Pulling out of NAFTA ill-advised in response to U.S. steel tariffs: expert

by Naomi Powell (feat. John Weekes)

Financial Post
March 2, 2018

Canada will take the harshest blows if U.S. President Donald Trump slaps heavy tariffs on foreign imports of steel and aluminum, but any temptation to suspend NAFTA talks in retaliation should be avoided, Canada’s former chief negotiator on the trade agreement said Friday.

Putting the NAFTA negotiations on hold pending a resolution of the dispute over steel tariffs would give the U.S. an excuse to wash its hands of the agreement altogether, said John Weekes, Canada’s former WTO ambassador and chief negotiator on the original deal.

“I think, quite frankly, we are on the brink of a trade war if Trump goes through with this,” Weekes said in an interview. “But we don’t want to make it easier for him to walk away from NAFTA and if we leave the table, that’s exactly what we’ll do.”

Any hopes that Canada would be exempted from Trump’s proposed tariffs of 25 per cent on steel and 10 per cent on aluminum were derailed Friday by U.S. Commerce Secretary Wilbur Ross.

“Of the options that I presented, the president chose one — which was put broad tariffs on all products from all countries,” Ross said in interview on Bloomberg TV. “We have to deal with a global problem on a global basis.”

The threats from the U.S. prompted a sharp response Friday from World Trade Organization director general Roberto Azevedo, who cautioned that “a trade war is in no one’s interests.”

“The WTO is clearly concerned at the announcement of U.S. plans for tariffs on steel and aluminum,” Azevedo said in a brief statement issued by the WTO. “The potential for escalation is real, as we have seen from the initial responses of others.”

Jerry Dias, head of Canadian private-sector union Unifor, said Trump’s latest gambit to push his “America First” strategy had immediately soured the NAFTA negotiations under way in Mexico City and enfuriated the Canadian team.

“It is crystal clear to us that if Canada is not exempted from the U.S. tariffs on Tuesday, then Canada should walk away from the NAFTA table,” Dias told Reuters, likening the Trump administration to a “schoolyard bully.”

“Ultimately Canada’s going to have to start fighting fire with fire,” he said.

Foreign Affairs Minister Chrystia Freeland has said Canada will “take responsive measures to defend its trade interests and workers.” But trade experts are divided on just how much Canada, as a market of 35 million people, can push back against the U.S.

Canada is clearly more dependent on its trade relationship with the U.S. than the other way around, Weekes said. Canada is the top exporter of steel products to the U.S., accounting for 16.1 per cent of all foreign steel entering the country. And more than 75 per cent of all Canadian exports cross the border into the vast U.S. market of 350 million people.

Still, there are ways Canada can influence officials south of the border, including by drawing up a “retaliation list” of American exports that Canada would levy in response to the steel tariffs, Weekes said.

“A list like that can get things moving and I do think we’re at a point now where we need to do something,” he said. “Of course, we risk a situation where we give them a bloody nose and they break our arm.”

Much of Trump’s rhetoric regarding unfair trade in the steel sector has been directed at Chinese producers, who he says unfairly dump surplus steel into Canadian and American markets at prices that undercut local producers. However, the proposed tariffs are more likely to hurt other countries and Canada in particular, according to He Ming, senior manager at research consultancy Wood Mackenzie.

In 2017, the U.S. imported 35.6 million tonnes of steel, about 36 per cent of its total consumption, equivalent to about US$33.6 billion, He wrote in a note to clients. China accounted for about 2.9 per cent of U.S. total imports, but this volume was only 1.4 per cent of the country’s total exports.

“Thus, the steel tariffs will not have much impact on Chinese steel exports and China does not have as much to lose as the traditional U.S. trading partners,” He said.

Instead, the proposed protection measures will have a more negative impact on steel imports from Canada, Mexico and Brazil. Consumers will also take a hit, as increased costs of aluminum and steel hike the prices of everyday items such as cars, appliances and canned beverages like beer.

“Certainly consumers will take a hit, but from a trade perspective, Canada will be hurt the most,” said Christopher Sands, director of the Centre for Canadian Studies at Johns Hopkins University in Baltimore. “And America is so big, it’s not clear that applying a tariff on any single product would make much of an impact.”

If suspending NAFTA talks prompt Trump to walk away from the deal, it might force Congress to take steps to block him, Sands said. This, combined with the adverse effects such a move would have on stock markets, could put tremendous pressure on the U.S. president to back down from the steel tariffs.

“This is a mega-showdown,” Sands said. “I’m not trying to be overly dramatic here, but I really do think this is where we are at.”

But the move could be too much of a gamble, particularly when Canada is already facing a steep decline in foreign direct investment, said Mark Warner, a trade lawyer representing clients in Canada and the U.S. Investments by foreign companies in Canada fell by 26 per cent in 2017 to $33.8 billion, according to Statistics Canada.

“If Trump pulls out of NAFTA, business investment in Canada will be killed,” Warner said. “Historically, small countries very rarely win trade wars against large countries. Canada needs to stop talking about retaliation and calmly make a case for why it should be exempted from these tariffs.”

Meanwhile, industry leaders argued the tariffs make little sense, given the highly integrated nature of the steel and auto industries. Parts cross the border multiple times before ending up in a final product and many producers depend on those flows to keep their costs down.

“If we screw up the supply chain and add costs, then our prices will go up; if prices go up, if sales are lowered, production goes down,” Rob Wildeboer, executive chairman with Canadian autoparts firm Martinrea International, said in a call with investors yesterday. “If that happens, we cut jobs and two-thirds of the jobs will be lost in the U.S. with half of them in so-called swing states that elected the president. Why would we do that, how does that benefit our industry? That’s a question I ask as a supplier.”