Trump’s Second Period

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April 12, 2018

Trump’s Second Period

As the NHL moves into Stanley Cup playoffs, consider this the second period of the Trump administration engaging on NAFTA. After a six-month long intermission where strategists and advisors gave it their best shot, Team Trump is back on the ice and has clearly decided that their tactics from the first period were the ones that will win the game. The replacement of key advisors with media pundits – Cohn with Ludlow, McMaster with Bolton, the re-emergence of Peter Navarro, the departure of Hope Hicks – all portend nationalist policies borne of an echo chamber where no one’s voice echoes louder than the president’s own.

Donald Trump has now acquired the confidence to rely on his own instincts, the same instincts that defeated 16 other candidates to make him the Republican nominee. He has gone back to his understanding of his political “base”, his beliefs, and his platform – and this applies particularly on NAFTA and trade. The policies he proposes lead the United States back to what he believes were the golden years – the turn of the 20th century, pre-World Wars, pre-“Pax Americana”.

As this second NAFTA period progresses, observers must note the domestic political points the U.S. administration has on the board so far. The American economy continues to strengthen, despite noise from global markets. Americans have more money in their pockets this tax year, thanks to a tax reform that, while arguably short-sighted, is high on instant gratification. He has successfully begun to dismantle regulatory regimes, has militarized the southern border, and, with the help of conservative think tanks, remade the American federal courts.

Trump on Trade

The president has fought his battle for free trade on many fronts simultaneously. He walked away from the Transpacific Partnership within days of inauguration, began renegotiation of two of the most substantial trade agreements for the United States, the Korea-U.S. Free Trade Agreement (KORUS) and NAFTA, all the while preparing the ground work for an ambitious play against China.

From Canada’s perspective, the rest may just be background noise, but the entirety of Trump’s economic agenda has to be taken into account. At this point, there is a view that NAFTA is taking up too much attention. KORUS has been largely put to bed, with an agreement in principle being reached, although the president has floated the idea of postponing that until a deal with North Korea on denuclearization has been obtained. Section 232 tariffs against steel and aluminum are being used as leverage with not just Canada, but Europe, Korea, Brazil, and Japan. Meanwhile, the trade war with China has begun in rhetoric, if not fact.

The reality of all this combined action is that NAFTA has become political low-hanging fruit. While there are many issues where common ground has yet to be found, there is a push to resolve the file so the Trump administration’s trade team can focus on China.

The Republicans look to be in substantial peril in the upcoming midterm elections, creating a sense of urgency for the White House. The Mexican electoral reality has always been a factor – the reality of a lame duck government from July until December, combined with concern that Lopez Obrador, a populist, may win that election.

The goal of securing an agreement in principle is obtainable. Simply put, it will be an agreement to come to an agreement. The terms can remain broad, meaning  it would be a statement of good faith – not details.

It goes without saying, however, that an agreement in principle requires more than will – its contents must also garner domestic support in all three countries.  According to Foreign Affairs Minister Freeland, the deal hinges on automotive rules of origin. The USTR has walked away from the 50% U.S. content requirement the Americans initially proposed, but has instead floated a proposal on wages that the Mexicans find unworkable. The focused ‘regional value approach’ advocated by the Canadians has largely been agreed to, at least in concept, by all three partners, but the devil, as always, is in the details – and reportedly, few have been agreed upon.

Other significant areas of contention remain, including government procurement, the proposed 5-year sunset clause, the labour provisions and the dispute resolution mechanisms in both Chapter 11 (investor-state dispute resolution) and Chapter 19 (anti-dumping and countervailing duties). An agreement in principle could occur without full agreement on these, but with a promise – and a genuine belief – that a path forward exists. Mexico and the United States appear to be on that path, but the USTR has identified that a deal with Canada will be more difficult.

Trans-shipment: Moving Goods from China

The steel and aluminum tariff threat from the U.S. has been averted – at least for now – but with the agreement that Canada will address trans-shipment.  The U.S. is of the belief that Canada is part of the problem related to Chinese goods entering the American market. A fix, at least for now, gives the Canadian Border Security Agency (CBSA) new powers to conduct investigations on companies believed to be reconstructing components from China in Canada in order to call them Canadian. At the same time, the historically under-resourced CBSA has made headlines with its dismal numbers on the seizure of counterfeit goods (48 in 3 years, compared with 34,000 in one year in the United States and 63,000  in the EU). Whether the Americans believe the new powers will result in new enforcement is not yet clear.

Key Issues for a NAFTA Deal

Competitiveness of the Canadian Economy: In the wake of the massive tax reform bill in the United States, Finance Minister Morneau has included an emphasis on competitiveness to the government’s narrative on equality and growth of the middle class in this year’s budget. The stalemate between Alberta and British Columbia has forced Kinder Morgan’s hand to stop work on its pipeline. This only adds to the energy sector’s concerns and Canada may find it needs to take more aggressive action to pull itself out of the shadow of its southern neighbour. The U.S. combination of carrots and sticks for the one and protectionist policies for other makes it a tough competitor for investment.

Congress and Chapter 11: On the U.S. end, the renegotiation of NAFTA is taking place under the umbrella of the 2015 Trade Promotion Authority. Under that law, Congress must be satisfied that the USTR is representing U.S. interests in the negotiations. Members of Congress have written letters to the USTR articulating particular concerns. The latest is on the USTR’s removal of the United States from the Chapter 11 Investor-State Dispute Resolution Settlement mechanism. Congressional leaders, as well as Canada and Mexico, continue to feel that ISDS is a key aspect of the enforcement of rule of law and a required mechanism to foster investment. An agreement in principle without U.S. participation in ISDS will struggle to gain congressional support.

Trade Actions against the United States: As China heats up the trade war by invoking the WTO, Canada has also turned to Geneva to determine a solution to the softwood file. While other trade irritants have been resolved in the past few months in favour of Canada (Bombardier, newsprint), softwood lingers as a reminder of how tough trade issues can be.

Government Procurement and Supply Management: Canada is particularly sensitive to the resolution of the government procurement chapter and protecting its dairy sector. The U.S. has shown no interest in softening its line including a convoluted formula for determining access into the U.S. procurement process. The U.S. does not find access to Canadian or Mexican procurement a large enough advantage to give up much ground, and so this chapter remains, for now, without a solution. In much the same way, Canada has stood its ground on protecting the supply management system. The USTR is under continued Congressional pressure to guarantee more access to the Canadian dairy market for American products.

Important Dates:

  • April 13 & 14: Summit of the Americas in Lima, Peru
  • April 22: First Mexican Presidential Election Debate
  • May 1: End of Steel and Aluminum Tariff exemption for Canada and Mexico
  • June 7:  Ontario Election
  • July 2:  Mexican Federal Election (note lame duck until December 1)
  • November 6: U.S. Federal Election – November 6 (note lame duck until January 3, 2019)