By Carlo Dade
Published in Policy Options
August 20, 2018
There is one, and only one, viable option for getting out of our ever-worsening trade row with the United States and it lies with a more activist Congress. But the conundrum is that this option, which has grown more urgent with President Donald Trump’s recent move to bring about tariffs on autos, will take time, and the more time passes the less viable this option becomes.
It’s funny how time changes perspective. A year ago, Canadians worried about whether the country could survive a US withdrawal from the North American Free Trade Agreement (NAFTA). Then came the onslaught of unilateral trade measures from Trump, which is eclipsing our earlier worries about NAFTA.
Yes, NAFTA is important, and yes, Canada could survive the ending of NAFTA with the US. But we cannot survive the continued barraged of unmoored shocks arriving by tweet in the middle of the night.
In an article I coauthored with Naomi Christensen, I maintain (as does Dan Ciuriak), that without NAFTA, the impact of reverting back to the World Trade Organization’s (WTO) most-favoured-nation (MFN) tariffs (the measures that existed before the Canada-US Agreement and NAFTA), would vary from business to business. In many ─ if not most ─ cases, the impact should not be disastrous. In the event that the US withdraws but NAFTA remains in effect between Canada and Mexico, Ciuriak finds that the “economy could. . . even make marginal gains in trade, real GDP and economic welfare if Canada’s bilateral relations with Mexico remain liberalized.”
According to the Canada West Foundation, if the US withdraws from NAFTA, Canada would most likely transition to the World Trade Organization’s (WTO) most-favoured-nation (MFN) tariffs and rules. What that means is that we would go from being uniquely privileged in our access to the US market to being only better privileged, thanks to geography and other nontariff factors, than any other country. While we would lose NAFTA’s tariff advantages and professional visas, we would still have expedited border procedures, the NEXUS and Free and Secure Trade (FAST) programs, and ongoing rules and regulatory harmonization under the Regulatory Co-operation Council (RCC). This is in addition to unique province-to-state access including regular invites to US Governors’ Association meetings, membership in the US Council of State Governments and invites to the US Conference of Mayors. All of this without NAFTA would leave us worse off than we currently are, but still better off than any other US trade partner, including Mexico.
If the US withdraws from NAFTA, it would at least give us certainty – and we know we could survive reverting to WTO tariffs. What is more problematic is the unpredictability and cost of the seemingly random unilateral trade and tariff measures Trump has been lobbing at us, with the acquiescence of a largely compliant Congress. Hence the road to trade hell on which we currently find ourselves. The tariffs on steel and aluminum using the national security section of the 1962 Trade Expansion Act, nicknamed the “nuclear option” for trade retaliation, are turning out to be just the beginning. We keep thinking if we can get over the next hurdle, be it renegotiating NAFTA or dealing with steel tariffs, then we’ll be OK. But what we’re beginning to realize is that the hurdles will not stop popping up. And let’s be clear, it is Trump and Trump alone who is doing this.
So what can we do about it? The answer, not surprisingly, is not much. We can continue to play defensive whack-a-mole, or we can start to get better at anticipating, responding to and mitigating the trade shocks coming from the US. If this is going to be a long-term problem, we need to start treating it as such.
But there is little that we can do beyond this. The only entity that can end it is the US Congress.
The power that Trump exercises over US trade policy has been ceded to the office of the president by Congress. In the past, that power had been exercised with a degree of thought, caution and deference to Congress. Under Trump, this is no longer the case. Suddenly, it is more than imaginable that we could see trade in automobiles also labelled as counter to US security interests. Who knows what would happen if the president ever discovers the RCC or the FAST program, or if he wakes up one morning and decides that if foreign imports of gas is a bad thing for Germany, then it’s also bad for the US.
Restraining this president will not come from a WTO ruling, which would take years to come about, nor will it be mitigated by retaliation by Canada. Although Canada’s exports to the US amount to 24.6 percent of our GDP, total US exports to Canada account for barely 1 percent of that country’s GDP. China has more leverage than Canada does, and while Canada’s pushback is having more impact, it is not moving the president ─ in fact it is having the opposite effect.
And that brings us back to the lone exit off this road to trade hell.
Canada’s way out can be found in the US Constitution: The Congress shall have the power to: “regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes.”
That is, Congress alone has the power to regulate commerce with foreign nations.
The complexity of trade, the need for rapid and streamlined decisions in response to quickly changing circumstances, and the president’s authority to manage day-to-day foreign relations has, over the years, caused Congress to cede more and more power to the president. But if Congress ceded this power to the president, then Congress can take it back – or put new conditions on its use. This happened in 1975, when Congress temporarily suspended President Gerald Ford’s ability to use national security provisions of the 1962 Trade Expansion Act, and it happened again in 1980, with President Carter.
It may be in the process of happening again. On July 11, the US Senate voted on a nonbinding motion ─ introduced with strong bipartisan support ─ to restore Congressional authority over tariffs enacted to protect national security. The motion directs the Senate’s energy and water appropriations bill conferees to produce legislative language that would provide “a role for Congress in making a determination under Section 232 of the Trade Expansion Act of 1962.” Even though it is nonbinding, the resolution is still a shot aimed at Trump by increasingly alarmed and frustrated senators.
This summer, Ohio Senator Rob Portman (R) introduced legislation to reform section 232 of the 1962 Trade Expansion Act. The law currently allows Congress to pass a joint resolution of disapproval of actions taken by the president under the law, but only if the president’s actions relate to petroleum products. Portman’s bill would require the Defense Department to justify tariffs imposed due to national security concerns, and expand congressional oversight.
However, there are a couple contravening factors.
First, any legislative attempt to counter Trump on trade will largely be up to Republican leadership in the House and Senate. Congress (both the Senate and House) in general has been reluctant to go against the president. With critical mid-term elections around the corner, it may not be in the Republicans’ interests to reign in Trump right now. Many Americans being directly hurt by the escalating trade war still strongly support the president.
Second, while there is a good chance that growing economic pain will eventually force Congress to act, that will require senators – who face re-election every two years – to step up. In a world where Trump can get you voted out of office when you come up for re-election, that doesn’t leave a lot of time for the current crop of senators to act. So, in a few months during the midterms and then again in two years, and in every special election in between, any attempt to reign in the president on trade is going to get harder, not easier, for US senators.
What happens this summer when Senator Portman’s bill comes up for a vote will be the most critical time for global trade. We need to do what we can to help those forces in the US pushing for more rationale trade policy, walking the line between being helpful and interference that will cause a backlash. But, if Portman and his allies fail, then Canada needs to forget about all its previous plans for dealing with Trump and move directly to plan Z: a worst-case scenario for dealing with continuous upheaval and unpredictability. A NAFTA 2.0 won’t end this nightmare – even if we somehow hammer out a new North American agreement, Trump would still be free to pull section 232 stunts.
The most important step will be to stop thinking of and responding to US trade actions as disparate one-off actions. We have to think about this state of affairs being the norm for the foreseeable future. It means taking the policies, tools, organizations and institutions that we built to manage a stable, predictable and mutually beneficial trade relationship with the US and retooling them for the current reality and its extension beyond the current president. Getting better at responding to trade shocks from the US will entail specific targeted actions like compensation and transition assistance to larger endeavours such as liberalizing internal trade and strengthening the global pushback against the US administration through continuing to expand liberalized rules-based trade (what Canada is doing with the Trans Pacific Partnership). Only then can we can forge a new route toward a new trade relationship with the US – one that’s less painful for Canada.
– Carlo Dade is the director of the Trade & Investment Centre at the Canada West Foundation.