How NAFTA was saved: The bitter fight and the final breakthrough - Macleans.ca

How NAFTA was saved: The bitter fight and the final breakthrough

It started with a demand from Donald Trump and seemed like a zero-sum game. John Geddes on the long, divisive fight and the last minute deal.

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Prime Minister Justin Trudeau is greeted by U.S. President Donald Trump as he arrives at the White House in Washington, D.C., on Oct. 11, 2017. (THE CANADIAN PRESS/Sean Kilpatrick)

The trade agreement finalized in the late hours of Sept. 30 between Canada and the U.S. amounts to a triumph of the desire to do a deal over what often seemed to be irreconcilable differences.

From the outset of these renegotiations, the dissonance between the tough-talking American rhetoric and the soft-pedaling Canadian tone made it seem like U.S. Trade Representative Robert Lighthizer—U.S. President Donald Trump’s top guy on the NAFTA file—and Foreign Minister Chrystia Freeland—entrusted by Prime Minister Justin Trudeau to safeguard Canada’s most vital trading relationship—must be talking about entirely different sets of talks.

“We feel that NAFTA has fundamentally failed many, many Americans and needs major improvement,” Lighthizer said before the opening round in Washington last August. Freeland, however, spoke mildly of augmenting the North American Free Trade Agreement as it had existed for nearly a quarter-century with new feel-good sections on labour and environmental standards, gender and Indigenous rights.

The disconnect between them went back to the elections of Justin Trudeau and Donald Trump.

“The Liberal Party of Canada strongly supports free trade, as this is how we open markets to Canadian goods and services, grow Canadian businesses, create good-paying jobs, and provide choice and lower prices to Canadian consumers,” Trudeau said while charming his way into the hearts of voters in the 2015 Canadian general election.

But Trump—back when he was obliterating the political conventional wisdom that supposedly stood between him and the presidency—called NAFTA “a disaster” and later labeled it “the worst trade deal maybe ever signed anywhere.”

It was good politics for both of them. The difference is that the data pretty much confirmed Trudeau’s sunny view of NAFTA. Trump’s bluster was always based on what orthodox trade experts dismissed as a fundamental misunderstanding about what agreements like NAFTA are supposed to do.

READ MORE: The new NAFTA: This is every chapter in the agreement

As his main evidence for the pact’s failure, he offered the U.S. trade deficit with Mexico and Canada. (Never mind that the U.S. actually enjoys a surplus with Canada when trade in services is taken into account.) But the point of modern trade agreements isn’t to equalize trade between countries—it’s to let markets decide, by and large, what flows across borders.

“Trade deficits are the product of a whole range of things including exchange rates and capital flows,” explains veteran Toronto trade lawyer Lawrence Herman. “In fact, they may reflect a buoyant economy and demand for goods from abroad to support manufacturing industries. So trade deficits occur because the market allows them to occur. They are not the product of trade agreements or of open markets.”

Trump’s insistence that the point of reworking NAFTA was to erase the U.S. trade deficit wasn’t just a matter of misconstruing the treaty’s function for purposes of getting elected—it distorted the whole renegotiation. No trade negotiation—not Canada’s deal with Europe, not the Trans Pacific Partnership—could conceivably have been finalized if the explicit aim was securing one country’s interests at the expense of the others.

“These NAFTA renegotiations were started,” Herman said, “not because there was a common objective of three parties to improve NAFTA, but through a demand by the United States that NAFTA had to be changed in major ways for its own benefit—that it was a zero-sum game.”

ENTER CHRYSTIA FREELAND

Even though the American starting point was matter-of-factly radical, the talks began with the audaciously ambitious aim of wrapping up in just a few months. That was never in the cards. After all, the Americans went in demanding enormous concessions from Mexico and Canada.

To name just two, Lighthizer demanded a large boost in U.S.-content requirements for North American-made cars to trade duty-free in the NAFTA zone and the scrapping of the deal’s famous “Chapter 19” dispute resolution panels.  As for Canada and Mexico, they wanted the U.S. to reduce “By American” rules that limited Canadian and Mexican companies from bidding on U.S. government contracts—a non-starter with Trump’s team.

As talks continued into the fall on 2017, formal expressions of hopefulness began to sound strangely detached from informal leaks about what was actually happening at the bargaining table. “I am pleased to report we have found mutual agreement on many important issues,” Lighthizer said after Round 2 in Mexico City in early September. And Freeland chimed in cheerfully, “All three partners are absolutely committed to getting this done.”

Yet analysts and experts, industry and union leaders, couldn’t find concrete reasons to be upbeat. Talks seemed stalled on every major issue.

