Andrei Sulzenko was a principal negotiator of the Canada-U.S. free trade agreement.
This essay is part of the Prosperity’s Path series. In a time of geopolitical instability and a shifting world order, the challenges facing Canada's economy have only gotten more visible, numerous and intense. This series brings solutions.
The U.S. deadline of Aug. 19 for the imposition of additional tariffs on about US$20-billion worth of imports from Canada is, of course, totally artificial and designed to maximize pressure to reach a deal on American terms.
The pressure is really on the U.S. side as President Donald Trump is desperate for a good-news story in the avalanche of bad news he has faced on multiple fronts. That pressure will only increase as the November U.S. midterm congressional elections quickly approach.
A further pressure point on the U.S. side is the legal basis for the threatened tariffs – markedly less plausible than previous actions that have since been struck down by U.S. courts.
So Canada’s current rush to reach a deal is a mistake. Instead, Ottawa should treat Aug. 19 as a TACO (Trump Always Chickens Out) moment that will be rolled over repeatedly. Any escalation through the imposition of new U.S. tariffs would only serve to toughen Canada’s position, reflective of hardening public opinion. It’s eerily similar to the situation the President finds himself in dealing with Iran.
The real deadline for these negotiations is some time after Labour Day, when American voters start to pay attention to the coming elections. Their outcome could herald an embattled, lame-duck presidency for the balance of Mr. Trump’s term.
Let’s be clear, though, on what these talks should not be about: a wholesale renegotiation of the United States-Mexico-Canada Agreement. That will need to wait for a more propitious occasion, probably after Mr. Trump leaves office. The agreement provides ample time to do a proper job of that. Therefore, it is in Canada’s interest to negotiate only short-term fixes that can be easily undone if necessary.
There is some overlap between such a strategy and Canada’s current one, though bilateral talks reportedly involve a long list of concessions from Ottawa and are wider than need be.
The biggest “get” for Canada in current talks would be eliminating the punitive steel and aluminum tariffs imposed in the name of U.S. national security. The U.S. has a real incentive to trade away these tariffs because they hurt their economy more than they help it. For example, U.S. steel tariffs are estimated to kill 10 downstream manufacturing jobs for every steelworker job created or saved; and U.S. aluminum smelting capacity is well below domestic market demand, with no prospect of that increasing because of unattainable electricity requirements.
In the short term, to help offset its own goal, the U.S. could offer a form of managed trade in both steel and aluminum (but probably not lumber, the subject of an intractable 40-year trade dispute). Historically, these kinds of arrangements have involved some form of tariff-quota system.
It would work as follows: Both sides agree on a politically tolerable level of imports, either by value or by volume, subject to no or low tariffs. They then agree on the level of tariffs on imports that exceed the quota. Finally, they agree on duration and whether the quota grows over time. There are many variables with lots of room for haggling.
A recent example of a tariff-quota arrangement is the one Canada made with China for autos. Under this scheme, China can export to Canada 49,000 vehicles annually, subject to the standard tariff rate of 6.1 per cent. That quota increases by 6.5 per cent annually. Exports in excess of the quota are effectively prohibited, as they are subject to the 100-per-cent tariff previously imposed on all vehicles from China.
As with steel and aluminum, a similar interim arrangement might be possible with respect to Canada-U.S. auto trade, whereby favourable treatment up to a certain quota level would serve to guarantee a minimum level of activity on both sides of the border. Such an arrangement would help reduce the competitive damage wrought by the tariffs that Canada and the U.S. impose on each other’s automotive imports.
A longer-term solution on automotive trade would, however, need to wait, as a key factor – higher North American content – requires legislative change in the U.S. Furthermore, Mexico would also need to be engaged, given the industry’s integration across the three economies.
In exchange for making these kinds of second-best bilateral arrangements, Canada could offer up some limited concessions in relief for the two red-flag issues on the U.S. side: provincial treatment of alcoholic beverages and of supply-managed products, mainly dairy.
The first issue is quite straightforward, but contingent, particularly in Ontario, on relief in the treatment of metal and automotive exports. Canadian consumers may not, however, be forgiving in their buying habits once U.S. alcohol returns to store shelves.
The second issue, supply management, is more complicated, at least politically in Canada. But if the real U.S. “get” is to improve their quota for the Canadian market, especially relative to other trading partners, then a finesse should be possible. Salability to Quebeckers of better dairy access would be much more likely if Canada received relief on aluminum, a major Quebec export.
From a Canadian perspective, there’s a simple reason for this narrow focus in current talks. The President has demonstrated repeatedly that he cannot be trusted to honour for very long any agreement he has made – witness the transgressions against the letter and spirit of the USMCA as he drums up far-fetched excuses to impose new tariffs.
There are also very practical reasons for not having broad renegotiations now. First, it would take a lot longer than the political window in the U.S. for Mr. Trump to achieve a self-declared win before the midterm elections. Second, changes to the existing agreement that require legislative amendment would, under the U.S. Constitution, be subject to congressional scrutiny and approval, a non-starter for this administration.
Moreover, many of Canada’s concerns relate to executive actions (of contested legality) that have been delegated over the years by Congress. Those actions can, of course, be similarly reversed or altered under executive authority, if not dealt with sooner by U.S. courts.
The current bilateral negotiations are, therefore, mainly about bazaar-like haggling over recent trade actions instigated by the U.S. side and counteracted to varying degrees by the Canadian side. A risk-management strategy for Canada should involve completing or achieving good progress in the current negotiations by around Labour Day in time for the Trump administration to offer some good news for a change, such as better access for California wines, Kentucky bourbon and Wisconsin dairy products.
Who said the U.S. holds all the cards?