Whatever the Heck They Decided To Call It, It’s Done – Canada, US and Mexico Agree To Something On Trade

The “three amigos” they are not; but President Trump, Prime Minister Trudeau and outgoing Mexican President Nieto agreed on September 30th to renew the terms of trade between their three economies by updating and replacing NAFTA with The US, Canada, Mexico Agreement.

There is a rumor that the marketing mad US President wanted to call the deal the “US, Mexico, Canada Agreement” so he could talk about a “USMC” until it was pointed out to him that is the acronym for the US Marine Corps! The hunt for another name likely held things up for a few hours. It is a sort of milquetoast (excuse the reference to dairy; but it’s the key to everything) name that might cause a high-paid marketing professional to wonder: “Geez, why didn’t I think of that?”

The bland name is fitting for what turns out to be, after all the bluster and all the angst and all the sleepless nights, a surprisingly practical deal that could have been achieved at any time without all the bluster, the angst and the sleepless nights. More irony in that the template for most of the provisions in this deal was the Trans Pacific Partnership Agreement (“TPP”) which the US abandoned.

What got it done in the end was a confluence of events that drove the three countries to “just do it”.

A major concession on dairy, which Canada knew it would have to agree to, could only have been offered last weekend with the Quebec election almost over so that issue would not dominate the campaign.

Canada needed a deal now, before the US midterms because, while many Canadians may cheer the prospect of a takeover of Congress by the Dems, Democrats have been harder for Canada to deal with on trade.

Canada was seeing a precipitous drop in foreign direct investment (“FDI”). Foreign investors concluded while there might be all kinds of good reasons to invest in Canada, none trumped (forgive the pun) the fact that a Canadian beachhead made absolutely no sense unless it served as a springboard to business in the US. In short, the US was winning every investment beauty pageant (forgive us for referencing Mr. Trump’s favorite business). The almost seamless supply chain (if we could only deal with the physical infrastructure inadequacies at the land border) didn’t look to be so seamless with no deal or perpetual negotiations.

The US President needed a deal now so he could campaign on it in those midterms. Republican Congressional Representatives, from the 31 states for whom Canada is the major trading partner were getting hysterical at the prospect of explaining to voters why the US was up-ending the valuable trade relationship with Canada. And the US, as it turns out, couldn’t fight with everyone at the same time. Dissipating energy on talks with Canada was distracting key officials from dealing with the real trade war (without end) with China. That one looks likely to end in tears. The relationship with Canada and Mexico was salvageable.

It should be noted that the new trade agreement contains a novel provision effectively giving each party to the agreement the power to review an agreement another party enters into with a “non-market economy” and withdraw from the North American deal. This will complicate Canada’s relationship with other countries (e,g. China) as Canada works to diversify trade.

Mexico needed it done, because they needed an agreement to preserve extraordinary economic gains achieved by NAFTA. The desperation of the Mexicans for a deal was clear when they blinked a few weeks ago and signed a bilateral with the US that contained concessions they might not have offered if they could have had more time. They are left having given up things (bi-national panel review of trade remedies) that Canada preserved for itself. Who betrayed who, to cut the first deal with the US is only mildly interesting.

It is worthwhile remembering that the very idea of NAFTA in the 1990s was to help revive the Mexican economy and prevent it becoming a “failed state” also (hopefully) stemming the tide of economic migrants to the US. In spite of the xenophobia in certain circles in the US, NAFTA achieved that and the new agreement will also help, wall or no wall.

Winners and losers? Well if we must…the reality is that that everyone won a little and gave up a little.

Canada has a deal and that’s a UGE (as President Trump pronounces “Huge”) win for an economy where 70 percent of exports head south. For Canada, the deal means certainty and predictability, both prerequisites to attract investment in Canada. With terms of trade clarified and locked in, Canada will be seen once again as a stable destination for investment. Canada can go back to competing for investment based on corporate tax rates (watch Canada respond to the US corporate tax cuts in the next federal budget) and on monetary policy (watch interest rates rise).

