Fraser Forum

Trump win puts Canadian trade policy at a crossroads

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The election victory of Donald Trump has added dramatic new uncertainty to the global trade and investment regimes coming on the heels of the Brexit vote. Canada is now caught up in the uncertainty, and uncertainty is not good for the Canadian economy, to put it mildly, including the Canadian dollar exchange rate.

To this point, the day after the election, the Canadian dollar dropped a full cent relative to the U.S. dollar.

The immediate source of added uncertainty is president-elect Trump’s vow to tear up NAFTA. Although Trump has never been specific about what he means, taken literally, one would assume he means he will withdraw the U.S. from the treaty, as he would have the power to do as president. On the other hand, one might interpret his threat as hyperbole and that he will pursue amendments to NAFTA that contain greater allowances for protection against import “surges” and stricter enforcement of clauses dealing with unfair trade practices.

If Trump truly means to withdraw the U.S. from NAFTA, however, the obvious question is what becomes of the trading regime between Canada and the United States. While Trump has never expressed the sentiment publicly, to my knowledge, I have heard radio interviews with his main economic advisor (Peter Navarro) who effectively said that Canada has been a good trading partner with the U.S.—meaning that U.S. trade with Canada is in sufficient balance as to not be a “problem” for the U.S.

This suggests that Trump would be open to reinstalling a version of the Canada-U.S. Free Trade Agreement as the legal instrument to govern trade relations post-NAFTA. Presumably Canada would be free to negotiate its own free trade agreement with Mexico, if it so chose. It would remain in Canada’s interest to retain a free trade arrangement with the U.S., although it’s certainly possible U.S. negotiators insist on changes to the current trade regime with Canada that Canadian negotiators will find hard to accept, such as stricter rules of origin or limits on an independent monetary policy.

Even if a free trade agreement between Canada and the U.S. replaced NAFTA, Canada would face a U.S. administration that seemingly subscribes to a naïve mercantilism. This suggests that trade disputes with the U.S. will be more frequent and more difficult to resolve.

Border security might also be tightened, restoring some of the higher costs and transportation disruptions that plagued bilateral trade in the years immediately following the 9/11 terror attacks. On the other hand, Trump has expressed enthusiasm for increasing energy production in the U.S. along with limited concern about environmental consequences of carbon fuel. This could mean that oil and gas imports from Canada will be less encumbered by U.S. environmental concerns that ultimately blocked the construction of the Keystone XL pipeline.

In short, Trump’s election, on balance, probably means a more problematic bilateral trade environment from Canada’s perspective but, perhaps, not the catastrophe one might extrapolate from his threats to tear up NAFTA and penalize U.S. companies that invest abroad. Still, Canadian trade policy is at a crossroads. Canada wants to push ahead with an agenda of trade liberalization, while the U.S. is moving in the opposite direction. This suggests a tricky balancing act for the Canadian government, but even a mercantilist Trump regime will be reluctant to sever the deep and extensive cross-border supply chains characterizing the Canada-U.S. transportation equipment, agricultural and energy industries.

Nevertheless, Prime Minister Trudeau will have difficulty dealing with the new U.S. administration that, to this point, is largely a cipher in terms of economic policy.


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