Rather than a “worst-case scenario,” the US-Mexico agreement-in-principle contains provisions that are in Canada’s national interests to accept, write Brian Lee Crowley and Sean Speer.

By Brian Lee Crowley and Sean Speer, August 30, 2018

Prime Minister Trudeau’s recent observation that “no NAFTA deal is better than a bad NAFTA deal” is true in theory but the government isn’t debating theoretical questions in a university classroom. It’s making a determination about whether the terms of the US-Mexico agreement on free trade are acceptable to Canada – a vital question which is anything but theoretical. Canadian jobs are at stake.

Much of the public commentary around the government’s options has adopted a similar tack to the prime minister’s. The parameters of the proposed deal are characterized as a “worst-case scenario” that will be near impossible for the prime minister and his government to accept.

We take a different view: while there are a number of outstanding issues, which include that of dispute settlement, what is on offer ought not just to be acceptable to Canada. It is emphatically in Canada’s interests. We shouldn’t let the disjointed process or our feelings about the American president obscure this point. We should take this deal and run.

Background

Before we get to explaining why the proposed deal, including headline items like autos, supply management, and intellectual property protection, is good for Canada, let’s spend a moment reviewing how we got here.

Remember when the NAFTA negotiations commenced just over a year ago, the hope was that we could “modernize” the agreement but otherwise preserve much of what we liked. President Trump’s principal focus was Mexico. Canada was just a bystander, a minor player in the galaxy of countries attracting President Trump’s trade ire. There was a degree of public optimism as a result. Prime Minister Trudeau even took the president’s daughter to a Broadway show.

Trump’s mercurial leadership virtually guaranteed that the process would be unorthodox and unpredictable. There was always going to be an element of theatre to these negotiations. But, as we’ve written elsewhere, the Trudeau government made some serious strategic errors in the year-long negotiations. These errors contributed to our being pushed up Trump’s list of trade offenders and then excluded from intensive Mexico-US talks altogether. Certainly the fact that Mexico has struck a deal with the US while Canada was sidelined puts the lie to the argument that “you can’t negotiate with the crazy man in the White House.”

The Mexicans have been more strategic and disciplined. Their government was focused like a laser on its national interest (despite regular provocations from Trump) while ours was preoccupied with tendentious “progressive” politics and paralyzed by complacency. One of our colleagues recently tweeted that we’ve been “played” by the Mexicans. As more information becomes available, it’s a difficult evaluation to contest.

What’s on offer

However we got here, though, there is little point now in relitigating the recent past. The present is far too important.

The agreement-in-principle reached between Mexico and the United States may not be precisely what we would have negotiated on our own terms but that’s the wrong test. The real question now is whether this agreement (and any other possible terms) is better than no free trade access to the US market.

Hard-headed realism must guide our choices now – there is no place for regret for a bygone era of Canada-US amity. Indeed such misplaced nostalgia is one reason we find ourselves in these circumstances in the first place.

Hard-headed realism must guide our choices now – there is no place for regret for a bygone era of Canada-US amity.

Equally, we cannot afford to let Canadians’ almost universal distaste for the president colour our decisions. Pointless gestures like “standing up to Trump” against our own national interests have no place in calculations of what happens next. Roughly one-fifth of our economy depends on exports to the US market, whereas less than two percent of the US economy depends on Canada. That reality defines our bargaining power.

The prime minister is, of course, theoretically correct that it’s conceivable that we could be presented with a deal that’s worse than no deal. But that’s not where we are today.

We would submit, in fact, that the deal now on the table (setting aside the seemingly unresolved dispute settlement question) shouldn’t just be acceptable to Canada. The broad brushstrokes of the US-Mexico agreement – including on autos, agriculture, and intellectual property – are largely positive for us. The 16-year process for review of the agreement is a huge improvement on the Americans’ original five-year sunset proposal. This is no worst-case scenario. It’s broadly good for Canada, our economy, investment, and jobs.

