The sabre-rattling on NAFTA is worrying, but take it as an opportunity

MICHAEL HART AND WILLIAM DYMOND

Globe and Mail Update

March 14, 2008 at 11:39 PM EDT

Thanks to some opportunistic electioneering in Ohio by the two Democratic hopefuls, Hillary Clinton and Barack Obama, Canadian interests – specifically, the North American free-trade agreement (NAFTA) – briefly became an item in the U.S. presidential campaign. While the campaign has moved on, the Canadian chattering classes remain fixated on the apparent threat to NAFTA, with many voices urging the government not to let the Americans bully us into reopening the agreement. As former officials involved in the negotiation first of the Canada-U.S. free-trade Agreement (FTA) and then of NAFTA, we are gratified to see such solicitude for these two treaties. On closer examination, however, there is both more and less to this story.

First the “less.” No, the Clinton-Obama political pandering poses no serious threat to NAFTA. Ohio is a vote-rich and union-rich state, two facts of life that make it almost axiomatic that Democratic politicians would rattle some sabres on trade. Ohio is also part of the U.S. rust belt that is undergoing some serious adjustments to changing economic conditions. Highly paid, unionized manufacturing jobs in that region have been declining since the 1970s. International trade contributes to this trend, though it has also fuelled the growth of high technology, financial services and other sectors in the U.S. Other factors, notably technological change, are more important causes of the rapid economic adjustments. Trade, however, is the politically easiest target. In the case of Ohio, it is not trade inside NAFTA, but trade with China and other low-cost suppliers that is burrowing into its manufacturing base. If anything, NAFTA has helped prolong auto-industry and other manufacturing jobs, by providing a more integrated North American trade and investment environment.

The evolution of the Ohio economy – and that of Michigan, Indiana, Illinois and other parts of the rust belt – is too complicated a story to be captured in the images and slogans that make up a political campaign. Politics is about simplifying complex problems and phenomena, and offering attractively packaged solutions. Claims that NAFTA is part of the problem and that it can be renegotiated to create a better balance fall easily from the mouths of candidates fighting for every delegate they can get.

But that prospect is not real, as Austan Goolsbee, Senator Obama's economic adviser, admitted in an unguarded moment to Canada's consul-general in Chicago. It is unreal for any number of reasons. First of all, the FTA/NAFTA regime is now approaching its third decade. Negotiations began in 1986, to respond to problems that had been recognized in the early 1980s. The FTA came into force in 1989, NAFTA in 1994. Both have now been fully implemented; all transitional arrangements have been exhausted. Opening up NAFTA would consequently be tantamount to going back to the 1980s. Too much adjustment and investment have taken place since then, in reliance on the agreement's rules. By targeting NAFTA, the two Democratic candidates are promising a better yesterday.
Brian Gable/The Globe and Mail
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(Brian Gable/The Globe and Mail)
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Senators Clinton and Obama insist their real concern has to do with the labour and environmental side agreements. Sen. Clinton seems to have conveniently forgotten that it was her husband and a Democratic Congress who insisted on these side agreements. They are integral parts of NAFTA and form part of the U.S. legislation that has implemented it. The environment pact has worked well, providing a spotlight on potential problems in the enforcement of domestic environmental laws. The labour pact has been less active, not because of its terms, but due to a lack of credible complaints. If the U.S. has serious proposals for updating these agreements, Canada should be prepared to look at them with an open mind.

So much for the less, what about the more? Is there anything Canadians should be worried about? Yes, there is.

IF THINGS GET UGLY

Washington is going through one of its periodic protectionist moods on trade and investment. For all their talk about reaching out more and working with their friends and allies after the Bush administration is gone, Democrats show little interest in enhancing the global role and image of the U.S., when they talk threateningly about unilateral actions on trade. If our neighbours elect a Democratic president, Senate and House on Nov. 4, things could get ugly, as a falling U.S. dollar, the credit crunch and serious troubles in the housing market add to recession anxieties.

The target for much of that ugliness will be China and other low-cost suppliers to the U.S. consumer market. Most Americans do not have much understanding of the role of these suppliers in maintaining U.S. economic activity. Both politicians and the public fail to realize the benefit of Chinese manufacturing goods produced to U.S. design and using U.S. technology. A recent University of California study found that, of an Apple iPod sold in the U.S. for $299, $160 goes to American companies that design, transport and retail iPods. Only $4 stays in China with the firms that assemble the devices.

Canada will not be a direct target of know-nothing economics that believes trade is bad and no trade is good. But we could be sideswiped. Canada needs open global markets for trade and investment. Protectionism directed against any country hurts our economy. To forestall protectionist sentiment in the U.S., Canadians need to take a serious look at the Canada-U.S. relationship and consider areas where there is scope for constructive, co-operative engagement with the next administration. We should do this, whoever is sworn in as president next Jan. 20.

The Canada-U.S. relationship has drifted for more than a decade. It came close to coming off the rails in the Martin years. Dialogue at the most senior levels of government almost ceased, as petulance and prickly self-righteousness became the salient characteristics of Canadian management of the relationship. The Harper government brought maturity and perspective, but it is still difficult to discern to what purpose the Prime Minister wants to put this civility. He urgently needs to fill that gap, and no later than the end of this year. Specifically, he needs to reconnect Canadian policy with Canadian interests. Ministers and officials, now devoting resources to minor trade agreements with minor trading partners – that includes the European Union – need to refocus their energy on matters that count. As it stands, to use a Texan saying, Canadian trade policy is “all hat and no cattle.”

THICKENING BORDER

Ideas and initiatives have always had to come from Canada because Americans do not devote a lot of thought to the Canada-U.S. relationship, and when they do come up with ideas, Canadians are quick to see these as threatening. It will be better for Canadians to begin mapping out what kind of agenda meets the interests of both countries. Finding an answer big enough to interest American politicians and not so big as to frighten Canadian politicians will tax the imagination of officials and others interested in Canadian public policy. In our view, Canadians need to work out a plan to deal with these concerns:

What steps can be taken to achieve a more open and more secure border for cross-border trade and investment? Ever since Sept. 11, 2001, the border has been thickening, to the detriment of trade.

What can we do together to promote our common interests in the security of the Arctic, the sustainable exploitation of Arctic energy supplies, and environmentally responsible navigation through Arctic waters? Russian and other claims in the high Arctic could be problems and need to be contained by well-thought-through efforts to establish a Canadian presence there. U.S. support will be critical.

What kind of legislative and other programs can we pursue in order to ensure long-term North American energy security?

What further steps can be taken to promote cross-border regulatory co-operation? As the two economies have become more integrated, small, incidental regulatory differences are adding to costs and reducing wealth-creating trade and investment opportunities.

What kind of institutional capacity do we need to have in place to facilitate and promote the governance of North American economic and security concerns and to ensure appropriate co-operation at the state/provincial and legislative levels?

What steps can we take to work together in promoting global peace, security and development, particularly in Afghanistan and other troubled states?

What do we need to do together to address global and cross-border environmental issues?

On some of these matters, direct bilateral interests are at stake. On others, we share values and goals that arise from our common humanity. Canadians like to make a difference in world affairs. The U.S. is the one country that has much in common with us and has the capacity and resources to make a major difference. We can be more effective if we work with the Americans, not at cross-purposes.

At one level, the sabre-rattling on NAFTA is worrisome. At another, it is a wakeup call and an opportunity. Let's seize it.

Michael Hart is Simon Reisman professor of trade policy at Carleton University's School of International Affairs. William Dymond is Senior Executive Fellow at Carleton's Centre for Trade Policy and Law. Both are former federal officials.