Pacific Alliance is right for Canada

Colin Robertson Globe and Mail February 4, 2018

Among the spaghetti bowl of trade deals currently on the Canadian menu, associate membership in the Pacific Alliance should be an easy choice.

The government and House of Commons International Trade Committee are currently holding consultations. Here is what they should consider:

The Alliance members – Chile, Colombia, Mexico and Peru – are business-minded. They embrace the rules-based, democratic order. Their economic well-being affects the economic health of Canadian companies, especially in resources, infrastructure and finance.

The “Pacific pumas” have more than 221 million consumers. Their combined GDP is equivalent to the world’s sixth-largest economy. Canadian investment in the alliance is estimated at $50-billion.

The alliance’s goal is to achieve free movement of goods, services, capital and people. The members are integrating their stock markets, and are even sharing embassies in certain countries.

Canada already has free-trade agreements with individual alliance members, so some ask why we should become an associate member.

The first answer is that we must take our opportunities when they come.

We would have first-mover advantage within the best trade agreement in the Americas, just as we will have with trans-Pacific countries through the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), and trans-Atlantic through the Comprehensive Economic and Trade Agreement (CETA). That means a bigger payoff as we establish a customer base ahead of the opposition. The cumulative rules of origin would weave the individual free-trade agreements (FTAs) with alliance nations into a seamless web. That would mean improved competitiveness of Canadian products.

Second, the Pacific Alliance is consolidating itself as a platform for economic integration within the Americas.

Canada would become a leader within the Pacific Alliance by virtue of being the biggest economy in the most liberalized caucus of trade nations in the world.

While the alliance is mostly about trade, it is also about building deeper co-operation through regulatory integration and addressing emerging issues such as the digital economy. What better place to advance the progressive trade-agenda goals in gender, labour, environment and small and medium-sized enterprises, than in this group of progressive democracies. And we have already begun. Last year, the Canada-Chile FTA was revised to include gender rights.

Third, stronger links with the alliance would give us better place and standing in the Americas. History and migration have given us strong links across the Atlantic and the Pacific. Our ties south of the Rio Grande, by comparison, are less so.

The Pacific Alliance commitment to transparency and anti-corruption within Latin America is the better model than its protectionist counterpart, Mercosur – Argentina, Brazil, Paraguay, Uruguay – and a contrast to the periodic illiberal governance in places like Venezuela. Canadian participation in the alliance would reinforce its attraction to the rest of the Americas.

But there are potential challenges to membership. For example, the alliance’s mobility provisions – free movement among the member states – might not work for Canada.

One option could be to negotiate trusted-traveller programs for business. Our guest-worker program with Mexico could serve as a model. Operating for more than 40 years, it now brings more than 22,000 seasonal workers to Canada annually.

The provinces must be active partners in considering the Pacific Alliance, just as they have been in the negotiations of the CETA, CPTPP and the talks to renegotiate the North American free-trade agreement (NAFTA). Trade is increasingly less about tariffs at the border and more about standards and regulations in areas of provincial or shared responsibilities.

Trade liberalization acts as a catalyst to domestic economic restructuring. Most are winners, but there are also losers. We have developed institutions between the levels of government to find and implement solutions, including adjustment assistance and retraining. We must continue and refine this.

Against a backdrop of “America First” protectionism and no foreseeable conclusion to the zombified Doha round of talks at the World Trade Organization, we need alternative markets. Middle power groupings, such as the Pacific Alliance, pick up the slack and help sustain the rules-based trading order.

Other key Pacific partners – Australia, New Zealand, Singapore and South Korea – are actively considering associate membership. It is always better to be a driver setting the course in the front seat, rather than a late passenger along for the ride. Canada should move now on associate membership in the Pacific Alliance.

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Crunch Time for NAFTA: A Test for the USA

The NAFTA negotiations this week in Montreal will give us a good sense of whether a new agreement is possible. Canada and Mexico are coming to the table with ideas on the “poison pills” but is the United States ready to negotiate?

The test will come on three issues:

– Can we preserve dispute settlement as a check against unfair protectionism?

– Can we find an equitable formula around trilateral content rules for cars, our most traded commodity?

– Will government procurement stay open to all three nations?

If we cannot resolve these issues, then we have to look to Plan B, life without the North American free-trade agreement.

Foreign Minister Chrystia Freeland’s “hope for the best, prepare for the worst” is a fair characterization of NAFTA’s prospects. The Trump administration continues to ramp up protectionist actions against foreign competition. In recent months, the United States has hit Canada with punitive tariffs on lumber, jets and now newsprint.

U.S. President Donald Trump’s repeated threats to rescind NAFTA is galvanizing hitherto-silent U.S. support into action. The farm community and business, two vital groups in the Trump coalition, want NAFTA improved, not rescinded. Surveys show a majority of Americans like NAFTA. Senators and members of the House of Representatives, especially those in the Midwest and from Texas, are now pressing the President to do no harm to NAFTA.

Canada and Mexico have launched unprecedented outreach campaigns. Canadian envoys have met with more than 65 governors and lieutenant-governors and more than 265 congressmen. We are finding allies. We will need them if Mr. Trump rescinds the agreement or if any new deal reaches Congress.

Canada and Mexico must stay engaged in what should become a permanent campaign to cultivate the biggest market in the world.

But the future of NAFTA now depends on the outcome of the American internal debate.

Canadians faced their moment of truth on trade in 1988. We fought an election over closer economic relations with the United States. It brought prosperity, not, as the critics warned, a loss of sovereignty. Mexicans faced a similar moment in 1994 when they embraced the NAFTA.

For both Canada and Mexico, freer trade proved that we could compete, not just with the U.S., but internationally.

Freer trade also became a catalyst for domestic economic reform.

For Canada, the restructuring included the introduction of a national value-added tax, the GST. Federal and provincial governments cut their deficits. For Mexico, NAFTA restructuring supported democratic change in 2000 after 71 years of one-party rule. More recently, it helped spur the “Pacto por Mexico” reforms to education, finance, labour and energy.

For Americans, NAFTA is a litmus test of its place in the world. Will they replace the rules-based order, created and sustained by the United States for 70 years, with Mr. Trump’s vision of America First? Will Americans set aside their traditional generosity towards other countries with one based on mercantilism and beggar-thy-neighbour?

For the first time, the most important global economy wants to renegotiate a trade agreement by increasing trade barriers so as to balance its trade. It’s a world of big rolling over small. Middle powers like Canada and Mexico need to push back.

Previous U.S. administrations, both Republican and Democrat, saw U.S. internationalism not as an act of charity, but as reflecting U.S. values and principles. As practised by Roosevelt through Reagan and Obama, the United States used its weight to better the global condition, willing to give more than it received. This is the “indispensable nation” that Ms. Freeland described when she laid out the Trudeau foreign policy last June. She described a United States that sustains the global order, for the greater global good, through a network of alliances, trade agreements and international institutions.

Mr. Trump’s “America First” breaks with this American tradition. Will Congress and the courts go along with Trumpism? While Canada and Mexico prepare for the worst, we must stay engaged with the many Americans who see the world, and America’s place in it, differently than Mr. Trump. Ultimately, Trumpism is a test of how Americans see themselves and their place in the world.

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Trudeau’s China Trip

Prime Minister Justin Trudeau’s China trip may not have netted the expected free-trade talks, but Canadians should be satisfied on several fronts.

First, the institutional framework is strengthened.

Critics discount this as more bureaucratic jibber-jabber, but in China – as business has painfully learned – it’s the mandarins who make things happen. Last year the prime ministers of Canada and China initiated regular annual meetings. Now, there will be regular meetings of ministers of the environment and energy.

