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By Steven Globerman
and Gary Hufbauer
The Fraser Institute

As North American Free Trade Agreement (NAFTA) talks continue, much remains undecided.

The United States and Mexico have already reached an agreement in principle on a new free-trade arrangement. But in light of Trump’s complaints about Canadian dairy tariffs, the highest hurdle for Canada will be our supply management programs.

Canada’s trade hurdle is all about supply management

Steven Globerman

The U.S.-Mexico deal, while still light on details, means Canada faces a serious threat of trade and investment diversion over time if Mexican producers have tariff-free access to the U.S. while Canadian producers don’t.

That means NAFTA – or, if U.S. President Donald Trump gets his way, “USMC” talks, for a U.S., Mexico and Canada pact – is in jeopardy.

Post-NAFTA, Canadians may dream they can rely on the Canada-United States Free Trade Agreement, established in 1987. But Trump has demonstrated his disdain for trade commitments. Canadian negotiators therefore have less leverage in bargaining with U.S. negotiators than they did before the U.S.-Mexico deal.

For example, Canada is worried about U.S. insistence on a sunset clause, which would force Canada to recommit every five years to the trade pact or watch it automatically end. In bilateral talks with the U.S., Mexico successfully sidestepped the sunset clause, although their agreement includes a “review” every six years, with the spectre of termination if problems can’t be resolved.

Canada’s trade hurdle is all about supply management

Gary Hufbauer

But in reality, the Trump administration will invoke new tariffs whenever it suits its political purposes. A six-year review period rather than a sunset clause will likely not convince investors that there will be a stable long-run trade regime between the U.S. and Mexico. In this circumstance, Canadian negotiators have no strategic reason to object to the same six-year review.

Another non-negotiable for Canada was eliminating the trade dispute resolution process. As the full text has yet to be revealed, it’s not clear whether, or in what form, the U.S.-Mexico agreement preserves the process.

However, like the sunset clause, a NAFTA dispute resolution process is only meaningful to Mexico or Canada if the U.S. is a good-faith participant. The willingness of the Trump administration to take unilateral trade actions, while anticipating retaliatory actions from trade partners, essentially proves that the dispute resolution process has lost much of its relevance.

Mexican trade negotiators have likely accepted this reality. In bilateral talks with the U.S., Canadian negotiators can perhaps keep a ghost of the original dispute resolution process on the books to avoid a complete surrender.

The higher domestic content rule, which requires that 75 percent (up from 62.5 percent) of the parts in any car sold in North America be produced in the U.S. or Mexico, presents no real problem for Canada to adopt in a similar agreement with the U.S. Nor does the requirement that 40 percent to 45 percent of auto parts in cars sold be made by workers earning at least US$16 per hour.

But Mexico’s apparent commitment to increase imports of U.S. agricultural products brings front and centre the main challenge facing Canada’s government. Again, maintaining Canada’s supply management system is likely a deal breaker, from Washington’s perspective. It’s the one outstanding issue the Trump administration can’t resolve unilaterally.

While the Canadian government has rejected Trump administration criticisms of Canada’s high tariffs on dairy products, it has not explicitly stated that supply management – now a hot button issue on Canada’s political scene – is non-negotiable.

The time is coming when Prime Minister Justin Trudeau and his cabinet will need to be explicit about whether Canada will walk away from a bilateral agreement with the U.S. to protect domestic dairy farmers.

Steven Globerman is a senior fellow at the Fraser Institute. Gary Hufbauer is a non-resident senior fellow at the Peterson Institute for International Economics.

Canada’s trade hurdle is all about supply management

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