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The fear of NAFTA collapse could be as big a problem as any future collapse itself

Donald Trump's suggestions that he'll be "flexible" about the deadline for NAFTA talks settled down the markets, but Canadian officials aren't feeling much of a respite.

The sixth round of talks will be held in Montreal this week, and there's only moderately less tension over the potential for the whole thing to go off the rails soon.

Welcome to Year Two of Mr. Trump's nervy NAFTA ride. At some point in 2018, the ups and downs might be just as dangerous for Canada's economy as the potential crash of NAFTA withdrawal.

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Less than two weeks ago, the mood meter on the NAFTA talks shifted rapidly from pessimistic to downright jumpy to a deep sigh of relief. The latter two probably weren't justified.

The swing started with the headline on a Reuters story suggesting Canadian officials were sure Mr. Trump was about to trigger a U.S. withdrawal from NAFTA, knocking the value of the Canadian and Mexican currencies and stocks in companies that rely on cross-border trade.

But the jitters vanished a day later when Mr. Trump told the Wall Street Journal he'd be "a little bit flexible" on the deadline for the talks because he understands Mexico might not be able to do a deal just before its presidential election July 1.

It sounds like crunch time is being delayed. The Mexican election is in July, but the new president won't be inaugurated until Dec. 1. That suggests a deal can wait until 2019.

Canadian officials were encouraged. But not much. They can't count on Mr. Trump's comments about flexibility. It's a cliché to call him unpredictable.

Mr. Trump certainly has other things on his plate. For the past week, it was talks over the U.S. government shutdown, which led to questions about whether U.S. negotiators will even show up for NAFTA talks in Montreal. (They will.)

But the shutdown drama also showed that when Mr. Trump's commitment to his basics is challenged – the wall, immigration crackdowns, ripping up NAFTA – he returns with atavistic zeal.

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After his chief of staff, John Kelly, said Mr. Trump's view of the wall had evolved from an uninformed view, Mr. Trump tweeted nothing had changed, and that Mexico could pay for the wall through a renegotiated NAFTA. That probably hardened the impasse over the shutdown, and may complicate NAFTA talks further.

The bigger point is that Mr. Trump still talks constantly about NAFTA withdrawal. Maybe he'll just keep talking through the U.S. midterm elections, but he hasn't given any hint of a way to stop it.

Foreign Affairs Minister Chrystia Freeland has said Canada will put forward "creative" proposals in Montreal. One is a "compromise" on U.S. demands for higher American content in cars. Canada is proposing counting more high-value items like software, and less low-value items like rubber parts – essentially trying to increase the content number by changing the way it is counted. That's creative, but can it move Mr. Trump?

In the meantime, Innovation Minister Navdeep Bains was at the Detroit auto show touting Canada as a place for auto makers to invest, enthusing about Canada's advantages, including the government's willingness to invest in "innovation," but dodging the uncomfortable NAFTA questions that could scare off investors.

That risk is a problem Prime Minister Justin Trudeau will face in 2018. It's no longer just the risk that Mr. Trump will suddenly withdraw from NAFTA. Mr. Trudeau is lobbying U.S. business about the danger of killing NAFTA, but at some point, Canada's interests might depend on reassuring investors that Canada's trade will go on after NAFTA.

NAFTA fear does affect investment. That little political-news swing two weeks ago not only affected Mexican and Canadian currencies, but stocks of U.S. companies that depend on cross-border trade.

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Morgan Stanley's NAFTA index fell 1.21 per cent on the day of that Reuters headline, but bounced back more than double, 2.84 per cent, with Mr. Trump's "flexible" comments. Last October, as the U.S. started tabling tough negotiating positions, the index fell 5.93 per cent between Oct. 4 and Nov. 15. Those investment effects were short-lived, but they could deepen this year, with the prospects for NAFTA talks immersed in pessimism, and the constant prospect Mr. Trump will suddenly kill it.

For Mr. Trudeau's government, it means a tough decision: When will lobbying to save NAFTA give way to reassuring business that its demise won't kill Canada's ability to trade?

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