Second, there will be more trade.

Sales of uranium (good for Saskatchewan) and beef and pork (good for Western Canada) will be expedited. Premier Kathleen Wynne has just returned with $1.9-billion in deals that will generate an estimated 2,100 jobs in Ontario.

A crosswalk between climate and clean energy has been created. This should work to Canada’s advantage both commercially as well as in research and development, given the Chinese lead in innovation in renewable energies, especially solar.

Third, the people-to-people exchanges are significantly enhanced.

Chinese tourism – more than half a million visitors last year – has taken off. It’s growing annually at double-digits. More direct flights to Calgary and Montreal, as well as Toronto and Vancouver, are coming from 11 Chinese cities, and we are opening seven additional visa centres. During a visit to Beijing last month, Immigration Minister Ahmed Hussen declared we could “easily double or triple or quadruple the numbers.” China has designated Canada as the preferred travel location for 2018.

Where once it was the Japanese who skied Banff and Whistler, it will now be wealthy Chinese. Hoteliers had better be sure there is a kettle stocked with Chinese teas in every room and that their feng shui is right.

Tourism begets foreign students as well as trade and investment. China is already our largest source of foreign students, although – where we once led – in recent years Australia has done the better job of attracting Chinese students.

But even with these developments, the China relationship is always going to be tricky. Its leadership has a different conception of human rights and the rule of law. China is an authoritarian state. Authority rests with the Chinese Communist Party and its survival comes first.

When things get tough, as we saw in Tiananmen Square, the People’s Liberation Army cracks heads. Information does not flow freely and, as Facebook, Google and earlier media companies have learned, you either play by their rules or you don’t do business. That’s the way it is.

Canadians have a tendency to discount our assets when dealing with China. As Paul Evans recounts in Engaging China, that we were “somewhat independent” and could play a middle power role in bringing China in from the cold were major factors in China’s decision to accept Pierre Trudeau’s invitation to open relations with Canada in 1971.

Legitimacy still matters for China, and closer relations with Canada gives it that. Try as it might, and it did try hard, especially in the later years, the government of Stephen Harper could never really come to terms with it.

The Trudeau government doesn’t have the anti-communist ideological baggage that confounded its predecessors. Instead, its progressive values – labour, environment, gender equality, Indigenous rights – bolster Canada’s position in the Western democratic pantheon. It is a strength, even if the Chinese don’t like it. Their first instinct will be to bully us into submission.

We need to stand up for our progressive values. But they also need pragmatic application if they are to have any effect. Finding that balance is an art, not a science. In his dealings with foreign leaders, Mr. Trudeau demonstrates a high degree of emotional intelligence. He will need it when dealing with China’s leadership.

The Trudeau trip to China moved the yardsticks. Maybe no China free-trade deal now, but all in all, not a bad haul – and the promise of more to come.

When dealing with the Chinese, strategic patience counts. The Chinese measure progress in centuries rather than days or months. Nor should we discount standing firm on our progressive values. The Chinese may not like it, but they respect conviction.

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Canada needs to look at BMD

“Rocket Man” has done it again. Each time North Korea’s Kim Jong-un improves his missile projection capacity, the potential increases that a missile intended for the United States will accidentally land in Canada. The Trudeau government needs to reconsider ballistic missile defence (BMD) as a shield to protect Canadians against this growing threat.

The government dodged consideration of BMD in its defence policy review last June. It got a perfunctory single line: “Canada’s policy with respect to participation in ballistic missile defence has not changed.” It meant that the policy of the Paul Martin government that was continued under Stephen Harper – a polite decline – remains in effect.

There is a reference in the defence review to discussing with the U.S. government the defence of North America against “all perils.” This should be sufficient cover to review its June decision.

When the Martin government considered BMD in 2005, the answers to three critical questions were deemed inadequate:

  • Does BMD work and how would it protect Canada?
  • How much participation would Canada have in what is essentially a U.S.-managed system?
  • How much would BMD cost?

These are still good questions. The current government should get these answers and share them with Canadians. It should begin by looking at the useful work done by the Senate national defence committee. It has twice examined BMD. Its June, 2014, report unanimously recommended that Canada participate in BMD. The witnesses supporting this recommendation included two former Liberal defence ministers, Bill Graham and David Pratt. More recently, retired general Roméo Dallaire added his support for BMD.

This week’s test is further evidence of North Korea’s improved capacity to project a warhead by ballistic missile across continents. As U.S. President George W. Bush reportedly asked Mr. Harper in 2006, what happens if a North Korean missile aimed at Los Angeles or Seattle winds up heading toward Calgary or Vancouver? Reconsideration was on the Harper government’s agenda had it received a fourth term.

In testimony this fall to parliamentarians, NORAD Deputy Commander Pierre St-Amand, current ranking Canadian at Colorado Springs, said that “U.S. policy is not to defend Canada,” although in the “heat of the moment” the U.S. could do so, “but that would be entirely a U.S. decision.”

But that is no guarantee, since the U.S. system is limited in size and the North Korean ICBM force of uncertain number. Unless we are inside the system – and making a contribution – we have no assurances, even if the U.S. command would wish to protect a Canadian target that is remote from a U.S. asset (think Edmonton or Calgary).

Consideration of Canadian engagement on BMD should cover all possible initiatives beyond the simple positioning of anti-missile sites in Canada.

These would range from a government declaration acknowledging the missile threat to Canada; to allocating additional Canadian Forces resources to the North American Aerospace Defence Command; to equipping the Royal Canadian Navy with appropriate gear to detect missiles; to radar arrays in Canada; to writing a cheque to support research. It would also oblige more attention to security in Canada’s North.

If we decide to participate, we do it because it serves Canadian interests and protects Canadians. We do not do it because we are doing the Americans a favour. On the contrary, the U.S. would be doing us a service, having made the initial, and ongoing, investments.

The U.S. is not asking us to join BMD; it did that in 2005, and we said no.

Asking now to be included would probably result in a “yes,” but it would require the U.S. to make changes to a system in which they have invested billions of dollars. Donald Trump being Donald Trump, there would be a cost to Canada.

Canada has participated in NORAD’s missile warning function for decades. Joining BMD would probably result in NORAD and the U.S. Northern Command taking responsibility for continental BMD defence. Bringing BMD into it would strengthen the binational institution that lies at the heart of the Canada-U.S. defence relationship.

Our European allies and Pacific partners employ BMD. It’s time for Canada to reconsider it. Even if the shield is imperfect, we need this additional insurance policy should errant missiles come our way.

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NAFTA: Fish or Cut Bait

It’s time for Trudeau to fish or cut bait in the NAFTA talks

NAFTA negotiators are meeting again in Washington this week with their sights on the “elephants in the room”: the U.S. demands around dispute settlement, rules of origin, “Buy American” on procurement and a sunset clause.

The Americans, who initiated the renegotiation of the North American free-trade agreement to reduce the U.S. trade deficit, are expected to lay out their positions on the various “elephants.” There are also U.S. demands specific to Canada – supply management of our dairy markets – and specific to Mexico – wages, trucking and agricultural exports.

For Prime Minister Justin Trudeau, who is also meeting with President Donald Trump at the White House and then with President Enrique Pena Nieto in Mexico City, this week will be a test of his personal diplomacy. Can he convince his counterparts that a renewal of the North American idea of three sovereign nations, united in managing their common space to mutual advantage, requires taking a bigger view?

Mr. Trump promised to put “America First.” He is delivering and not just in his tweets.

