By Theo van de Kletersteeg
The short answer is an unequivocal “yes”. NAFTA came into effect early in 1994, and was Canada’s second major trade deal – the first was the “Auto Pact” negotiated with the United States that came into effect in 1965. The Auto Pact was highly beneficial to Canada, resulting in the rebirth of an automotive manufacturing industry in Canada. However, it did not take long for Americans to realize that Canada appeared to have benefitted more from the Pact than the U.S. had, and complaints about it began to emerge in 1970. Similarly, U.S. complaints about its NAFTA deal with Canada surfaced not long after it came into effect.
NAFTA has been very beneficial to Canada, with Canadian merchandise exports to the U.S. consistently rising more rapidly over the years than U.S. merchandise exports to Canada. To be fair, over the same period of time, the U.S. has enjoyed increasing service export surpluses with Canada.
The Auto Pact and NAFTA’s advocates were then, and Donald Trump is now. In the days of the Auto Pact, Canada was, from an industrial point of view, a very small nation, and consisted mostly of branch plants of U.S. corporations. Negotiators of the Auto Pact must have thought that by boosting industry in Canada, prosperity would increase, enabling people to buy cars in greater numbers. Cars that, by the way, would be offered to consumers at lower prices because of the elimination of import duties. The Auto Pact was clearly a win-win Agreement for both countries which boosted Canada’s industrial capabilities, and lifted prosperity. NAFTA was, from that point of view, more of the same for Canada.
But things change: in 2016 the U.S. is no longer the global powerhouse it was in 1965. The country has seen its economic, military and diplomatic power slip as other nations have challenged America’s competitiveness. The country is deeply into debt, has massive budget deficits, has not produced a trade surplus for decades, and is no longer the once-cherished land of social mobility and the fulfillment of dreams. In fact, Presidential candidate Clinton recently referred to half the country as a “basket of deplorables”. The “deplorables” have spoken, and caused a new President to be elected who won his mandate on a platform of “making America great again”. This time, those in the Administration expressing unhappiness with NAFTA are not Ivy League-educated professional bureaucrats or industry representatives– this time, the unhappiness comes right from the top of the U.S. government, with Mr. Trump announcing that renegotiation of NAFTA is his number one priority, to commence immediately after his inauguration. Given that stock markets have reached new highs after the election results, and given that Mr. Trump has made a number of seemingly reconciliatory statements after his victory, should we think that he will put water in his wine about renegotiating NAFTA? I think that would be a grave mistake. Mr. Trump is a hard-nosed businessman who does what he needs to do to win – winning is his overriding objective. He has promised his supporters to make America great again, and to return jobs to the U.S. Renegotiating NAFTA is a cornerstone of his promise to Americans, and he simply cannot walk away from that. Some in Canada believe that Canadian politicians must and will rally Governors and other senior politicians in border states to put pressure on Trump by explaining to him that their local state economies will suffer if the U.S. insists on a major overhaul of NAFTA or walks away from it. Undoubtedly this will occur, but I think it would be unwise to underestimate Trump’s resolve on this fundamental issue. He will listen to his Governors, but simply ignore their advice.
Where does this leave Canada? Despite the courage displayed by our PM, there is little doubt in my mind that Canada will come out at the losing end of the stick. We should hope for the best, but fear the worst. Needless to say, any setbacks to this stagnant economy will increase the risk of a recession, for which Canadians are not prepared, given an already precarious employment situation and record-high consumer debt. Our economy has found it difficult to find its footings again since the Recession of 2008, and anemic global growth in recent years has reduced global demand for Canadian resources. Assessing the mood of the country, there is a level of optimism that I find hard to justify on the basis of economic prospects for the country, and the threats to Canada’s economy by a protectionist client that buys 75 per cent of our exports.
Many years ago, Canada started talking about developing an LNG industry to create markets for its burgeoning natural gas industry. Nothing happened. Subsequently, we talked about new pipelines going to the both the west coast and the east coast to expand sales of Canadian oil, and to replace imports. While it appears that the Kinder Morgan proposal to expand an existing pipeline proposal will be approved, the other two proposals are mired in controversy, and may never see the light of day. Well before Trump arrived on the scene and threatened to renegotiate trade deals, there was a strong need for Canada to find new global business opportunities to sustain its economy. Canada has not done that in sufficient measure, and is therefore at risk of serious consequences if any of its existing client relations sour. The U.S. is by far Canada’s largest client, and we should be gravely concerned that any measures the U.S. takes for its own benefit will come out of someone else’s pockets, with Canada and Mexico standing at the front of the line.
While possible changes to NAFTA must be on every Canadian’s radar, there are other consequences of Trump’s expected policy initiatives that will affect Canada. For example, while increasing economic activity in the U.S. will benefit Canada in a general way, increasing U.S. government debt will cause interest rates to rise. Because Canada is so closely linked to the U.S., our Central Bank would then have to choose between increasing rates in Canada, or seeing a further fall in the value of the Canadian dollar, which would cause the cost of imports to rise.
Trump will advocate for maximization of U.S. energy production, which has the potential of turning Canada’s biggest customer for oil and gas into its biggest competitor. If we have insufficient pipeline capacity to ship elsewhere, what will be the consequence of having the products, but not the means to deliver?
Trump threatened to shred the Paris Accord limiting greenhouse gas emissions. If he goes ahead with his plans, and Canada and the provinces proceed with plans to impose carbon taxes, such plans will make it more expense to produce energy in Canada relative to the U.S. The lack of adequate export pipeline capacity and higher costs of production in Canada will result in foreign investors finding Canada’s oil and gas industry less attractive to invest in.
Another serious threat to our economy is Trump’s promise that he will make drastic cuts to corporate income taxes, to a level below Canada’s. While it’s a great idea for the U.S., it could have devastating longer-term impacts for Canada. Lower taxes in the U.S. will undoubtedly cause foreign investors to choose the U.S., rather than Canada, as their investment destination, and cause some of our export-oriented companies to think about moving to the United States. Canadian companies that rely on foreign investment or foreign venture capital will be subject to pressure from their financiers to move to the U.S., with or without changes to NAFTA.
Our trade negotiators will give it their best, as they have always done. However, besieged as we are by a new U.S. President who favours protectionism, and finding ourselves (all levels of government and consumers) highly indebted, is it not high time for Canada to do some serious soul-searching about how we can contain the ever-growing costs of big government and social spending, in the absence of a strategic plan to keep companies in Canada and to attract new industries and new businesses. The thing that Trump’s plans have in common is that they undermine the incentives for Canadian movers and shakers to stay here to expand their businesses and create new ones. The situation feels like 1959 when the government of the day decided to stop funding the Avro Arrow fighter jet, which at the time was by all accounts one of the most advanced in the world. The decision led to the departure from Canada of thousands of aerospace engineers who contributed in a major way to the future commercial successes of Boeing, McDonald Douglas, Grumman, Northrop, General Dynamics, and Lockheed, as well as the successes of NASA. Arguably, Canada never recovered from that horrific mistake.