Nafta: How not to negotiate a trade deal with the US

President Donald Trump was elected on a pledge to renegotiate all trade deals involving the United States so long as they are fair, reciprocal — and put “America first.”  Nafta and Korus, the US-Korea Free Trade Agreement, are the first deals being renegotiated. Understanding Canada’s experience with the Trump administration on trade will be valuable for future negotiations with all trading nations.

Unlike former president Barack Obama who used similar rhetoric and accepted the status quo after assuming office, President Trump withdrew the US from the Trans-Pacific Partnership (TPP) last January and gave notice to Congress in May that the US intended to renegotiate Nafta, the North American Free Trade Agreement.

Canada’s Liberal government prepared for the Trump administration by shuffling the cabinet, appointing ministers with experience and strong ties with the US. Chrystia Freeland became minister of foreign affairs and the lead elected official in handling Canada-US relations.

The office of the prime minister, Justin Trudeau, then created a dedicated “Trump Unit” with several officials including Freeland, Brian Clow, Gerald Butts, Katie Telford, Ambassador David MacNaughton, journalist Michael Den Tandt and trade officials. This group was structured like an election-style “war room” to orchestrate and coordinate Canada’s response to the Trump administration. The Trump Unit collected information on American politicians, key constituencies and interest groups, who were, in turn, targeted for “outreach” and “rapid response” by Liberal politicians.

A political campaign, not a trade negotiation

The unit treated relations with the Trump administration as a political campaign, where all that mattered was winning on election day. Political operatives could care less about the long-term consequences of their tactics. Upholding institutional integrity and maintaining credibility is a low priority compared with winning the campaign. The idea was to let President Trump “declare victory” without ceding substance. Canada expected to make few concessions to Trump. Deal with Trump the politician, not the businessman.

The Trudeau Liberals were confident that they could establish ties with key Trump administration officials. Katie Telford, the prime minister’s chief of staff, built a relationship with Trump’s daughter, Ivanka, to push for gender equality during the Trudeau’s visit to the White House last February. Telford was also in frequent contact with Trump’s son-in-law, Jared Kushner. Gerald Butts made friends with Trump strategist Steve Bannon. Relations with the executive branch seemed to have been in hand when Trump’s first attempt to give notice of withdrawal from Nafta in April was beaten back with the help of Kushner.

The outreach campaign, meanwhile, ramped up with Canadian politicians and officials lobbying Congress, State governors, mayors, and Canada-friendly interests such as the US Chamber of Commerce and trade lobbies. Canada produced data showing that Canada is the No. 1 trading partner of most American states, and accounts for a large share of every state’s GDP. By year’ send, Liberal members of Parliament had held 300 meetings with 16 US cabinet secretaries, 250 Congress members, and more than 50 state officials: The message: “We [Canada] are your largest customer,” seemed to be working.

The intent of Canada’s Trump Unit campaign was to collaborate with Mexico to generate so much opposition in Congress to Nafta renegotiation with state governors and well-heeled US interest groups that the Trump administration would be stymied.

The intent of Canada’s Trump Unit campaign was to collaborate with Mexico to generate so much opposition in Congress to Nafta renegotiation with state governors and well-heeled US interest groups that the Trump administration would be stymied. Failing that, there are possible legal challenges to the president’s authority to terminate Nafta.

When the Trump Unit campaign failed to deliver results, Canada became concerned. Negotiations ended deadlocked in November. Canadian negotiators were so confident of their “facts” that they lectured the US team on what was good for America — to no avail.

Ambassador MacNaughton this month told the Wall Street Journal: “What we are depending on is that facts should win the day.”   What facts? How reliable and credible are so-called facts from Canadian officials? How does the US view them?

American suspicions about Canadian claims are more often than not, justified. Many Canadian claims fail to pass the smell test for anyone with an undergraduate economics degree. For example, while it may be true that Canada buys a lot of American goods and services, it does not follow that Canada can cease to do so from others without additional costs after Nafta. Many agricultural exports from the US to Canada or Mexico are unlikely to be affected because the US is the world’s lowest cost supplier of those goods. Frightening the US farm lobby and states with misinformation irritated the Trump administration and Congress.

Likewise, manufactured goods or services imported from the US to Canada or Mexico often have no ready substitutes or large switching costs. Thus, threats made by the Canadian government to “not buy” from America have little credibility in most cases.

