Foreign Policy Research Institute A Nation Must Think Before it Acts The United States, Canada, and Tariff Turmoil

The U.S.-Canada bilateral relationship often has been described with the hoary maxim that “we share the world’s longest undefended border.” Over the decades, the observation has become a tired cliché, and (unfortunately) less and less accurate since 9/11. Now, our border, if not “militarized” with guard towers, barbed wire, and/or minefields, is heavily policed against terrorists, narco smuggler-criminals, and illegal border crossers seeking refugee status.

Other descriptions have suggested that “we are best friends—like it or not.” (With “not” often in the ascendency.) And Canadians hold tightly to Trudeau pere’s maxim of the elephant (USA) and the mouse (Canada), claiming that no matter how benign the elephant may appear, the mouse is always nervous about how the pachyderm may twitch at any given time.

But, perhaps more realistically, our relationship is defined by economics. Or, perhaps more accurately, with the struggles over “free trade” and its restrictions. And every particular thereof: How free is “free.” How much? What products? What exceptions? What rules of engagement/resolution of disagreements? These are all arguments that have dismayed diplomatic negotiators and made trade lawyers and business experts rich over the decades.

As one might imagine, all economics becomes political when international and/or “free trade” is involved. Historically, the relationship has been characterized by alternating bouts of free trade and protectionism. In the 1840s, Canada pressed for a free trade agreement, and in 1854, the United States signed a 10-year free trade agreement—but then declined to renew it, despite Canadian importuning and subsequent efforts by then-Canadian Prime Minister John A. Macdonald. Canadian political leadership subsequently moved adroitly to protectionism with heavy tariffs beneficial to Canadian manufacturing.

And free trade continued as a Canadian “third rail.” In the 1891 election, the Liberals campaigned for unimpeded free trade with the United States—and Macdonald now opposed such. Macdonald won, and the free trade issue evaporated. It was resurrected in the 1911 election with the Liberals again pressing free trade and the conservatives opposing with anti-American rhetoric.

In 1935 and 1938, the Mackenzie King government negotiated agreements with the United States easing tariff restrictions; these agreements were subsumed in the post-WWII global General Agreement on Tariffs and Trade that led in turn to the U.S.-Canada 1965 Auto Pact, creating a North American market for manufacture/sale of automobiles. The agreement, however, required one car to be manufactured in Canada for every care sold there and that 60 percent of parts/labor for every car manufactured in Canada be of Canadian origin. The agreement essentially saved the Canadian auto industry at the cost of factories/jobs not being built/created in the United States.

The politicization of trade continued as the bilateral Free Trade Agreement (FTA) became the major topic in the 1988 Canadian election. Studies and analyses earlier in the decade concluded both countries would benefit from trade/tariff adjustment, and negotiators created an agreement reducing barriers to trade and services and investment. Canada exempted its cultural industries as well as its health services and dairy/poultry industry. The agreement was embraced by Canadian Tories led by Prime Minister Brian Mulroney, but furiously was opposed by Liberals and New Democrats (NDP) who charged the FTA would conclude with undue U.S. control over the Canadian economy and social structures. They effectively blocked parliamentary passage, and Mulroney called the election to resolve the issue. The campaign was bitter, including one now-iconic negative advertisement showing a line being erased—which was the Canadian border. Interestingly, it was Quebec separatist leaders who generated sufficient support for Mulroney (seeing the FTA as beneficial for their ultimate sovereigntist interests) and provided the margin for his victory. Following the Mulroney mandate, the U.S. Congress quickly approved the agreement in 1989.

Trade increased, and none of the invidious consequences trumpeted by the Liberals and NDP eventuated. Critics’ claims that trade would have increased anyway were dismissed as no one can prove a negative.

Moving to a North American Free Trade Agreement (NAFTA)

Prompted by Mexican desire for improved economic relations, the U.S. and Mexico began discussion of a bilateral agreement in 1989. Becoming aware of these negotiations and concerned that Ottawa might find its economic FTA gains diluted, PM Mulroney urged negotiation of a trilateral agreement. Negotiations succeeded with agreement reached in December 1992—requiring legislative endorsement by each country.

Mulroney’s parliamentary majority provided easy NAFTA passage; however, with the Tories facing an election in October 1993, Liberals under Jean Chretien made NAFTA a major point of attack with Chretien campaigning to renegotiate or abrogate the agreement. The Tories, struggling with scandal and recession as well as failures to resolve national unity/Quebec sovereignty issues virtually were annihilated (reduced to two seats from a majority).

