A split Congress may increase uncertainty surrounding Canada’s trade environment

This week’s midterm elections in the United States were the most expensive (in terms of candidate expenditures) and featured the largest voter turnout for any midterm election in U.S. history, as many observers saw it as a referendum on President Trump’s performance.

For once, the pollsters got it right. The Democrats won the House of Representatives while the Republicans held their majority in the Senate. So there’s now a split Congress.

What does this mean for U.S. policies that may affect Canada?

The consensus is that the U.S. is in for a period of political gridlock, at least until the next presidential election in 2020. However, Congress will need to address the important issue of the USMCA trade deal, which of course is of vital interest to Canada.

While most commentators believe the Democrats in Congress will vote to approve the USMCA, they may insist upon changes that will garner support from labour unions, environmental and social justice groups. In particular, the Democrats may seek to strengthen provisions in the USMCA dealing with worker protections, programs to advance gender and minority group economic interests, and stronger environmental regulatory safeguards. This would be an ironic turn of events, since Prime Minister Trudeau prioritized those issues at the start of the NAFTA renegotiation process, with the U.S. and Mexico summarily ignoring his appeals.

Since the U.S. Senate now thoroughly reflects President Trump’s populist economic ideology, Senate approval of a Democrat House-amended USMCA would follow President Trump’s direction. After lauding the USMCA as a major improvement on NAFTA, it’s difficult to imagine President Trump would back away from what he sees as a negotiating triumph by urging a Senate rejection of an amended USMCA. This is especially unlikely since any Democrat-initiated amendments would probably strengthen the position of manufacturing workers in the U.S., a group the president supported with his tariff policies. The wild card in this process is how the incoming Mexican government will respond to changes to the USMCA proposed by the U.S. Congress.

President-elect Andres Lopez-Obrador will be sworn in as Mexico’s new president on December 1. While the Mexican government will vote on the USMCA prior to his inauguration, any amended agreement will require approval from the new Mexican government, since it would represent a new treaty. If Congressional amendments substantially increase manufacturing costs in Mexico by, say, expanding the scope of minimum wage requirements to qualify goods for tariff-free trade within North America, Mexico may balk at a revised USMCA. At the very least, there may be a need for new rounds of acrimonious negotiations that would resurrect political uncertainty surrounding the North American trade regime. Acrimony between the U.S. and Mexico could ramp up dramatically depending on how those two countries cooperate (or not cooperate) in dealing with the looming inflow of refugee claimants from Central America moving through Mexico to the U.S. border.

Renewed uncertainty around the USMCA would damage the environment for capital investment in Canada. Furthermore, it’s unlikely that the takeover of the House by the Democrats will do anything to affect U.S. tariffs on Canadian steel and aluminum exports. Congress would have to repeal legislation giving the president the power to impose tariffs to protect national security. A Democrat-controlled House might be willing to initiate changes in U.S. trade law to weaken President Trump’s powers, but a Republican-controlled Senate under the president’s influence would not cooperate.

In short, while the midterms weakened President Trump’s political position, they may have increased political uncertainty surrounding Canada’s trade environment, which is bad news for most Canadian companies, their employees and the country overall.