North American Brief
Issue 20 | July 2024

In this issue: The third border, U.S. government trade studies, an energy J.D. ad-Vance-ment opportunity, Columbia River Treaty, Mexico may push back on U.S. over Chinese investment, U.S. bans B.C. auditors, border open for cats, not dogs and the only 100 per cent accurate source for U.S. election predictions.

Whew, that’s a lot for what’s supposed to be a slow summer. 

MAJOR STORIES  

Canada literally and figuratively sits a top North America, at least in what truly matters. The one truly ‘big’ story this summer is the Copa America results. The quadrennial Latin American national football (soccer) tournament came to the U.S. this year and the three North American national teams were invited. In other words, a true test for North America against the world’s best footballers (with no apologies to Europe). The only North American nation to meet this challenge? Canada, which made it to the quarter-finals and finished fourth. The U.S. and Mexico? Couldn’t make it out of the first round. It’s taken ages, but Canadians FINALLY HAVE something to brag about in sports bars throughout the hemisphere, especially in the U.S. and Mexico. So, while productivity tanks and the country is a NATO pariah, at least Canada matters in the one thing about which everyone in the hemisphere outside of Cuba truly cares.  

Hitting the shot as the clock expires. Though it’s the offseason for basketball, the analogy is the most apt for the announcement of a provisional agreement on the expiring-in-two-months Columbia River Treaty (CRT). In the U.S., the dam generates 40 per cent of the nation’s power (think of that I84 drive to Portland), irrigates $8 billion in agriculture and moves 42 million tons of commercial cargo each year. For background on the CRT, an excellent short but detailed (15-page) backgrounder on the treaty and the issues under negotiation comes from the Congressional Research Service. A good and even shorter backgrounder comes from Chris Sands at “Canada’s only think tank on the US,” the Woodrow Wilson Center’s Canada Institute.  

While the full text of the agreement in principle has not been made public, the Government of British Columbia has published a summary. The U.S. State Department has its own version of what’s most important in the agreement. Here’s what we know so far:  

  • The Canadian Entitlement, which is Canada’s share of downstream power benefits under the treaty, is being reduced immediately by 37 per cent with further reductions to 50 per cent by 2033. The good news? There is some flexibility for Canada.  
  • Water storage at Treaty dams can be reduced to manage impacts on ecosystems, indigenous cultural values and socio-economic systems, but the U.S. will then reduce the Canadian Entitlement. For those unfamiliar with the terms of the Entitlement – the U.S. provides Canada with megawatts and energy capacity instead of cash. The energy marketing arm of BC Hydro, Powerex, sells the power to either BC Hydro or utilities in other provinces or the U.S., with cash going back to provincial coffers. The value of the CRT fluctuates with the market, but in 2012 was estimated at $120 million. 
  • The amount of water B.C. is committed to storing for flood mitigation in the U.S. is reduced under the new terms, and a tribal and indigenous-led body will be established to provide recommendations on cultural values and the ecosystem, including salmon survival.  

It’s beyond this brief to go into a detailed analysis of the agreement; we will watch for more details and in-depth analysis because of the value of this river to both countries. We aren’t sure which is more important to the B.C. government – the loss of cash from the sale of Canadian Entitlement power or the loss of access to the power itself. On both sides of the border, electricity, especially the supply of clean electricity, is an issue as economies grow and the move to the ‘electrification of everything’ gains momentum. And given the coming U.S. elections and CUSMA review, there’s also relief that an agreement has been reached now. 

Canada’s third border 

Top stories this week come from our southernmost neighbour and other less-covered stories that will impact Western Canada. So, why the attention to Mexico? 

“Trump announces U.S.-Mexico trade deal to replace NAFTA, and says ‘we will see’ if Canada can join.” This CBC headline from August 2018, the last time we negotiated a trade deal with the U.S. and Mexico, is reason enough. The story of what happened during the negotiations to replace NAFTA with CUSMA is the subject of a CWF op-ed in the Calgary Herald that puts what happened last time into the context of the just-around-the-corner review of the current North American trade agreement, CUSMA. The point of the op-ed is that our interest in Mexico is not about Mexico per se; it’s about that country’s potential impact on what is most important to Canada – the North American trade agreement.  

