The Great Divergence: North America’s Trade Policies

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INTERNATIONAL TRADE SERIES PAPER

by Sarah Goldfeder
CGAI Fellow
February 2018

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Table of Contents


Introduction

The United States and Canada are operating from diametrically opposed playbooks on global involvement and trade. While one is seeking to minimize its global responsibilities and maximize trade potential via the use of bilateral tools, the other is reaching out to bring the world more engagement, philosophically positioned to reflect the government’s progressive values. This opposition played out not just on the stage at Davos, but it’s also present at the negotiating tables for the North American Free Trade Agreement (NAFTA).

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Global Positioning

President Donald Trump outlined his vision in a series of speeches, both at home and abroad, but nowhere was it more apparent than in his speech on national security. In the decades since the end of the Second World War, the United States had understood that its security was connected to global security. The Marshall Plan took that a step further and embraced the idea that a prosperous, stable world was a safer world, and the United States had an obligation to contribute to that stability. The world wars were taken as proof points that an isolationist United States was just as vulnerable to the disastrous effects of dictatorship, extremism and instability as any of the countries involved directly with those conflicts. This global sense of responsibility grew to an understanding of itself as a global leader – with obligations to the nascent democracies and the oppressed, as well as to preserving the routes of global trade.

That the United States has turned its back on this globalist philosophy should not be a surprise – frankly, not only has it been decades in the making, many would argue the world would be better off without one nation playing puppeteer via global military might and access to its consumer-driven market. But others would argue that now, with displacement throughout the world due to conflict and natural disasters, and other major powers moving into position for global leadership, the world needs the United States.

Meanwhile, Canada has demonstrated a desire to be part of the global conversation – presenting the idea of middle powers as leaders, using trade agreements and international aid to frame the conversation. The Progressive Trade Agenda is one attempt to move other middle powers toward economies that provide for prosperity for all their citizens. Using economic measures as diplomatic carrots is not new; in fact, the State Department under former president Barack Obama codified a program of economic diplomacy with great success. Additionally, Canada is using a set of defined objectives to determine deployment of its international aid, further entrenching feminism, economic empowerment, environmentalism and inclusion into its foreign policy.

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The Economy of the Future vs. the Economy of the Past

The leaders of the two neighbouring countries are focusing on entirely different economic drivers. One is looking toward clean technologies, making urban areas hives of economic activity, while the other considers the resurgence of traditional sectors its primary concern.

Canada’s current government has made a point of preparing the Canadian economy for jobs of the future. By focusing on services, highly skilled opportunities in high-tech fields and investment in next-generation technologies, Canada has built up a narrative designed to tantalize the millennials and Generation Z. In gauging what success looks like for trade agreements, Canada is focused on creating modern agreements that provide ample space for navigating the unknown unknowns of future technologies.

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Figure 1: Miners working in close quarters in a West Virginian coal mine. Roughly one fifth of all jobs in West Virginia rely on mining as a primary industry of employment. (Source: U.S. Bureau of Labour Statistics| Jim Pickerell/Newscom)

In contrast, the United States is looking back to its future. The Trump administration’s industrial strategy is built on a foundation of traditional economic engines such as construction, manufacturing and extractive industries. The push to undo regulations that are designed to limit development – including regulatory processes regarding the exploration and extraction of fossil fuels and minerals, building of infrastructure and the protection of federal lands – is key to this strategy. Trade deals that are understood to be a challenge to the U.S. manufacturing environment or that give up procurement space to foreign entities are seen as a threat.

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Big Economies Don’t Like Multilateral Deals

This U.S. administration is operating in a zero-sum environment where trade deals yield one set of losers and one set of winners. Multilateral deals complicate this math, creating compromise in search of a common, level playing field where all the signatories give up something to get something else. No wonder this administration prefers the bilateral agreement. The problem is, a bilateral agreement with unequal partners leads to an uneven deal.

Market monoliths such as the United States, China and even India, are far more interested in bilateral deals, where they can more easily gain access to new markets while giving up less. Meanwhile, middle-sized, small and developing economies are better served by multilateral trade deals where their combined weight can help to balance out the equation. NAFTA was the first of these, but the TPP and the dormant (for now) Transatlantic Trade and Investment Partnership (TTIP) were intended to be the next generation, creating a modern agreement focused on non-tariff trade barriers and market fairness rather than on one that is tariff-based and goods-driven.

In addition, Canadian and European leaders have accepted the tactic of isolating economies that are not interested in playing by the widely held rules of the global markets. The creation of TPP and TTIP were both driven by this philosophy, now abandoned by the Trump administration. Ironically, these agreements would have served to counteract the World Trade Organization’s lessening influence, and establish enforcement mechanisms that would be timely and thus create a fair-trade environment for the signatories.

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Selling a 21st Century Agreement to a 20th Century Leader

As NAFTA negotiations continue, Canada and Mexico are facing an increasingly frustrated Trump administration. The American trade deficit has grown in the past year, mostly due to policies the Trump administration has enacted, yet the blame continues to fall on the shoulders of the trading partners. The president, rather than seeing the deficit as proof of a robust consumer economy, sees it as a loss for America. This disconnect, along with the push for the return of 20th century jobs, has set up an impossible task for the U.S. trade negotiators.

