Justin Trudeau is Talking Nonsense on a “No Deal NAFTA”

The United States-Mexico Trade Agreement (note the absence of the word “free”) has been hailed by Donald Trump, outgoing neo-liberal Mexican President Enrique Peña Nieto and incoming leftest-populist Mexican President Elect Andrés Manuel López Obrador. While Nieto favoured preserving the 1994 North American Free Trade Agreement (NAFTA) without any modifications, ultimately he took the pragmatic view that as an economy that is indelibly tied to the US market, Mexico could not afford to refuse Trump’s offer for a re-negotiated trading agreement without causing serious harm to Mexican workers. Likewise as a long time critic of NAFTA, Andrés Manuel López Obrador praised how the new agreement helps to preserve Mexico’s energy independence.

In reality, China and to a lesser but still notable extent Japan and South Korea are the only major developed economies that can fully withstand the pressures of Trump’s trade war without the need to make urgent concessions on Donald Trump’s terms. For every other major exporting economy including the European Union, it is simply going to be a matter of “when” rather than “if” in respect of coming to Washington in order to make new trading deals that will clearly be largely dictated by the US side.

As a nation with the second most potent domestic market after China and one where a rising Dollar is making American consumers even more powerful, most major economies will eventually have to play the new trade game and do so according to the rules Donald Trump has set. China alone can defy the US in this respect. While China’s economy is indeed reliant on the US market of its exports, the fact that China is able to outproduce every other nation and already is the largest trading partner of most of the world’s markets, Beijing can afford to stand its ground on a realistic rather than idealistic basis. For others, the task is far more difficult.

In realising the biting reality of facing an unwinnable trade war with a surging US economy, Mexico not only made a pragmatic decision but made a wise decision in re-negotiating in good faith with the US, in spite of Donald Trump’s rhetoric on Mexico and Mexicans that has earned him the ire of many Mexican citizens and many more Mexican-Americans. By being the first major trading partner of the United States to agree to a new deal, Mexico’s status in the eyes of the US has moved up several notches. Meanwhile, Canada’s Prime Minister Justin Trudeau is saying everything he can to anger Donald Trump while attaining no clear advantage in the process.

The world may be less than twenty-four hours away from a Canada-US trading agreement that operates on similar terms to the one signed with Mexico. However, Justin Trudeau is saying all the wrong things on the eve of negotiations According to Trudeau,

“We recognise that there is a possibility of getting there by Friday, but it is only a possibility, because it will hinge on whether or not there is ultimately a good deal for Canada. No NAFTA deal is better than a bad NAFTA deal”.

Seeing as Trump has already threatened massive tariffs on Canadian produced cars (mainly those produced by US owned General Motors and Ford), should a new post-NAFTA agreement not be reached, Trudeau may be unwittingly walking his country into a major recession by talking tough without the realistic ability to back it up. At present, trade with the United States accounts for a whopping 76% of all Canadian exports valued at $319.6 billion per annum. With Canada’s second biggest export market being the United Kingdom which only accounts for $6.8 billion per annum, it is clear beyond a shadow of a doubt that if Canada were to be hit hard by more tariffs, the country could face a substantial economic challenge. Furthermore, by targeting the car industry specifically, factories in Canada owned by General Motors and Ford could easily make the decision to move some of their operations out of Canada and back across the border, especially since Trump has promised substantial tax incentives for companies who make such moves.

Thus, while the man who champions the concept “people kind” and relaxed border policies has suddenly become an economic nationalist, he may soon find that when it comes to basic economies, he is totally out of his depth. Donald Trump has already proved that when he threatens further tariffs on a nation, including a long time US partner, he typically means it and acts fast on his threats. As a nation so utterly dependant on the US in order to sustain economic growth, Canada might find that in spite of being a fully developed industrial economy, its position vis-a-vis the US is even more precarious than Mexico’s as Mexico operates a far more investment friendly developing economy from the Chinese perspective than the highly regulated and highly developed Canadian economy.

In this sense, while  Mexico could have cut ties with the US, tightened belts in the short term while waiting for the fruits of would-be Chinese and other Asian capital to replace that derived from exports north of the border, Canada is more or less boxed into a corner.

The sooner Justin Trudeau realises this, the sooner he will be able to make the same pragmatic decision that Mexico made. Trudeau is neither a cultural nor philosophical nationalist. He ought to drop his economic nationalist rhetoric before Canadians begin feeling the real effects of a trade war with a genuine economic nationalist in the form of Donald Trump.

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