For the upcoming CUSMA review, Mexico and Canada disagree on some issues of importance to the West – Mexico’s deepening push to re-nationalize its energy sector and its ban on the importation of genetically modified corn for human consumption (here it’s the ban, not the product that’s the problem as we’ve previously explained). On other issues like Country of Origin Labelling, Mexico has been an ally. For Western interests to be protected in the forthcoming review of the North American trade agreement, Canada and the prairie provinces need, figuratively speaking, to be in Mexico, not just New Mexico. In other words, we need to go beyond the U.S. and cross our third border to defend prairie interests.  

This partially explains why, on June 6, we hosted former Canadian and U.S. Ambassadors to Mexico with Mexico’s former Under Secretary for North America in what appears to be the only public event in Canada to discuss what happened in the June elections of our North American trade agreement partner, Mexico, and what it means for Western Canada. The webinar is available here. 

Briefly, takeaways from the discussion with the time stamp to find the spot in the recording: 

  • The biggest winner may be the outgoing President. He gets something he’s wanted but lacked – a veto-proof majority, potentially in both houses. In Mexico’s transition of power, the newly elected congress is seated a month before the newly elected president. This means the outgoing President has one month of governing with the new congress which gives him one month of submitting legislation that a previous Congress would not have approved. (21:40) (39:00) 
  • A worry by the Canadian and U.S. speakers was that one result of the old president having a new congress would be the passage of judicial reforms to allow for the election of judges. (19:40) (23:00) 
  • How different will the incoming president, Claudia Sheinbaum Pardo, be from her predecessor and mentor, Andres Manuel Lopez Obrador? (30:00) 
  • There is a need for dialogue between Canada, Mexico and the U.S. starting now in the lead-up to the CUSMA review in 2026. This dialogue should include the private sector and academia as well. (27:26) (50:15) (54:20) 

Congress issues a new report on Canada-U.S. trade: On July 3, the Congressional Research Service published a short ‘state of trade’ type of update – U.S.-Canada Trade Relations.  Interestingly, the introductory overview focuses almost exclusively on the two-way energy trade. The report lists the major trade issues: Canadian legislation on digital services providers, news outlets and online content; automotive issues; potential cooperation on critical minerals; U.S. access to Canada’s dairy market; and last-but-not-least, the perennial softwood lumber. The discussion of the digital services tax and related issues takes up about half of the two-page document, with a paragraph each for the remaining items. The update ends with a mundane recommendation that Congress follow these issues in advance of the 2026 North American trade agreement review and, interestingly, offers a suggestion that Congress ‘may also consider whether or not to engage with Canada at the congressional/parliamentary level to discuss pathways to address bilateral irritants and deepen cooperation in key supply chains.” 

And speaking of U.S. trade reports, we don’t cover autos (or digital services issues) here for obvious reasons. But these more central Canada issues do affect or are important signals for Western exporters. That’s the case with the USTR biennial review of how the automobile industry is fairing under the North American trade agreement. News that the U.S. plans to ignore a CUSMA/USMCA dispute panel ruling echoes problems well known by cattle and softwood lumber.  

The dispute is over how to calculate the percentage of goods or parts in a car to determine if the finished product is made in North America from North American inputs. There is a substantial difference between the Canadian and Mexican positions. Still, the important point is that an independent panel, agreed by all three countries, heard the case under rules agreed upon by all three countries. The Americans lost and, in response, will simply ignore the ruling and continue to pressure Canada and Mexico to agree to the U.S. position. Several media outlets covered this, but the story by America Economia is probably the most sympathetic non-U.S. source. With the review of the CUSMA/USMCA/T-MEC treaty, where the Americans will have leverage in two years, this might not be a bad tactical strategy.  

But it begs the bigger question – the North American trade agreement was supposed to ease trade and investment by providing certainty that rules would be enforced. Especially in the case of state-to-state dispute settlement, as explained in a backgrounder on dispute resolution in the new North American trade agreement from the Brookings Institute. The new agreement corrected a problem with NAFTA that had allowed one party to, essentially, avoid having issues brought to dispute resolution by refusing to agree to appoint members to a panel. The new agreement has a roster of pre-approved individuals to sit on panels. In theory, this was supposed to strengthen the dispute process. But what to do about a party to the agreement that simply refuses to be bound by decisions? This is something that would seem an ideal topic of discussion for the upcoming review. For Canada and Mexico, and those in both countries rushing to protect the current agreement at any cost, this refusal by the U.S. to adhere to agreed-upon rules, along with the failure to gain compensation for the U.S. decision to kill the Keystone XL pipeline, raises interesting questions about how much Canada should be prepared to surrender in exchange for U.S. commitments to follow the rules. 

