Now that the dust has settled on United States-Mexico-Canada Agreement (USMCA), what are the key takeaways and what should Canadians be doing next?
The first and most obvious takeaway is acceptance: this deal is poison.
USMCA does not create a free-trade zone. In fact, the words ‘free trade’ never appear in the documents.
This is a considerable loss, since the spirit of its predecessor, the North American Free Trade Agreement (NAFTA), was lofty; it was designed to create a free-trade model for the world around the idea of open and free competition in North America.
This new agreement aims much lower. At best, USMCA is a politically-opportunistic, managed-trade deal, not one for open and free trade.
Second, it’s now obvious that continental integration is dangerous to Canada and Mexico, and certainly not in the best interests of Canadian businesses.
It has always been a curious characteristic of Canadian policy-makers and business executives that they believe access to the U.S. market (and not domestic free trade) is the road to salvation for Canadian business. Recent events have clearly proven that this idea is simply wrong.
Continental integration under NAFTA has left Canada at the mercy of U.S. political gamesmanship and market manipulation.
Consider the oil business. Canadian conventional oil producers have essentially one export option: the United States. They export through a U.S.-controlled pipeline system that’s designed to oversupply. As a result, Canadian petroleum sells at significant discounts.
Brent crude, which sets the world price for oil, traded recently at US$85 per barrel. The U.S. domestic price for oil, which is established at the structurally oversupplied market in Cushing, Okla., was US$74 per barrel. What is Canadian oil trading at in these circumstances? Most recently, Western Canada Select was priced at just over US$29 per barrel.
Meanwhile, domestic refineries in eastern and central Canada are importing vast amounts of oil at world prices from Saudi Arabia, Venezuela and other ethically dubious sources.
The truth is continental integration under NAFTA has been exposed as a dangerous U.S. entrapment device.
The U.S. negotiators’ search for a ‘fair’ and ‘reasonable’ trade deal was conducted under the threat of economic armageddon, and it’s a testament to our negotiating team that they got as much out of this imperfect deal as they did.
The integration of the North American auto sector, for instance, was mercilessly exploited by the U.S. administration. President Donald Trump has always been a keen negotiator and his favourite tactic is to negotiate with a gun on the table.
The gun in this case was the presence of illegal punitive tariffs on Canadian steel and aluminum, and the threat of 25 tariffs on Canadian autos and auto parts, which – if enacted – would have crippled the Ontario economy.
Continental integration means dependency and the U.S. has now demonstrated clearly that it will abuse these dependencies without regard for the letter of the law or common decency. The hard truth is, we can no longer trust the United to play by the rules.
So what should Canada do in the face of these cold new realities?
The first thing our leaders should do (and I’m sure are doing as fast as possible) is to realize that the deal they’ve worked so hard to reach is worthless – empty words on paper. Naked self-interest and cynical national security calculations can (and will) override this trade deal.
And worse, there are clauses in USMCA that limit Canada’s options in dealing with other nations (read China). These are simply backdoor attempts by the U.S. to sustain the abusive relationship.
In the old NAFTA days, the six-month opt-out clause was simply a formality. Canadians were committed to continental integration and would make whatever sacrifices necessary to uphold the agreement.
But not now, not with Trump’s deal.
There’s an old saying in business that applies here: control your own destiny or someone else will. But what is the Canadian destiny?
Regrettably we don’t know, because NAFTA overwhelmed our sense of common purpose and with it any definitive calculation of national interest.
It’s time to have a national conversation about where we’re going as a nation and start building an independent Canada. There’s a lot of work to be done.
The obvious truth is that Canada needs to globalize its trade and immediately reduce its dependency on the U.S. market. Then we need to start acting like the grown-up nation that we are.
Robert McGarvey is an economic historian and former managing director of Merlin Consulting, a London, U.K.-based consulting firm. Robert’s most recent book is Futuromics: A Guide to Thriving in Capitalism’s Third Wave.
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