The standalone trade deal negotiated by Mexico and the United States this month shows Canadians the truth of not one but two adages—Lord Palmerston’s observation that “nations have no permanent friends or allies, they only have permanent interests,” and the age-old proverb that “no good deed goes unpunished.”
When Mexico-bashing and wall-building dominated U.S. President Donald Trump’s Twitter feed last year, Canadian Prime Minister Justin Trudeau and Foreign Minister Chrystia Freeland nobly insisted that they wouldn’t sell out Mexico by negotiating any bilateral replacement for the three-way North American Free Trade Agreement (NAFTA) that has been in place since 1994—a show of Canadian-Mexican solidarity that harkened back to the Three Amigos summit of 2016. At the time of this good deed, it was imagined (not unreasonably) that Mexico ultimately would bear the brunt of Trump’s protectionist ire, with Ottawa playing the role of honest broker, earnestly applying Canada’s negotiating clout to demand a fair deal for a poorer country.
But Trump is, of course, a man of many moods. And as the first two years of his presidency passed, he has launched surprisingly bitter attacks against Canadian trade practices and has even insulted Trudeau personally. And this week, it was Mexico, not Canada, that took the opportunity to assert its interests by selling out a national amigo. “There are things that we don’t control, particularly the political relationship between Canada and the U.S., and we definitely don’t want to expose Mexico to the uncertainty of not having a deal,” is how Mexican Foreign Affairs Secretary Luis Videgaray Caso gingerly spun the decision. “Not having a trade agreement with the U.S., that’s a substantial risk to the Mexican economy. Literally millions of jobs in Mexico depend on access to the U.S. market.” As for Trump, he is now calling this deal “the United States-Mexico Trade Agreement.” He has also been threatening Ottawa with a 25 percent tariffon its auto exports if no Canadian deal is reached, a move that experts predict would cost 160,000 jobs, push the country into recession, and massively devalue the Canadian dollar.
These developments have triggered a round of predictable Trudeau-bashing in the Canadian media, with pundits recycling the caricature of their prime minister as a foreign-policy naïf getting a hard lesson in the art of the deal from hard-nosed world leaders. “The Liberals still conduct foreign policy as if Barack Obama were [U.S.] president, or as if Hillary Clinton had taken his place,” wrote a columnist on the Canadian Broadcasting Corp. web site. “Like Japanese Prime Minister Shinzo Abe and British Prime Minister Theresa May, Trudeau seemed to think his considerable charm and celebrity could mollify Trump.”
There is a grain of truth to this. While Freeland and her team have shown admirable professionalism in the face of Trump’s erratic outbursts and shifting bargaining positions, Trudeau himself sometimes has sought to co-opt the trade issue to signal fashionable social justice positions. At a glitzy 2017 women’s rights conference in Toronto, for instance, he told journalist Tina Brown that any new iteration of NAFTA must include blanket guarantees of gender equality. Shortly thereafter, it was reported that Canadian negotiators were pushing for a what they called a “groundbreaking” new NAFTA chapter on indigenous rights. The idea that Trump’s administration would say yes to either of these proposals belongs in the realm of satire.
News of the U.S.-Mexican deal has created a sense of crisis in Canada. It’s not just that the draft agreement includes nuts-and-bolts provisions that Canadian negotiators have opposed, such as an increase in the required level of domestically sourced content in manufactured cars, which will disadvantage Canadian suppliers whose parts are used in U.S. assembly plants. More fundamentally, the sight of Canadian trade officials submissively signing on to an agreement negotiated entirely by two other countries would represent a humiliation for Canada—and for Trudeau himself, who followed his 2015 election win with the bold claim that “Canada is back.”
And yet, this sense of crisis hasn’t led to anything resembling panic. The Canadian benchmark TSX Composite Index has been largely flat over the last week. And the Canadian dollar is worth about 77 American cents—just where it was a month ago. Perhaps that’s because there are many reasons to expect that Trudeau—and, more importantly, the country he leads—will come out of this crisis in good shape, with both dignity and economy fully intact. Here are three of them.
First, while Friday is being touted as a “deadline” for Canadian buy-in on the U.S.-Mexico agreement, there isn’t as much urgency as some might think. The U.S. Congress would have to approve any new trade pact, a process that could take months—or even become stalled indefinitely. (And although any U.S. president could unilaterally withdraw from NAFTA after giving Canada and Mexico six months’ notice, Congress can use legislative means to revoke or modify that power.) The fact of congressional involvement plays massively to Trudeau’s advantage because, from the moment Trump was elected, the prime minister and his team have been playing the long game in Washington, assembling a powerful network of pro-trade allies among legislators, business lobbyists, and governors. Already, some of these players are pushing back at the U.S.-Mexico deal and the associated ultimatum to Ottawa. “The administration … must reach an agreement with Canada,” Republican Sen. Pat Toomey warned Trump this week. “NAFTA was a tri-party agreement.”
Second, for all the talk of “replacing” NAFTA, the new template seems, from what we know, a lot like the agreement it could replace. Moreover, at least one of the few proposed big-ticket changes to the status quo—a provision requiring at least 40 to 45 percent of a vehicle to be produced by workers earning at least $16 per hour—would actually play to Canada’s advantage, because it likely would encourage a shift in production from low-labor-cost Mexico to high-labor-cost Canada. As Catherine Porter of the New York Times notes, the deepest concerns Canada has with the U.S.-Mexico agreement are meta-issues: dispute resolution mechanisms (which Canada wants, but the United States doesn’t) and the addition of sunset provisions (vice versa). In both cases, the new model would provide less long-term assurance to Canada’s foreign investors than the incumbent NAFTA regime. But there would likely be no immediate effect on the economy.
Third, Trudeau has a trump card he could play that would allow his negotiators to gain critical leverage on some or all of the above-listed issues—without hurting Canada’s bottom line. Just the opposite: Trump’s brinkmanship allows Trudeau political cover to end an outdated and inefficient protectionist program that impoverishes Canadian consumers even as it (properly) irks American competitors and trade negotiators.
That program, of course, is Canada’s dairy cartel, which rigs the domestic market for eggs and milk products through a combination of price controls, production quotas, and tariffs. As I wrote in Foreign Policy several months ago, it’s a naked racket that drives windfall profits to the corporate farm operations that have steadily bought up most of Canada’s family farms (much of which is shoveled back into sentimental propaganda campaigns aimed at shoring up political support for the scheme). According to one authoritative 2012 study, the cartel costs the average Canadian family about 200 Canadian dollars (more than $150) per year. For decades, it has been taken as political gospel in Canada that no government could break up this scheme without suffering electoral catastrophe. But as polls show, every crisis creates opportunity. And if Canadians knew that ending the dairy cartel was the price they paid for the effective survival of NAFTA, few would object.