True North Strong and.... liberal?

Much of the planet is still trying to sort out the meaning of President-elect Donald Trump. Indeed, if some viewed last June's Brexit vote was a nerve-wracking tremor symptomatic of Europe's slide into economic and political nationalism, Mr. Trump's election was a tectonic shift confirming it.

In late October (linked here), The Economist hailed Canada as a kind of lone outpost in defense of liberty and openness among liberal democracies; the country's young, energetic, and progressive Prime Minister, Justin Trudeau being the most obvious symbol. Indeed, Canada has a long multicultural tradition of tolerance, inclusiveness, and adherence to the rule of law. But of particular importance to a country of enormous geography (2nd largest land mass) and small population (just 35 million) has been the nation's openness to international trade.

Mr. Trudeau has doggedly pursued the completion of the Comprehensive Economic and Trade Agreement (CETA) with Europe. It hasn't been smooth sailing. Indeed, the mere fact that Mr. Trudeau has pressed for CETA implementation-- an agreement initiated and largely negotiated by his predecessor-- is an implicit acknowledgement of the importance of open markets for Canadians.

However, Mr. Trudeau's DNA in defending openness is already being tested by Mr. Trump. It's a test that, in my view at least, Mr. Trudeau has already failed.


The End of North America?

The populist, anti-trade rhetoric of the 2016 U.S. Presidential campaign-- and my despair about it-- need no repeating here. I've had plenty to say about it in this blog. Several major U.S. trade initiatives are dead, notably the Trans Pacific Partnership (TPP)-- to which Canada is a signatory-- and the highly ambitious Trans Atlantic Trade and Investment Partnership (TTIP). Scrapping each of these proposed agreements is problematic enough, particularly in terms of what it signals about U.S. foreign policy throughout the Pacific Rim (TPP). Yet, some of Donald Trump's most potent anti-trade rhetoric on the campaign trail was reserved for the North American Free Trade Agreement (NAFTA). For many years, the NAFTA has become a pejorative short-hand for just about any poorly functioning element of the economy. 

Don't like the high price of milk at the grocery store? Upset over immigration? Manufacturing jobs disappearing? No one dare ask whether high prices for dairy are connected to domestic supply management practices. No one bothers to read the NAFTA with enough depth to learn that labour markets were not liberalized with the Agreement. And, too few are willing to consider that technological change has also contributed mightily to the erosion of the manufacturing sector? You name it, it's the NAFTA's fault.

Donald Trump thinks the NAFTA is the worst trade deal ever negotiated in the history of mankind, and wants it scrapped. Indeed, he's already got a timeline for doing so.

In Mr. Trudeau's very first phone call to congratulate Trump on his victory, the Prime Minister "pre-emptively" put the NAFTA on the table and indicated Canada's willingness to re-negotiate. A few days later, Mexican President Enrique Pena Nieto did the same thing.

In my mind, this represents a shocking capitulation on trade by both countries that is hard to fathom for two reasons. 1) Canada and Mexico have unambiguously benefited from trade liberalization, and from the NAFTA in particular. 2) the renegotiation of the NAFTA likely means the acceleration of the re-bilateralization of North America into two highly asymmetrical relationships-- unhealthy for both Canada and Mexico.

1) Who Really Benefits From Trade?

At the APEC Summit in Lima, Peru, Mr. Trudeau meekly tried to reassert the importance of openness, but also played into incorrect populist notions that trade only helps those already at the top of the income scale (linked here).

Both Canada and Mexico have a standard of living-- $US43,248 and $9,009 respectively in 2015-- are deeply dependent on international trade. One common measure of the importance (some might say vulnerability to) international trade is the sum of the value of all imports and exports as a share of GDP. Canada and Mexico represent a tiny share of North American GDP, but depend on open markets for huge shares of their economic activity-- 65% and 73% of GDP respectively. The potential impact of U.S. protectionism is even more evident if you consider where most of Canada's and Mexico's exports actually go-- 77% and 81% respectively to the U.S. alone. More restrictive market access will amount to an "own goal" for the U.S. as well-- the Peterson Institute, for example, estimates a full-blown trade war could cost the U.S. as many as 4 million jobs. Yet, relative to Canada and Mexico, only about a third (28%) of U.S. GDP is tied to market access.

The bottom line is that selling lots of stuff to Americans has worked out very well for both Canadians and Mexicans. 

Table 1. NAFTA Asymmetries (in billions $US)

	1975	1987	1994	2000	2012	2015
Canada GDP	$170	$420	$560	$770	$1,780	$1,550
% of North American GDP	9%	7.9%	7.0%	6.5%	9.3%	7.5%
Exports + Imports as %GDP	47%	53%	67%	85%	63%	65.4%
Mexico GDP	$88	$140	$420	$581	$1,178	$1,144
%  of North American GDP	4.7%	2.6%	5.9%	5.2%	6.1%	5.5%
Exports + Imports as %GDP	17%	33%	38%	64%	66%	72.9%
United States GDP	$1,600	$4,700	$7,017	$9,764	$16,240	$17,946
% of North American GDP	86%	89.3%	87.7%	88.2%	84.5%	86.9%
Exports + Imports as %GDP	16%	19%	22%	26%	29%	28.1%