The ‘best customer’ claim was a hollow threat

When the Canadian dollar fell against the US dollar from above par in 2013 to a low of 1.47 in 2016 to settle at 1.25, Canadian demands for most non-commodity US goods and services was, as economist say, largely inelastic. “We are your best customer” is a veiled but hollow threat and not exactly charming.

The apparent charm of America’s “biggest customer” — the “Boy Scout Canadians” — at first confused their US targets, then was revealed to be ugly when Boeing filed a trade complaint against Quebec-based Bombardier Inc. last April, right after Kushner blocked Trump giving notice to terminate Nafta. Ambassador MacNaughton said to Boeing representatives: “I don’t do business with people suing me,” and, “You shouldn’t treat customers this way.” Subsequently, Canadian plans to buy F/A-18 Super Hornet fighter aircraft from Seattle-based Boeing Aircraft Co. were suspended and then cancelled in retaliation.

Officials from Bombardier involved the British government and Prime Minister Theresa May in harassing the Trump administration and jointly making threats against Boeing. PM Trudeau telephoned Missouri Gov. Eric Greitens, where Boeing makes the Super Hornet, to impress on him how many jobs there depend on Canada. The campaign collapsed when it was revealed that Canadians failed to disclose that Bombardier was courting the Chinese to sell out “lock, stock, and barrel” sensitive technologies and know-how that threatened the Airbus/Boeing duopoly and millions of high-paying jobs on both sides of the Atlantic.

US tariffs on C-Series Bombardier jets, rather than being withdrawn, remain in place. What the campaign did was to expose Canada’s method and means and the extent the Trump Unit will go for a victory regardless of long-term consequences for Nafta and other bilateral issues.

Personal ties had no impact on the White House

What about the Trump Unit’s personal ties to the Trump administration? Katie Telford’s ties with Jared Kirshner and Ivanka Trump had no discernable impact on the Bombardier case, or Nafta negotiations although it did get Trudeau a dinner with Ivanka in October.

Gerald Butt’s relationship with Steve Bannon did nothing for key issues. David MacNaughton is still ambassador despite Secretary of State Rex Tillerson’s visit to Canada which produced no change in US policy toward Canada. Meanwhile, Chrystia Freeland’s troubled co-operation with the US on North Korea cemented her reputation with the US and China. Personal ties to Trump political appointees mattered little once the US bureaucracy reasserted authority and advised the president properly.

Trade deals are all about structuring mutually beneficial long-term relationships that live for decades or longer after it is negotiated. It is all about crafting a framework that can live and grow with the partners all fairly benefiting from a much bigger pie. Canadians were poised to deliver “feel good” victories to the Trump Administration when the president was looking for substance. Canada’s intransigent behavior and backstabbing tactics on all key US issues damaged Canada’s reputation — troubled before Trump — for credibility and reliability.

Compounding Canada’s failure to deliver substance, ahead of the sixth round of Nafta talks in Montreal, Canada filed an extensive trade complaint against America at the WTO which US trade representative Ambassador Robert Lighthizer diplomatically observed is “bad for Canada.” The WTO complaint will undo goodwill toward Canada in Congress, the state governments, and many American interests that might have supported Canada before: wiping out benefits from the “charm offensive.”

The Canadian Trump Unit — a political animal to the core — in its death throes, ordered a banzai charge at WTO against America. Let Canada’s travails be a warning to America’s allies and close trading partners who are next up for renegotiating trade deals with the US.


Danny Lam is an analyst based in Canada. The opinions expressed are personal views and do not represent any organization the author may be affiliated with. This publication is provided for entertainment or informational or educational purposes only and is not a solicitation to buy or trade securities of any kind. The information is provided “as is”, believed to be accurate but its timeliness, accuracy and completeness cannot be guaranteed. At the time of publication, there are no known conflicts of interests unless expressly disclosed: The author does not hold a position in any securities mentioned at the time of publication, though this may change at any time after publication. Although the author and publisher have made every effort to ensure that the information in this book was correct at press time, the author and publisher do not assume and hereby disclaim any liability to any party for any loss, damage, or disruption caused by errors or omissions, whether such errors or omissions result from negligence, accident, or any other cause. The appearance of external hyperlinks does not constitute endorsement of the linked websites, or the information, products or services contained therein. The author and publisher does not exercise any editorial control over the information you may find at these locations.

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