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  • OPINION: Further possible unintended consequences

    Posted on: February 4th, 2018

    By Theo van de Kletersteeg

    As is explained in the adjoining article, business and personal relationships among North Americans will likely be among the casualties of a NAFTA renegotiation process that fails or that produces unsatisfactory results.

    In many respects Canada has taken open U.S. borders and free trade for granted. By and large, Canadians were able to move across the border with very little formality. However, ever since 9/11 and the creation of Homeland Security, things have become more difficult, little by little. Admittedly, when it appeared that business began to be affected negatively, bi-lateral discussions were successfully conducted to ease restrictions and facilitate the movement of goods and people.

    However, this year signs were beginning to emerge that the progress of the past might not go on forever. First, there was another softwood lumber trade dispute, another one in a series of such disputes spanning decades. Then, after President Trump made it clear that, in his opinion, the NAFTA Agreement had been a bad deal for America, negotiations started to “modernize” it. At this time, although negotiations are still being conducted, it is probably fair to characterize them as “not going well”, from Canada’s point of view. Finally, in September, Bombardier was targeted for trade retaliation.

    Incidents such as those above have consequences. In the case of softwood lumber, many Canadian producers have stepped up their investments in the U.S. so that when prices rise because of trade disputes, their U.S. lumber mills are highly profitable and will more than offset any negative consequences from exporting Canadian lumber, subject to duties, to U.S. customers. Bombardier got around punitive tariffs, at least for now, by forging an alliance with Airbus, which will see much of the production of CSeries aircraft intended for delivery to U.S. customers transferred to Airbus’ U.S. plant.

    These actions have negative consequences for Canada because they generally result in the migration of Canadian jobs to the U.S. If NAFTA negotiations fail or produce undesirable results for Canada, more jobs will migrate to the U.S. and/or Mexico because the cost of accessing U.S. markets for Canadian businesses will go up, and may become more difficult. Some Canadian businesses may find that the “Canadian advantage” has been diluted, and that operating a business from a U.S. or Mexican location offers greater advantages. Canadian businesses (including branch plants of foreign-owned businesses) will take note and calculate the benefits and costs of exporting from Canada vis-à-vis the benefits and costs of moving all or part of their operations to the U.S. or Mexico. Overseas businesses that had planned to establish a North American presence and that had decided, in part because of CETA and NAFTA, to establish themselves in Canada, might well have second thoughts. Canada’s energy companies have been particularly active recently making significant acquisitions in the U.S. (for example, Enbridge & Spectra Energy, AltaGas and WGL Holdings). In such a scenario, it is reasonable to expect that investment outflows will continue, whereas investment inflows will decline. For the record, Foreign Direct Investment into Canada has dropped from US$59.06 billion in 2014, to $41.5 billion in 2015, and then to only $33.7 billion in 2016.

    In the aggregate, Canada can no longer expect to gain anything from ongoing NAFTA renegotiations. At best, our losses will be minimal, but there are not many that currently expect Canada’s losses to be minimal. We cannot give up, and must continue to make our points. However, we also need to recognize that our trade with, and our relations with the U.S. will never be as easy again as they were in the past.

    Perhaps the root cause of the malaise is best explained through the cover of The Economist of November 11-17: “Endangered – America’s future as a global power”. Feeling threatened, America wants to make itself great again in part, it believes, by establishing new rules that suit itself, but not so much others.

    Going forward, the question will be what Canada will do as a nation to recover from these setbacks.