Author Archives: Lawrence Herman

About Lawrence Herman

Counsel on International trade and investment, global business transactions & public policy

Neighbourly relations with the U.S. are over

GLOBE & MAIL

31 May 2018

LAWRENCE L. HERMAN © 2018

Former Canadian diplomat, practices international trade law at Herman & Associates and is a Senior Fellow of the C.D. Howe Institute in Toronto.

 

The Trump administration’s announcement of punitive tariffs on Canadian steel and aluminum yesterday means we’re into a full-blown economic and political war with the Americans.

The Prime Minister’s tough statement yesterday [30 May 2018] that these tariffs are unacceptable and an affront to all Canadians is unprecedented for its direct and un-restrained criticism of an American president and his administration by any Canadian leader. In answering the press, the PM said that Mr. Trump’s actions represent a “turning point” in Canada-US relations.

The descent into full-scale economic warfare with the Americans had been evident for some time, notwithstanding overly-optimistic comments by some observers dismissing Trump’s periodic threats and fits of rage against Canada (and Mexico) as just so much bombast. Some bombast.

It’s no surprise that Trump would use tariffs as his weapon of first choice, recalling his bellicose inaugural address with its unapologetic “America First” chant. Tariffs are easy to apply, especially if you disregard treaty obligations, can be designed to appease domestic constituencies and inflict maximum pain on foreign trading partners

The duties will have an immediately negative impact on Canadian steel and aluminum industries, forcing production cutbacks and threatening thousands of Canadian jobs.

Added to this Mr. Trump’s threat to target Canadian auto imports down the road.

The Canadian counter-measures announced yesterday have been designed surgically with the same pain-inflicting objectives, even if Canada’s relative economic size means Canadian surcharges won’t inflict the same level of absolute discomfort on the American economy. Nevertheless, Canada has little choice but to go down that road.

All of this heralds a long, bitter and painful battle with the Americans and ominously darkening relations on a scale broader than tariffs, a destabilizing and destructive situation unprecedented in over 150 years of shared history.

There have been periods of tense political relations between the two countries before. There was Kennedy’s intense dislike of Diefenbaker and the then Conservative government’s refusal to accept nuclear-armed missiles. There was tension with the Johnson and Nixon administrations during the Vietnamese war. George W. Bush was angered when Paul Martin backed out of shared North American missile defense at the last hour.

These earlier episodes can be chalked up to bilateral irritants and divergent interests that emerge from time-to-time in a complex relationship. But these were of an order materially different from the open anti-Canadian hostility, contempt and disregard exhibited by the White House today.

Canada of course isn’t alone at being targeted by Mr. Trump’s protectionism. Yesterday’s actions are part of an American trade strategy aimed at adversaries and allies alike, the EU included, grounded in Mr. Trump’s xenophobic world view, aided by the likes of Messrs. Bolton, Navarro and Lighthizer.

Beyond American bilateral relationships, actions by the Trump administration denigrate the multilateral rules-based system and disregard US obligations under that system, however the White House tries to dress these with a degree of justification. Foreign Minister Freeland repeatedly described the duties as illegal, which is correct.

Recourse to rarely-used WTO national security exceptions is only permitted in time of war or other international emergency, a term that requires objective fact, not some unbridled right of unilateral declaration. Using the guise of national security, as Freeland has said, is “specious and unprecedented” in trade law terms.

Mr. Trump is pillaging the temple of the global trading system so painstakingly constructed over decades, largely as a result of US pressure – sometimes more benignly and ironically described as American leadership.

Where we go from here? In the immediate term, Canada will proceed to retaliate with its own surcharges against $16 billion with of US imports, as the PM stated. We will need steely (forgive use of the word) resolve and steadfast political will at all levels as we move down this perilous path.

Turning to the NAFTA negotiations, there’s no doubt the American actions have jeopardized any residual amount of good will at the negotiating table, an element requisite to cementing any mutually-agreed trade deal. The NAFTA exercise thus could be irredeemably harmed by this latest US move.

