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Canada threatens U.S. over aerospace as NAFTA talks loom

The federal government has started negotiations this year to buy 18 Boeing Super Hornet fighter planes as an interim measure to bolster the capacity of the Royal Canadian Air Force as it seeks a longer-term solution to replace its fleet of aging CF-18 warplanes.

Boeing

The Trudeau government is threatening to jettison a multibillion-dollar purchase of Boeing Super Hornet fighters if the United States proceeds with damaging trade action against Montreal-based Bombardier Inc. – a warning shot fired the same day the Trump administration officially started the countdown to the renegotiation of the North American free-trade agreement.

The looming trade battle ratchets up the tension between Ottawa and Washington as the two sides gear up for NAFTA talks set to kick off in mid-August, and signals Canada's willingness to stand up to President Donald Trump.

The U.S. Department of Commerce announced Thursday it will investigate accusations from Chicago-based Boeing Co. that sales of Bombardier's new C-series jetliner constitute dumping into the U.S. market, because the plane is subsidized by the Canadian and Quebec governments. The investigation could lead to punitive U.S. duties being slapped on sales of the jet as soon as July.

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Foreign Affairs Minister Chrystia Freeland promptly fired back.

In a blunt statement, she said that Boeing's complaint is aimed at blocking the jet from the U.S. market. And she warned that Boeing's attempts to sell fighter jets to the Canadian government could be at risk as a result.

"Canada is reviewing current military procurement that relates to Boeing," Ms. Freeland said. "Our government will defend the interests of Bombardier, the Canadian aerospace industry and our aerospace workers."

The federal government has started negotiations this year to buy 18 Boeing Super Hornet fighter planes as an interim measure to bolster the capacity of the Royal Canadian Air Force as it seeks a longer-term solution to replace its fleet of aging CF-18 warplanes.

The dogfight comes a month after Mr. Trump blasted Canada's softwood lumber and dairy industries for "taking advantage" of the United States under NAFTA and considered – but ultimately decided against – triggering an American withdrawal from the deal.

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Earlier Thursday, United States Trade Representative Robert Lighthizer formally gave Congress 90 days' notice of the administration's intent to reopen NAFTA. His one-and-a-half page letter was short on specific negotiating objectives, sticking instead to broad themes. It steered clear of the protectionist language that permeated an earlier draft circulated in March.

The letter listed the digital economy, intellectual property protections, labour and environmental standards as possible areas of discussion. It said the United States will look for better enforcement of the provisions of the deal. "We note that NAFTA was negotiated 25 years ago, and while our economy and businesses have changed considerably over that period, NAFTA has not," the letter read. "Many chapters are outdated and do not reflect modern standards."

The earlier draft, by comparison, suggested that Buy-American policies and tax provisions meant to favour U.S. goods could be among the things demanded by negotiators. It also floated abolishing NAFTA trade panels – which have previously ruled in Canada's favour in the softwood dispute.

The Canadian and Mexican governments, as well as business groups, publicly embraced the renegotiations Thursday – even though officials have privately conceded they would rather NAFTA be left the way it is.

The aim is to divert the talks into a discussion over how to improve the deal, such as by adding new provisions for e-commerce and strengthening environmental and labour regulations, while leaving the integrated market intact and pushing back against Mr. Trump's protectionist inclinations.

"Two areas that I think could very usefully benefit from modernization in NAFTA are the labour and environment chapters," Ms. Freeland told reporters.

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Mexican Foreign Secretary Luis Videgaray, speaking after a meeting with his American counterpart Rex Tillerson in Washington on Thursday, took a similar tack: "This is a 25-year-old agreement … The world has changed."

Perrin Beatty, CEO of the Canadian Chamber of Commerce, said Canada will have to hold firm against Mr. Trump – but must also bring its own demands to the table with the goal of improving the deal. Ottawa should push for new NAFTA provisions that would make cross-border business even easier, such as more digital trade, labour mobility and regulatory co-operation, Mr. Beatty said.

"Nobody is under the illusion that these negotiations won't be difficult. The government has to be prepared to defend Canada's interests," he said in an interview. "But it should go in with its own agenda, it should go in with optimism and confidence – it is possible to get a trade agreement that is better."

The chief executive officers of two Canadian companies that have a big stake in the integrated North American economy staying that way said this week that they believe renegotiation of the trade agreement will not lead to wholesale changes.

"Mr. Trump is a businessman," Linda Hasenfratz, president of auto parts maker Linamar Corp. said. "He will make fact-based decisions and it's a matter of putting those facts in front of him."

Those facts relate to the negative impact that drastic changes in NAFTA would have on the auto industry, which relies strongly on duty-free trade of parts and vehicles among the three countries.

Keith Creel, chief executive officer of Canadian Pacific Railway Ltd., said he thinks Mr. Trump's call to revamp NAFTA is aimed at Mexico.

"I think he's a negotiator," Mr. Creel told The Globe and Mail earlier this week. "I think he's trying to create leverage and at the end of the day if he does what is right for the country he understands how critical Canada is as a trading partner to the U.S."

Still, the battle over the fighter jets signals that neither side is afraid to put its elbows out as the negotiations draw near.

Ms. Freeland noted any pain served on Bombardier by Washington would hurt Americans because many companies supplying the C-series jet program are based in the United States. "Components for the C-series are supplied by American companies, directly supporting high-paying jobs in many U.S. states, including Connecticut, Florida, New Jersey, Washington, New York, Ohio, Iowa, Kansas, Pennsylvania and Colorado."

The initial purchase of these Super Hornets could cost $2-billion, but their maintenance, support and upgrades could cost as much as $10-billion over the full period of their use. That could mean billions of dollars more in parts and support for Boeing beyond the initial capital investment.

Analysts had been warning that Boeing's actions against Bombardier could come back to bite the company, especially as it relates to the business it does with the Canadian government.

"Boeing is now part of Trump's anti-Canada jihad," Richard Aboulafia of the Teal Group said in a recent note.

Boeing has also supported a Republican plan to impose a border tax on imports – a proposal that would hurt Canadian firms shipping products to the United States.

Renegotiating or pulling out of NAFTA was one of Mr. Trump's central campaign pledges. He blames the deal for hollowing out the U.S. manufacturing sector in the Rust Belt.

Congressional notification, a legal requirement before talks can start, was delayed as the Senate dragged its feet on confirming Mr. Lighthizer as Trade Representative. Mr. Lighthizer was finally confirmed last week, sworn in Monday and has spent the last three days in meetings with members of Congress.

With a report from Nicolas Van Praet in Montreal

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About the Authors
Parliamentary reporter

Steven Chase has covered federal politics in Ottawa for The Globe since mid-2001, arriving there a few months before 9/11. He previously worked in the paper's Vancouver and Calgary bureaus. Prior to that, he reported on Alberta politics for the Calgary Herald and the Calgary Sun, and on national issues for Alberta Report. More

Washington correspondent

Adrian Morrow covers U.S. politics from Washington, D.C. Previously he was The Globe's Ontario politics reporter. He's covered news, crime and sports for The Globe since 2010. He won the National Newspaper Award for politics reporting in 2016. More

Auto and Steel Industry Reporter

Greg Keenan has covered the automotive and steel industries for The Globe and Mail since 1995. He also writes about broader manufacturing trends. He is a graduate of the University of Toronto and of the University of Western Ontario School of Journalism. More

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