Trade Uncertainty

The future of US-Canada cross-border trade remains uncertain, but both economies are well integrated, and there’s increasingly unified political action and lobbying by businesses on either side of the border
The Peace Bridge separating Buffalo, NY, and Fort Erie, Ont.
The Peace Bridge separating Buffalo, NY, and Fort Erie, Ont.
THE TWIRLING CAROUSEL that has characterized the first few months of Donald Trump’s ascendance to the US presidency appears to have left the future of cross-border trade hanging in the air, nudged here and there by the daily or weekly whims of the Oval Office.

What we do know is this: President Trump has called the North American Free Trade Agreement (NAFTA), which received the approval of Congress in 1994, the “worst trade deal ever.” We also know that getting a better deal for the US is high on this administration’s agenda. President Trump and Canadian Prime Minister Justin Trudeau met in February 2017 to begin the dialogue. Meanwhile, Mexican President Enrique Peña Nieto hastily called off his first encounter with President Trump after the US president signed an executive order authorizing a border wall between US and Mexico.

What getting a better deal means, however, is unclear. Does it portend the modification of NAFTA, the end of NAFTA, the revitalization of the pre-existing Canada-US Free Trade Agreement (CUSFTA), or whatever else President Trump may be considering? Will Canada be in the crosshairs or merely sideswiped as Mexico, and its $60-billion trade surplus with the US, takes the brunt? After all, the Canadian government’s propaganda machine has been ceaselessly pointing out that trade between Canada and the US reached $769 billion in 2015; that Canada is the primary trading partner for 35 US states; that nine million American jobs depend on trade with Canada; that the pay scales of Canadian workers approximate those in the US; and that the US trade deficit with this country isn’t significant.

Faced with all the uncertainty, pundits appear confounded. “That’s not surprising when you’re dealing with a guy who operates by issuing threatening tweets,” says Jack Millar of Millar Kreklewetz LLP in Toronto. “There’s a lot of uncertainty about whether or to what degree the US is going to continue to conform to the traditional trading rules.”

Still, John Boscariol of McCarthy Tétrault LLP in Toronto doesn’t think doomsday is around the corner. “[President] Trump is not the end of the world, and I don’t believe we’ll see complete chaos in the world trading regime, as cooler heads will prevail,” he says. “But even if he does some of what he says he will do, Canada is likely the country best positioned to ride it out because — as the American business community recognizes — our economies are so integrated both from a trade and an investment perspective. Changes may hurt at the nuts and bolts level, but whether we end up with NAFTA or something else, there won’t be another country with greater preferential access to the US.”

But even if the pundits are not confounded, they’re certainly not united. Opinions have ranged from prognostications of outright doom for the Canadian economy to optimism that foresees a host of benefits arising from the expected negotiations and related policy changes. “For example, the new administration probably represents a net positive for the energy sector, especially oil and gas,” says Mark Adkins of Blake, Cassels & Graydon LLP in New York, who predicted that Trump would, as he soon did, approve the Keystone XL pipeline project that had been nixed by President Obama.

Boscariol believes that Prime Minister Trudeau was right in taking the opportunity to leave open the possibility of NAFTA’s renegotiation. “NAFTA was a leading-edge trade agreement when it came into force, but it’s now more than 20 years old,” he says. “By comparison, CETA [the Canada-European Union Comprehensive Economic and Trade Agreement] is a much more advanced treaty that sets a new standard, contemplating even closer integration than NAFTA does. If there are some elements of CETA that could be incorporated in NAFTA, I think that would be great and confirm that Prime Minister Trudeau made the right decision in opening that up.”

Yet another view focuses on the spillover benefits to Canada from President Trump’s overall economic policies, which many observers expect will boost the US economy. Naysayers point out that the $1-trillion infrastructure program that is at the heart of President Trump’s policies also embraces a “Buy America” approach. As well, UNIFOR’s National President, Jerry Dias, recently blamed NAFTA for General Motors’ potential layoff of up to 600 workers at its CAMI plant in Ingersoll, Ontario, in July. Former Bank of Canada Governor David Dodge also appears to be leaning to the naysayers: while he is on record that faster post-election growth in the US could well represent short-term gain for Canada, he opines that we could find ourselves struggling over the medium and long term in trade and other areas.

Stephen Schwarzman, the head of President Trump’s Strategic and Policy Forum, has tried to be reassuring. “Canada is very well-positioned for any discussions with the United States,” he reportedly told the Trudeau cabinet. “I don’t think [Canada] should be enormously worried because Canada is held in very high regard.”

For their part, Prime Minister Trudeau and Finance Minister Bill Morneau have focused on an amorphous openness to changes that advance the country’s interest — without particularizing what those changes might be. Perhaps they’re not “enormously worried” about them, but nobody out there thinks they’re not worrying at all. “What I’m telling clients is that, even if the uptake in enforcement activity at the border is likely to be focused on China and Mexico, there could be considerable sideswipe potential affecting trade to and from Canada,” Millar says.

What is clear is that unraveling NAFTA will mean unwinding some of the very complicated stitching that characterizes what has become a truly integrated market. “What I’m really curious about are the unintended consequences if the US actually withdraws from NAFTA,” Adkins says. The manufacturing process for cars and trucks, for example, routinely criss-crosses North American borders, helping the US auto industry to compete with Asian and European manufacturers. Still, while NAFTA may have increased GDP and incomes in the US, skeptics point out that it has cost the country’s blue-collar workers a host of well-paying jobs in the manufacturing sector.

