Trump’s trade ‘tweaks’ may substantially impact Canadian economy

Prime Minister Trudeau met with President Trump at the White House this week. The meeting was highly anticipated by Canadian officials primarily as an opportunity to lower Canada’s visibility as a target for the president’s ire given his previous characterization of the North American Free Trade Agreement (NAFTA) as the “worst trade deal ever.”

The key takeaway from the meeting, at least for the media, was President Trump’s statement that the United States has a very outstanding trade relationship with Canada and that changes to existing legislation governing trade between the two countries will amount to “tweaking NAFTA.” It was likely not a surprise, although doubtless still a relief to Canadian officials, that Trump focused his disapproval of NAFTA on Mexico’s trade practices.

Not surprisingly the president did not disclose the tweaks he has in mind at the press conference following his private meeting with the prime minister. More concerning, perhaps, is that they apparently were not discussed during the private meeting either, at least according to Canada’s Finance Minister Bill Morneau, who described private talks as a discussion of the bilateral trade relationship in “general terms.”

While the tone of the meeting is reported to have assuaged fears of Canadian managers worried about a significant deterioration of the bilateral trade relationship, their relief might be premature. In particular, the tweaks foreshadowed by the president’s comments might turn out to have fairly substantial impacts on the Canadian economy. For example, the expiration of the Softwood Lumber Agreement exposes Canadian exports of lumber to new import quotas imposed by the U.S. Apparently there was no discussion of renegotiating the expired agreement.

Moreover, to the extent that the U.S. ultimately increases tariffs on its imports from Mexico, China and other countries enjoying trade surpluses with the U.S., the U.S. will also likely want to tighten North American content rules to qualify products for tariff-free trade between the U.S. and Canada. Any such increase in domestic content rules could raise input costs for Canadian producers by discouraging Canadian firms from buying cheaper intermediate goods imports from non-U.S. sources.

Still another possibility is that the U.S. will initiate countervailing duties or other trade actions against countries that act as so-called currency manipulators. While the Trump administration has explicitly identified China and Japan, but not Canada, as currency manipulators, the threat that the U.S. might apply trade sanctions against Canada because of a declining Canadian dollar might indirectly constrain the Bank of Canada’s freedom to condition monetary policy on domestic economic conditions.

One important issue raised by reporters at the press conference following the private meeting between Trump and Trudeau relates to differences in immigration policies. Specifically, President Trump was asked if he believed the northern border is secure. Trump replied that “you can never be totally confident” and then went on to talk about the great job the U.S. was doing in kicking hardened criminals out of the country. He also went on to mention his “very, very large” electoral college vote. While it’s difficult to identify a specific answer in most of President Trump’s responses to questions, one can see a real possibility, based on his answer to the security question, that crossing the border into the U.S. might become more time consuming and difficult for all Canadians if the administration sees a greater threat of Canada becoming an entry point into the U.S. for “risky individuals.”

At the same time, there’s a potential upside for the Canadian economy. Namely, Canada might receive more immigration applications from highly skilled individuals residing in countries that are on U.S. immigration restriction lists.

In summary, U.S. proposals to tweak NAFTA may turn out to be much more than tweaks to the Canadian economy. In this regard, it might be premature for Canadians to interpret the meeting between the two leaders as signaling a benign future for the bilateral trade relationship. The trade objective of the Trump administration is clearly to promote U.S. exports and discourage imports. It believes in managed trade, not free trade, and the management tweaks the U.S. will ask of Canada may significantly affect the net benefits to Canada of any new trade agreement with the U.S.