Trade-remedy action by the U.S. Commerce Department is at a 16-year peak. Canada’s Bombardier joins Canada’s softwood industry as the latest victim of punitive penalties. Commerce Secretary Wilbur Ross claimed “NAFTA rules are killing our jobs.” In an unfortunate turn of phrase, U.S. Agriculture Secretary Sonny Perdue said agricultural trade is “like policy toward North Korea – all options are on the table.”

Rescinding NAFTA would be disruptive and hurt all three economies.

In the absence of a free-trade deal with the United States, Most Favoured Nation tariff rates, as negotiated under the World Trade Organization, would apply. The Peterson Institute for International Economics estimates that tariffs on all products would rise to an average of 3.5 per cent for the United States, 4.2 per cent for Canada and 7.5 per cent for Mexico – a terrible deal for all.

This will also result in trade diversion – the markup on Heinz ketchup, for example, could have Canadians switching to Salisbury or Tesco, now that the Canada-Europe trade deal is in place. Continuing trade diversification – a resurrected Trans-Pacific Partnership, potential deals with India and China – need to be part of Mr. Trudeau’s message to Mr. Trump.

A rescinded NAFTA would have an attitudinal effect on border administration. With the Canada-US FTA (1989), border agents took a “pass, friend, pass” attitude, further facilitating the passage of goods, people and services. After the attacks on Sept. 11, 2001, “security and enforcement” replaced “facilitation.” The border thickened.

If NAFTA is to be renovated and not rescinded, Canada and Mexico must redouble their advocacy efforts in the United States. With a focus on the state and local level, the message is simple: Jobs and investment depend on preferred access to Canada and Mexican markets.

Normally, the U.S. president is our shield against congressional protectionism. This time, the protectionist push is coming from the Trump administration. We need to push back with help from allies in the American Farm Bureau Federation, U.S. Chamber of Commerce and auto manufacturers.

In his meetings on Capitol Hill, Mr. Trudeau will repeat to legislators our message about the jobs and investment in their state depending on Canadian trade and investment. The Canadian Business Council recently complemented this with a map that identified 7,705 Canadian-owned businesses across 434 of the 435 congressional districts.

The Trudeau government sees the NAFTA talks as an opportunity to advance its progressive trade agenda. In putting forward Canada’s NAFTA objectives, Foreign Affairs Minister Chrystia Freeland said that “too many working people feel abandoned by the 21st Century global economy.” Mr. Trump and his supporters understand this message. Trade is blamed, even if most change is created by technological innovation and automation.

Trade works – on this, the economic evidence is clear. But if the gains of trade are seen to advantage only the rich and business, then populism will curb and roll back trade liberalization.

What if we put a tiny levy on all North American commerce and then distributed it for training and income-support to sectors and regions adversely affected by trade? It would lift some of the burden from local and state governments. This should be part of Mr. Trudeau’s discussion with Mr. Trump and Mr. Pena Nieto.

If the leaders buy in, then there is no reason that the NAFTA renegotiations cannot gain new life, meet their deadlines and set the model for future progressive trade agreements.

NAFTA Renegotiations: Fish or Cut Bait

NAFTA_Renegotiations_Montage.JPG

Image credit: Canadian Press

POLICY UPDATE

by Colin Robertson
CGAI Vice President and Fellow
October, 2017

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Table of Contents


NAFTA Renegotiations: Fish or Cut Bait

It’s fish-or-cut-bait time for the NAFTA renegotiations.

Negotiators reassemble in Washington this week (Oct. 11-15) with their sights on the elephants in the room – the U.S. demands around dispute settlement, rules of origin, “Buy American” on procurement and a sunset clause.

The Americans, who initiated these renegotiations to reduce the U.S. trade deficit, are expected to lay out their positions on the various “elephants”. There are also U.S. demands specific to Canada – supply management  – and specific to Mexico – wages, trucking and agriculture exports.

For Prime Minister Justin Trudeau, who this week will see first President Donald Trump in Washington and then President Enrique Peña Nieto in Mexico City, it will be a test of personal diplomacy. Can Trudeau persuade his counterparts to compromise on the “elephants” and keep the negotiations moving forward?

At the midway point in the scheduled seven rounds, the low-hanging fruit – chapters on small and medium-sized enterprises, competition, transparency and anti-corruption – are ready for harvest. They will likely resemble what had been previously negotiated in the stillborn Trans-Pacific Partnership (TPP) agreement. Trump withdrew the U.S. from the TPP shortly after his inauguration.

The auspices going into this round are not good.

Trump promised to put “America First” and he is delivering. From Jan. 20 through Sept. 20, 2017, the Commerce Department has initiated 65 Anti-dumping (AD) and Countervail (CVD) investigations – a 48 per cent increase from the previous year and a 16-year peak in the number of initiated investigations.

The U.S. Commerce Department has sided with Boeing in making protectionist decisions against Bombardier’s sale of its C-series jets. Inspired leaks that the U.S. side will seek to impose 50 per cent Made-in-America content on the North American manufacture of autos  follow on the heels of Commerce Secretary Wilbur Ross’s Washington Post piece: “NAFTA Rules are Killing our Jobs”. In an unfortunate turn of phrase, Agriculture Secretary Sonny Perdue said agricultural trade policy is “like policy toward North Korea – all options are on the table”.  Perdue promised to press Canada’s supply management policy and consider seasonal limits on Mexican produce.

President Trump’s continued  musings –“bring me some tariffs”, “I happen to think that NAFTA will have to be terminated if we’re going to make it good.”and tweets about rescinding NAFTA only aggravate the situation. Mexican Foreign Minister Luis Videgaray has said that Mexico would leave the negotiations if the U.S. gave notice that it was invoking NAFTA article 2205 rescinding the agreement.

After Washington, another round is scheduled weeks later in Mexico City. If there is deadlock on the “elephants”, negotiations could take a long pause, or be suspended. Finishing the negotiations by Christmas is doubtful especially given the kind of detail work, for example, that would have to go into the tracing formulas for rules of origin. Passage through Congress will also require real effort from the administration and its track record so far (repeal of Obamacare, tax reform, infrastructure spending) is not encouraging. The Trump administration continues to be understaffed, politically inexperienced and chaotic.

The biggest unknown is Trump himself.

Trudeau meets Trump this week in the White House and then goes to Mexico City to see Peña Nieto. Trump came close to rescinding NAFTA on day 100 of his administration. He continues to make threats about scrapping NAFTA. Is it another example from Trump’s playbook, The Art of the Deal? Is he serious about renegotiation or is he simply dangling increasingly unacceptable offers that would oblige a suspension or breakdown in negotiations? Mr. Trudeau should politely tell Mr. Trump to fish or cut bait.

Foreign Minister Chrystia Freeland has suggested that Mr. Trudeau will “explain really clearly to the President … that Canada is not America’s problem.” Some have suggested that this is a gentle poke at Mexico. This would be a strategic mistake and it would play directly into the divide-and-conquer tactics that Mr. Trump describes in the Art of the Deal. Mexico is a good neighbour, fellow middle power and our third largest trading partner. We need to build on this relationship.

For now, Canada and Mexico must redouble their advocacy efforts in the U.S., especially at the state and local level, to put pressure on the Trump administration if NAFTA is to be revised and not rescinded.

Elephants in the Room I: Rules of Origin

The U.S. wants to revise the current rules of origin to ensure a higher percentage of this U.S.-only content.  Secretary Ross claimed in a recent Washington Post column that, “these NAFTA rules are killing our jobs”. The numbers he used are suspect, argues former Mexican trade negotiator Luis de la Calle. The Peterson Institute’s Caroline Freund writes that U.S. content requirement in NAFTA could hurt U.S. manufacturing.

