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Canada's path forward during turbulent times

Canada-United States relations in 2017

First, Quebec separatism. Now, U.S. separatism. Fortunately, separatism is something Canada knows how to handle.

Canada is behind three big eight-balls: an economy not yet fit for the future; real U.S. trade risks; and a possible Canadian unity problem from pipelines. Prime Minister Justin Trudeau could now simultaneously face all three of these challenges. Canada must get its economy back on a strong track, particularly with a United States in political turmoil led by a wounded president, and Alberta/B.C. could be the new unity challenge.

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The United States is the long-term problem

U.S. President Donald Trump is a high-risk president. He will not change. Reliable relationships are not possible, and if you get too close to him, you could get badly burned. What Mr. Trump says matters less than what he does; the internal and external push-backs matter even more. The underlying sources of the deep and persistent division in his country will take years to sort out.

Canada has a unique combination of U.S. strengths – an unmatched understanding of dealing with a difficult, powerful neighbour as well as broad and positive continuing relationships with key institutions and individuals there. Americans in general know Canadians lend a hand when they need it. How Canadians use these connections matters. Ottawa, so far, has reached out well. Other Canadian communities, starting with business, need to address the big picture better and leverage Canada's particular positions in the United States where it counts.

Canada in an America-first world

Global fundamentals within and between countries will be a primary world challenge over the next 25 years. Canada probably has the best chance of succeeding in a Trump America-first world. Trade and services current flows between the two countries are in broad balance (right now, Canada is in deficit). When you take into account net investment-income flows, Canada has always been in overall current account deficit with the United States. Canadian imports matter in politically-key U.S. states. A retaliatory Canadian border tax on non-business tourism, for example, in big Trump states (e.g. Florida and Arizona) would quickly hurt politically.

Trade is not the only area affecting Canada's relationship with the United States. Canada has important North Atlantic Treaty Organization, North American Aerospace Defense Command and Group of Seven relationships as well as close security working arrangements with the United States. Mr. Trump may be learning this this is not a world where going it alone works.

Canada, from its beginnings, has experienced the best and worst of the United States. For its part, the United States has often recognized the asymmetrical relationship means that Canada sometimes needs exemptions from U.S. global policies. In the current fear- and enemy-driven U.S. politics, Canada is not seen as an enemy or a people to be feared.

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Canada has a lot to work with

Canada can help Mr. Trump get political wins that also work for Canada. Ottawa got off to as good a start as possible – not just with Mr. Trudeau's Washington visit, but in mobilizing long-standing relationships with both U.S. government and non-government players.

The challenge is to use the above talking points with all kinds of U.S. contacts. The Canadian business community, in particular, must use and create opportunities to tell these stories. If all parties work hard on the Canada side, the outcome can become a win-win story for both countries – economically and politically. It can be done but won't be easy.

Canada always has to play the long game with the United States. Between 1945 and Sept. 11, 2001, both countries were closely aligned on most things. But on many fundamentals, Canada and the United States are very different: mutual accommodation versus division; persuasion versus force; use of collective effort versus extreme individualism; and openness to the use of government versus an overwhelming distrust.

U.S. strengths in postwar era

The United States after 1945 had two great abilities: to attract almost everyone from everywhere (though not Russia or China, initially) to its larger purposes; and to get others to follow. No other country in history can match that record.

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Canada can help Mr. Trump and the United States get back to these strengths. It also needs to bring these strengths to a new vision and a new global order. Only the United States can lead this.

Every era ends in overreach or underreach. The years from 1945 to 2000 were largely productive. The way forward is not to undermine, but to build on their achievements. Churchill said he looked backward to get a better view of the future.

If the United States in the 1980s and 90s had looked backward, it would have had a better sense of what had worked so well and avoided much of the Reagan/George W. Bush overreach that must now be undone, and the dangerous kind of Trump underreach on climate change and the Trans-Pacific Partnership.

The NAFTA challenge

A major strength for Canada is it is part of North America, but the basic imbalance within the North American free-trade agreement is a problem: NAFTA trade disproportionately benefits Mexico, which has big surpluses with its partners. U.S. politics and the United States' and Canada's global current account deficits will make it impossible to continue the disproportionate trade surpluses Mexico has with each.

