Trump's ‘art of the deal’ agreement with Mexico puts ‘heavy pressure’ on Canada

President Trump announced Monday that officials have finalized a bilateral trade deal between the U.S. and Mexico that would replace NAFTA, with Canada possibly joining later pending negotiations. Photo: Getty Images

U.S. President Donald Trump said Prime Minister Justin Trudeau should expect a call “very soon” to discuss the future of trade on the North American continent.

“If they’d like to negotiate fairly, we’ll do that,” he told reporters at an Oval Office press conference on Monday. “The easiest thing we can do is to tariff their cars coming in. It’s a tremendous amount of money, and it’s a very simple negotiation. It could end in one day.”

Trump’s renewed threats against Canada were coupled with news that the United States has inked a breakthrough preliminary agreement with Mexico, resolving thorny issues such as auto sector labour and foreign content in vehicles.

The development puts Canada in the spotlight after its five-week summer vacation during bilateral talks between the other NAFTA partners.

“(It) is definitely good news for Mexico and the U.S., but could be good or very bad for Canada,” Capital Economics Chief U.S. Economist Paul Ashworth wrote in a note to clients on Monday afternoon.

The good

The agreement is evidence that Trump’s trade delegation is willing to negotiate in good faith, and even accept some concessions on key issues.

Under the deal, the amount of NAFTA-made content required for vehicles to qualify as tariff-free rises from the current 62.5 per cent to 75 per cent. The U.S. had originally pushed for 85 per cent.

Canada’s auto plants stand to benefit from rules requiring up to 45 per cent of vehicle content from factories where workers earn at least US$16 per hour. The average wage for Mexican workers in car assembly plants is under $8 per hour, and under $4 per hour for workers in parts plants, according to the Center for Automotive Research.

“Canada shouldn’t have a problem signing on to this,” Ashworth said.

The U.S. also appears to have softened its demands for a “sunset clause,” a provision that Canadian negotiators have flatly rejected in previous rounds of negotiation.  

“Trade Representative Robert Lighthizer appears to have weakened U.S. demands that the new deal should include an automatic five-year break clause, under which the agreement would need to be explicitly renewed by the legislative bodies in each of the three countries,” Ashworth said. “Rather than scrapping the existing investor state dispute tribunals, the latest agreement would exempt some industries, but allow the existing system to continue covering industries like energy, mining and telecoms, where firms bid for government permits and licenses.”

The bad

In addition to sabre-rattling about tariffs that would punish Canada’s auto sector, Trump once again took aim at another of his favourite targets — the country’s heavily protected dairy industry.

“They have tariffs of almost 300 per cent on some of our dairy products. We can’t have that. We’re not going to stand for that,” he said.

Ashworth expects Canada will be less accepting of U.S. demands for sweeping reforms to its dairy market, given the political sensitivity of the issue ahead of the federal election due in October 2019.

“Trudeau and his ruling Liberal party will be concerned about a backlash from rural voters if they cede too much ground to the U.S. That said, there is some wiggle room, and Canada made concessions on this topic in the TPP agreement,” he said.

While neither of Trump’s threats against Canada are new, Ashworth notes the U.S. president has upped the pressure by triggering the six-month NAFTA termination notice.

“Trump is working straight from his ‘Art of the Deal’ playbook,” he said. “Canada has been frozen out of those bilateral (U.S.-Mexico) talks in recent weeks, and will now be under heavy pressure to give ground.”

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