tweeting: “We do have a Trade Deficit with Canada, as we do with almost all countries (some of them massive). P. M. Justin Trudeau of Canada, a very good guy, doesn’t like saying that Canada has a Surplus vs. the U.S. (negotiating), but they do...they almost all do...and that’s how I know!”

Most recently, Trump’s figures have been escalating. In an attention-grabbing June 10, 2018 tweet he said: “According to a Canada release, they make almost 100 Billion Dollars in Trade with U.S. (guess they were bragging and got caught!). Minimum is 17B.”

Turns out that this maximum of $100 billion deficit is a figure which has been promoted by the U.S. trade representative based on a misunderstanding of the data provided by Statistics Canada. The erroneous use of data stems from the fact that Canada reports its figures differently and includes the re-export of goods from third countries in its calculation of a merchandise trade deficit, which amounts to $98 billion. So, for example, if a washing machine from China on its way to the United States makes a pit stop at Vancouver’s port along the way, the U.S. not only counts that in its deficit with China, but it also counts the same machine as part of the trade deficit with Canada.

Canada, of course, includes a notice to the users of this raw data, but the U.S. is clearly willing to distort the truth to make its point and generate support for the cause. The Washington Post fact checked the President’s statement and gave it four Pinocchios! It is a worrisome state of affairs when you are trying to negotiate with a country that has little respect for the facts, no sense of fair play, and no apparent interest in how they are perceived on the world stage.

As for the presence of a trade deficit or surplus, most respectable economists would agree that it is not an appropriate measure to judge the success of a trade relationship, but the American president nonetheless views these figures as key evidence of which country is “winning” or “losing”.

The notion that trade is only favorable when exports equal imports, is not only unlikely, but it is terribly misguided. First, countries of varying populations and economic means cannot be expected to match the buying power of the U.S. Second, it does not take into account the benefits derived from the imports of raw materials, intermediate goods or capital equipment, which in turn can churn out products and create additional jobs.

America is a consumption-based society, which has always been able to expend more than it produces and it has done so every year since 1976. That is, in fact, an enviable position to be in. It also means that America owes money to the rest of the world in the form of bonds – think of it like a cheap line of credit. If the U.S. does not make good use of it, that’s America’s problem, not the trading system’s.

It is also worth noting that because the U.S. dollar is a world reserve currency, there is an added factor of demand constantly propping up the exchange rate. A strong dollar also makes imports cheaper – naturally deficits ensue. Under different circumstances, the value of the American dollar would have likely diminished a long time ago, rendering U. S exports cheaper and helping to reduce the deficit.

Trump may very well think the U.S. is on the losing end of trade with Canada. However, the Office of the United States Trade Representative confirms that “the U.S. goods and services trade surplus with Canada was $12.5 billion in 2016.” Overall, Canada is, by far, America’s best customer and the most important export market for 35 American states. Hopefully logic and truth will prevail one day, and our being on the losing end of trade with the U.S. will work in our favor to keep the gates of free-trade open between our two countries should we need to renegotiate a bilateral trade agreement.

Moving on…

If the U.S. decides to remove itself from the pact, NAFTA could live on between Canada and Mexico. Under Article 2205, the treaty itself provides: “If a Party withdraws, the Agreement shall remain in force for the remaining Parties.” There are many complex relationships at stake, but the big question is whether continuing the terms of the trade pact without the participation of its largest member makes any sense.

Granted, Mexico has made progress to ensure the safety of foreign direct investment, in large part thanks to NAFTA. It has also improved its infrastructure and enhanced legal transparency. The lower labor costs have also allowed numerous Canadian companies to compete more effectively. But there is no telling what will happen to the Mexican economy if NAFTA is left with only two amigos.

In the meantime, Canada has been busy looking elsewhere for trade partners as part of an ongoing mission to expand trading opportunities across the globe. Progress to date includes CETA, which came into force on September 21, 2017. The agreement not only eliminates tariffs between Canada and the E.U., but it opens substantial opportunities in the European government procurement sector.

Canada also recently signed CPTPP, but the issue is that all of these other trade pacts are not in the same league as NAFTA. For the time being, Canada trades more with the border state of Michigan than the European Union. And Canada’s two-way trade with the Asia-Pacific region is less than $170 billion – only a quarter of its trade with the U.S.

Canada has turned its sights on South America with the recently launched free trade talks with the Mercosur bloc of nations – which includes Argentina, Brazil, Paraguay, Uruguay and Bolivia – which it is in the process of joining. (Venezuela’s membership is understandably suspended.) Mercosur is the next largest trade bloc in the hemisphere after NAFTA and is an area of untapped potential.

Trade in Canadian auto parts for example – one of the areas where we do, in fact, have a surplus with the U.S. – could benefit from diversification, given the uncertainty in the NAFTA auto sector. The two powerhouses of Brazil and Argentina would be a welcome alternative, but as it stands Canadian auto parts are currently subject to a hurtful 35 percent tariff in Mercosur nations.

But even the 2.6 million vehicles produced in Argentina and Brazil in 2017 pales in comparison with the over 12 million vehicles built in America during the same period.

Ironically, if NAFTA fails and Mercosur succeeds, Canada may find itself in free trade deals with almost every other American nation, except its original trade partner – the United States of America.

Going back in time

On the first day of March 2018, a telling report called the 2018 Trade Policy Agenda and 2017 Annual Report of the President of the United States on the Trade Agreements Program was released by the Office of the U.S. Trade Representative.

It revealed that Trump’s trade agenda rests on principles espoused by George Washington, who served as America’s first president from 1789 to 1797. Washington said that when it comes to trade “there can be no greater error than to expect, or calculate upon, real favors from nation to nation.” He also cautioned that trade agreements should be “temporary” and “abandoned or varied, as experience and circumstances shall dictate.”

Trump’s terrifying tariffs for the sake of economic independence are the perfect embodiment of this 200-plus-year-ago mentality. It is also the opposite of everything today’s rules-based system stands for.

Aside from the existential risk to the world economy expected to ensue from Trump’s antiquated protectionist policies and unfolding trade war, the greatest long-term injury from this fiasco is likely to be to America’s reputation. Only time will tell if it can ever recover…