Indeed, by mid-October, reality set in. Freeland was openly expressing exasperation with the U.S.’s  “winner-takes-all mindset,” and describing American “proposals that turn back the clock on 23 years of predictability, openness and collaboration under NAFTA.”

Undaunted, Lighthizer accused Canada and Mexico of intransigence. “Frankly, I am surprised and disappointed by the resistance to change from our negotiating partners on both fronts,” he said, as if caving in to U.S. demands so clearly against their interests would be the logical move for Trudeau and Mexico’s President Enrique Peña Nieto.

Clearly, Freeland and Lighthizer weren’t getting along. Why would they? Freeland is a journalist-turned-politician who moves in international liberal-minded policy-wonk circles; Lighthizer is a longtime Republican trade lawyer, with a reputation for playing hardball on behalf of what his political bosses define as U.S. interests. She has established herself as a champion of a world order she sees as embattled by angry populism and protectionism. He has long argued the multilateralism undermined U.S. interests and protectionism has a long, proud tradition in the Republican party.

As a total collapse of talks began to seem more plausible, the political stakes for Trudeau came into sharper focus. Should Trump actually scrap NAFTA, the Liberals might be seen as having failed on the most vital economic file. After all, NAFTA, the 1994 successor to the Canada-U.S. free trade deal, supports about 1.9 million export-related Canadian jobs. And Canadians know it matters: a Pew Research survey found an almost identical 82 per cent of Liberals and 83 per cent of Conservatives in Canada support NAFTA. (The politics of trade is an entirely different story in the U.S., where 68 per cent of Democrats and just 30 per cent of Republicans like NAFTA.)

Trudeau has, in fact, poured extraordinary effort into the file. He brought Brian Mulroney—political lion in winter and the Conservative architect of the original deal—in to brief the Liberal cabinet. Trudeau appointed a NAFTA council that included not just prominent Tories and New Democrats, but also top union and farming voices, along with the expected business leaders from banking, auto parts, entertainment, high tech and more.

In fact, the conviction in elite Canadian political and business circles that a wide-ranging coalition would have to be assembled in the face of Trump’s protectionism went back at least to his Jan. 20, 2017 swearing-in as president. In his inaugural address that day, Trump inveighed about the need to “protect our borders from the ravages of other countries making our products, stealing our companies and destroying our jobs.”

At a party at the Canadian embassy in Washington that day,  James Moore, a former top minister in Stephen Harper’s cabinet, now a business adviser for the international law firm Dentons, spotted Freeland across the room. “I went up to her,” Moore recalls, “and said, ‘It’s about to get real. Give me a call if there’s anything I can do. Country first.’ ” She called. Moore has been a prominent voice on his NAFTA advisory group.

Trudeau didn’t just assemble sympathetic insiders. He flooded the U.S. zone with endless visits by top cabinet ministers, supportive provincial premiers, and squads of diplomats—all designed to cultivate a network of U.S. business and political support for NAFTA that might pressure Trump when the going got tough.

READ MORE: Wooing America to win NAFTA

Perhaps most tellingly, he had put Freeland on the case, shuffling her from the Trade portfolio to Foreign Affairs early last year, but leaving her responsibility for Canada-U.S. trade. Average Canadians might shrug at that hybrid cabinet assignment. Specialists didn’t.

“It’s exceptional—unprecedented—that the Canadian foreign minister would be responsible for trade negotiations with the United States,” Herman said. “She’s also very, very smart and tough, and isn’t prepared to be pushed around by American bullies, which is what she’s been up against.”

NAPPING ON NAFTA

Even appointing Freeland and orchestrating the broader pro-NAFTA strategy didn’t entirely shield Trudeau from criticism. Former prime minister Stephen Harper sent a memo to clients of his Harper & Co. consulting firm, with the title “Napping on NAFTA,” which was leaked to Canadian Press. In it, Harper said the Americans were “irked and mystified by the Liberals’ unwavering devotion to Mexico,” and criticized the Trudeau government’s bid to inject progressive preoccupations like climate change and gender rights into the talks.

Still, Harper’s successor as Tory leader, Andrew Scheer, evidently didn’t see much advantage in squaring off with Trudeau over NAFTA. In his first official trip to Washington as Conservative leader, early this year, Scheer adopted a non-partisan stance in a speech to the Wilson Center think-tank. “We want to make sure we’re here to support our government’s efforts in maintaining and protecting what we have in NAFTA,” he said. “I believe it’s important to send that signal to interests here in Washington.”