Relaciones con la República Popular China. “Few issues will loom larger at the upcoming review of the North American trade agreement two years hence” is a statement we hear repeatedly, almost reflexively, when talking to colleagues in the U.S., Canada and less frequently, Mexico. That makes remarks by former Mexican Under Secretary for Foreign Trade (and equally notable, football Club America fanatic – that’s an inside joke) Juan Carlos Baker interesting.  As reported by InsideTrade, in response to a question as to how Mexico would respond to pressure from Washington to cut trade ties with China, Baker evinced candour not often heard in Canada. Taking from the InsideTrade report, key points from his remarks: 

  • Mexico has the legitimate expectation to be able to trade with everyone and to receive investments from everyone. 
  • The political narrative of detaching from China is just not there. It is very complicated to go around with stakeholders and say, ‘Hey, we’re going to close down that door with that country because people in Washington or in Ottawa … might be disappointed in us.’ (Something one won’t hear in Canada.) 
  • Cutting trade with China may necessitate the creation of a new industrial policy for Mexico. 

The last point touches on a reality not often realized in Canada – Mexico is a developing country, not a developed country like Canada and the U.S. As such public sentiment and policy orientation have a stronger developmental and poverty alleviation focus. This difference is between trade being important to keep people comfortably in the middle class versus trade as vital to lift people out of poverty.  For Mexico and other developing countries, trade with China is a different type of existential question: an economic and developmental one instead of a political or security one.  

A second observation for Canadian readers is that while Mexico needs the U.S. as much as Canada needs the U.S., the reverse is also true for Mexico but not for Canada. Mexico is a key enabler of the U.S. desire to nearshore supply chains to North America and compete economically with China, Canada is not.  

This will all make for an interesting dynamic around the CUSMA review table, given that the above-referenced USTR report on autos under the North American trade agreements flags Chinese investment in the Mexican auto sector as a USMCA review issue. 

An ally for Canadian energy in Blair House? Several U.S. media outlets have dug into Republican VP nominee James Vance’s record on energy. A good piece is by FastCompany and as one would expect, another is from Politico. Reporting suggests Vance adds another voice for a rollback of U.S. climate actions and push for more fossil fuel energy production in, and use by, the U.S. But before Canadian oil and gas exporters get too excited, there is an important caveat (well, there are several, but we’ve picked one). A piece by the New York Times, “J.D. Vance Is an Oil Booster and Doubter of Human-Caused Climate Change” goes into the motivation for Vance’s switch from supporter to opponent of solar energy. The reason? It’s jobs stupid…and a bit of politics. Swing states Pennsylvania and Vance’s home state of Ohio rank second and 7th in gas production in the U.S., ahead of Alaska, Wyoming, and North Dakota. In oil production, Ohio ranks tenth. His support for oil and gas industries is tied to the jobs in his and similar states. That the Biden-Harris administration invested massively to create ‘green energy’ jobs in Ohio and harm traditional energy production goes a long way to explaining his preference for one type of energy job over others. But the larger point remains: it’s first and foremost about the jobs, not the specific type of energy.  

We export jobs to the U.S. The first and traditional reaction by Canadians to this type of news is to tout to Americans that “Canada is the largest source of energy exports to the U.S.” Saying this, in the case of Vance and the MAGA movement, will do all harm and no good. What it says is that we export something that American workers also produce, and therefore our exports threaten American jobs. Given the shallowness of political and economic discourse in the U.S., this is a real threat. Instead, as we argued in the Calgary Herald, we need to make clear that Canada exports energy jobs to the U.S. It’s worth repeating the message in that op-ed: 

With our oil and gas exports, U.S. workers are put to work, not out of work, as they process our heavy crude and natural gas for U.S.-based companies to export. For natural gas alone, in 2022, Canadian exports to the U.S. created more than US$1 billion in wages and 7,000 good, middle-class jobs. And that doesn’t include the jobs attributed to processing Canadian gas to export from LNG facilities in Texas and Louisiana. Our crude oil is refined in U.S. refineries, creating even more jobs. 