Rules of origin were first introduced in the Autopact (1965) to ensure most of the production took place in Canada and the U.S. and then the Canada-U.S. Free Trade Agreement (CUSFTA) and NAFTA extended this principle. To qualify as made in North America, autos must have 62.5 per cent content, i.e., parts, made in Mexico, the U.S. or Canada. Cars now contain an average of 30,000 parts (when we did NAFTA it was closer to 20,000 parts). Before a car is assembled, it crosses the Canada-U.S. border an average of seven times.

During the TPP negotiations, U.S. Trade Representative Mike Froman was prepared to lower the current threshold to less than 50 per cent in order to do a U.S. deal with Japan. Canada and Mexico protested but the decider was the U.S. congressional auto caucus, which forced Froman to back down.

Recent leaks in Inside US Trade suggest that USTR Robert Lighthizer wants a 50 per cent U.S. domestic content requirement. The suggested U.S. proposal would increase the NAFTA regional value content requirement from 62.5 per cent to 85 per cent and include an expanded tracing list that includes all components of a car. Supply chains are carefully designed to ensure quality, timely delivery and best price, so disrupting current processes is not something the manufacturers, parts-makers or tertiary suppliers want to see. UNIFOR and the UAW want more made in Canada and the U.S., arguing that Mexican wages are kept artificially low.

Elephants in the Room 2: Dispute Settlement

Dispute settlement covers two dimensions: investor state and trade remedies. The U.S. wants to remove both chapters from the agreement and have disputes settled solely through the U.S. trade remedy system. This is a red line for Canada and Mexico. The Trump administration sees dispute settlement as an infringement on U.S. sovereignty; it is taking a hard line not just in NAFTA renegotiations, but also at the World Trade Organization (WTO), blocking appointments of new appellate judges to the Dispute Settlement Body (DSB).

Investor-state dispute settlement (ISDS) currently contained in NAFTA’s Chapter XI, was included at the Americans’ behest to prevent appropriation of investments in Mexico. However, it has been applied mostly against Canada, usually over initiatives taken by a provincial government for which the federal government must pay the price.

As trade scholar Larry Herman observes, “the successful Chapter 11 claims against Canada would be in the order of $320 million versus $5.0 billion claimed or approximately 6.4% of total damages claimed over 23 years. While this is still substantial, it does put these amounts in perspective.” TransCanada had filed a $15 billion suit under Chapter XI over former president Barack Obama’s rejection of the Keystone pipeline permit but it was suspended after Trump issued the permit.

We are not sure yet what the Americans want to do on ISDS. Given our experience, we are promoting institutionalization of permanent courts to provide more certainty in case law and more transparency in deliberation. We took this approach in the Canada-European Union Comprehensive Economic and Trade Agreement (CETA) and TPP.

Trade Remedy, or Chapter XIX, deals with disputes related to countervail (products with prices lower than the cost of production) or anti-dump (products produced with subsidies). Examples include the softwood lumber dispute and now Boeing’s complaint about Bombardier.

U.S. trade remedy afflicted Canadian products – raspberries, lumber, fish – during the lead-up to the original CUSFTA negotiations in 1985. Dispute settlement was essential to Canada in its negotiation of CUSFTA and NAFTA. Canada would have walked if we had not secured tribunals independent of the U.S. trade remedy system. The Mexican congress passed a non-binding resolution shortly before the negotiations began, insisting that we maintain Chapter XIX.

Herman notes that, softwood lumber excepted, Chapter XIX has not been used as much in recent years – some argue its very presence keeps the system honest.

Could improvements be made to Chapter XIX? Yes, but what form they will take must be negotiated. As with tracing rules of origin, the devil is always in the detail.

Elephants in the Room 3: Five-Year Sunset Clause and Government Procurement

The proposed five-year sunset clause is a non-starter for Canada and Mexico, and business in all three countries opposes it because it removes certainty around investments.  As Canadian Ambassador David MacNaughton wryly observed: “If every marriage had a five-year sunset clause on it, I think our divorce rate would be a heck of a lot higher than it is…One of reasons you do (a trade agreement) is to create an environment within which business can make investments. (In) many of those investments people will look to 20 years’, 25 years’ payback. If you have to do it every five years, the pricing of political risk is very high.”

U.S. negotiators are proposing a “dollar for dollar” opening of North American procurement markets that would greatly reduce Canadian and Mexican access to the U.S. market. Canada and Mexico want to curb, if not exclude, ‘Buy American’ provisions at the federal and state level but the U.S. wants to roll back its NAFTA commitments.

Ongoing Disputes: Softwood Lumber and Bombardier-Boeing

Softwood lumber negotiations continue outside of NAFTA. The relevant provinces – British Columbia, Alberta, Ontario, Quebec and New Brunswick – have all appointed special envoys.  It is hard to see an early resolution. If history is any guide, resolution won’t happen until the pot is sweetened with Canadian cash. Even then, we will likely wind up with another managed trade deal of five years’ duration. Not a great solution.

The Boeing-Bombardier dispute is potentially more dangerous and could affect the negotiations in the same fashion that shakes and shingles nearly scuttled the CUSFTA negotiations in 1985-1986. The Boeing suit against Bombardier over subsidies may have a basis but given the subsidies (state, local and federal) that Boeing enjoys, is there injury?

The Commerce Department announcement on the last day of the Ottawa round of negotiations made a statement, but embarrassed the Canadian hosts. As Trudeau repeated, Canada “will not do business with a company that is busy trying to sue us and put aerospace workers out of business”.

The Boeing suit strikes at Quebec pride in its aerospace champion. The Couillard government has framed it as an affront to Quebec. Bombardier workers live in Trudeau’s riding and the Boeing officials, likely encouraged by senior Trump officials, would appear to have behaved with a surprising lack of sensitivity. BHP made the same mistake during its Potash Corp. bid and it was a major contributing factor to the deal’s collapse.

The Negotiators and the Negotiations

There is good personal chemistry at the chief negotiator level. U.S. negotiator John Melle is a long-time USTR official responsible for North America. Mexican chief negotiator Kenneth Smith is another long-time negotiator and was a member of the Mexican NAFTA team in 1993 before heading Mexico’s NAFTA office in Washington.  Canada’s chief negotiator, Steve Verheul, was chief negotiator for CETA and prior to that chief negotiator for Agriculture Canada.

Canadian Foreign Affairs Minister Chrystia Freeland and Mexican Economic Secretary Ildefonso Guajardo work together well as trade ministers. They like each other and they are in regular contact. USTR Lighthizer is a seasoned trade lawyer who served in the Reagan administration. To get a sense of the trio’s dynamic, watch the body language when the three minsters are together.

Negotiations are taking place at 28 tables. Chapters covering telecoms, small and medium-sized enterprises, competition and food safety are essentially done and they are close to closing those on digital trade and anti-corruption. To get a sense of what these chapters might look like as well as the format of the new North American accord, look to the 30 chapters in the Trans-Pacific Partnership Agreement that was signed a year ago February in New Zealand but which Trump rejected. Ironically, the U.S. negotiating team is using the TPP language for much of their suggested draft language for the NAFTA 2.0 text.

Canada and Mexico want to expand the list of business travellers eligible for the NAFTA fast-pass into the digital age. There may or may not be an energy chapter (the U.S. leans against it). If there is, it would include Mexico. Regardless, there is continuing trilateral co-operation on energy with regular ministerial meetings and efforts to consolidate and ease the flow of oil, gas and electricity through the 150 Canada-U.S. crossings and the 81 refineries that import Canadian oil or gas.

No surprise – the U.S. is pushing Canada on supply management around dairy. The likely give here (in return for something from the U.S.) would be more quota for U.S. producers similar to that given to the Europeans in CETA. We should reform our dairy industry, given the growing demand for protein in Asia. We should look to the examples of New Zealand and Australia, who shed supply management to become world-beaters in dairy products.