By the time Scheer visited the U.S. capital, the renegotiations had already dragged on longer than the original, albeit wildly optimistic, plan. At an early January cabinet retreat in London, Ont., Freeland mused to reports about her team engaging in “creative thinking” and “new ideas” to try to make progress at the Montréal round of NAFTA talks set for late that month.

In fact, the tone in Montréal was overshadowed by the fact that, just before the session, news broke that Canada had launched a wide-ranging challenge at the World Trade Organization against Washington’s use of anti-dumping and anti-subsidy duties, mainly against Canadian lumber. Lighthizer slammed the action as “a massive attack on our trade laws.” Freeland coolly sought to keep NAFTA talks and the WTO action separate. But that, of course, wasn’t possible.

Trump’s protectionist bent, rather than receding as the technical aspects of the deal occupied the negotiators, increasingly mattered at the NAFTA table. In early March, he announced that the U.S. would impose a 25 per cent tariff on steel imports and 10 per cent tariff on aluminum. Canada and Mexico were initially exempted, but on a month-by-month basis, apparently contingent on NAFTA talks progressively to the White House’s satisfaction. It was another point of pressure and source of friction in negotiations that already seemed tense and tractionless.

And Trump’s unpredictability wasn’t helping. In mid-March, a leaked recording found the president regaling political donors about how he had insisted to Trudeau that the U.S. runs a trade deficit with Canada without actually being sure. “I didn’t even know,” Trump bragged. “I had no idea.” Still, Trudeau remained at least publicly hopeful, calling a deal “eminently possible.”

Against a backdrop of slow or no progress, an early spring burst of optimism was fuelled by an external factor: a brewing U.S. trade war with China. Many independent observers speculated that a NAFTA deal was suddenly worth more to the White House to offset financial market anxiety over the economic impact of growing trade tensions between Washington and Beijing.

READ MORE: A patriot’s guide to shopping during a Canada-U.S. trade war

“We’ve entered a new, more intensive stage of engagement,” Freeland said in early April. Why?  “It is U.S.-China relations in capital letters that is in the background,” said Paul Evans, a professor at the University of British Columbia’s School of Public Policy and Global Affairs.

Arguably the clearest indication that negotiations were more focused on achieving something came in the news that auto sector issues were now firmly centre-stage. Colin Robertson, a former diplomat with long experience in the U.S., whose NAFTA analysis for the Ottawa-based Canadian Global Affairs Institute were must-reads for those watching the negotiations, said it all goes back to Trump’s 2016 campaign promise to reverse the exodus of U.S. auto sector jobs to Mexico. It was a key message in swing states he won like Michigan. “That’s what the President cares about,” Robertson said. “That’s a key constituency for him.”

STABBED IN THE BACK

At the end of May, however, those steel and aluminum tariffs were finally imposed on Canada and Mexico. Previously all bark, for the first time Trump bit his NAFTA negotiating partners enough to hurt. His relationship with Trudeau had turned testy, although it was sometimes hard to gauge how much of Trump’s ire was theatrical. In a May 25 phone call on the rising tariff tensions, the president reportedly asked Trudeau, “Didn’t you guys burn down the White House?”

It was a reference to British troops setting the president’s mansion ablaze in 1814, a reprisal for destructive U.S. attacks on what’s now Ontario in the War of 1812. He had a point. Canada-U.S. history, after all, isn’t entirely about world’s-longest-undefended-border bromides.

But this wasn’t about quips and historical footnotes. On May 31, Trump slapped the threatened 25 per cent tariff on steel and 10 per cent on aluminum from Canada, Mexico and the European Union. Trudeau and Freeland were ready for it: they quickly announced retaliatory tariffs on everything from ketchup to whiskey, pleasure boats to playing cards. Trump threatened a wildly disproportionate response—a 25 per cent tariff on autos, which TD Bank’s economists called “carmaggeodon” and figured could cost Canada—gulp—160,000 jobs.

Even numbers that big, however, don’t resonate like a truly acrimonious war of words. After Trump left the G7 summit in Charlevoix, Que., in late June, Trudeau was asked at a news conference about the tariffs, and said Canada “will not be pushed around.” From Air Force One, Trump fired of a Tweet about “Justin’s false statements,” and deployed surrogates to the Sunday political gab shows, where, among other bon mots, his chief economic adviser, Larry Kudlow, declared that Trudeau “really kind of stabbed us in the back.”

There followed a brief period of multi-partisan rallying around Trudeau. “We are all Canadians first,” Conservative House Leader Candice Bergen said, expressing “shock and dismay” over Trump’s tactics. NDP trade critic Tracey Ramsey’s motion to “stand in solidarity” with the Liberal government and against “disparaging and ad hominem statements by the U.S. administration” won all-party support in the House.