No matter what the Canadians bring to the negotiating table, if the disconnect between one party seeking a trade agreement for the future and one party looking to reinvigorate the past is not addressed, the parties will continue to talk past each other. We saw that evidenced in Montreal. Robert Lighthizer has one goal in the renegotiation of NAFTA and that is to reclaim jobs lost, in the same industries (more or less). Making the argument that high-tech or service jobs are a suitable substitute does not meet the mandate under which the United States is operating.

Consider the Americans’ automotive rules-of-origin proposal. Canada, believing that the U.S. position on regional content could be satisfied once the entire life cycle of the car manufacturing process was included, offered up a matrix that would include things like engineering and marketing, as well as research and development in the component list. Lighthizer roundly rejected that, pointing out that once you’ve included all those aspects, more of the manufacturing could be off-shored. The disconnect between the intended outcome (displaying how the status quo on regional content is optimal for the North American auto sector), and the actual outcome (convincing the USTR that manufacturing continues to be at risk because of NAFTA) is representative of the ongoing dialogue. Until one or the other partners brings a proposal to the negotiating table that addresses the manufacturing issue, the chances of finding a pathway out of this impasse are slim.

It is hard to overstate the gulf between the U.S. and Canada’s foreign policy goals and philosophies at this moment. Likewise, it should be expected that those differences will affect how NAFTA will be renegotiated and if it will be concluded. The North American supply chain of the next NAFTA will have to address the manufacturing question in order for this U.S. administration to sign on. Canada will have to accept that the United States does not share its vision of the economy of the future in order to move past the current impasse.

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About the Author

Sarah Goldfeder is a Principal at the Earnscliffe Strategy Group in Ottawa, where she provides high-level insight on the inner workings of the U.S. and Canadian governments, including how they work together on important issues. With 15 years of experience in the U.S. federal government, Sarah most recently served as Special Assistant to two U.S. Ambassadors to Canada, fostering bilateral relationships at the most senior levels. Her understanding of the interplay between state and federal governments complements her service within the U.S. federal bureaucracy. She has expertise in a wide range of policy issues, which has enabled her to provide practical short and long-term advice on managing the economic, cultural and political dynamics in North America.

Prior to her arrival in Ottawa, Sarah spent three years in Mexico as a Foreign Service Officer, cultivating a deep understanding of U.S./Mexico border issues and appreciation for a region revitalizing itself after years of violence and fear. Her experiences have convinced her of the potential for a stronger, more cohesive partnership across the North American continent. In her work, she seeks to maximize the region's ability to advance the movement of people, goods, and services; the supply, production, and use of energy; and balancing the energy and environment equation. Sarah has also served in Southeast Asia, giving her a global perspective on North American policy development and an appreciation of the opportunities available both within and beyond the Western hemisphere.

Sarah is a North American nomad, with a father from Brooklyn, a mother from Chicago, and a life lived in eight states, six countries, and three continents. She calls the West her home, having studied at the University of Oregon in Eugene, Oregon and Colorado State University in Fort Collins, Colorado.

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Canadian Global Affairs Institute

The Canadian Global Affairs Institute focuses on the entire range of Canada’s international relations in all its forms including (in partnership with the University of Calgary’s School of Public Policy), trade investment and international capacity building. Successor to the Canadian Defence and Foreign Affairs Institute (CDFAI, which was established in 2001), the Institute works to inform Canadians about the importance of having a respected and influential voice in those parts of the globe where Canada has significant interests due to trade and investment, origins of Canada’s population, geographic security (and especially security of North America in conjunction with the United States), social development, or the peace and freedom of allied nations. The Institute aims to demonstrate to Canadians the importance of comprehensive foreign, defence and trade policies which both express our values and represent our interests.

The Institute was created to bridge the gap between what Canadians need to know about Canadian international activities and what they do know. Historically Canadians have tended to look abroad out of a search for markets because Canada depends heavily on foreign trade. In the modern post-Cold War world, however, global security and stability have become the bedrocks of global commerce and the free movement of people, goods and ideas across international boundaries. Canada has striven to open the world since the 1930s and was a driving factor behind the adoption of the main structures which underpin globalization such as the International Monetary Fund, the World Bank, the World Trade Organization and emerging free trade networks connecting dozens of international economies. The Canadian Global Affairs Institute recognizes Canada’s contribution to a globalized world and aims to inform Canadians about Canada’s role in that process and the connection between globalization and security.

In all its activities the Institute is a charitable, non-partisan, non-advocacy organization that provides a platform for a variety of viewpoints. It is supported financially by the contributions of individuals, foundations, and corporations. Conclusions or opinions expressed in Institute publications and programs are those of the author(s) and do not necessarily reflect the views of Institute staff, fellows, directors, advisors or any individuals or organizations that provide financial support to, or collaborate with, the Institute.

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PODCAST

An Update on NAFTA: Can We Get To A Deal?

September 17, 2018

On today's Global Exchange Podcast, we continue our discussion on the future of the North American Free Trade Agreement (NAFTA). Join host Colin Robertson in conversation with CGAI Fellows Sarah Goldfeder and Eric Miller as they recap the past few weeks of NAFTA negotiations, outline the enduring hot-button issues, and provide some predictions on whether the three NAFTA parties can get to a deal before the end of September.



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