The Great Divergence: North America’s Trade Policies

February 22, 2018

The Great Divergence: North America’s Trade Policies

Written by Sarah Goldfeder for the Canadian Global Affairs Institute. Click here to read the original.


The United States and Canada are operating from diametrically opposed playbooks on global involvement and trade. While one is seeking to minimize its global responsibilities and maximize trade potential via the use of bilateral tools, the other is reaching out to bring the world more engagement, philosophically positioned to reflect the government’s progressive values. This opposition played out not just on the stage at Davos, but it’s also present at the negotiating tables for the North American Free Trade Agreement (NAFTA).

Global Positioning

President Donald Trump outlined his vision in a series of speeches, both at home and abroad, but nowhere was it more apparent than in his speech on national security. In the decades since the end of the Second World War, the United States had understood that its security was connected to global security. The Marshall Plan took that a step further and embraced the idea that a prosperous, stable world was a safer world, and the United States had an obligation to contribute to that stability. The world wars were taken as proof points that an isolationist United States was just as vulnerable to the disastrous effects of dictatorship, extremism and instability as any of the countries involved directly with those conflicts. This global sense of responsibility grew to an understanding of itself as a global leader – with obligations to the nascent democracies and the oppressed, as well as to preserving the routes of global trade.

That the United States has turned its back on this globalist philosophy should not be a surprise – frankly, not only has it been decades in the making, many would argue the world would be better off without one nation playing puppeteer via global military might and access to its consumer-driven market. But others would argue that now, with displacement throughout the world due to conflict and natural disasters, and other major powers moving into position for global leadership, the world needs the United States.

Meanwhile, Canada has demonstrated a desire to be part of the global conversation – presenting the idea of middle powers as leaders, using trade agreements and international aid to frame the conversation. The Progressive Trade Agenda is one attempt to move other middle powers toward economies that provide for prosperity for all their citizens. Using economic measures as diplomatic carrots is not new; in fact, the State Department under former president Barack Obama codified a program of economic diplomacy with great success. Additionally, Canada is using a set of defined objectives to determine deployment of its international aid, further entrenching feminism, economic empowerment, environmentalism and inclusion into its foreign policy.

The Economy of the Future vs. the Economy of the Past

The leaders of the two neighbouring countries are focusing on entirely different economic drivers. One is looking toward clean technologies, making urban areas hives of economic activity, while the other considers the resurgence of traditional sectors its primary concern.

Canada’s current government has made a point of preparing the Canadian economy for jobs of the future. By focusing on services, highly skilled opportunities in high-tech fields and investment in next-generation technologies, Canada has built up a narrative designed to tantalize the millennials and Generation Z. In gauging what success looks like for trade agreements, Canada is focused on creating modern agreements that provide ample space for navigating the unknown unknowns of future technologies.

In contrast, the United States is looking back to its future. The Trump administration’s industrial strategy is built on a foundation of traditional economic engines such as construction, manufacturing and extractive industries. The push to undo regulations that are designed to limit development – including regulatory processes regarding the exploration and extraction of fossil fuels and minerals, building of infrastructure and the protection of federal lands – is key to this strategy. Trade deals that are understood to be a challenge to the U.S. manufacturing environment or that give up procurement space to foreign entities are seen as a threat.

Big Economies Don’t Like Multilateral Deals

This U.S. administration is operating in a zero-sum environment where trade deals yield one set of losers and one set of winners. Multilateral deals complicate this math, creating compromise in search of a common, level playing field where all the signatories give up something to get something else. No wonder this administration prefers the bilateral agreement. The problem is, a bilateral agreement with unequal partners leads to an uneven deal.

Market monoliths such as the United States, China and even India, are far more interested in bilateral deals, where they can more easily gain access to new markets while giving up less. Meanwhile, middle-sized, small and developing economies are better served by multilateral trade deals where their combined weight can help to balance out the equation. NAFTA was the first of these, but the TPP and the dormant (for now) Transatlantic Trade and Investment Partnership (TTIP) were intended to be the next generation, creating a modern agreement focused on non-tariff trade barriers and market fairness rather than on one that is tariff-based and goods-driven.

In addition, Canadian and European leaders have accepted the tactic of isolating economies that are not interested in playing by the widely held rules of the global markets. The creation of TPP and TTIP were both driven by this philosophy, now abandoned by the Trump administration. Ironically, these agreements would have served to counteract the World Trade Organization’s lessening influence, and establish enforcement mechanisms that would be timely and thus create a fair-trade environment for the signatories.

Selling a 21st Century Agreement to a 20th Century Leader

As NAFTA negotiations continue, Canada and Mexico are facing an increasingly frustrated Trump administration. The American trade deficit has grown in the past year, mostly due to policies the Trump administration has enacted, yet the blame continues to fall on the shoulders of the trading partners. The president, rather than seeing the deficit as proof of a robust consumer economy, sees it as a loss for America. This disconnect, along with the push for the return of 20th century jobs, has set up an impossible task for the U.S. trade negotiators.

No matter what the Canadians bring to the negotiating table, if the disconnect between one party seeking a trade agreement for the future and one party looking to reinvigorate the past is not addressed, the parties will continue to talk past each other. We saw that evidenced in Montreal. Robert Lighthizer has one goal in the renegotiation of NAFTA and that is to reclaim jobs lost, in the same industries (more or less). Making the argument that high-tech or service jobs are a suitable substitute does not meet the mandate under which the United States is operating.

Consider the Americans’ automotive rules-of-origin proposal. Canada, believing that the U.S. position on regional content could be satisfied once the entire life cycle of the car manufacturing process was included, offered up a matrix that would include things like engineering and marketing, as well as research and development in the component list. Lighthizer roundly rejected that, pointing out that once you’ve included all those aspects, more of the manufacturing could be off-shored. The disconnect between the intended outcome (displaying how the status quo on regional content is optimal for the North American auto sector), and the actual outcome (convincing the USTR that manufacturing continues to be at risk because of NAFTA) is representative of the ongoing dialogue. Until one or the other partners brings a proposal to the negotiating table that addresses the manufacturing issue, the chances of finding a pathway out of this impasse are slim.

It is hard to overstate the gulf between the U.S. and Canada’s foreign policy goals and philosophies at this moment. Likewise, it should be expected that those differences will affect how NAFTA will be renegotiated and if it will be concluded. The North American supply chain of the next NAFTA will have to address the manufacturing question in order for this U.S. administration to sign on. Canada will have to accept that the United States does not share its vision of the economy of the future in order to move past the current impasse.