The U.S. wants Canada to raise the customs threshold (de minimus) for packaged goods (currently $20 and for Mexico $50 USD) to something approaching their $800, but retailers fear that they will be put out of business.

The Trudeau Visit

Prime Minister Trudeau will travel to Washington (Oct. 10-11) for meetings with President Trump and members of Congress, then to Mexico City (Oct. 12-13) to see President Peña Nieto.

The Canada-U.S. and NAFTA file have a permanent place on Trudeau’s desk. His January cabinet shuffle named Chrystia Freeland as Foreign Affairs minister, leaving her with the North American trade file. Get this wrong and it will certainly not help the Trudeau government’s re-election prospects in 2019. A special unit within the PMO focuses on Canada-U.S. relations and there is a cabinet committee headed by Transport Minister Marc Garneau. The Clerk has also made the Canada-U.S. relationship priority for deputy ministers.

Since January there has been a very public advocacy and outreach into the U.S. including Mr. Trudeau speaking on energy in Houston and on trade to the governors in Rhode Island. Ministers and MPs, premiers and legislators from all provinces have also been working their counterparts both in D.C. and throughout the states.

With all the balls in play, Mr. Trudeau must demonstrate the skills of a conjurer during this week’s visits. He must persuade Mr. Trump that a renegotiated NAFTA serves U.S. interests while at the same time holding firm on those interests we share with Mexico – rules of origin and dispute settlement – and those specific to Canada – supply management, softwood lumber and Bombardier. Normally, the U.S. president is our shield against congressional protectionism. This time, the push is coming from the Trump administration.

In his meetings with Congress, Mr. Trudeau can point out to each congressman the trade of their state and district with Canada and the jobs that depend on Canadian trade and investment. The Canadian embassy has parsed this information in its state fact sheets and it is now complemented with an interactive map by the Canadian Business Council that identifies 7,705 Canadian-owned businesses across 434 congressional districts.  The Canadian message is to remind Americans that Canada is their No. 1 export market and that we are a reliable neighbour and ally, pointing to, for example, Canada’s commitment to increased defence spending in the recent Defence Policy Review.

Work with our U.S. Allies

In the coming weeks, Canada and Mexico will need to redouble their outreach to Capitol Hill and into each state, pointing out the benefits of trade and underlining the cost should NAFTA be rescinded. We have allies – notably the Farm Bureau, U.S. Chamber of Commerce and auto manufacturers and their suppliers for whom supply chain disruption will be costly.

Warning of an “existential threat” to North American economic security, U.S. Chamber CEO Tom Donohue recently described the Administration’s proposals on sunset clause, dispute settlement and rule of origin as “poison pills”. Donohue observes “U.S. exports to Canada and Mexico generate nearly $37,000 in annual export revenue for every American factory worker. And in the first eight months of 2017, exports from the United States to our NAFTA partners were worth four times as much as those to China.” Rescind NAFTA warned Donohue and “The United States could then reasonably expect trade retaliation … higher tariffs … broken supply chains … and potentially less cooperation on other priorities like anti-terrorism and anti-narcotics efforts. And who would be hurt the most as a result? The very Americans that this administration seeks to put first.”

What Canada Wants

In a speech at the University of Ottawa and remarks before the Standing Committee on International Trade (Aug. 14) Foreign Minister Freeland compared the negotiations to “renovating a house” and laid out her main objectives:

  • Modernize the 23-year-old NAFTA to recognize the technological and digital revolution;
  • Make it a progressive “fair trade” agreement, using CETA as a model, through inclusion of chapters on the environment, labour, gender equality and Indigenous peoples;
  • Reforming dispute settlement to ensure governments have the right to legislate in the public interest with fair dispute settlement (Chapter XIX);
  • Easing business travel (Chapter XVI), cutting red tape and focusing more on harmonized regulatory co-operation;
  • Preserving supply management and cultural exception.

The progressive trade agenda is still taking definition. Environment and labour, side letters in the original NAFTA, are key elements in the progressive trade agenda along with provisions relating to the rights of Indigenous peoples and gender equality.

For a sense of what it might look like, the Canada-Chile FTA has been amended to add new chapters on sanitary and phytosanitary measures, technical barriers to trade, and trade and gender, making technical amendments to the existing government procurement chapter, and adding new, progressive elements to the investment chapter.  These amendments will enter into force once both Canada and Chile have completed their respective domestic implementation processes.

What If the Negotiations Break Down?

NAFTA would remain in effect between Canada and Mexico although if the TPP-11 negotiations are successful, the new TPP would effectively replace the Canada-Mexico NAFTA. If the U.S. rescinded NAFTA, Canada and the U.S. would revert to CUSFTA. This may prove a weak shield because CUSFTA contains Chapter XIX.

Rescinding NAFTA would be disruptive and hurt all three economies. At that point, most-favoured-nation tariff rates, as negotiated under the WTO, would apply, After withdrawing from the deal, the Peterson Institute’s Chad Bown says that tariffs on all products would rise to an average of 3.5 per cent for the U.S., 4.2 per cent for Canada and 7.5 per cent for Mexico – a terrible deal for all.

The consumer would be the biggest loser. As we have seen with softwood lumber tariffs, it would divert trade. Instead of buying Heinz ketchup, which would be subject to a seven per cent tariff, we may switch to Salisbury or Tesco.

A rescinded NAFTA would likely have an attitudinal effect especially at the border on trade.

After CUSTFA was implemented (1989), border agents took a “pass, friend, pass” attitude. This further facilitated trade in goods, people and services. After 9/11 this facilitation attitude changed to that of security and enforcement. The border thickened. Mitigated by the Smart Border accord (2001), and the current Beyond-the-Border (BTB) and Regulatory Co-operation Council (RCC) initiatives, the ongoing NAFTA consultations have underlined that border frustrations remain the number one complaint of business.

For Canada, plan B is continuing to ease passage of goods, people and services at the border through the RTB and RCC discussions. These take place on a separate track to the NAFTA negotiations. They are making progress to reduce redundancies and duplication and on establishing a paperless, cashless and single-portal access for business.

We are likely months, rather than years, from submitting customs papers in electronic form through a single portal to Canadian and American authorities that will address all the needs of the respective departments. Originally promised under Smart Border – the accord that John Manley and Tom Ridge negotiated after 9/11, it will make the passage of goods much easier. It would avoid the problem of having to show up at the border with pages of forms and cash.

We are also making big border infrastructure investments, most notably the construction of the Gordie Howe Bridge between Windsor and Detroit, that is scheduled to open in 2022. There are also plans to improve the existing Ambassador Bridge.

There are also other instruments facilitating trade that would remain in place, most notably the Defence Production Sharing Agreement (DPSA) between Canada and the U.S. Dating back to the Second World War, DPSA is the overarching agreement from which much of the favourable defence trade treatment of Canadian companies interested in doing business with the U.S. Department of Defense (DOD) has arisen.  This includes specific language in the U.S. Defense Federal Acquisition Regulation Supplement (DFARS) regarding the special DOD access for Canadian companies.

Through DPSA, the Defense Development Sharing Agreement (DDSA), and NAFTA, the U.S. and Canada each enjoy unique defence trade status with the other.  With limited exception, DPSA allows Canadian suppliers to compete for U.S. government defence contracts under the same terms applied to U.S. suppliers.

Additionally, there are the Canadian exemptions to the U.S. International Traffic in Arms Regulations (ITAR). While recent tightening of the exemptions is aggravating, it works for Canadian companies.

