Canada unlikely to give up on NAFTA

Canada walked away from the free-trade negotiations with the United States in 1987. It did the same in 2016 in the negotiations with the European Union.

Both walkouts were predicated on two assumptions: first, that the negotiations would have to be elevated to the political level for resolution, and second, that there was the belief that the other side wanted a deal.

In the current North American Free Trade Agreement 2.0 negotiations, Canada and Mexico are under no illusions that American negotiators will call them back with a compromise if they walk.

In fact, it is possible that the negotiators from the Office of the United States Trade Representative are under instructions to let the deal fail.

The real sticking points are the four so-called poison pills. These include reductions in government procurement, a sunset clause that would kill the deal on the basis of U.S. trade deficit triggers, automotive rules of origin that no North American automotive company could currently meet, and a dispute settlement system that allows participants to opt out at will. Wouldn’t your kids love it if you tried that at home?

Negotiators now must focus on reaching a provisional settlement on issues where there is common ground and leave the job of rescuing the deal from a hostile administration to the U.S. Congress, where it belongs. Trade-oriented members of Congress have noted that the poison pills will equally harm U.S. production and investor confidence, and will provoke trade retaliation from Canada and Mexico.

Yet leaders from the House of Representatives’ ways and means committee and the Senate finance committee have not yet seriously engaged on the trade file.

When they do engage, Republican senators from agricultural states are not going to let this agreement fail with nearly $18 billion in U.S. agriculture exports to Mexico and $23 billion to Canada at stake.

Unfortunately, the least likely outcome is the near-term implementation of a modernized NAFTA that facilitates trade among the three countries.

However, complete dissolution of NAFTA is also unlikely. The Wall Street Journal puts the odds at one in four. Most legal experts agree that it would be difficult for U.S. President Donald Trump to re-move the U.S. from NAFTA without agreement from Congress and there is little support for this action among U.S. legislators.

The more likely scenarios are that the president launches a notice of withdrawal that is blocked for the next couple years by the legislative or judicial branches of the U.S. government.

In practical terms, the most likely short-term option is a zombie NAFTA that is neither alive nor dead while North American producers and consumers wait for a presidential change of heart or a change of president.

The zombie option is preferable to a completely dead NAFTA, but the economic effects of such instability are undeniably negative for all three countries.

More than 80 percent of economists surveyed by the Wall Street Journal this month predict that a NAFTA withdrawal would hurt U.S. growth, some predicting it could even trigger a recession. But it is not necessary to kill the deal to torpedo the U.S. economy with more than 80 U.S. agricultural groups saying they were “sadly confident” that even the initiation of withdrawal measures would trigger cancellation of commodity order and product-specific retaliation. Once such supply chains are broken, these markets are not easily restored.

It is by no means certain that the NAFTA will fail, but what is clear is that the resolution lies in U.S. political hands. Facing this reality, Canadian negotiators should continue to work on the issues where they can make a difference until they can go no further, recognizing that once they the leave the table, influence over final outcomes moves out of Canadian control.

Laura Dawson is director of the Canada Institute, a public policy forum in Washington, D.C., that studies the Canadian-American relationship.

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