Should negotiations be suspended, whether the three countries can get back to the table will be an open question. This leads to the possibility of Trump triggering the US intent to withdraw, compounding the increased political and commercial uncertainties facing Canadian business.

As to broader political matters, the conduct of neighbourly relations with the US under these unprecedented circumstances (a term used by the PM several times during his press conference) will be challenging. By turning aside all of Canada’s representations, Trump and his cohorts have jettisoned the idea that allies are important, especially ones that have been as remarkably steadfast as Canada for over more than 150 years.

It will require teeth-clenching and diplomacy of the highest order for Canada to maintain any semblance of a decently friendly relationship with Washington over the remaining years of the Trump administration.

At the same time, Canada needs to be armed and girded for the vicissitudes of trade and economic war with our largest trading partner, because that’s where we’re heading.

 

 

An Illuminating (but Short) History of Canada-US Trade Relations

The threat of Mr. Trump ending the NAFTA negotiations, including the possibility of him sending a notice of US withdrawal from the treaty itself, prompts a brief but interesting review of US-Canada trade relations over the last 150 years.

In may come as a surprise to learn that the US has only terminated one trade agreement in its entire history. And that was a trade agreement with Canada.

The 1854 Reciprocity Treaty was the first free trade agreement ever concluded by the United States. Canada was still a British colony then, so the treaty was negotiated and signed in Canada’s name by the British government. It provided for access of American and Canadian fishermen to each other’s coastal waters and created duty-free trade in fish, grain, poultry, eggs, lumber and a range of other non-manufactured commodities.

While the Reciprocity Treaty wasn’t anything like NAFTA or other free trade agreements we know today, it was a remarkable achievement for its time. In those days, customs duties were much more important than they are today, so duty-free trade really meant something, even if it was confined to basic commodities. The preamble used the following wording about both Parties being,

“ . . . desirous to regulate the commerce and navigation between their respective territories and people, and more especially between Her Majesty’s possessions in North America and the United States, in such manner as to render the same reciprocally beneficial and satisfactory . . ”

Unfortunately, the treaty’s days were numbered because of deteriorating relations between the US and Britain, mainly over the Alabama incident.

The Alabama was a Confederate gunboat. It had been built by a British shipyard, delivered to the Confederacy (over protests by Washington) and then raided Union coastal shipping during the early years of the American Civil War.

The fact that Britain allowed the Alabama (and other British-built gunboats) to be delivered to the South in spite of that country’s legal neutrality didn’t sit well in Washington when the war ended. As well, there was a perception that Britain had lent other forms of tacit support to the Confederacy because of its need for cotton from southern plantations to supply British textile mills.

Anger over all of this, plus a movement in the US to annex Canada, was running strong, so in 1866, the US abrogated the treaty. The interesting point about this is that President Johnson, who had assumed office when Lincoln was assassinated, required the approval of Congress to do so. There are some constitutional lessons here that are relevant in 2018.

To restore good relations and help calm things down, the US and Britain concluded the 1871 Treaty of Washington, providing for an international tribunal to settle the Alabama claims, which eventually awarded Washington $15.5 million in compensation. The treaty also resolved pestering disputes over the Atlantic fisheries and drew the Canada-US maritime boundary line off the west coast in the Strait of Juan de Fuca.

Now fast forward a few decades to another interesting episode in the early years of the 20th century. The bitterness of the post-Civil War period had long dissipated and there was general goodwill between the two countries, allowing Canada (under the Laurier government) and the US (under the Taft administration) to conclude a second Reciprocity Treaty in 1911.

In sending that treaty to Congress for approval in January of that year, President Taft expressed fine sentiments about the importance of good relations between the US and Canada:

“The guiding motive in seeking adjustment of trade relations between two countries so situated geographically should be to give play to productive forces as far as practicable, regardless of political boundaries. . . . an exact balance of financial gain is neither imperative nor attainable. No yardstick can measure the benefits to the two peoples of this freer commercial intercourse and no trade agreement should be judged wholly by custom house statistics.”