Canada needs to take full advantage of our current bilateral and regional agreements, most notably the recently implemented (Sept. 21) CETA. We need to put effort into creating a TPP of 11. The government has announced it is working on an FTA with ASEAN. Then there are the Canada-China discussions and ongoing Canada-India negotiations. Our trade commissioner service, working with the provinces and Canadian business, needs reinvigorating to expedite commerce.

Pre-Clearance Pending…

The U.S. passed pre-clearance legislation last December and Canadian legislation is in the Senate. When it is done, then we can proceed with pre-clearance at Billy Bishop Airport in Toronto and in Quebec City, for cross-border train travel from Montreal and Vancouver and some marine ports, and pilots for rail cargo and intermodal traffic. About 12 million passengers now pass through airport pre-clearances on Canadian soil, and there are only about five to 15 strip searches per airport per year. What will happen when we pass our marijuana legislation is anyone’s guess.

The Trade Deficit Question

In July, USTR Lighthizer provided Congress with a list of U.S. objectives with the underlying goal of reducing U.S. trade deficits. NAFTA negotiations began in mid-August, after the USTR secured trade promotion authority from Congress. Foreign Minister Freeland has argued that Canada-U.S. trade is virtually in balance. Even Secretary Ross puts Canada in the “blameless deficit” category because the U.S. is “not self-sufficient in energy.”

But the administration seems consumed with goods, especially manufactured goods being made in America. A series of executive orders are aimed at “Buy American and Hire American” with a focus on steel and aluminum. That penny is still to drop. It could mean tariffs that will affect supply chains.

China, as we heard during the campaign, is the main target for trade action but Trump’s enthusiasm is tempered by the realities of geo-politics, namely North Korea, and the recognition that China must play a key role in containing or curbing the rogue state.

Canadian Attitudes to Trade

When the Mulroney government negotiated CUSFTA in 1988, the country was divided: about 25 percent in favour, 25 per cent dead against and about half in the middle. It was the main issue in the 1988 election. While Brian Mulroney and his Progressive Conservatives won with a majority (with 43 per cent of the vote), they only carried three provinces: Alberta, Quebec and Manitoba.

This time around the Liberals and Conservatives are united behind NAFTA. Surveys say Canadians like NAFTA. Canadians trust Prime Minister Trudeau to negotiate a good deal and they are also prepared to let him walk if it is not. And surveys also say that Canadians don’t think much of President Trump. He is the most unpopular U.S. president in our life-time and this sentiment is shared in much of the globe.

NAFTA Worked But…

By all economic analysis – Canadian, American, Mexican, OECD, World Bank and IMF – NAFTA has worked for all three nations with trade tripling since 1994. But there continues to be a lot of misinformation and myth about its shortcomings as we witnessed during the 2016 U.S. presidential election.

NAFTA broke new ground in its day but it was drafted before the digital age. The Trudeau government sees NAFTA as an opportunity to advance its progressive trade agenda because, as Freeland told the House International Trade Committee when she put forward Canada’s NAFTA objectives, “too many working people feel abandoned by the 21st century global economy.” But if the gains of trade are seen to advantage only the rich and business, then populism will curb and roll back trade liberalization.

Even if most change is created by technological innovation and automation, trade is held accountable and this has led to the demonization of NAFTA since its implementation (1994) especially by U.S. Democratic politicians (including Hillary Clinton and Barack Obama) and now Trump. While congressional Democrats, with few exceptions, have traditionally opposed freer trade, Republicans until recently supported it.

Today, public opinion polls show Trump supporters to be the most vociferous anti-free traders. Ironically, the U.S. public supports freer trade.

Time is an Issue.

The Mexicans have a presidential election in July and the ruling PRI party and centre-right PAN party don’t want NAFTA to intrude into the presidential campaign lest it give an advantage to the leftist candidate, Andres Manuel Lopez Obrador (AMLO), The Americans don’t want it to intrude into November’s mid-term elections. The timetable set by the Trade Promotion Act under which the USTR is proceeding has a fixed congressional schedule for approval that potentially takes up to a year before the congressional up or down votes.

Further Reading

The NAFTA negotiations receive daily coverage by Canadian media. The US publications Politico and Inside US Trade have daily insights into the negotiations. CSIS Andrea Durkin edits the excellent Trade Vistas – its graphics are superb. The Wilson Center’s Canada Institute is closely following the negotiations and Director Laura Dawson publishes a regular insightful newsletter. The Canadian American Business Council CEO Scotty Greenwood’s weekly looks at the broader Canada-US relationship. NASCO’s Rachel Connell edits the useful North American Now. My go-to for NAFTA trade policy commentary is the Peterson Institute for International Economics. I wrote a CGAI NAFTA Primer that includes a list for further reading.

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About the Author

A former Canadian diplomat and a member of the teams that negotiated the Canada-U.S. FTA and NAFTA, Colin Robertson is Vice-President and Fellow at the Canadian Global Affairs Institute and Executive Fellow at the University of Calgary’s School of Public Policy. He is Senior Advisor to Dentons LLP. He is a member of the NAFTA Advisory Council to the Deputy Minister of International Trade. A Distinguished Senior Fellow at the Norman Paterson School of International Affairs at Carleton University, he is a member of the advisory councils of the Conference of Defence Associations Institute and the North American Research Partnership and participant in the North American Forum. He is a past president of the National Capital Branch of the Canadian International Council. He is an honorary Captain (Royal Canadian Navy) assigned to the Strategic Communications Directorate. He writes a regular column on international affairs for the Globe and Mail and he is a regular contributor to other media.

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Canada has Edge in NAFTA Negotiations

Experience, outreach give Canada an edge in achieving NAFTA renovation goals

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Is Canada really back?

How Canada must navigate the new normal of global relationships

What does “Canada is back” really mean? Some answers will come this week in Foreign Affairs Minister Chrystia Freeland’s foreign policy speech and in the release, overdue, of the Defence Policy Review.

Success will hinge on answering three questions:

• What are the priorities?

• How much new money will be invested?

• What are the means to achieve them?

From day one, the Trudeau government vigorously re-embraced multilateralism, declaring that Canada would seek a seat on the UN Security Council.

But a council seat is a means, not an end. Will Ms. Freeland spell out our electoral platform and tell us what we want to achieve? And what is happening with peace operations? Are we going to Mali?

The election of U.S. President Donald Trump has shaken the rules-based liberal international system in the same fashion that the tumbling of the Berlin Wall presaged the end of the Soviet Union.

It is too soon to tell whether President Trump’s changes will endure but, for now, as guardian of the order that it created the United States has gone AWOL.

Middle powers such as Canada need to step up to save our global operating system.

In the wake of Mr. Trump’s withdrawal from the Paris Accord, we should focus on the practical side of climate mitigation through, for example, the open sharing of technological innovation achieved by Canada’s oil sands companies, coupled with more science diplomacy. Evidence-based research still matters.

The Trudeau Government has rightly made the U.S. relationship its top priority, shifting cabinet officers, connecting with the new administration, reaching out to Congress and, in its outreach into Trump territory, bringing in premiers and business to make the case for Canada. Our livelihood – and the government’s own re-election – depends on managing this relationship.

In response to Mr. Trump’s “Buy American, Hire American” policies, Justin Trudeau is going full bore into trade diversification. His father did the same after Richard Nixon imposed a U.S. import surcharge in 1971. Pierre Trudeau’s third-option strategy was aimed, with limited success, at closer links with Europe and Japan.

Ms. Freeland brought home the Canada-Europe trade agreement. International Trade Minister François-Philippe Champagne is helping to resuscitate the Trans-Pacific Partnership and is leading talks with China. In renegotiating NAFTA, we are working with Mexico, our third-largest trading partner. Continental ties are also deepening through the Pacific Alliance.

