The Morning Brief: The Economy and NAFTA

Bruce Carson - January 12, 2018


Economy—NAFTA Negotiations

NAFTA Negotiations—They are due to start again on January 23 and last through to the 28thin Montreal. Leaving aside the trade noise that The Morning Brief dealt with yesterday, possible notice of withdrawal from NAFTA by the President of the United States and the trade complaint filed with the WTO; there are important negotiations that begin in less than ten days.

Asked about what is happening with NAFTA and the pending discussions yesterday at the federal cabinet retreat in London, Foreign Affairs Minister Freeland said that Canada has been doing “some creative thinking” on possible alternatives to the five “non-starters” advanced by the United States and that some of the efforts to modernize the treaty have progressed quite nicely. And she said something she has said many times before; Canada is hoping for the best but is prepared for the worse. Also the government seems quite positive that its application to the WTO questioning the use by the United States of certain trade remedies has provided a sufficient shot across the bow of the president and Commerce Secretary Ross so that they now know Canada is capable and willing to play hardball on trade.

Yesterday U.S. Treasury Secretary Mnuchin in response to a question on NAFTA said “we expect the agreement to be renegotiated or we will pull out.” Later in the day President Trump, in relation to Mexico said that Mexico would pay for the border wall through its involvement in a renegotiated NAFTA. So if that is the case, the president could perhaps give notice of withdrawal from NAFTA, but not act on it, leaving it out there hanging over the negotiations until the “right” deal is concluded, or not give notice at all. It would seem to be safe to say at this point that no one, including the president, knows what is going to happen regarding notice of withdrawal. It seems to be a constantly moving target.

One of the most recent pieces on the state of play of the talks came last evening from John Ivison and it contained a familiar theme in that U.S. negotiators were becoming frustrated with Canada’s insistence on putting elements of its so-called “progressive” trade agenda into the agreement. This includes in the U.S. opinion, such non-trade related matters as gender equality and a chapter on Indigenous issues. As noted this complaint is familiar, as it was raised by some countries involved in the Trans Pacific Partnership negotiations in Vietnam and rejected out of hand by China, leaving the prime minister’s trade negotiating cupboard rather bare.

Ivison goes on to write that the Americans are beginning to believe that reaching agreement with Mexico might be more attainable that pursuing talks with Canada and its progressive agenda. The view from the U.S. is that Canada is not actually negotiating, but lecturing. It is notable that U.S. Trade Representative Lighthizer will not be in Montreal monitoring the talks, but in Davos at the economic forum.

Ivison reports that the U.S. view of the talks is considered to be “total nonsense” by Canada’s negotiators as the U.S. is simply frustrated by the fact that its “big five” negotiating asks are considered to be non-starters by Canada. Nevertheless, the ‘creative thinking’ referred to Freeland does include the possibility of raising the North American content on vehicles from 65% to 75% as do-able and wording could be found to allow for something similar to a sunset clause; perhaps a non-binding review every five years. No progress has been achieved on government procurement and supply management, but the Globe is reporting some progress on a new dispute settlement regime.

While Ivison didn’t go there; it would be interesting if all matters were agreed upon at some future date, except the inclusion of the prime minister’s progressive agenda. This would put Trudeau directly in the middle of a trade and political conundrum as while the NDP would support the progressive matters, it is almost certain that the Conservative Party would not; reverting to its previously expressed opinion that the prime minister’s progressive agenda has little or nothing to do with trade. As noted this would be consistent with the views expressed by certain countries involved in the TPP negotiations and is China’s position as well.

Former Conservative Party interim leader Rona Ambrose, now a member of Minister Freeland’s advisory council on NAFTA wrote in an op-ed piece published by the Post chain on November 24, 2017 which stated that in various NAFTA negotiating scenarios, the result is Canada facing economic uncertainty. It is worthwhile to review her three scenarios; the twitter withdrawal scenario, the Zombie standoff scenario and the poisoned chalice scenario.

Under the twitter scenario, Trump gives notice of withdrawal but never acts on it or does act on it and it gets bogged down in litigation and disagreements with congress causing endless uncertainty. The Zombie standoff sees the negotiations going on and on with no agreement on the horizon, but no one walks away, killing the talks. Again this causes uncertainty for Canada. The poisoned chalice scenario sees an agreement reached but is not ratified as the Mexico general election intervenes and then the U.S. mid-terms and it just goes on and on.

The point in the three scenarios, which are all quite possible, is that they breed uncertainty and when there is economic uncertainty the United States wins, as the country with the largest economy, virtually unaffected by uncertainty. Lawrence Herman writing last evening in the Globe lent support to the view that uncertainty would negatively affect Canada’s economy.

The Bank of Montreal issued a report this week advancing the claim that Canada’s exit from NAFTA would result, as Doug Porter asserted, in “manageable risk” to Canada’s economy. BMO predicts that in the next five years Canada’s economy will see GDP growth of 9%, but only 1% would come off, if NAFTA did not survive. There would be adjustments but they would be “manageable.” The conclusions of the BMO report are largely consistent with the report issued by the C.D. Howe Institute before Christmas.

Next week The Morning Brief will focus on the tax changes brought in by the Trump administration and if one thought loosing NAFTA was a big deal, it is negligible, when compared to the effect these tax changes will have on Canada’s competitiveness, if the federal government does not adjust its policies.

Other National Issues

The Inquiry into Missing and Murdered Indigenous Women and Girls

Its Executive Director has resigned after only four months on the job, as she replaced the original executive director who had also resigned. This brings to 20 the number of staff who have left the commission, including one of the commissioners, Marilyn Poitras, since it was established.

The Minister of Crown and Indigenous Affairs, Carolyn Bennett expressed concern about the resignation but said “we are not going to interfere in internal matters.” A couple of months ago the prime minister said that the Inquiry was being run out of his office, so perhaps he should be the one to react.

At the very least, the government should not extend the term of the group leading the Inquiry. A request for an extension and more funding is said to be coming from the commission in due course. The government should refuse this request, thank the commissioners for their work and request that they deliver their final report on time. Then the government should take a deep breath and determine if a similar commission, differently constituted, with a mandate that focusses on policing and related matters should be established. The focus must be on the survivors and their families. In the case of the present Inquiry, while the cause is just and necessary, this group led by Marion Buller, has shown it does not deserve an extension.

To Come

--today, cabinet retreat in London concludes
--January 16, foreign ministers meet in Vancouver to discuss North Korea—at this point China will not be attending
--January 16-17, Conservative Party leader Andrew Scheer and Deputy Leader Lisa Raitt plus some caucus members will be in Washington to discuss the NAFTA negotiations
--January 17, Bank of Canada deals with interest rates and presents its Monetary Policy Report
--January 23-28, NAFTA negotiations resume in Montreal

As Parliament is not sitting until the end of January, The Morning Brief will return on Tuesday, January 16--bc

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