Beyond USMCA: The Enemy is Complacency

Prime Minister Trudeau meets with President Donald Trump of the United States during the G7 in Charlevoix. June 8, 2018. Adam Scotti photo


While the USMCA has yet to be ratified, Canada should begin strategizing beyond the stabilization of its North American trading relationships and look to the possibilities offered by the European trade deal, the new TPP and our potential trade growth with China and India. FTA and NAFTA negotiation alumnus and former Ambassador to the United States Derek Burney offers some guidance.

Derek H. Burney 

The result of our trade negotiation with the U.S. and Mexico is more a source of relief than celebration, especially given the challenge of dealing with the highly unconventional Trump administration on trade. Better a deal than no deal or a bad deal. More commendable perhaps for what it retained than what it gained. With some warts to be sure but, on balance, a decent, respectable deal.

Let’s consider first the talks, and how they came together in the end. The first nine months of the negotiation proceeded cautiously, with each side doing their homework and staking out their basic positions. Not a lot of consensus. The Americans decided that the best way to gain traction was to divide and conquer. So they moved first to reach agreement with the Mexicans and then turned their focus on Canada. 

My impression is that the two major outstanding issues with Canada were, number one, access for the Americans to the dairy market in Canada, which is highly protected under supply management. This, more than anything else, seemed to agitate Donald Trump, fueling many of his bombastic attacks on Canada. 

Preserving the binding dispute settlement mechanism of the existing agreement, NAFTA, was of primary importance to Canada. Why? Because, when you’re dealing with someone 10 times your size, you need to protect yourself from the arbitrary or capricious actions of any U.S. administration. 

That had been the sine qua non of the initial agreement, the FTA in 1987. It was preserved in the NAFTA, and Canada made it a “red-line” issue for us from the outset this time. The Americans wanted to get rid of it. We insisted that it stay. In the end, there was movement by Canada on dairy opening 3.6 per cent of our market (up from 3%) and by the U.S. agreeing to leave intact the dispute settlement provisions. That created momentum to resolve the remaining issues.

I suspect that the United States wanted to put a “win” on trade in the window before the midterms in November. After all, they are fighting everywhere in the world on trade. They obviously saw political advantage in being seen as getting rid of NAFTA (“promise kept”), even if only nominally.

Canada held firm against the most egregious U.S. demands—scrapping dispute settlement and supply management, insisting on 50 per cent U.S. content for autos, attacking our exemption for culture, etc.—and the Canadian team deserve credit for that. 

What did Canada gain? Some of the modernization measures that were imported from the Trans-Pacific Partnership (TPP) negotiation, whether on digital commerce or the facilitation of business travel, should yield increases in access for Canada to the U.S. market. 

We have accepted a managed trade quota on the auto sector, one that offers significant headroom for growth. That is a big plus given the importance of the auto sector to our exports. The auto parts firms have room to grow and the unions see the wage rate increases accepted by Mexico as helping create a more even playing field. On balance, a good result.

We also wanted more certainty for investors and the deal has given us a degree of certainty, or at least tempered some of the uncertainty.

What did we miss out on? We still face tariffs on steel and aluminum that have no basis in American law—none whatsoever. Imagine, Canada is an ally in NORAD, an ally in NATO, and a partner in the Five Eyes intelligence association and yet is subject to tariffs on the grounds of “national security”. That is absurd. For industries that are fully integrated, these tariffs make neither practical nor strategic sense.

I know that our government claims that they represent a separate issue but these tariffs, and threats of more, were used blatantly to cajole concessions at the negotiation table. We can only hope that they will be removed expeditiously after the congressional elections

Is it fair to say that things haven’t changed that much? Yes, but never forget that what has changed and remains most troubling is the “America First” approach to trade generally by the U.S. With the original FTA, and with NAFTA, there was a consensus and a degree of trust among the leaders about the objective—mutually beneficial trade liberalization that would make the bloc of NAFTA more competitive in the world.

The fact that President Trump had a very different attitude about trade made these negotiations more arduous, if not exasperating. He clearly missed the lesson on mutual benefit.

This negotiation had a serious handicap, and I take my hat off to the Canadian negotiating team in particular for their stamina and resolve. They ignored the president’s barbs and tweets, held firm against key U.S. demands and dealt pragmatically with the substance. Yes, the result is essentially a do-over of NAFTA, although we can’t say that because it’s a title that’s been expunged from the vocabulary. At Trump’s insistence, it’s now the USMCA, the U.S.-Mexico-Canada Agreement.

