How we can avoid a devastating trade war with the U.S.

Canada US border and trade
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Gwyn Morgan: How Canada can avoid a devastating trade war with the U.S.The importance of the North American Free Trade Agreement to Canada’s economy is staggering. Each day, $2.4 billion worth of goods and services cross the Canada/U.S. border. Some 78 per cent of Canada’s merchandise exports are destined for NAFTA partners.

Now, the 23-year-old agreement is under severe threat from a hyper-protectionist American president.

Initially, NAFTA partners Canada and the Mexico were granted a “temporary reprieve” from punishing steel and aluminum tariffs imposed globally in April. That reprieve ended in May with President Donald Trump’s decision to impose those tariffs until Canada and Mexico agreed to his NAFTA demands.

Canada responded with a one-for-one tariff on U.S. imports. Trump then threatened to further breach NAFTA with an illegal tariff of 25 per cent against Canadian auto imports. Auto trade is a lynchpin of NAFTA. Pulling that pin would disable a major part of Ontario’s economy.

These events coincided with a deterioration of relations between the leaders of the two countries. Prime Minister Justin Trudeau’s first visit to the White House in early 2017 was cordial and friendly. And just last March, Trump called Trudeau “a very good guy” after a telephone conversation about trade.

The downhill slide began at the conclusion of the June  G7 summit in Quebec, when the president, who had just shaken hands with the prime minister as he departed on Air Force One, watched Trudeau’s televised comment that Canada “wouldn’t be pushed around by the United States.” A furious Trump responded, “That’s going to cost a lot of money for the people of Canada.”

Back in Ottawa, the prime minister’s vow to stand up to the U.S. has been lauded by provincial premiers, trade union leaders and media commentators. Public opinion surveys show a majority of Canadians want Trudeau to play the brave gladiator in the face of Trump’s bullying tactics.

That may seem like good politics with the next federal election little more than a year away. But while the biblical David managed to defeat Goliath the giant, a direct frontal attack on a bully who is 10 times more powerful is neither smart nor effective.

Over decades spent as a CEO, I’ve presided over many negotiations. My counterparts each exhibited unique traits and tactics. Thankfully, none were as unpredictable as Trump. Nevertheless, Trudeau would have fared better by following three universally applicable negotiating principles:

  • Carefully asses the personality of your adversary and develop a smart strategy for dealing with them.

Trump is a narcissistic, ego-driven bully whose dysfunctional thought process categorizes everyone as either friend or foe. That our prime minister is no longer in the friend category was confirmed by Trump’s characterization of Trudeau as “dishonest and weak” after his ill-considered post-G7 comment.

Rather than outsmarting Trump, Trudeau fell into the trap of trying to match Trump’s strongman tactics to bolster his domestic popularity.

  • Be realistic about your negotiating position.

Engaging in tit-for-tat escalations with an adversary who can hurt you much more than you can hurt them will leave you economically bloodied and beaten. The American economy is 10 times bigger, so the one-for-one tariffs action is likely to hurt Canadians 10 times more.

  • Find something you can give up that the other side really wants.

In this case, that something is Canada’s dairy supply management system. Trump has been obsessed with ending supply management from the outset of the NAFTA negotiations. On June 9, he threw down the gauntlet: “It’s very unfair to our farmers. … It’s going to stop or we’ll stop trading.”

Clearly oblivious to all three negotiating principles, Trudeau’s response was to make the hole he had dug even deeper: “I’ve told him many times: No … we won’t touch our supply management system.”

Why is our prime minister willing to risk economic armageddon over a sector that constitutes less than one per cent of Canada’s gross domestic product? And what if ending supply management would actually be good for Canadian dairy producers and consumers?

Supply management is an outdated relic of government intervention in free markets, akin to the Canadian Wheat Board’s longtime grain monopoly. When the previous government led by Stephen Harper announced plans to dissolve the wheat board in 2015, the same frantic concerns were raised that are now being heard from the dairy sector.

But ending the wheat board’s monopoly gave farmers the freedom to raise whatever crops yielded the best returns. Hence, the formerly mono-culture prairies became a checkerboard of yellow canola, lime green peas and a diverse variety of cereal grains. Command-and-control farming has morphed into high productivity entrepreneurship.

Australia has demonstrated how ending dairy supply management can benefit both producers and consumers. Prior to 2000, Australia employed a dairy control system similar to Canada’s.

A just-published Fraser Institute report presents a compelling picture for dairy deregulation: “Consumers have benefited from lower prices for fresh milk. Farmers have received consistently rising farm-gate prices. The national milk supply has been maintained. The Australian dairy industry now exports almost half its output, making dairy the third (largest) agricultural export after beef and wheat.”

How did Australia manage the move to free markets without the wrenching pain that Canadian producers fear?

Through carefully-constructed transition measures that cushioned the lower prices received by producers.

An inevitable outcome of artificially limiting supply of any good or service is to inflate the value of production assets. Just as limiting the number of taxi cabs in New York City drove the market value of a single cab medallion to more than US$1 million, supply management has driven the value of a single cow dairy quota to around $30,000, or $3 million for a typical 100-cow herd. This makes dairy owners multimillionaires on paper, but it also presents a dilemma on how they can cash out as retirement age approaches. Moreover, it presents an insurmountable barrier for the aspiring young farmers needed to renew the industry.

Government intervention created this dilemma, so government must help unwind it. It would be patently unfair to end supply management without compensation. Doing it right would allow dairy owners wishing to exit the business a means of realizing fair compensation, while cushioning price drops for continuing farmers.

The Canada West Foundation has published a very thoughtful report on how these measures could be structured. The benefit to consumers would be significant. The report estimates that moving to free market pricing would save the average Canadian household with children $600 a year.

Within Trump’s friend-or-foe mindset, our prime minister has been moved to the foe position. Our forest products, aluminum and steel industries are struggling under punishing tariffs. Our crucially important auto industry is threatened with a debilitating 25 per cent tariff.

The president has made it absolutely clear that exemption from these tariffs depends on a satisfactory outcome to the negotiations. And that requires an end to dairy supply management.

This presents the best negotiating opportunity I’ve ever seen to give up something the other side really wants by changing something that’s also in the best interests of Canadians.

Gwyn Morgan is a retired Canadian business leader who has been a director of five global corporations.

How Canada can avoid a devastating trade war with the U.S.

The views, opinions and positions expressed by columnists and contributors are the author’s alone. They do not inherently or expressly reflect the views, opinions and/or positions of our publication.

By Gwyn Morgan

Gwyn Morgan has become one of Canada’s foremost business leaders and an ardent champion of the importance of Canadian-headquartered international enterprises. Gwyn has served on the board of directors of five global corporations. He serves as a trustee of the Fraser Institute, the Manning Centre for Building Democracy and the Dalai Lama Center for Peace and Education. He devoted three decades to building EnCana Corp. into Canada’s largest energy company. When he stepped down as founding CEO at the end of 2005, EnCana was Canada's most valuable company with a stock market value of approximately $60-billion. Gwyn has been recognized as Canada’s Outstanding CEO of the Year and also as Canada’s Most Respected CEO. He has been inducted as a Member of The Order of Canada.

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