Any NAFTA renegotiation has to start from the fundamental balance of Canada-U.S. economic relations and the fundamental imbalance of Mexico's economic relations with its two NAFTA partners. The three countries have become economically intertwined, and so it will not be easy for the United States to avoid doing itself more harm than good on its Mexican flank.

There is merit in the Mexican President's idea of a stronger North America opposite a rising Asia, but it is one which would have to be based on a vision shared by all three countries. Mexico will have to do some heavy trade lifting to make that happen.

North America's large current-account deficits are supporting the rest of the world by importing their goods and exporting jobs to them – an untenable situation given the current U.S. political landscape. Canada is right to want to keep NAFTA, but it cannot do for Mexico what Mexico must do for itself to get a better three-way balance.

How best to cope with the United States

Canada has had an unstable United States to deal with several times in the past, such as the threats that came from the American War of Independence, the War of 1812 and the Civil War. But if war comes today, it will be over trade. The trade wars of the thirties brought global depression and the Second World War.

The big countries could not then find the shared vision or project to move from the old world before 1914 to a new global one. Today, with the world once again in the midst of huge and troubling transitions, the challenge for Canada, North America and Western Europe is how best to move forward with a divided and unpredictable United States embroiled in a bumpy process of withdrawal from overreach.

What ideas and steps should guide Canada's diplomacy with a strongman U.S. President who has been steadily weakened since his inauguration and is now wounded – possibly fatally?

Most politicians are more driven by pain avoidance (losing) than pleasure-seeking (winning). Mr. Trump's driving force is the pleasure of winning – as both he and others see it.

Canada's way forward is to explore all the possible positives and negatives for Mr. Trump. The pain that matters is any that impacts Mr. Trump directly or indirectly. Diplomacy that works requires the opposing side to understand the political pain an agreement can help avoid. Canada's strongest approach to the contentious trade issues surrounding NAFTA – softwood lumber, a border tax and a "Buy America" policy – is to know more about everything that matters to us than the other parties do; and, second, to have and optimize the best set of relevant relationships.

Negotiating amid the chaos

Chaos was something Mr. Trump could always manage as a businessman. Chaos does not work so well for the White House. The firing of former FBI director James Comey is a good example, with its confused and conflicting stories. This erratic messaging is impossible for both the White House staff and everyone else to handle.

The combination of multiple Russia problems and an out-of-control White House will make it difficult to move anything forward in Washington, including NAFTA renegotiation. This stalemate makes the task of Canadian and Mexico negotiators decidedly high-risk and, at some point, perhaps impossible. Amid all this chaos, slow will likely be better than fast.

What Canada must do

Canada needs to work harder on doing everything it can to build its economy. Its biggest shortcomings of the past 12 years have been living beyond its means; the failure to build an economy that is better suited to the future; and the failure, in the post-Brexit and Trump world, to adopt policies that will attract the "best people" to drive a successful private sector. A stronger private-sector-driven economy will make it easier for Canada to live through a self-centred United States – and prepare for a possible fight ahead.

Mr. Trump is cornered by a combination of economics and politics. There is no money for his election promises. Right now, with the Russian investigation and a chaotic White House, he's lost the presidential leverage that hard congressional politics require. With the President and Congress all under the Republican banner, if the United States cannot pull itself together now, when will it? Fortunately for Canada, this turmoil may be its greatest protection against a bad NAFTA outcome – a border tax and Buy America.

Mexico has got itself through its share of foreign economic crises. The NAFTA review comes at a time of domestic political stresses that will be very difficult for Mexico. Canada and the United States could help more if their current accounts with other countries could get better. Canada so far has not been destabilized by U.S. political turmoil. Its stronger politics and economics make it less vulnerable to destabilization than Mexico. All three partners will have to help improve the Mexican NAFTA imbalance in a way that strengthens stability in each.

Canada needs both a pain-exaction and a pleasure-giving strategy. Its task now is to know how to execute it. It must also put its mind to a post-NAFTA renegotiation vision and project for North America more suited to the world ahead.

William A. Macdonald is a corporate lawyer turned consultant with a long history of public service and social engagement.

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