Mexico has agreed to higher wages (a great win for workers there which we should all cheer). But this will mean Mexico will lose its low wage advantage in the location of plants and this provision will preserve and add more jobs in Canada and the US in the auto sector. Canada can live with the wage agreement for workers, we’re there already and the higher level of North American content is not a problem

Canada gets a deal that could run for 16 years and while it will be reviewed in 6 years it does not “sunset”. The bilateral deal that a weak Mexico agreed to contained a sunset clause; but Mexico has been saved by what Canada negotiated.

While dairy farmers paid for it, Canada preserved critical dispute resolution provisions in spite of the President’s determination to gut these. No deal was possible with Canada without a dispute resolution mechanism and the US blinked. Turns out they needed a deal more than they let on. Put Canada in the win column here. State to state provisions remain as do binational panels to review trade remedies. While investor/state dispute resolution provisions remain as between the US and Mexico (in energy primarily), Canada happily gave this up as these disputes (by dis-gruntled US investors) have been very costly for Canada.

The US gave some on trade in data, agreeing to balance those goals with a nod to (Canada’s) concerns with data privacy.

Canada did not get an elimination of the tariffs on aluminum and steel. To win that fight Canada heads to the WTO which the US President is trying to gut. Winning disputes like those depends on adjudication at the WTO. With the US refusing to nominate new panel members to fill vacancies, the WTO could soon be moribund with no quorum to hear and determine disputes. The President hates multi-lateral arrangements like the WTO; but what he hates most is that the US sometimes, rightly so, loses at the WTO.

Canada preserved an exemption safeguarding its power to protect cultural industries, saving thousands of jobs. And thousands of Canadian professionals working in the US on NAFTA visas won’t have to come home to live in their parent’s basement again.

Canada is a loser (well the provinces anyway) because of provisions extending patent protection for drugs that will upend generic manufacturing, making drugs more costly for provincial plans. (Ontario has had different drugs in mind).

Canada was unsuccessful in rolling back “Buy America” procurement rules. The new deal contains no chapter on procurement; but Canada will live with the procurement rules contained in the WTO. Canadian infrastructure companies will continue to be frustrated in competing in the lucrative infrastructure procurement market south of the border.

Sadly, for former Harper Minister Maxime Bernier, the agreement on dairy undercuts the one plank he had for his break-away Conservative rump of one.

Manny Maroun’s Ambassador Bridge is a big winner until we see the competitive Gordie Howe International Bridge built (it will now go ahead) at the Windsor/Detroit crossing.

Clear winners are workers in all three countries where a decent wage is locked in. Strange as it sounds, the US billionaire President can credibly campaign as a friend of the ordinary auto worker. Ironically, given all his vile rhetoric about Mexicans, that worker resides in Mexico and doesn’t vote in US elections.

The US or President Trump loses (but he’s declaring victory anyway) because this deal is a “win,win,win” something he said he abhors. It doesn’t just benefit the US. He loses because dairy concessions by Canada the thing he was most focused on are fairly modest; but enough for him campaign on in farm states. Others around him knew more was at stake.

If one wonders about the outsize prominence of dairy farmers in what are not exactly 19th century agrarian economies, one needs to take note of the fact that so many around the President hail from farm states. The outsize influence of farmers in the politics of nations is not unique to the US. That’s why we ended up with supply management in Canada, that’s why farmers in Wallonia (in Belgium for now) held up Canada’s trade deal with the EU; that’s why farmers in France get to dump manure on highways and dare we say that’s why the rice industry in the US enjoys huge subsidies.

As always, the ” devil is in the details”. This is a massive deal, and much will emerge (good and bad) as the text is studied.

Canada has always fared well in bilateral negotiations with the US and has done well again. It is always for the same reason: the outcomes are more important to us than them, so we put our best and brightest on it (as we did here) and we can stay focused while they are distracted by so many pressing things.

In the end, the negotiations played out as negotiations most often do: the parties made a deal when they needed to, there was give and take no ‘winner take all” and everyone ended up just a little unhappy.

For more information on this subject, please contact:

Barry Campbell: barry@campbellstrategies.com
T: 416-368-7353 x 101