Commentary Type

Canada Turned to the WTO because Trump Has Threatened NAFTA

Chad P. Bown (PIIE)


Another round of renegotiation talks for the North American Free Trade Agreement (NAFTA) just wrapped up—and US, Canadian, and Mexican trade ministers report that progress remains slow, especially in rules governing trade in the auto industry. But in remarks to the news media Monday, US Trade Representative Robert E. Lighthizer directed his most searing criticism toward Canada, which he accused of having launched a "massive attack on all of our trade laws."

The Canadian "attack" is but the latest in a relatively long history of formal trade spats between the two neighbors. Canada filed a formal World Trade Organization (WTO) dispute in December that seeks to protect billions of dollars of its exports to America that are suddenly under threat, in part because of President Trump's NAFTA renegotiation. What's different this time is that Ottawa's dispute could also weaken a US trade policy that Lighthizer finds necessary to defend against China.

Ottawa claims Washington is breaking WTO rules in ways that allow it to impose punitive tariffs on imports determined to be unfairly priced or subsidized. Canada mostly wants the threat of new American tariffs on its exports of lumber, paper, steel pipe, and other products to stop.

Here's what you need to know:

1. The NAFTA renegotiation has Canada increasingly worried about bilateral trade under Trump.

The Canadian economy is highly integrated with its southern neighbor. About three-quarters of Canada's exports are destined for the United States.

US-Canada trade throughout the NAFTA period has been mostly harmonious. Canada's exporters have rarely faced attack under the sort of American "unfair" trade policies—anti-dumping and countervailing duties—that Ottawa is fighting with this formal dispute. As late as 2017, only about 1 percent of Canada's exports to the United States were caught up in these policies.

But that may be changing. Pending US tariffs could suddenly shut down billions of dollars of Canadian exports of products such as lumber, paper, and steel pipe.

Until Trump came into office, Ottawa wasn't particularly concerned about frequent US abuse of these policies because China—and not Canada—had been Washington's primary target.

2. Ottawa and Washington have a long history of WTO disputes.

Canada has turned to the WTO on frequent occasion to protect its exports—the latest dispute was Ottawa's 19th case against the United States, making up exactly half of its formal WTO actions. Since the WTO's inception in 1995, Canada trails only the European Union in challenging US trade policy through formal WTO channels.

My own research—including most recently with Kara Reynolds—suggests this is standard procedure for countries that trade a lot. They tend to have more to litigate over in Geneva.

Nevertheless, Canada's WTO actions against the United States have ramped up of late. After a lull between 2008 and 2015, Ottawa has brought four new disputes since 2016—filing three of these after Trump came into office. All four challenge the same sort of US unfair trade actions.

3. How does China factor into this particular Canadian dispute?

China isn't a part of the Canadian dispute. But Lighthizer indicated this month that if the United States removed all of the special tariffs that Ottawa named as evidence in its legal filing that "the flood of imports from China and other countries would negatively impact billions of dollars in Canadian exports to the United States, including nearly $9 billion in exports of steel and aluminum products and more than $2.5 billion in exports of wood and paper products."

Indeed, Canadian exports are involved in very few of the cases in which Ottawa alleges Washington had abused these unfair trade laws. The dispute reads as if Canada is arguing on behalf of exporting countries such as the United Kingdom, Japan, and even China.

Why? To make its WTO case, Ottawa must show that current US targeting of Canadian exporters of lumber, paper, and steel pipe products is part of a longer pattern of bad behavior. But because Canada hasn't been the target of earlier tariffs, it had to draw from US actions against other countries, including China.

Yet this could pose risks to other Canadian companies, which supply 60 percent of aluminum and 16 percent of steel imported into the US market. China supplies less than 5 percent of US imports of each product because of those earlier US tariffs.

Here's the bottom line: Ottawa's actions could result in Washington reducing the tariffs that currently protect both American and Canadian companies in the US market from Chinese competition.

4. Trump's NAFTA renegotiation also precipitated Canada's WTO move.

NAFTA itself is another reason Canadian companies haven't been a major target of these tariffs historically. NAFTA courts can be used to resolve US-Canada disputes, including a special provision—known as Chapter 19—that discourages especially frivolous claims under unfair trade laws. Ottawa also recently filed a dispute challenging potential US lumber tariffs under Chapter 19.

Trump has repeatedly threatened to terminate NAFTA. But even if it remains, the Trump administration has also prioritized ending these NAFTA legal protections.

The institutional uncertainty over NAFTA has forced Canada to turn to the WTO, even though addressing this dispute "privately" under NAFTA might have less impact on China's trade to the US market and thereby alleviate Lighthizer's concerns.

5. Trump is now at a crossroads.

Canada's WTO dispute could have outsized repercussions—for all parties. If Trump decided to end NAFTA and slap special tariffs on billions of dollars of Canadian exports, Ottawa's worst fears would be affirmed.

WTO rulings could also affect how the United States uses its unfair trade laws in the future. Alternatively, if the Trump administration were to refuse to change its tariffs after a WTO legal decision, Ottawa could be authorized to retaliate against US exports. This occurred in 2004 and 2015 before Washington eventually complied with earlier WTO rulings.

Canada's legal act of self-protection chiefly serves to clarify the costs to this US administration continuing a mostly antagonistic trade policy toward its northern neighbor. And it may prove another crack in the already fractious NAFTA renegotiation.

The Trump administration's policy response is critical. It could choose to mend fences, resolve the NAFTA impasse, and keep these North American skirmishes in the family. The next round of NAFTA talks starts February 26 in Mexico City.

The alternative of continued bellicosity presents two problems. Escalation puts Canadian retaliation on the table and even more US economic interests in peril. Of course, there's the risk that continued turmoil distracts both sides from cooperating on pressing areas of mutual concern, including the systemic challenge that China poses to the world trading system.

Chad P. Bown is a senior fellow at the Peterson Institute for International Economics. With Soumaya Keynes of the Economist, he hosts Trade Talks, a weekly podcast on the economics of international trade policy. Follow him on Twitter @ChadBown.

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