NAFTA talks: Like Mexico, Canada may need 'insurance' against tariffs

Canada maintains that its efforts to evade American tariffs on steel and aluminum, and threatened tariffs on cars, are on a "separate track" from the ongoing NAFTA talks.

But that's not how U.S. President Donald Trump sees it. His attempts to use tariffs as leverage in NAFTA negotiations have become such a ingrained habit by this point, he's started using the word as a verb.

"If countries will not make fair deals with us, they will be 'Tariffed!'" he tweeted Monday.

China was in Trump's sights at the start of the week — but by week's end he also could be talking about Canada and his threat to impose "national security" tariffs of 20 to 25 per cent on its auto industry if it doesn't soon join the new North American trade deal Americans sketched out with Mexico last month.

One of Trump's loyal Congressional soldiers, House Majority Whip Steve Scalise, warned Tuesday that Congress would "consider its options" if Canada doesn't sign on.

Foreign Affairs Minister Chrystia Freeland insists Canada won't sign a bad deal.

"That's not rhetoric," she told reporters before she left again for Washington. Still, she said, Canadians have a "talent for compromise."

Her negotiators face a tough call. Even if they strike deals and close the remaining chapters — by Thursday, Freeland's Mexican counterpart suggested, if they're going to have a text for Congress by the end of the month — a bigger question lurks.

Would a renegotiated NAFTA lift damaging steel and aluminum tariffs and shut down threats of future car tariffs? If it didn't, why would Canada sign on?

Monica de Bolle, a senior fellow at Washington's Peterson Institute for International Economics, said people have been too focused on specific sticking points — dairy concessions, dispute resolution chapters, intellectual property demands and more.

"The big picture is the threat of tariffs," she said. "And not just the threat. The ones already in place."

Mexicans sought 'insurance'

Mexico's preliminary agreement in principle with the U.S. included a side letter that accepts voluntary export restraints, or quotas, on future automotive exports to the U.S. In return, future car tariffs won't apply to shipments below the mutually-acceptable level.

De Bolle was in Mexico last week, speaking to officials from both the outgoing and incoming administrations.

"All of them said explicitly that this letter was their insurance," she said. "They're very straightforward in terms of saying that this is why they accepted this deal — which, on the surface, seems to have been a bad deal for them in many other respects."

De Bolle said that the Trump administration may double back and impose car tariffs on Mexico anyway, but the Mexicans are betting that they won't.

Because of this move, "I can't see how the Canadians are not going to demand a similar insurance," she said.

But there were no assurances for Mexico about the removal of steel and aluminum tariffs — something that's important to both countries but arguably more critical for Canada, given how much it exports to the U.S.

"Because the Mexicans gave so much away, it puts Canada in a tricky position," she said. "The U.S. is just basically going to say to the Canadians, 'We didn't do this for Mexico, so we're not going to do this for you.'"

The Trump administration's trade strategy is premised on creating American jobs by putting up tariff walls to support domestic industries. They aren't about to roll anything back, de Bolle said.

Proceeding with a new NAFTA without a de-escalation on tariffs would be a hard sell for the Trudeau government at home. That's why de Bolle thinks the Canadians are unlikely to settle this week.

"I don't think we're going to get a NAFTA deal any time soon," she said. "I wouldn't be surprised if the Canadians are just playing for show here."

'Messy' to cut out Canada

Flavio Volpe, the president of Canada's Automotive Parts Manufacturers' Association, said he won't judge Mexico's decision to accept quotas in the face of a serious threat to its economy. But he's concerned about the precedent it sets.

This threat of car tariffs may or may not be legitimate, Volpe said; major players in the U.S. automotive industry have warned of dire economic consequences, and Republican Senator Orrin Hatch warned Congress could repeal Trump's tariff powers if he followed through.

When it comes to NAFTA, "all of the things that exclude Canada are messy for American commercial interests," he said. "Whether it means something specifically to the president or not, it does mean something to Congress."

Instead of a side letter, Canada could insist the Commerce Department change the scope of its investigation to exclude its NAFTA partners.

The U.S. doesn't need to put quotas on Canada anyway: Canada's industry has been shrinking, not expanding like Mexico's.

Lifting steel and aluminum tariffs is trickier, Volpe said, because the U.S. industry is operating at only 50 per cent of its capacity. By contrast, the American automotive industry is operating at close to full capacity.

Canada's strongest defence is the damage car tariffs would do to the U.S. industry.

"Canada's not going to be the biggest loser on this one," Volpe said, adding his organization will be one of many heading to court to defend their industry.

Face-saving pragmatism?

Trade lawyer Mark Warner sees a tough choice shaping up for Canada — between trying its luck with the chaos that might unfold if this week's deadline is missed, or swallowing some national pride in the name of pragmatism.

It's not realistic to think that Trump will retract his tariff threats, he said. Canada may believe that levying national security tariffs against an ally is wrong, but that's not getting it anywhere.

"Their bet is that Trump won't do what he says he's going to do, he won't withdraw from NAFTA, and he won't put the [section] 232 tariffs on autos," he said. "Personally, my view is that those are two big bets.

"I doubt that Canada will get a formal carve-out from 232 tariffs explicitly made in this agreement. The practical thing, as the Mexicans figured out, is, 'Let's give him a face-saving device.'"

If quotas are set high enough, they might not hurt Canadian industries. But they could make the Trump administration feel like it has a win, and climb down.

"You've got to be a bit creative," Warner said.

Otherwise, Canada might need Congress to ride to its rescue to block either the car tariffs or Trump's withdrawal from NAFTA altogether.

Warner suspects a veto-proof majority in support of the existing NAFTA may be hard to achieve now, let alone after November's unpredictable midterms.