We are good at trade policy. Now we need to invest more in trade development. We also need the infrastructure, especially pipelines, that get our resources to market.

Ms. Freeland is sure to mention the progressive trade agenda in her policy speech. It will take real form, with the addition of a chapter on gender to the Canada-Chile free-trade agreement, as part of the announcements during this week’s visit of Chilean President Michelle Bachelet.

It is a smart initiative. Women are steadily increasing their place in global business. Women are very good entrepreneurs when given the opportunity, as micro-financing has demonstrated in Asia and Africa.

A progressive trade agenda must also address trade adjustment.

Canada’s social safety net – medicare, pensions and unemployment insurance – helps shield us from the populism that propelled Mr. Trump to power but, as we witness in Europe, it does not guarantee immunity.

Addressing inequality would be a useful theme for Canada to champion as we host next year’s G7 summit and, in the meantime, we should make it a focus for collective attention in multilateral forums such as the Organization for Economic Co-operation and Development and the International Labour Organization.

The Trudeau government has sustained our commitment to collective security, with a brigade headed to Latvia and a sustained naval presence in the Arabian Gulf. But there is a readiness gap as we await new warships and fighter jets. When it comes to defence, money matters.

Successive Canadian governments have skimped and we stand accused, with some justice, of “freeloading”. We should set as goals of good international citizenship a contribution of 2 per cent of GDP to defence spending – the NATO norm – and 0.7 per cent of GDP for development – the Pearson Commission standard. If the United Kingdom can manage it, so can Canada

Canadian foreign policy, like all middle powers, is inevitably reactive. Choices must be weighed against interests, values and resources. With effort and money, we can make a difference in the niches. This week will give us a better sense of the Trudeau niches.

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Bulk Drug Sales to the USA

Canada must resist the lure of bulk U.S. drug purchases

 

‘Beware of Greeks bearing gifts” is advice that Canadians should heed on U.S. legislation permitting the bulk purchase of pharmaceutical drugs from Canada for the U.S. market.

At a time when we are about to renegotiate our preferred access for people, goods and services, it makes no sense for Canada to involve itself in this very American controversy.

Vermont Senator Bernie Sanders is the driving force behind a bill in the U.S. Senate aimed to give Americans “Canadian” prices for their prescription drugs. A similar bill was defeated in January (52-46) but not on the usual Democrat versus Republican partisan lines. A dozen Republicans, including senators Ted Cruz, Chuck Grassley and John McCain, voted for the measure.

Americans spend more per capita on health care than anyone else in the world – $9,451 (U.S.), according to the OECD (the comparable figure for Canada is $4,727). Donald Trump and the Republicans were elected, in part, on their promise to abolish Obamacare, and their recent spectacular failure in the House of Representatives only underlines the challenges around U.S. health care.

Groups of American seniors crossing the border to buy drugs or having prescriptions filled in Canada and then sent to them in the United States – this also accommodates Canadian snowbirds – has long been a feature of cross-border “trade.” This will continue. But Canada is not the solution to the United States’ drug-pricing controversy.

Our pharmaceutical industry – innovators and the generics – is stretched providing for the Canadian market. Last year, Health Canada introduced regulations requiring drug manufacturers to report on anticipated and actual drug shortages. There is even a website – Drug Shortages Canada.

Involving ourselves in this American problem would not serve Canadian interests. Given that many of the prescription drugs that Canadians consume are manufactured elsewhere, Canada would simply be a trans-shipment point.

The failure of Canadian authorities to inspect for counterfeits in goods trans-shipped through Canadian ports is a continuing irritant to the United States. With the opioid epidemic in the United States (a problem also in Canada), there is also concern that Canada would become a back door for international drug smugglers. The bulk transfer of pharmaceutical drugs makes no sense. As with the prohibition on the bulk transfer of our water, Parliament and provincial legislatures should act now to prevent wholesalers from exporting drugs in bulk from Canada.

With aging populations in both Canada and the United States, there is only going to be more demand for drugs and biologics that improve and sustain life. This is where Canada and the United States should be co-operating.

It is estimated that, with research, clinical trials and licensing by governments, it takes eight to 11 years and costs almost $3-billion to bring a drug to market. The creators, mostly private companies, deserve a fair return on their investment but pricing must be fair as consumers and their legislators will intervene, as illustrated by the EpiPen controversy.

Innovation is a Trudeau government priority. Innovative Medicines Canada says that there are more than 500 new products in development supported by more than $1-billion in annual research and development. Genome Canada and its provincial partners are making a difference employing using new approaches, such as Open Science, involving the sharing of data and samples.

If health care in the United States is the most expensive in the world, Canada’s is also costly – about 11 per cent of our GDP. Every provincial government is engaged in efforts to bring down health care, which absorbs about 40 per cent of their budgets. More attention needs to be devoted to outcomes. This will require hospitals and health-care professionals to share data and then crunch them so we can see what is working and what can be improved. This is another area where co-operation with the United States makes sense.

In the meantime, let’s not risk our reputation and our own supply to address a “Made in America” problem that must be fixed in America. Mr. Sanders’s “Trojan horse” should be emphatically rejected and the sooner the better. Canada has much bigger stakes in play with our American neighbours.

A former diplomat, Colin Robertson is vice-president and fellow at the Canadian Global Affairs Institute.

 

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Getting Ready for NAFTA Negotiations

For Canada, all hands on deck during NAFTA renegotiations

The rules of the road for trade with our biggest trading partner are about to be renegotiated. We need an all-of-Canada effort to get ready.

The stakes are critical: Three-quarters of our exports head south to the United States. Trade with the United States represents almost a third of our GDP and it sustains close to one in five Canadian jobs.

In the coming days, U.S. Commerce Secretary Wilbur Ross will formally advise Congress of NAFTA renegotiations, setting in play a 90-day consideration by House and Senate committees. By the latter part of the year, Mr. Ross expects that we will be into “real” negotiations that he predicts will take at least a year.

Following his White House meetings with Prime Minister Justin Trudeau last month, President Donald Trump described the Canada-U.S. relationship as just needing some “tweaking.” But, as Mr. Ross told Bloomberg this week, “there is a lot of meat to be dealt with,” including addressing the digital economy and revising the rules of origin.

After meeting recently with her Mexican counterparts in Toronto , Foreign Minister Chrystia Freeland said that Canada’s preference is for trilateral negotiations. Mr. Trump prefers bilateral deals but Secretary Ross says he is “open-minded” about the form. Regardless, Canada and Mexico need to stay close to avoid the divide-and-conquer techniques that are integral to Mr. Trump’s “art of the deal.”

Getting Canada’s act together means real collaboration between the federal and provincial governments and close, continuing consultations with business, labour and civic society. We need consensus on two questions:

  • What do we want from the negotiations?
  • How do we get there?

The more creative we can be, the better. The expertise of sectoral advisory groups proved vital to the successful negotiation of the Canada-U.S. free-trade agreement (1988) and NAFTA (1993-4). They should be resurrected and made permanent. We need to co-opt the best brains in our research community to rapidly crunch data and provide timely analysis for our negotiators.

The Canadian strategy going into the talks must be bold. A new agreement should be broad and comprehensive, providing for the free flow of people, goods and services with enforceable standards for labour and the environment. Let’s take the best from the stillborn (at least for now) Trans-Pacific Partnership. Prime Minister Justin Trudeau spoke to our mutually beneficial energy relationship in putting forward a Canadian policy that is both pragmatic and progressive.

Most of the American “asks” are readily identifiable. As Mr. Ross told Congress during his confirmation hearings, the United States wants to reduce its trade deficits and to restore manufacturing through increasing the “Made in America” content for rules of origin.