In the end, Congress approved the 1911 treaty but, as fates would have it, the Canadians rejected it. Laurier and the Liberals lost the bitterly fought 1911 election, the Reciprocity Treaty being one of the main issues in the campaign. Western Canada was in favour, eastern Canada largely opposed. Borden and the Conservatives campaigned vehemently against reciprocity and won, the Toronto business community carrying an anti-free trade banner with the rallying cry, “No Truck or Trade with the Yankees.”

And here matters stood for several decades. While there was an intermittent effort by the McKenzie King government to conclude a trade deal with Washington in the late 1930s, nothing came of it. In 1965, there was renewed forward movement with the conclusion of automotive free trade in the ground-breaking Auto Pact.

However no all-encompassing trade talks occurred until President Reagan and Prime Minister Mulroney launched an historic set of bilateral free trade negotiations in the mid-1980s. In a statement of vision, Ronald Reagan said this in presenting the final outcome – the 1988 Free Trade Agreement – to the Congress in January 1988:

“The U.S.-Canadian free trade agreement is the culmination of 18 months of strenuous negotiations between our governments. . .  Frankly, I think we’ve come up with a winner, a winner for people on both sides of the border. Canada and the United States are already each other’s largest trading partners. . . . The economic health and national security of our countries are linked. This well-honed treaty will build on these ties that already exist and open up tremendous new potential.”

The rest, as they say, is history.

 

POST NAFTA WORLD

This op-ed piece by Lawrence L. Herman was published on-line in the Toronto Globe and Mail on 11 January 2018 and was in the print version the following day. https://www.theglobeandmail.com/report-on-business/rob-commentary/the-post-nafta-world-is-starting-to-take-shape/article37572664/

Below is a copy of that article.

Are we entering the post-NAFTA world? It certainly looks that way.

The markets finally woke up to this Wednesday, after sleepwalking for the past year, as bond yields and stock prices sank and the dollar took a hit on news that the Trump administration is preparing to pull the NAFTA plug, maybe even before the next round of negotiations slated for Montreal at the end of the month.

Markets have a way of ignoring facts, or at least taking a rosy view in complex situations of government-to-government trade policy. In this case, the somnambulism was based on misplaced optimism that trade negotiators would be able to solve the NAFTA problems, blithely ignoring the significance of Mr. Trump’s repeated declarations that the agreement was the worst deal in history and constantly threatening to walk out unless the US got what it wanted in the renegotiating process.

Canada’s move to take the US to the World Trade Organization over its abuses of globally-agreed rules, made public yesterday, is a clear signal that the NAFTA exercise is up against the wall and that the US is preparing to trigger the 6 month withdrawal notice. It’s an indication that Plan B is now operative, as Barry McKenna rightly observed yesterday.

Taking the Americans to the WTO diverts the matter from the NAFTA turf, where the Americans hold most of the cards, and moves it to an international forum where all parties are equal and where judgments over whether the rules are being followed will be determined by a neutral panel.

It’s what the multilateral system was designed to do – level the playing field, removing the case from a stacked negotiating forum where a powerful bully dominates and relying on the WTO’s judicial body to dispassionately review one member’s complaint against another.

Canada has outlined a whole litany of US “nullification and impairment” measures affecting Canadian trade extending over decades, including the US refusal to fully implement WTO panel rulings, saying that those decisions only cover past importations and only those particular products, leaving the impugned measure in force for future cases.

By bringing its WTO case now, the Trudeau government recognizes that the NAFTA can’t be repaired and that US trade actions will only escalate with full encouragement under Mr. Trump’s protectionist America First agenda. Canada is showing that it has offensive as well as defensive strategies.

There are risks here, many of which were discussed in this paper yesterday. The first will be the inevitable souring of our bilateral trade relations. As Andrei Sulzenko has written in this space, trade remedies are viewed by Americans as the commercial equivalent of the constitutional right to bear arms, meaning there will a highly-charged and aggressive counter-attack by the Trump administration.

