Aluminum & NAFTA Negotiations – a New Era of Global Trade?

Since the summer of 2017 Canada, Mexico and the United States have been negotiating with the objective of agreeing on a revised NAFTA—sometimes called NAFTA 2.0. Most observers take the view that the talks have not gone well to date. The U.S. Administration is now signaling that it wants to take a hiatus until after the Congressional mid-term negotiations in November. This, in spite of renewed pushes from Canada and the newly elected Mexican President’s calls to accelerate the talks. It seems that the parties cannot even agree on the timetable, and it has grown increasingly clear that there is a large gap between the U.S. position and that of its two NAFTA partners.

At this point, we are no longer heading towards unchartered waters with its incumbent uncertainty with respect to the U.S. 2017 demand for a “Revised NAFTA”— we are there and arguably have been there for some time. When observers look back on 2018 in the context of the Canada-U.S. trade relationship they may note the irony that the souring of relations spiked with tensions over aluminum and steel and the application of relatively obscure domestic trade regulations by the U.S. Administration with respect to the “national security” of the United States. The U.S. president landed at Bagotville, Québec on the morning of June 8^th and left less than 24 hours later. He was invited as the leader of the largest and most powerful member of the select club of the world’s economic powers. He seemed content to limit his role at the G7 Summit to that of unhappy and distracted guest whose major objective goal was to play to the anger and discontent of his political base back home.

Aluminum – ironically, Canada`s Royal Canadian Air Force base in Bagotville was built during WW II and expanded during the Cold War at least partially in response to U.S. pressure with respect to the need to defend the free world’s largest aluminum smelter in nearby Arvida (now part of Jonquière). The Saguenay easily provided the ideal combined energy and transportation elements to supply the United States’ industrial machine. The two countries viewed national interest through a similar lens. The importance of the joint defense of North America led to NORAD. Canada (thriving under the umbrella of the world`s most powerful nation) and the United States (having full military access to Canada`s sovereign air space) were happy with the pact.

Some argue that for the United States, free trade with Canada was the first step in building a hemispheric trade block (with the United States as the natural leader and chief beneficiary—part of its “Manifest Destiny” ideology). One that was optimistic and confident. As President Reagan said upon the achievement of the Canada-U.S. Free Trade Agreement:

We can look forward to the day when the free flow of trade, from the southern reaches of Tierra del Fuego to the northern outposts of the Arctic Circle, unites the people of the Western Hemisphere in a bond of mutually beneficial exchange, when all borders become what the U.S. – Canadian border so long has been: a meeting place, rather than a dividing line.

The push for economic integration was driven by more than inherent faith in the free market. In the post-war period the U.S. national interest was informed by the need to ensure that its industrial engine had full access to the wealth of natural resources Canada could supply. The FTA and NAFTA included specific obligations in NAFTA Chapter 6 – the Energy Chapter – that guarantees U.S. access to Canada’s energy resources through a proportionality provision that was part of the original FTA. The provision requires Canada to make available the current share of energy exports to the United States even when facing domestic energy shortages. If Canada takes action that cuts the availability of energy resources for whatever reason it must continue to make available for export the same proportion of total “supply” that was exported over the previous three years. [see https://www.businessinfocusmagazine.com/2013/06/energy-in-canada/]

It appears that the United States is now much more comfortable with its own and other energy sources and is no longer concerned with assured access to Canada’s energy resources to the extent that it feels no need for this provision. The proportionally provision was a controversial concession for Canadians in the 1989 FTA and it may be a relief to take it off the table. At the same time, in the context of its own national interest, the energy concession in return for continental integration of free trade again meant enhanced security. It meant the economic security of a privileged place inside the commercial umbrella of the world`s biggest economic power. And binding independent third-party dispute settlement was the key that convinced Canada`s leaders that they had the tools to mitigate against the worst vestiges of the consequent growth of economic dependence—that, and the explicit acknowledgement by the United States of Canada`s agricultural and cultural sensitivities. The bargaining chip of energy no longer appears to be Canada’s “trump” card.

The resulting free trade agreements (the FTA and then the NAFTA) lead to unparalleled Canada-U.S. economic integration and created the world’s largest trading area and new wealth and prosperity in both countries. This integration and what it has meant to business on both sides of the border is now under serious attack. The Trump team campaigned on the promise to re-negotiate the NAFTA or “tear it up.” Since the summer of 2017 Canada, Mexico, and the United States have been meeting to discuss a re-negotiated NAFTA 2.0.

The problem, many argue, is that is that the parties have not really been engaged in serious negotiating. The United States has been repeating a list of basic demands while showing no interest in engaging in real bargaining. Canada has spent a great deal of time and potential negotiating capital in the pursuit of new and progressive themes (environment, gender, labour, and Indigenous peoples, etc.) that neither of its NAFTA partners seems really interested. Mexico has generally adopted a “do no harm” approach and focused on maintaining the hard-negotiated results of the original bargain.

The original NAFTA negotiations that lead to the current agreement featured strong political commitment from the very top that ensured a successful outcome. This was coupled with an understanding that the parties would need to take into account and make allowance for certain key political sensitivities of their partners. In these negotiations, neither vital element has been present. On May 31, 2018, the U.S. Administration announced that it would apply punitive tariffs of 25 per cent and 10 per cent respectively on imported steel and aluminum under the seldom-used national security provisions of Section 232 of the Trade Expansion Act of 1962 to its NAFTA partners Canada and Mexico, as well as the European Union. All reacted quickly and forcibly, condemning the measure and planning to apply retaliatory duties.

When the President landed in Bagotville a week later in the region that marked, with its aluminum production, an early expression of North American economic integration and might, a tenuous situation became even more strained. In both 1987 and 1993, the Prime Minister and President worked together and spent great political capital to get the deals done. If the current situation maintains or perhaps worsens, that much-needed ingredient will be absent.

The past drivers for the United States—increased prosperity through economic expansion and securing geopolitical alliances and access to needed energy resources—have been replaced by the pursuit of commercial and geopolitical independence and economic and military dominance.

How did we get to this point? In our next note we will review this question in the context of the five key U.S. NAFTA demands at the outset of negotiations—what Canada has termed the “poison pills”.