The United States Trade Representative annual National Trade Estimates report lists United States’ complaints with Canada. These include extending the intellectual property protection for pharmaceuticals; ending supply management for dairy and poultry; and inspecting for counterfeits, especially for Chinese goods shipped to U.S. destinations through Canadian ports like Vancouver or Prince Rupert.

The easiest solution on rules of origin would be to move to a customs union, but the Americans are unlikely to buy in unless it is a strictly Canada-U..S agreement. Otherwise we need to redefine rules of origin as “Made in North America.” American manufacturers should be our allies, especially those in the automotive industry, where supply-chain integration dates from the 1965 Canada-U.S. Auto Pact.

We should agree to counterfeit inspection in return for extended pre-clearance of goods and easier business travel access. Reforming supply management is long overdue, but let’s get something in return, such as access to U.S. shipbuilding contracts.

Where they were once divided, today Canada’s premiers are of like mind on the value of trade, leading missions across our oceans. Now they need to focus on our biggest customer, especially through cultivating their governor counterparts in regional meetings and through visits to their states. Premier Rachel Notley sets the bar through consistent visits to the US capitol and other US cities.

Access to procurement is vital, especially at the state and provincial government level and, for the premiers, this should be job one. Working with governors, they did a procurement reciprocity deal around the Obama infrastructure investments in 2010. Now we need to make it permanent.

The Americans like us, indeed, more than we like them. The Trudeau government has created good working relationships within the Trump administration. But complacency is a mistake. Mr. Trump’s priority is “making America great again.” The business of America is business. Canada needs to be ready.

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Trudeau Trump meeting

Trudeau plans to connect with Trump on jobs but steer clear of immigration ban

Prime Minister Justin Trudeau intends to forge a personal connection with Donald Trump by playing to the U.S. President’s central campaign themes of job creation and a secure America when the two leaders sit down at the White House on Monday.

But a senior official said Mr. Trudeau will not use the Oval Office meeting to criticize the President’s executive order temporarily banning Syrian refugees and immigrants from seven Muslim-majority countries – now the subject of a legal battle between the White House and U.S. courts.

“No. I don’t expect Donald Trump to come to Canada and criticize our refugee and immigration policies. [Mr. Trudeau] is not going to do that,” the official told The Globe and Mail.

Explainer: As Trudeau and Trump prepare to meet, here’s a guide to where Canada-U.S. relations stand so far

Adam Radwanski: Can Trudeau’s optimism survive Trump’s unpleasant surprises on Monday?

Related: Trudeau visits Trump: A guide to their first meeting in Washington today

Mr. Trudeau will be the third leader to hold bilateral talks at the White House since Mr. Trump became President on Jan. 20, after the prime ministers of Britain and Japan.

“At the White House, they want this to be a success,” said another Liberal official involved in Canada-U.S. relations. After the President’s rocky start with the Australians and his tensions with the Mexicans, the official said that the Americans “don’t want to miss their chance” to get off on the right foot with Mr. Trudeau.

For the Prime Minister, the goal is to assure Mr. Trump that the United State’s closest ally and biggest trading partner is in sync with the President’s priorities, which are jobs for American workers and secure borders.

“We’re going to talk about all sorts of things we align on, like jobs and economic growth, opportunities for the middle class – the fact that millions of good jobs on both sides of our border depend on the smooth flow of goods and services across that border,” Mr. Trudeau said Friday at a town hall in Yellowknife. “But I am sure issues of security will also come up and I look forward to having very productive and constructive discussions.”

The Prime Minister, a strong advocate for free trade, the United Nations and progressive policies on immigration and refugees, said it’s likely “we are going to talk about things where we disagree on [but], we will do it in a respectful way.”

But Mr. Trudeau intends to speak positively about the President’s plan to renegotiate the North American free-trade agreement, laying out the case that this could benefit workers on both sides of the border, while stressing the deeply integrated nature of both economies.

“They are very much into job creation,” the senior official said. “They want to talk about how we are going to create jobs in the U.S., but the reality is the way to help create jobs in the U.S. is to have us work together rather than working at cross purposes.”

David Wilkins, a former Republican ambassador to Canada, said he is confident Mr. Trudeau will be able to charm the President, whose business instincts will recognize the value of the two-way trading relationship.

The added advantage is that Canada ran a modest trade surplus of $11-billion (U.S.) for all of 2016 compared with the U.S. trade deficit of $58-billion with Mexico, he said. “The U.S.-Canada relationship is so important to both of our countries in creating jobs and this President is all about creating jobs,” Mr. Wilkins said. “So how do we modernize NAFTA and make it better? How do we improve it so it creates more jobs on both sides of the border?”

The senior official said Mr. Trudeau is confident he can bond with Mr. Trump despite their ideological differences and avoid the bad vibes that occurred between the President and leaders of Mexico and Australia.

Mexican President Enrique Pena Nieto abruptly scrapped a White House visit after Mr. Trump signed an executive order to start building a border wall, while Australian Prime Minister Malcolm Turnbull got into a heated exchange during a phone call with Mr. Trump about a deal Australia struck last year with the United States over the resettlement of refugees.

“When [Mr. Trudeau] had his first call with Trump right after the election, he said, ‘first of all, congratulations,’ and the other thing is ‘you are going to face a lot of problems around the world, Canada is not going to be one of them,’” the official said. “It is incumbent on the people who are the leaders of our two countries to find a way to get along. It is too important a relationship.”

A lot of preparatory work has gone into this visit from a Liberal government that expected Hillary Clinton to win the presidency, forcing Mr. Trudeau to recalibrate his strategy to deal with a President known for his bluster and America-First policies.

“No one expects the kind of bromance that characterized the relationship with Barack Obama. Having a good, working relationship with Mr. Trump will be sufficient,” said Colin Robertson of the Global Affairs Institute.

Mr. Trudeau shuffled his cabinet and recruited former Progressive Conservative prime minister Brian Mulroney to open doors to Mr. Trump and other senior members of his cabinet and administration.

Mr. Trudeau’s principal secretary, Gerald Butts, chief of staff Katie Telford and Ambassador David MacNaughton have already struck up positive relations with Mr. Trump’s chief strategist Stephen Bannon, chief of staff Reince Preibus and the President’s son-in-law, Jared Kushner.

A parade of cabinet ministers – Foreign Affairs Minister Chrystia Freeland, Defence Minister Harjit Sajjan and Finance Minister Bill Morneau – travelled to Washington this week to exchange views with their U.S. counterparts and set the stage for the Prime Minister’s visit.

The three ministers discussed everything from NAFTA to talk of a possible U.S. border tax to Canada’s role in the fight against the Islamic State and how to beef up NATO and NORAD.

“I think both the President and the Prime Minister are going into this meeting well-briefed on some of our key positions and one would hope that it is going to be a very friendly, cordial visit,” Conservative foreign affairs critic Peter Kent said. In advance of the trip, Mr. Trudeau has held talks with provincial premiers to seek their advice on the discussions with Mr. Trump and other U.S. officials. There is a great deal of concern about a border adjustment tax promoted by Republican Speaker Paul Ryan.

“Our strongest case, at a high level, is that the benefits that we experience here in Canada are shared across the border, and trying to deconstruct them at this point, actually jeopardizes economic prosperity and jobs for people on both sides of the border,” Alberta Premier Rachel Notley told reporters Friday. “There’s a pretty strong consensus among premiers and the Prime Minister that probably the best way to do that is to get in front of as many people as we can to describe how much the relationship with Canadian business actually benefits American business.”

Ms. Notley is planning to visit Washington at the end of this month to meet with officials and remind them how intertwined the economies are.

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