That this is a unique Canadian claim that won’t come from south of the U.S. (i.e., Mexico), makes it more powerful still. 

And finally, the dog days of summer.  A story in the Hill Times’ Politics This Morning briefing explains why CWF office dogs Charlie, Tigik, and Enzo will be doing hard time pacing their kennels this summer while the literal cool cats, Athena, Atticus, and Felix enjoy in a milkshake-sampling road trip south of the border. There is an inadvertent ban on Canadian dogs entering the U.S. As of Aug. 1, Canadian dogs will need to be microchipped and have an import form endorsed by the Canadian Food Inspection Agency (CFIA). Cats can bring whatever paper their vets give them. So, passports for dogs, unenhanced driver’s licenses for cats. In all seriousness, this kerfuffle literally brings home the importance of regulatory harmonization between the U.S. and Canada. Better coordination and harmonization of rules like this mean Canada wouldn’t have been caught out on this change. A point Canada’s Health Minister Mark Holland made to CBC when he described the new rule as “very poorly thought out” and a ”complete surprise.” And also “The Americans adopted this as a blanket policy for all countries. I don’t think they thought about what they were creating at the Canadian-U.S. border.”  

Late breaking news is that the Americans have granted a reprieve for Canadian dogs. But this points out the importance of mechanisms like formal, institutionalized regulatory harmonization to prevent being blindsided. But there may be good news. There is a push by the Canadian Treasury Board President, Minister Anand, to revive the U.S.-Canada Regulatory Cooperation Council, which could help mitigate if not avoid this sort of problem. With close to eight million dogs in Canada, it’s an important new constituency for regulatory harmonization. 

ODDS and ENDS 

  • Writing in The Logic, David Reevely discusses a topic getting far too little attention in Canada and North America: the potential for a strike by Canada’s largest railroads, CPKC and CN.   
  • More than twice as many cattle as people? That would be Montana, with Alberta not even close. In Why are Montanans eating beef from Brazil, the NYTimes takes a deep dive that helps explain (not justify) the American obsession with Country of Origin Labelling (COOL). 
  • Is there any B.C. auditor not sanctioned by the U.S. government? might be the first thought readers, especially those from outside Canada, have after reading a Business in Vancouver piece titled, Nine B.C. public auditors hammered by U.S. regulator. Select quotes from the Glacier Media story: “Nearly every accounting firm that audits B.C. junior companies has come under regulatory fire…U.S. regulator hands out bans, US$445,000 in fines to B.C. firms…B.C. firms that are responsible for the lion’s share of audits of B.C. public companies.”  
  • New Mexican Rail Capacity. Our friends at the InterAmerican Dialogue have an Ask the Experts feature that delves into the implications of the new Mexican administration’s announcement of three new rail lines to link Mexico City with the country’s northern border. The plans call for adding electric passenger trains to diesel freight routes. Project components claim that combining the two will improve efficiency and reduce emissions. Skeptics make the obvious point that none of this makes sense. Then there are the concerns over the trains facilitating greater movement of non-Mexican migrants toward the U.S. border.  
  • U.S. election questions? Ask the Simpsons. CBS News has confirmed what many of us have known for a while – if you want an accurate prediction for election results in the Trump era, watch the Simpsons. CNN has come to the same conclusion. In 2000, the show had Lisa Simpson as president, taking over from Donald Trump. As well as giving a prescient nod to a Trump presidency, it’s also been noted that Lisa was wearing an outfit that is eerily close to what Kamala Harris wore during her inaugural address (purple suit and pearls). Viewers could take that as a prediction of a Harris presidency – or perhaps the candidate is drawing style tips from fashionista Lisa.  

Carlo Dade, Director, Trade and Trade Infrastructure

The Western North America Brief is a compilation of stories and links on the United States and Mexico’s relationship with Canada’s Mountain West- prairie provinces focusing on stories and topics that are not always “on the front page” in national coverage.