Still, opposition griping—particularly from Tories—began to focus on the notion that Trudeau and Freeland had failed in their highly touted strategy of managing and mitigating the obvious threat Trump posed to vital Canadian trade interests. That thesis gathered steam in August, when the Mexicans and Americans began weeks of NAFTA negotiations, with Canada relegated to the sidelines. Senior Tories were previously worried about any statements that seemed to side with Trump—shown by polls to be enormously unpopular in Canada.

Yet Conservative strategists began to see the potential for linking Trudeau’s NAFTA negotiating strategy with what they regard as his biggest bungle to date—his visit to India last winter, complete with an embarrassing array of costumed photo-ops. By Aug. 27, when Trump held an extraordinary White House media event to announce a two-way deal with Mexico, essentially saying Canada could take it or be left out, Tories were primed to pounce.

“Thanks to Justin Trudeau, Canada is on the outside looking in while Canadian jobs hang in the balance,” Scheer tweeted. “His economic failures have ruined Canada’s bargaining position and jeopardized thousands of jobs.”

And, for anyone just listening to Trump, Canada’s prospects suddenly looked miserable. “We’re going to call it the United States-Mexico Trade Agreement,” Trump said of his bilateral deal. What about Canada? Trump issued what sounded like an ultimatum. “It will either be a tariff on cars, or it will be a negotiated deal,” he said imperiously. “And, frankly, a tariff on cars is a much easier way to go, but perhaps the other would be much better for Canada.”

Freeland was on a working trip in Europe, which, needless to say, she cut short to hurry to Washington. And so began the grinding stretch run to the deal finalized late on the evening of Sunday, Sept. 30—the deadline set by the Americans for delivering a text of the U.S.-Mexico deal to Congress. If Canada came aboard, fine. If not, so be it.

ONE LAST SHOT

Marathon negotations in Washington in the final few days of August seemed fruitless. The American capital was enduring a heat wave and then the emotional funeral of Sen. John McCain, which amounted to a ceremonial rebuke of Trump’s presidency.

Freeland emerged frequently to offer reporters a few carefully chosen sentences about what’s going on in the closed-door talks. Her phrases about “goodwill on both sides” and about her fixed objective of getting “a good deal for Canada” took on a rote quality.

Then the Toronto Star broke a story about Trump boasting that any deal the U.S. reaches with Canada will be “totally on our terms.” Asked if the Americans were negotiating in “good faith,” Freeland wouldn’t quite answer the question. Instead, she said only that Lighthizer and his team were “working really, really hard.”

Trump’s boast—made off-the-record to Bloomberg, but later leaked to the Star—portrayed Canada as desperate for a deal, himself as entirely inflexible. And yet it wasn’t entirely obvious that he held the upper hand.

From the moment Trump announced his bilateral understanding with Mexico, some trade law experts had said he was overstepping the authority Congress gave him last year to try to update NAFTA. Cutting Canada out would be more than modernizing the existing treaty. American media reported Trump would face stiff congressional resistance if he tried to shrink the trade pact to a U.S.-Mexico deal.

That domestic pressure must have been a factor in the intense, final round of talks that occurred in the last weekend of September. It culminated in a symbolic win for Trump: he hated the acronym NAFTA, and the renewed deal will be known as the United States-Mexico-Canada Agreement, or USMCA.  “Truly historic news for our nation and indeed for the world,” declared Trump at an Oct. 1 press conference announcing the deal and the new name—”Has a good ring to it.”

On substance, though, Canada saved the dispute-settlement process known as Chapter 19—which Trudeau insisted on preserving throughout. But Canada gave up some access to its dairy market, a prominent sticking point. Trump backed away from earlier demand for a sunset provision that would have made the trade deal seem precarious and impermanent, accepting a 16-year term for the pact, with a joint review by all three countries within the first six years.

The details —and the wins and losses for each country—will become clearer of the next few days and weeks. Canada clearly made concessions on dairy and other supply managed farm products, and there are highly technical but potentially controversial American wins in areas like intellectual property and American influence over future Canadian and Mexican trade deals with other countries.

But the politics of agreement seem clear. Freeland made her mark in federal politics in the fall of 2016 by overcoming last-minute obstacles to finalizing the Canada-European Union trade deal known as CETA. Now, the salvaging of NAFTA—or at least the birth of the USMCA—gives her another conspicuous win.

She solidifies her claim to being the most obvious star in Trudeau’s cabinet. And what might have been an historic failure for these Liberals now emerges—just as they head into the final 12 months before the fall 2019 election—as what could well be their signature selling point to Canadian voters.

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