This has already begun, with Robert Lighthizer, the US Trade Representative, slamming Canada’s WTO request as a “broad and ill-advised attack on the U.S. trade remedies system.”

The Trudeau team needs to be steely-eyed in weathering these assaults. Whatever vitriol might light up twitter accounts, the Canadian complaint is totally within WTO rules and the right of any member to seek redress where another member nullifies or impairs its benefits under the WTO Agreement.

This will be Canada’s biggest ever WTO case, an epic battle taking years to get resolved. In the meantime, Canadian business needs to adjust to a likely post-NAFTA world. Even the earlier 1988 bilateral Canada-US FTA, which remains in force in the background, could be in Mr. Trump’s crosshairs. Terminating US participation in these treaties will mean ending current and future binational panel reviews, including softwood lumber, all which will be diverted to the US domestic court system.

On the less negative side, a world without a Canada-US trade agreement won’t stop ongoing trade or business between our two countries. Japan, the EU, China and indeed most of the world do business with the US without bilateral trade agreements. There will be an adjustment period but in the end Canadian trade will recover.

The longer-term spillover impact on the bilateral relationship in a post-NAFTA world is difficult to assess. Luckily, that relationship is robust enough to weather strains and irritants and has shown itself to be surprisingly resilient in spite of political and economic disputes in particular areas, some of which have been pretty contentious.

The problem until all of this gels will be ongoing market uncertainty, compounded by the battle shaping up in Washington over whether Trump can legally withdraw from NAFTA without congressional approval. The debate over Congress’ role will be further complicated by the impending US mid-term elections as well as constitutional litigation over the respective roles of the White House and Congress regarding abrogation of trade agreements.

So, while there’s a lot of drama surrounding Canada’s WTO case and all of its strategic implications, the centre-piece in all of this is the NAFTA and the critical events unfolding over the next few weeks. We’re in for uncertain times in a post-NAFTA world.

 

 

NAFTA SCENARIOS UNDER MR. TRUMP

Here are some comments on the various possibilities for Canada-US trade relations as we move into 2018, overlain with the threat of Mr. Trump terminating US adherence to the NAFTA.

Regarding the resurrection of the 1988 Canada-US Free Trade Agreement (FTA), it’s true it remains suspended but not terminated as a bilateral treaty. It could re-enter into full legal effect if the US withdraws from the NAFTA early next year, should Mr. Trump trigger Article 2205 (the 6-month notice requirement). However, the re-entry of the FTA into full legal force wouldn’t be automatic: Canada would have to agree to that as a matter of treaty law.

One of the main red-line positions in the NAFTA negotiations is the US demand to end the Chapter 19 panel review process. The bilateral FTA has virtually the same panel review chapter and if the FTA were to re-enter in force after US withdrawal from the NAFTA, the FTA panel system would then also be applicable as part of that treaty. The question is whether the Trump White House be prepared to accept that.

The interesting point here is that the FTA panel system has a 5-year sunset provision (with an automatic 2-year extension) under Article 1906 thereof, something rarely mentioned by policy commentators and the media.

The FTA panel process already ran for 5 years (1989-1994) before the NAFTA entered into force. Thus, if the FTA snapped back into operation, its binational panel process would then at most have 2 operational years left. Maybe the US could accept this.

Should this scenario unfold, the softwood and aircraft subsidy and any other cases initiated under NAFTA Chapter 19 would presumably continue to the end even if US treaty obligations under the NAFTA were terminated.

After US withdrawal from the NAFTA was completed, any new panel reviews would take place under the bilateral FTA – until the sunset provision ended the process.

The 1988 FTA has the same 6-month withdrawal provision (under Article 2106). If the binational panel system as well as other parts of the FTA are as abhorrent to the Trump administration as the NAFTA, the White House could end US adherence to the FTA and trigger US withdrawal from that treaty at the same time as invoking withdrawal under NAFTA Article 2205.

Of course, none of this is 100% clear. But the various possible scenarios make for interesting speculation as we move forward into 2018.