This outcome—and the implicit Chretien promise to revise (at least) NAFTA—disconcerted Washington. Timely, high-level diplomatic inquiries in Ottawa, however, provided quiet reassurances that requested adjustments would be tertiary not terminal—and Washington started breathing again.

U.S. congressional approval, however, also was not a cakewalk. The U.S. 1992 election politicized the NAFTA agreement, and Independent candidate Ross Perot campaigned against NAFTA as creating a “vast sucking sound” of U.S. jobs going south to Mexico to benefit from low wages and weak labor protection. Consequently, the Clinton administration delayed seeking congressional approval until the results of the Canadian change of government were clear. Additionally, despite having a majority in the House of Representatives and Senate, the administration could not count on full Democrat support as many foresaw the negative effects on U.S. manufacturing and/or bowed to union opposition. Ultimately, NAFTA passed with more Republican than Democrat support in December 1993 and went into effect on January 1, 1994.

And Then?

Over the next 25 years, NAFTA meandered along. A judgment was that “economists consider that NAFTA was beneficial for the United States.” But the positives were not dramatic, with studies concluding, “a net benefit” including a 2015 Congressional Research Service report stating the “net overall effect . . . to have been relatively modest.” Predictably, the Chamber of Commerce stressed an over $800 billion increase in goods/services with Canada/Mexico between 1993 and 2011. Equally predictably, the American Federation of Labor and Congress of Industrial Organizations (AFL-CIO) stressed the loss of 700,000 manufacturing jobs to Mexico in the same period.

The existential problem remained: in global terms, U.S. citizens benefitted, but individual workers, manufacturers, and cities/regions lost. It was a political bombshell awaiting detonation.

The Trump Effect

In September 2015, then-presidential candidate Donald Trump called NAFTA “the single worst trade deal ever approved in [the United States]” and promised that if elected, he would “either renegotiate it, or we will break it.” He was countered vigorously by swarms of economists with “sky is falling” predictions should the United States leave NAFTA.

Ignoring the remonstrating naysayers, immediately after inauguration, on January 22, 2017, Trump announced that he would renegotiate NAFTA with Canada and Mexico. Subsequently, however, after “bromance” atmospherics during an official visit with Canadian PM Justin Trudeau, Trump left the impression that NAFTA revisions would fall lightly on Canada.

In July 2017, however, Washington introduced demands for required changes to NAFTA, focused on reducing the U.S. trade deficit, but also limiting Canadian-Mexican ability to appeal U.S. restrictions and dropping limits on the U.S. ability to increase import restrictions. Subsequently, Washington added a five-year “sunset” clause for any NAFTA agreement—which Canadians immediately rejected as designed to discourage investment as there would be no assurance the agreement would continue. One observer said the number of U.S. “poison pills” were so extensive that “they should have been charged with murder.”

With multiple negotiating rounds desultory rather than definitive, on March 8, Trump announced 25 percent and 10 percent worldwide tariffs respectively on imported steel and aluminum—with (temporary) exemptions for Canada and Mexico depending on the negotiating progress. On May 31, he shed the gloves and instituted the tariffs—with a predictable clamor of retaliation. And on June 1, he suggested that there could be separate trade agreements with Canada and Mexico—a trial balloon senior Canadian officials immediately punctured.

On June 3, an irritated Trudeau described the “security” rationale for the tariffs as “quite frankly insulting and unacceptable.” He identified $12.8 billion in retaliatory tariffs to go into effect July 1. Trump’s senior U.S. economic adviser said the tariffs were a “family quarrel” implying Trudeau was “overreacting.”

Trump’s actions have been almost universally excoriated. Notably by those that predict doom for their living. Volleys of studies insist the tariffs (and retaliation) will cost 200,000 to 300,000 jobs as well as extensively damage international trade and, coincidentally, cost Washington vital support from allies.

Thus far, Trump is not for turning.

Trump will meet with other G-7 members in Quebec on June 9, hosted by PM Trudeau. It will be Six on One regarding U.S. government tariff policy. Any U.S. change is unlikely. Trump’s tariff moves are designed to placate his political base leading into the November midterm elections (“promises kept”), and the hypothetical “sky is falling” consequences (even if accurate) would not be evident at that point.

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