Reverting to CUSFTA, a document that needs even more modernizing than NAFTA, could arguably create more problems than it solves. While bilateral trade in nearly all goods would remain duty free, CUSFTA could prove problematic for Canada in other ways: by way of example, CUSFTA rules of origin are less precise than those found in NAFTA; Canadian exporters would no longer be shielded against injurious import measures; there would be no binational dispute settlement mechanism for dumping and subsidy disputes; and services and investment trade protection would be narrower.

So although article 2205 of NAFTA allows a country to withdraw from the agreement on six months’ notice, the more likely scenario is a renegotiation. “It’s too early to panic,” says Dalton Albrecht of EY Law LLP in Toronto. “[President] Trump is a negotiator who is using the prospect of ripping up NAFTA as a bluff and an opening bid.”

Indeed, Steven Mnuchin, the new Treasury Secretary, expressed optimism during his confirmation hearing that a “win-win” scenario was in the offing. If that’s the case, the question becomes one of exactly what will be at stake in the negotiations.

Canada will likely be looking for a softening of Buy America policies; changes to the rule requiring minimum shipments of oil to the US; modernization of rules of origin; wider regulatory coordination; tweaks to NAFTA’s state-to-state dispute settlement process; and a new investor-state dispute scheme.

Canada will also likely seek more liberal rules on worker mobility, particularly for digital economy professions. Despite the new administration’s focus on security and immigration, Adkins believes Canada has demonstrated how seriously the federal government takes border security. “We just have to keep getting that message across to obviate concerns that Canada is a back door to the US,” he says. “The focus, I think, will remain on Mexico, because that’s what the President’s constituents care about.” But uncertainty lingers: “Will the end of NAFTA mean that all Canadians working in the US under NAFTA visas will have to go home?” asks Roy Berg of Moodys Gartner LLP in Calgary.

For its part, the US will hone in on supply management in agriculture; changes to country-of-origin labeling requirements; more scope for foreign investment in telecommunications; restraints on softwood lumber exports; modifications to Canada’s intellectual property rights laws to bring them closer to the US system; and transferring anti-dumping and anti-subsidy jurisdiction to US courts from the current system that engages a binational dispute-settlement mechanism.

Confidential briefing notes from the US Trade Representative’s Office — prepared in December 2016 and meant for the Trump transition team but obtained by CBC News — shed further light on American priorities in trade negotiations with Canada. Most interesting, perhaps, is that USTR officials have not flagged NAFTA on their list of trade issues. Among the issues listed, the softwood lumber dispute is highlighted, with the authors of the briefing notes stating that Canada has “unfairly subsidized or dumped” softwood lumber and that resolution of the issue appears remote. Millar shares that view. “A negotiated settlement based on the current rules isn’t going to happen,” he says.

The notes also express concern about dairy supply management, noting that CETA could undermine US exports to Canada by some $200 million. The notes say nothing, however, on other supply-managed products like poultry or eggs.

As well, while Congress amended US law to eliminate mandatory labeling requirements on beef and pork after the World Trade Organization ruled against its country-of-origin labeling (COOL) measures, the USTR notes indicate that the dispute has not been “formally terminated.” Indeed, Millar believes that COOL is where President Trump will be focusing. “Enforcement issues at the border have traditionally centered around value and tariff classification, with rules of origin being the laggard,” he says. “I believe that’s going to flip and that enforcement will focus on these rules going forward.”

Millar also expects an upswing in non-tariff barriers related to safety standards and other types of labeling. “I think that the drive to harmonize standards that we’ve been experiencing will abate,” he says. He also expects an uptick in US anti-dumping enforcement — “it’s been very quiet in recent years” — whether or not the jurisdiction remains with the binational process or moves to the US courts.

Peter Kirby of Fasken Martineau DuMoulin LLP in Montréal believes that the brunt of the impact will come at the administrative level. “The Department of Commerce has been told to be more creative in the sense of being unshackled and doing whatever they can do to enhance President Trump’s trade policy by deciding any close calls on imports in favor of the US,” he says. “Freight forwarders may find that the border keeps getting stickier, but the people making the decisions on the ground for the US have received assurances that no one will lose their job because of the position they take on imports.”

According to Kirby, that may not be as drastic a change as it first seems: the Obama administration, he points out, had already instructed border services personnel to get a lot more aggressive with anti-dumping. “For a while now, the tone has been to slow down imports, and that’s a tone that can be implemented in myriad ways,” he says.

While the US, as a global powerhouse, may hold the stronger cards in the negotiating deck, what Canada does have going for it is an emerging trend to unified political action and lobbying by businesses on both sides of the border. Eschewing their patchwork approach of the past, leading cross-border trade organizations in the US and Canada have organized a united front in their efforts to reach the hearts and minds of governments and legislators in support of cross-border trade.

The inaugural 2016 US–Canada SAGE Summit, which took place at Ohio State University’s Columbus campus in late June, featured delegates representing 60 leading cross-border business organizations as well as policy and political leaders from both countries. SAGE is an acronym for “Strategies. Advocacy. Gateways. Engagement,” which are the organization’s action pillars.

“This summit marked the first time that these organizations came together under one roof to chart a course for the future of the Canada-US relationship,” says Columbus-based Daniel Ujczo, a Summit co-founder and an international trade lawyer at Dickinson Wright PLLC, a firm with offices in Canada and the US, whose practice includes a significant focus on cross-border law and trade. “With a new government in power in Canada and American elections on the horizon, we needed to come up with a new way to manage this relationship going forward.”

The timing, it appears, is perfect.