The auto deal, for example, helps Canada’s struggling industry. We too have lost jobs and investment to Mexico, and while that’s the way free trade is supposed to work, this is not the time to be a purist. The issue is whether the deal before us is in Canada’s interests. On autos that answer is an emphatic yes.

On supply management of dairy and poultry, the naysayers are presenting any concessions Canada might have to make as somehow a crushing and unacceptable defeat. We think the opposite. There’s a far stronger case that liberalizing supply management would be good for Canada. The complicated system of quotas and high tariffs benefits about 16,000 farms at the expense of millions of consumers who are forced to pay higher prices. Put bluntly: low- and middle-income consumers of milk, cheese and poultry are forced by government policy to subsidize wealthy farmers whose average wealth is $5 million. Reforming supply management or phasing it out altogether would thus be consistent with the Trudeau government’s recent Poverty Reduction Strategy and its ongoing emphasis on the middle class.

These are just some of the reasons why there’s such overwhelming support among economists and policy commentators in favour of eliminating supply management, independent of any trade negotiations. Enacting reforms as part of a broader trade agreement and providing generous transition arrangements (including transitional payments and reasonable timelines) may make such a policy more politically palatable, since the politicians will be able to blame Donald Trump for forcing this decision on them.

It’s worth observing that the Harper government made concessions on supply management in the original Trans-Pacific Partnership agreement and the CETA with the European Union, and industry’s response was generally muted even though both occurred in and around the 2015 election campaign.

The point is that reform is both desirable and possible, and the Trudeau government shouldn’t be reluctant to liberalize supply management – particularly if it’s key to renewing NAFTA. The same advice goes for the Conservative Party, which has oddly gone from acquiescing in supply management for political reasons to enthusiastically championing it as good policy in recent months. It is essential that our leaders across the political spectrum understand the seriousness of the moment and put aside mere politics for the national interest.

Now, some will invariably argue that we’re too sanguine about the prospect of liberalizing or even eliminating supply management. Any changes to the system are bound to generate significant political controversy – particularly in the context of a provincial election in Quebec where most supply-managed farmers reside. There are also legitimate questions about transitional arrangements and compensation for farmers who are harmed.

We don’t dismiss these arguments. But the costs of getting out of supply management or at least giving US producers much more liberal access to Canadian consumers, are inconsequential compared to those of failing to reach an agreement covering the full range of Canada-US trade, of which supply managed commodities are a tiny proportion.

The costs of getting out of supply management...are inconsequential compared to those of failing to reach an agreement.

Something similar might be said about the intellectual property provisions which Mexico has accepted but Canada is still resisting, often, in the case of pharmaceutical patents, to placate the provinces and territories. Not only have MLI authors consistently shown that strengthened IP protection is good for innovation, investment, and drug access, we’ve even argued that the IP changes envisioned in the US-Mexico agreement are specifically worthwhile. Many of these proposals were part of the Trans-Pacific Partnership negotiation which Canada correctly signed up for, and our Munk Senior Fellow, Richard Owens, was enthusiastic about them then. They make even more sense now as a condition of getting NAFTA 2.0 over the finish line.

If, as in the case of supply management, a little kabuki theatre is necessary, where Canada resists (in order to placate loud yet small minorities) but ultimately accepts the IP provisions, that’s fine, but let’s not lose sight of the fact that what America is demanding is actually in the interests of a country that allegedly is seeking to up its innovation game.

We find ourselves in the curious position where an ill-informed American president has made issues like supply management and IP protection the holy grail for US trade negotiators while the blinkered Canadian policy has been to dig in its heels over these same issues, which actually hurt the national interests of Canadians. If Ottawa wakes up to this reality, and can strike a satisfactory bargain on dispute settlement that keeps an unreliable US trade tribunal system from having the final say, Canada could and should sign such an agreement with enthusiasm and a clear conscience.

Brian Lee Crowley is the managing director and Sean Speer is a Munk senior fellow at the Macdonald-Laurier Institute.