One new thing is the “non-market economy” restriction in Clause 32, the so-called China Clause. The clause stipulates that when one of the three USMCA countries wants to begin trade negotiations with a non-market economy, the other North American countries must be given three-months’ notice.

That may be more political rhetoric aimed clearly at China than binding substantively. In my opinion, it has no place in this trilateral trade agreement. 

I see it as a “knuckleball” one that was deemed essential by the Americans. I would hope that our government will do everything possible to show that this has no binding effect on Canada. If it had any effect, this restriction would be extraterritoriality out of control, and would raise questions of sovereignty.

We have misfired in our approaches to China thus far. I think we have to redouble those efforts and get more serious—not just with China, but with India as well. 

Diversification has to be more real than rhetorical as an objective for Canada when it comes to trade. We’re never going to replace the U.S. as our number one customer. But we do have to find opportunities elsewhere, especially in economies that are growing faster than the economies in North America. 

The mini-TPP gives us good access to Japan, Malaysia, Vietnam, and other signatories. We have the Comprehensive Economic and Trade Agreement (CETA), which gives us preferential access to Europe. We need to make better use of those agreements and, as well, negotiate significant new agreements in an increasingly volatile global environment. 

The biggest handicap I see in Canada is complacency. We’ve become too comfortable in the cocoon of dealing with the Americans for 75 per cent of our trade. There are other opportunities, other outlets for Canadian exports. The new LNG facility in Kitimat is an excellent opportunity for Canada to open the vista, especially to the Asian markets where there’s strong demand for our natural gas.

We also have to take a hard look at our declining competitiveness in North America, especially on the tax and regulatory front. As the smaller economy, that is not a luxury we can indulge.

This agreement in principle is the first concrete step towards a new trade agreement. But it has to be approved by Congress, which has the ratification authority for trade and delegates the negotiating authority to the administration. Once the administration provides the details of the agreement, Congress then has to vote its approval. Per the provisions of fast-track trade promotion authority, they can only vote up or down without making changes to the agreement. 

If the agreement passes, then Congress has to approve implementing legislation. Which means we’re looking to 2019, at a minimum, before all of the Congressional actions take place. 

We have to do the same in Canada with our Parliament. But when the executive and legislature are combined, as in our system, it is more straightforward. The Mexicans have a new administration coming in December, and a new Congress of the Union taking office in December. The team that is signing the agreement will be gone. 

Throughout all the pending steps we have to remain attentive, keep our wits and ensure that the review and the legislation are consistent with what has been agreed and that no new hooks surface. Above all, remember that “it’s not over until it’s over, and in Washington it’s never, ever over.”

There are a lot of pitfalls ahead on the trade front in a world where protectionism, populism, nationalism and “America First” are getting political traction. But hopefully the success of this negotiation will have a therapeutic, calming effect. 

Canada has to do a couple of things. The Trump Administration is doing its level best to undermine the World Trade Organization and the global rules governing trade. So, Canada, together with Japan, the Europeans and with other major players at the WTO, should look at pragmatic ways to strengthen the disciplines and the rules underpinning the WTO. 

Complaints about China as a non-market economy stem from the fact that they’re not playing by the rules, especially on intellectual property, and that is a valid criticism. It would be best to tackle that overtly and collectively at the WTO.

Secondly, diversification has to be more than part of the trade minister’s title. We must get more serious about negotiating with countries, even those that do not share our values or that have political systems different from ours. After all, China is a major part of the global economy, soon to become number one. We have to decide whether we are going to deal with the world as it is or as we wish it were. 

We have to determine from analysis whether we can get a proper negotiation with China that suits our interests without compromising our fundamental values. We have complementary economies. There’s scope for negotiation. It’s not without its dangers but it is worthy of serious attention.

A similar approach to India has obvious merit and would also enable us to use a negotiation with one Asian giant as leverage on the other. We should do it in a more coherent and strategic manner than what has been attempted over the past decade. 

We have an image of being a risk averse, cossetted economy and that is unfortunate. We have entrepreneurs with brilliant ideas, innovation skills, all of that. But we have to be more ambitious, more confident and strive for opportunities beyond North America while making the most of those in our immediate neighbourhood.  

Derek H. Burney, Senior Strategic Adviser at Norton Rose Fulbright, was chief of staff to the Prime Minister during the negotiation of the Canada-U.S. Free Tree Agreement in 1987, and Canadian ambassador to the United States during the NAFTA negotiations of 1991-92.