Can Canada Resist Trump’s Offensive on NAFTA?

Canada’s uneven dependence on the United States could reduce its leverage in future trade talks.

Prime Minister Justin Trudeau of Canada answers questions from reporters in Ottawa, October 20, 2015
Prime Minister Justin Trudeau of Canada answers questions from reporters in Ottawa, October 20, 2015 (Flickr/Justin Trudeau)

NAFTA stands for the North American Free Trade Act, but President Donald Trump does not.

After campaigning on a promise to repeal the act, then adapting his position to that of merely supporting the act’s renegotiation, Trump recently announced that he would no longer tolerate the status quo arrangement for American imports of dairy and forestry products originating from Canada.

Proposing, on April 24, to add a 24-percent tariff on American imports of Canadian softwood lumber, Trump kept up the pressure on Canada the following day, tweeting, “Canada has made business for our dairy farmers in Wisconsin and other border states very difficult. We will not stand for this. Watch!”

Watch! indeed: the value of the loonie fell sharply the week of the tweet, as investors worried how Canada will fare when it comes to the broader renegotiation of NAFTA Trump continues to promise.

Trump’s targeting of Canada in this way is not likely to have been random. Nor was it entirely economic in its intention. Rather, Trump brought up the issue in order to prove his anti-NAFTA bona fides to his political base, however, in a way that manages to avoid the hairier subjects associated with NAFTA’s other signatory, Mexico, such as those of immigration, racism and The Wall.

Trump has admittedly been careful to direct attention to goods of lesser importance, like dairy products and softwood lumber, rather than to Canada’s key exports of oil (from Alberta) and auto parts (from Ontario).

Still, he has been far tougher on Canada — at least in his rhetoric — than has any other recent president. To use a Trumpian phrase: Canada has now been put on notice.

Trudeau’s worries

Obviously, this may worry Canada’s prime minister, Justin Trudeau. Elected with a rare majority government in 2015, Trudeau’s political honeymoon now finally seems to be nearing its end.

The NAFTA/Trump issue was just one of four indications of this to occur this spring. The other indications were the election of a new federal opposition leader, Conservative Andrew Scheer, on May 28; the expectation of an NDP-Green minority government forming following an election in British Columbia in May; and the continuing decline in oil prices that has occurred thus far in 2017.

Of these, the price of oil is the most troubling sign for the Canadian economy and by extension for the approval ratings of Trudeau.

West Texas Intermediate crude oil prices crashed in mid-2015, hitting lows of $26 a barrel in February 2016 but staying mostly within a range of $40-55 since then. They began 2017 at $54 and remained there until mid-April.

However, in recent weeks they have fallen again, so that as of this writing they are at just $43 a barrel.

The Western Canadian Select oil price, which is the price that Canadian oil tends to sell at, is barely over $30. This does not bode well for the Canadian economy.

Conservative challenger

The biggest political news in Canada, meanwhile, has been the victory of the new Conservative leader, Andrew Scheer.

Scheer narrowly, and quite unexpectedly, defeated Quebec MP Maxime Bernier at the Conservative Party convention and so will now replace the party’s interim leader, Rosa Ambrose, as Canada’s leader of the opposition.

The impact of Scheer’s victory is likely to be twofold.

First, Trudeau now finally has to face a real political opponent in parliament, rather than a mere interim leader as he has faced until now. This may draw some media attention away from political narratives created by Trudeau, instead giving his Conservative opponents some more airtime.

Indeed, Trudeau may now no longer be the only golden boy in Ottawa. Scheer is just 38, seven years younger than his prime minister.

The second impact of Scheer’s victory is that, unlike Trudeau, Scheer is not from Quebec. Bernier, who had been expected to beat Scheer, would have been the first Conservative leader from Quebec since Brian Mulroney, who was prime minister from 1984 (the year Trudeau’s father left office) until 1993.

In every election since then, the Conservatives have trailed behind the Liberals, New Democratic Party and Bloc Quebecois in Quebec. This is not a trivial fact: Quebec is home to 23 percent of Canada’s population and tends to vote for homegrown politicians. Given that Quebec has tended to be anti-Conservative, and western Canada pro-Conservative, Scheer’s victory over Bernier could mean that the next national election in Canada will be decided again in Ontario.

This fact could influence Trudeau and the Liberals during NAFTA negotiations, given that Ontario depends far more on trade with the United States than do any of the other Canadian provinces (apart from New Brunswick).

Provincial politics

The month of May also saw a shakeup in Canadian politics at the provincial level. In British Columbia, the third largest of Canada’s ten provinces, the incumbent Liberal government failed by just one seat to hold onto a majority government. The NDP and Green parties have now announced that they plan to form a minority government in British Columbia instead.

This announcement has already had consequences for Trudeau, as the new provincial government is not expected to support the planned expansion of Kinder Morgan’s Trans Mountain Pipeline from Alberta to British Columbia’s coast.

Indeed, the British Columbia election, which was held on May 9 — just a few weeks before Kinder Morgan held what it had expected to be the fourth largest initial public offering in Toronto Stock Exchange history — caused Kinder Morgan’s stock to plunge. If Alberta cannot export its fossil fuels to world markets via British Columbia, then it will probably remain more dependent on sending them to refineries in the United States.

Obviously, this would be likely to reduce Canada’s leverage in any trade negotiations with the United States.

Disadvantage

If and when these negotiations do occur, it is difficult to know what the details of any new NAFTA agreement will be. Canada is obviously at a disadvantage relative to the United States when it comes to trade negotiations. Not only is the Canadian economy much smaller than that of the US, and more dependent on trade with the United States than the United States are dependent on trade with Canada, but Canadian politics are also — contrary to popular wisdom — more internally divided than those of the US.

To give only one relevant example of this, there is the division between Canada’s provinces in the extent to which they depend on American trade. The value of Ontario’s trade with America is equal to an estimated 49 percent of Ontario’s GDP. By contrast, in Canada’s other major provinces — Alberta, British Columbia and Quebec — trade with the United States accounts for just 31, 16 and 23 percent of GDP.

With these figures varying so widely, it could be difficult for Trudeau to present a unified front during negotiations. This could be especially true if the Liberals lose the upcoming provincial election in Ontario a year from now. According to current polling, they are strongly expected to do so.

On the other hand, the political interests of the United States are global in scope, so the United States cannot afford to spend as much of its political capital haggling with Canada as Canada can afford to devote to haggling with the United States. Thus it is always difficult to know which country holds the more leverage in the Canadian-American relationship.

What is obvious, though, is the importance of the relationship. Canada may appear small when compared to its southern neighbour, but it is the tenth largest economy in the world and has growth prospects that out-rival most other wealthy economies. Canada and the United States have the second largest trading relationship in the world, trailing only (for now) trade between China and the United States.

Now that they are both finally settled into office, it will be fascinating to watch how these two countries’ utterly different leaders, Trudeau and Trump, will steward and steer this relationship going forward.

This article originally appeared at MacroGeo , June 22, 2017.