Source: World Bank

Table 2. NAFTA Export Partners 2015 (rank order and percentage of total)

	Canada	Mexico	United States
Exports to	United States (76.7%) China (3.9%) UK (3.1%)	United States (81.1%) Canada (2.8%) China (1.3%)	Canada (18.6%) Mexico (15.7%) China (7.7%) Japan (4.2%)
Imports from	United States (53.1%) China (12.2%) Mexico (5.8%)	United States (47.3%) China (17.7%) Japan (4.4%)	China (21.5%) Canada (13.2%) Mexico (13.2%) Japan (5.9%) Germany (5.5%)

Source: CIA World Factbook

 
The idea that globalization and the benefits of trade have only accrued to those at the top of the income scale is a popular assertion. Unquestionably, there has been considerable public, academic, and political debate about rising income disparity in recent years. Moreover, it is the case that some of the political divisions over globalization flow from the divergence between those who have the skills, social mobility, and educational wherewithal to connect to the global economy versus those who don't. In rich countries, there has been a long standing debate about whether the state has done enough (a social contract) to protect the displaced workers that economic theory predicts will be created in the aftermath of liberalization. Indeed, many (including yours truly) think one source of modern economic populism has been the assumption that displaced workers will simply be "absorbed" into other sectors-- that Fordist assembly line workers can readily find work at Intel (Dani Rodrik is more concise than me on this). Such transitions are not straight forward. In short, decades of trade liberalization minus adequate compensation to the displaced have created a political situation in which the distributional chickens have come home to roost. 

Interestingly, the rhetoric of economic nationalism is most prevalent in the rich, developed economies of Europe and North America-- places where inadequate attention to the social contract around liberalization has been paid. Such rhetoric is fare less pronounced in the developing world (link to story). As depicted in the chart to the left, there is a strong connection between attitudes toward openness and per capita income growth-- where growth is stagnant, the rhetoric of economic nationalism tends to be stronger. 

2) The False Promise of Re-bilateralization

Sadly, the willingness of Trudeau and Nieto to so easily put the NAFTA on the table ensures neither will be as capable of getting what they want out of Washington. It's International Relations theory 101, or more specifically, interdependence theory. One tenet of interdependence theory is that by enmeshing larger powers in a web of interconnected relationships-- business, institutional, diplomatic-- you inherently curb some of the more arbitrary manifestations of power. While the NAFTA is famously devoid of supra-national institutions that pooled sovereignty among the three countries, the Agreement underwrote the concept of an idealized economic and political space in which cooperation was the rule and power politics the exception.

Awkwardness All Around

The problem for Canada and Mexico is that they themselves never warmed to this set of ideas. In 1990, Mexican President Carlos Salinas proposed free trade to President George H.W. Bush. Canada's Brian Mulroney hastily joined the party, but not because of the perceived benefits of trilateralism, or a vision of what North America could be. The whole point for Canada was to be at the U.S.-Mexican bargaining table to ensure the Mexicans didn't get a better deal than Canada had in their own hard-fought negotiations between 1985-1987.

Apart from their connection to the beaches of Cancun, the intersection of Canadians and Mexicans has been sporadic-- the two countries don't know each other well, nor are there many economic ties that would sustain a relationship absent Trump's America.

The years immediately following the 9/11 terrorist attacks on the U.S. represented some hope for a revitalized trilateral approach to a range of issues flowing in and out of security. Indeed, the 2005 Security and Prosperity Partnership was a genuine effort to set a broad, trilateral agenda. However, it suffered from a host of problems, not the least of which was that the security activity the preceded it-- the Smart Border Accords-- was itself mostly two separate bilateral exercises.

In my view, Mexico has been the most progressive of the three countries in thinking about possibilities for North America, at one point proposing a joint approach to energy cooperation and climate change mitigation. Yet, for some strange reason, Ottawa has always preferred to go it alone with Washington, evidently believing it can get more of what it wants without the pesky Mexicans slowing the whole process down.

In 2009, Prime Minister Harper put an exclamation point on all of that by imposing-- nearly overnight-- a new visa requirement on Mexican travel to Canada. In 2011, Canada and the United States launched the Beyond the Border initiative and the Regulatory Cooperation Council-- both distinctly bilateral cooperation efforts. Well, lo and behold, Mexico launched similar efforts with Washington as well. Brilliant!!!!


With the election of Justin Trudeau, I had hoped for something a little different for North America. Now, both countries are on a collision course with President-elect Trump over the NAFTA. Unfortunately for Canada and Mexico, it is a collision course with a much larger neighbor in an surly state of anxiety led by someone who has ridiculed Mexico for the better part of two years and likely doesn't care one bit about "special relationships" with Canada.

Trudeau and Nieto are undoubtedly using the NAFTA as a bargaining chip to engage the new Trump Administration and to signal a willingness to talk. I wonder, however, if in doing so they are also displaying an over abundance of confidence that things will turn out well for them. Once Trump pulls out of the NAFTA, Canada will get what it has wished for.... a purely bilateral negotiation with Trump's America to replace the NAFTA.

Good luck with that!!!