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Should Canada scrap NAFTA and seek a new deal with Trump?

According to our ambassador to the U.S., Canada is worried about "collateral damage" as President Donald Trump has Mexico and the North American free-trade agreement in his gun sight.

But even if Mexico is the main target, Canada is still in the firing range.

Because Canada's overriding interest is to have secure and stable access to the U.S. market, the strategic question is this: Should Canada agree to scrap the NAFTA and conclude a totally new bilateral trade agreement with the United States?

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Agreeing to end the NAFTA could allow Canada to get ahead of the issue with the Trump administration, much better than being dangerously on the defensive, trying to defend a three-way deal to preserve our two-way trade.

Given the animus directed at Mexico by Mr. Trump, there's a real danger that the NAFTA can't be rescued. Even if it can, it will have to be radically rewritten and totally asymmetrical to resolve very different problems the U.S. has with Mexico.

There are huge political and technical problems in trying to do this within the tripartite NAFTA framework.

Having three countries at the table makes the process exceedingly complicated and slows the whole thing down. The White House has already made it clear that it won't countenance delay, raising the chances that the U.S. will withdraw from the NAFTA in frustration.

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Because we could to get to that point anyway, wouldn't it be neater, cleaner and strategically advantageous for Canada to propose a totally new and separate Canada-U.S. trade deal? That would give Canada leverage without being hemmed in by the Mexico-U.S. problems.

It's not a matter of throwing Mexico to the wolves. Mexico will have to resolve its trade differences with the U.S. on its own and there's nothing Canada can effectively do to help them in that effort. So Mexico is really alone in dealing with the Trump administration.

Any new set of U.S.-Mexico trade arrangements will have to deal with things like rules of origin, investments, trade balances and immigration, and will be qualitatively different from any U.S.-Canada deal.

That means, ultimately, a new and distinct set of Canada-U.S. trade arrangements. So why not propose going down that route now?

That's the why. Here are some points about the how.

The NAFTA has a withdrawal clause. As commentators have pointed out, the U.S. is free to trigger that clause. It has already threatened to do so if it doesn't get its way. Whether this is just a negotiating tactic and leaving aside the internal U.S. legal and constitutional questions, there thus is a serious risk that the Americans will pull the NAFTA plug. If it does, it will resurrect the 1988 Canada-U.S. free-trade agreement (FTA), which was never terminated when the NAFTA entered into force in 1994.

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It should be remembered that after concluding the FTA with the Americans 30 years ago, Canada entered into negotiations with the U.S. and Mexico in the 1990s in order to not lose FTA preferences, the old "hub-and-spoke" concerns and the worry that Mexico would get a better deal in its bilateral arrangements, diluting Canada's advantages.

With the NAFTA now in Mr. Trump's crosshairs, the FTA comes back into focus.

Ending the NAFTA and reverting to the FTA could be disruptive for Canadian business, no doubt about it. But while more limited in scope, the FTA still continues two-way trade on many fronts. For one thing, it provides duty-free access to the U.S. market for Canadian manufactured goods, keeping the automotive, steel and other sectors free from risk.

Given Trumps' belligerent "America First" stance and the real risk of the NAFTA being terminated, rather than being in a defensive mode, Canada could be ahead of the curve with concrete ideas for improving and modernizing the FTA, in the end making it a 21st-century bilateral trade agreement.

Grabbing the initiative now carries numerous strategic and tactical advantages, not least of which is in setting the agenda and negotiating the framework.

Pending the results of these new talks, there could be interim application of those existing parts of the NAFTA that make sense bilaterally, such as the chapters on intellectual property, trade in services and investments.

With the FTA in force while keeping key NAFTA rules in place, there would be certainty and stability in our bilateral trade, vital for supply chains and for integrated manufacturing and other business interests.

With this secured in the interim, the new Canada-US negotiations would then address bilateral issues, like U.S. concerns over the binational panel system and rules of origin (though these are less an issue in Canada-U.S. trade) and Canada's concerns over U.S. trade remedies and other issues such as investment disputes.

Given the risks surrounding the NAFTA's longevity as currently structured, the question is whether it's a wiser strategy for Canada to secure what we have now in the FTA, coupled with a clean slate of negotiating items that will pave the way for a new and improved Canada-U.S. bilateral trade agreement.

Lawrence L. Herman is a former Canadian diplomat. He practises international trade law and is a senior fellow of the C.D. Howe Institute in Toronto.

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