Why Canada is the country to watch on Trump’s trade policy

If you want to know where US President Donald Trump is headed on trade, don’t look at China or Mexico. Don’t even look at the UK. Canada is the country you want to watch for a number of reasons.

First of all, Canada has an existing deal with the US and Mexico under NAFTA. That matters in terms of understanding where Trump is headed on trade. Moreover, Canada is also the 2nd largest trading partner for the US behind the European Union. Finally, the fact that Canada is finishing off its EU trade deal just as the UK is getting ready to exit puts it in a unique position in reconfiguring world trade alliances – wth an Anglo-American group involving Canada a potential outcome.

I have talked a reasonable amount about the potential for a trade war with China under the Trump administration. But I have also talked about where Trump wants to increase trade – and that starts with the UK. Now the reason trade matters is because Trump wants to show that he is focusing on jobs and the economy both domestically and internationally. Moreover, from a rhetorical perspective, trade is a key Trump campaign issue. Trump is going to want to counterbalance the stick he uses with China or Mexico with positive examples, specifically the UK and Canada.

Trump’s inauguration speech and comments at the weekend were panned by the media for being too ‘dark’ and focusing excessively on divisive non-economic issues. Moreover, his comments at the inauguration were very critical of politicians in both parties in Washington for favouring elites. And his comments on Sunday were completely at odds with Republican orthodoxy on government spending and deficits. And these two performances have Republicans in Congress worried that they will have problems with Trump’s economic policies. Therefore, Trump has to pivot to tax, trade and job issues to justify the so-called Trump rally in shares and show the GOP-led Congress that there are issues that they can work together on.

I will explain why Canada matters here. But let me say that, as I first wrote in December, I think the UK is now at the front of the queue on trade with the US:

“…The potential for the UK to pivot to an Anglo-American trading nexus, with Canada, Australia, and New Zealand also present, increases if the Trump Administration is actively engaging Liam Fox and David Davis. I would expect there to be overtures around bilateral trade as soon as Trump gets in, if not before, given the Obama Administration’s cool stance toward a potential UK deal.”

I see this Anglo-American trading nexus developing as a sort of trading group analogue to the Five Eyes alliance on intelligence, driven by the UK’s need to develop alternative trading arrangements and by the Trump Administration’s pivot away from China.

Now UK Prime Minister Theresa May is due to be the first foreign leader to meet with President Trump on Friday. That speaks volumes. It’s clear that Donald Trump sees Britain as America’s closest ally, with Germany now moving into a decidedly secondary role in US-European ties. It is also clear that Theresa May and Donald Trump are going to talk about a trade agreement. Rumours are flying that a trade deal with the UK could even involve labour mobility. I think it is way too early to speculate to that degree of specificity. But I see the UK-US talks as a sign both to a ‘German-led’ EU on politics and to China on trade.

Where Canada fits in here is that it is the next obvious candidate in line for a UK trade deal. The EU, having just signed a deal with Canada, that still only has provisional support from the Belgians from my understanding, will look askance at a UK – EU trade negotiation. Therefore, a possible arrangement that works politically here would be to use Canada as an adjunct to a US-UK deal, that squeezes out Mexico.

Why? First, we know that the UK is keen on a deal with the US. Second, we know that the Trump administration is keen to show a positive trade example to counterbalance the negative one with China. Third, we know that Trump also would like to renegotiate NAFTA almost entirely because of Mexico. (He has said nothing about Canada stealing American jobs.) Fourth, we also know that Trump’s trade team hates multilateral deals and likes bilateral ones. If you put all of this together, it sounds like this would be a potential Trump agenda:

1. Ditch NAFTA or most of it. And re-negotiate bilateral deals with Canada and Mexico that are very different from one another.
2. Come down hard on China on trade and currency manipulation.
3. Negotiate a future bilateral deal with the UK that will dual track with the US – Canada deal, increasing the likelihood of similarities.
4. De-emphasize the US economic and strategic relationship with the EU, NATO and Germany in favour of the English-speaking Five Eyes group

Canada is the key in all of this because of the existing trade relationship, the proximity to the US, the juxtaposition to Mexico, and the trade relationship to the EU. Canada is in a favourable position politically. And I think it will press this advantage to eventually re-negotiate NAFTA on mostly the same terms, but on a bilateral basis once the Trump animus toward Mexico is clear. What Canada has to fear is that its relationship with the UK and the US will put it into conflict with the EU, who could see those two countries as getting access via the back door to the EU.

Watch the interactions with Theresa May this Friday with the Canadian angle in mind to see whether the Trump Administration truly is going to make this kind of sweeping change in the importance of America’s strategic relationships.