by Sarah Goldfeder
March 22, 2018
While most engaged observers in Canada have been watching the NAFTA renegotiations the way we watch hockey—with an eye to who’s ahead after each round as if they’re periods—the process is unfolding within a larger economic context that matters. The bigger picture in both countries bears considering, and former U.S. diplomat Sarah Goldfeder is here with a tour d’horizon.
While Canada focuses on the North American Free Trade Agreement and whether the Americans will walk away from the negotiations, the real show has been the U.S. economy. The United States has seen growth in a number of economic indicators that speak to the work of the previous administration, but also in some that demonstrate that President Donald Trump’s economic growth strategy is working.
Trump came to power declaring that the “forgotten men and women of America would be forgotten no more.” His campaign centered around the Americans who had yet to feel the economic effects of a resurging economy, an economy that the Obama administration had been pointing out was in recovery. Stagnant wages and flat-lined productivity contributed to a reality in which many Americans felt left out of the upswing. Many of these Americans had voted for Barack Obama and were waiting for something that felt like the promised change in their lives. Donald Trump offered them another shot at change, another attempt at finding someone who could make their lives better.
Economic recoveries take time, and the economic cataclysm of the global financial crisis hit the United States in the fall of 2008, just as Obama was elected president. His policies, some of which were inherited from the prior George W. Bush administration, slowly stoked the American economy back to life. But certain indicators lagged—employment, wage growth, productivity. All those indicators that are felt by individuals. Add to that monopsony power—the creation of monopolies within the labour market—and the fears surrounding how technology will impact employment and the concerns of the forgotten men and women are very real. Donald Trump came to the White House with the American economy safely on its way up. He claims credit for many of the results of Obama and even Bush economic policies, but that’s not abnormal. The trick will be maintaining that trajectory.
Despite the slow legislative start for this administration, the Trump White House has managed to push through a combination of regulatory and economic measures that have done exactly what he promised. The regulatory environment is becoming friendlier to investment and development, and with no end in sight, companies are beginning to direct dollars into the United States. The tax reform bill, really the only legislative accomplishment of 2017, is beginning to pull capital back into the United States, again, as promised. And most importantly, the tax reform bill has put more money in the hands of Americans. Most middle and working class Americans have seen their paychecks grow in the first weeks of 2018, not because of wage policy, but because of taxes.
When you look at the aggregate of what President Trump has accomplished for the American economy, it’s arguable that despite his early missteps, he has managed to do exactly what he promised. Looking at the conventional measurements, the economy of the United States is in great shape and getting better. Consumer spending is up, unemployment is down, the stock markets are (even with the latest corrections) soaring, and overall, Americans are optimistic about both the larger economy and their personal situation. It is worth noting that the policies this administration has advocated are in many cases not sustainable, even the tax cuts are subject to sunsets, so the long-run impact is an open question for now. So, the question for Canada and Mexico is: what about NAFTA?
On the campaign trail, Trump identified trade deals as the all-purpose villain. Trade deals like the Trans-Pacific Partnership and the North American Free Trade Agreement were taking American jobs, stifling American abilities to export, and in general, just a raw deal for America, Trump claimed. The reality is far-removed from all those assertions, but it did not matter to the Trump voters. Early in the NAFTA renegotiations, many pundits and trade-watchers in Canada worried that the Americans would walk away from the deal just to score political points with the base. That argument, which never had the attention of Americans, is now turned on its head.
U.S.-watchers have always reminded those paying attention that in the end, these trade negotiations have been about domestic politics, just like every other hot-button issue between Canada and the United States has been for as long as they have been neighbors. The domestic political narrative that drove the United States to renegotiate NAFTA has been downgraded from a shout to a whisper, which is better for the agreement in the end.
NAFTA negotiations will no doubt continue, well past March and likely into 2019. There is no pressure in the domestic political narrative in the United States to do anything different. Political gains on trade deals are pretty narrow in any case, and the complex web between the needs and desires of the agriculture and services sectors in the U.S. and those of the labour movement, leave little doubt that at the end of the day, doing nothing is the safe bet.
Canada might not appreciate that result. The reality is that many sectors in Canada are nervous about the potential for continued uncertainty while negotiations either are paused, stall out, or continue in slow motion. As they should be. The current environment bolsters the Trump administration goal of attracting companies to the U.S. After all, if your company sells into the U.S., right now inside its borders is the safest place to be. In addition, the decreased tax burden has all but erased the financial advantages of headquartering a business in Canada vs. the U.S. And NAFTA? An afterthought in the end; why rely on that when all but three of the 50 U.S. states will provide some sort of tax incentive for investing in their jurisdiction.
The United States and Canada have chosen to focus on different policy priorities writ large, but specifically on the economy. Canada has chosen a path designed to get it to the economy of the future—one focused on innovation, technology, intellectual property, and service-based sectors. The U.S. continues to focus on manufacturing, construction, and natural resource development. Canada is looking for ways to meet carbon reduction goals through carbon pricing and rewarding research and development. The United States is opening itself back up to reduced environmental protections, even revisiting the “endangerment finding” that requires the Environment Protection Agency to regulate greenhouse gas emissions.
The effects of these differences in priorities have already been seen at the NAFTA negotiating table. Canada proposed a series of adjustments to the automotive rules of origin that would have included things like engineering, research and development and marketing in the components list for regional content calculations.
During the discussion, American negotiators appeared optimistic about the ability of this matrix to break the stalemate on this issue. But when Robert Lighthizer, the United States Trade Representative, arrived in Montreal, he roundly rejected the proposal as opening the door to yet more manufacturing flight from the United States. What was notable about the exchange was the earnestness of the proposal from the Canadians, which goes to their belief in their priorities. In the end, the two countries were talking past each other, each frustrated by the other’s proposals and tactics.
Where this difference really matters is (again) in the comparative competitiveness of the two markets. The United States is throwing open its doors to industries for which Canada is creating new obstacles. Rather than looking to minimize its carbon footprint, the United States has declared that it will walk away from its Paris Agreement emissions reductions. The changes in the energy regulatory structure announced in early February in Ottawa have only increased the uncertainty for now. The long runway to a new process does not limit the uncertainty. Neither does the emphasis on increased engagement by stakeholders and the potential inclusion of projects not previously subject to federal review. Does it matter? The proof is in the pudding. In mid-February, the investment numbers into the oil industry demonstrated that the regulatory changes, in addition to moribund pipeline capacity and political squabbling, make a difference. Investors pulled $56 million out of Canada and invested an additional $32 million in the United States since the beginning of 2018.
What would a conclusion to these NAFTA renegotiations do for Canada if they were wrapped up today? Not much. The forces that will continue to limit economic growth in Canada are perhaps aggravated by the NAFTA talks, but are not due to them nor would they be eliminated by a successful conclusion. The United States has, through a combination of carrots and sticks (but heavy on the sticks) created an environment for business that, when faced with a choice, will chose the United States. Inclusive values and a preference for climate change action will not change that calculus for many. Selling values is a tricky proposition, especially difficult when your number one trading partner is engaging a more agnostic approach. The advantage, for now, will be with the United States, but there is a salient argument that in the long-run, that will change.
Contributing writer Sarah Goldfeder, a principal of Earnscliffe Strategy Group, is a former U.S. diplomat who served as an adviser to two U.S. ambassadors in Ottawa, as well as three years at the U.S. Mission in Mexico.