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Canada can’t afford to play nice if Trump triggers NAFTA talks

Gordon Ritchie is a former ambassador for trade negotiations and deputy chief negotiator of the Canada-U.S. free-trade agreement (FTA)

President-elect Donald Trump has threatened to "rip up" the North-American free-trade agreement (NAFTA) if he is unable to renegotiate it on his own, very aggressive terms. The Canadian and Mexican governments have made a virtue of necessity by expressing their openness to renegotiation. What are the benefits and risks?

Naturally, the 23-year-old NAFTA could be improved and there is no shortage of helpful suggestions. One obvious example is the infamous Chapter 11, which provides foreign investors with special rights to sue national and provincial governments. In my testimony before the parliamentary committee at the time, I argued that this provision, which we had rejected in the original Canada-U.S. free-trade agreement (FTA), was ill-conceived and poorly drafted and would lead to continuing problems down the road. That has been the case and Canada has paid a heavy price for this foolishness. We could easily agree with Mr. Trump's demand that it be scrapped.

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There are also other provisions that could be improved, mostly of a highly technical nature involving rules of origin, customs procedures and harmonization of standards. But it would be a serious mistake to enter negotiations with a Canadian negotiating position based on these side issues. It would be like bringing a knife to a gunfight.

Mr. Trump – during his campaign, in his cabinet picks (notably Commerce and Trade representatives) and in his manic tweeting during the transition – has made it clear that he has much bigger game in mind. His will be a highly mercantilist administration, defining success in terms of exports versus imports and domestic production at all costs. This highly outdated and discredited view of international trade is a throwback to the 1920s and is dangerous for the North American and broader world economy.

While his main target in any renegotiation is Mexico, it is not hard to identify the demands his administration will make on Canada. Those U.S. demands that were rejected by Canada in the original FTA and that were not surrendered in the subsequent NAFTA will be back on the table with a vengeance.

Top of the list will be the restriction of imports of softwood lumber from Canada, which refused U.S. demands in the FTA to enshrine special restrictions singling out lumber imports from Canada. Successive U.S. administrations, succumbing to the enormous political power of the lumber lobby, then pursued claims that Canadian softwood was subsidized by the producing provinces and injured U.S. domestic producers. This claim was struck down by every international trade tribunal to take up the case, but the United States went ahead and imposed heavy penalties – in defiance of international trade law, the FTA rules and their own domestic law – to give them the bargaining leverage to ultimately force Canada to agree to a 10-year deal to penalize Canadian lumber imports above specified levels. This deal has now expired; the U.S. lumber "coalition" has reactivated the claims of subsidy; and the Trump administration will make this a top priority. It is unlikely the demands of the U.S. negotiators will be any more reasonable this time around and they are eager to enshrine the previously temporary restrictions, or worse, in a new NAFTA.

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The agricultural sector will provide more targets. In the original FTA talks, the United States demanded free access to the Canadian market for dairy products and other supply-managed commodities. I was no fan of supply management, but the government of the day (Brian Mulroney's) determined the political cost was unacceptable. That has remained the position up to the present, although the Harper government did open the dairy market by a few percentage points to accommodate the Europeans in the Canada-EU trade deal, which only outraged the United States further. They will press very hard on this issue. They will also try to provide cover for U.S. restrictions on meat imports through country-of-origin requirements that are illegal under the current NAFTA.

In the auto sector, Canada will be sideswiped by U.S. demands aimed ostensibly at Mexican production. We saw a recent example of Mr. Trump's thinking when he attacked Toyota for moving Corolla production to Mexico and threatened that he would unilaterally impose a heavy duty on that company's shipments into the United States. As usual, he got his facts wrong (the Corolla had actually been produced in Canada) but his aims are clear. To the extent he can induce the major car makers and parts producers, through threats of penalties and promises of subsidies, to invest in the United States rather than Mexico or Canada, he will do so. Companies, facing a drop in their stock-market valuation and market reputation if they fail to play along, will be reluctant to call his bluff. If, of course, the Trump administration were actually to impose unilateral duties, the NAFTA partners would have no alternative but to retaliate forcefully and everyone would lose in the resulting trade war.

Facing a U.S. administration aiming at these high-profile targets in an aggressive renegotiating agenda, it would be disastrous for Canada to drop into a purely defensive crouch. Top of the list should probably be to outlaw the "Buy American" preferences which could close Canadian producers out of much of Mr. Trump's proposed infrastructure plan. These have been carried to absurd lengths – resulting, for example, in the insistence the Canadian terminal for the Alaskan ferry must be built with U.S. steel – and there will be resistance to real reform.

Another top target should be restrictions on energy transportation. The United States has benefited substantially from access to Canadian energy (and other) resources on equal terms. It should not be able then to turn around and block projects such as the Keystone pipeline on transparently discriminatory grounds. (Does anyone seriously believe the Obama administration would have turned down the project if it involved U.S. oil?) The alternative would be to reinstate the authority of the NEB to restrict the volume and regulate the price of energy exports to the United States. So-called "national treatment" must cut both ways.

The bottom line is this: If, as president, Mr. Trump is determined to rework NAFTA in favour of the U.S. protectionists, Canada must come to the table with its own serious demands and negotiators tough-minded enough to stand up to the neighbourhood bully. High-minded tinkering will not be enough.

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