Canada Shouldn't Exacerbate Trump's Protectionism With Its Own

Mexican President Enrique Peña Nieto has made it clear he will not renegotiate NAFTA with a gun to his head. That’s a sound strategy. Perhaps he should explain it to Canadian Prime Minister Justin Trudeau.

Both U.S. neighbors face pressure from President Donald Trump, who has made it clear that he thinks the best way to get a favorable deal from the NAFTA partners is to put the squeeze on them. Trump reiterated that position this week, telling Forbes magazine that “NAFTA will have to be terminated if we’re going to make it good.”

Mexico has made it clear it will pull out of talks immediately if the U.S. gives six-month notice of canceling the agreement. But Trudeau, perhaps unnerved by recent U.S. protectionist measures regarding softwood lumber and airplane manufacturing, seems to be sending the opposite signal. He was scheduled to meet with Trump on Wednesday, the same day the fourth round of NAFTA negotiations were set to get underway.

Unfortunately, Trudeau appeared ready to try to persuade the U.S. leader to focus on extracting concessions from Mexico. Canada’s foreign minister said that Trudeau would “explain really clearly to the President … that Canada is not America’s problem.”

It may seem convenient to the Canadian Prime Minister to try to turn the United States against Mexico, but it is hard to imagine a more self-defeating strategy. If Trump cancelled the agreement and Mexico left the talks, all three countries would be hurt. The U.S. and Canada may seek to negotiate another deal, but Trudeau would find himself under pressure to agree to mercantilist terms.

Reports indicate that U.S. negotiators are pursuing an agenda under which NAFTA’s dispute-settlement mechanism would be diluted, government procurement contracts would be restricted, autos would have to include at least 50 percent U.S. content, and a five-year “sunset clause” would ensure an easy escape hatch. That would just make trade less free, and North Americans less productive. The best interest of all North Americans are served by freer trade, not managed trade with one partner seeking guaranteed gains regardless of competitiveness.

Trudeau might have the idea that Trump may target Mexico and leave Canada alone because lower Mexican wage rates have attracted jobs from the United States. But let’s be clear: When industrialized countries like the United States and Canada push developing countries to embrace tougher labor and environmental standards, they are not acting out of concern for workers’ conditions or a cleaner environment. They are just trying to drive up wages in a country like Mexico, in the misplaced belief that will help their countries hoard jobs.

Wages are lower in Mexico because productivity levels are lower. Making it more expensive to produce there would end up hurting not just Mexico, but also Canada and the United States. Mexican workers generally occupy lower-skilled parts of production processes, while Americans and Canadians focus on higher-value added segments. This division of labor has helped retain many higher-value U.S. and Canadian manufacturing jobs that would otherwise have gone to other lower-cost economies. 

NAFTA has benefited U.S. companies, like the jeans company based in South Carolina that exports 85 percent of its denim duty-free to Mexico. There it is cut and sewn into their jeans, and then shipped back to the United States to be sold – maintaining jobs for 2700 South Carolina workers.

Mercantilists might prefer to try to cling to every job. But that would only make overall prices uncompetitive. In the auto industry, for example, cross-border supply chains have helped drive up North American vehicle exports 10 percent per annum over the past decade. North America now accounts for roughly 22 percent of global auto industry exports, up from less than 19 percent a decade ago. Locating some jobs in Mexico makes jobs in the United States and Canada more productive and secure.

If Trump decides not to pull out of NAFTA, it will be because advisors and business leaders make it clear to him that doing so would hurt the U.S. economy, as Agriculture Secretary Sonny Perdue did in April. The Chamber of Commerce has already warned of the negative impact. Over the past few years, Canada and Mexico between them have been the principal export for about 40 states. If Trudeau makes it clear that Canada will join Mexico in pulling out of talks should Trump give notice of cancellation, the President is far less likely to try that ploy.

Rather than use the NAFTA talks to dilute free trade, all three countries would be better off focusing on changes the global economy has seen since the deal was originally negotiated in 1993, such as taking into account the digital economy and changing needs regarding intellectual property.

The United States, Canada and Mexico share a common goal – enhancing productivity. They should concentrate on that.